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CONSUMER CONFIDENCE - THE OPTIMISM SPREAD COLLAPSES

Not surprisingly, the University of Michigan consumer sentiment index plunged in July. 

 

It’s not a great time to be an American consumer as confidence in Washington’s ability to run the country effectively wanes.  No doubt the current debt ceiling debate is doing little to boost consumers’ perception of their representatives. 

 

Today it was reported that confidence fell 7.7 points sequentially to 63.8 in June, the biggest decline since March and the lowest level since March 2009.  The expectations component led the decline, dropping 9 points to 55.8 (lowest level since March 2009) and the assessments of current conditions dropped 5.7 points to 76.3 (lowest level since November 2009).  This is not a shock to anyone paying attention to the data; the economic drivers of confidence remain very weak.

 

The remedies required to address the serious fiscal issues facing the U.S., “eating peas” at the President calls it, are likely to impact growth negatively – at least initially.  At the same time, politicians’ inability to address the nation’s debt is a serious concern for consumers’ confidence. 

 

The decline in confidence comes on the same day that the New York Empire State Manufacturing Survey's weaker than anticipated.  This survey is the first look at factory conditions during the month of July. Within the survey, the employment indicators weakened significantly; the employment index barely stayed in expansionary territory, falling from 10.2 to 1.1 in July. The average employee workweek (hours) index fell sharply from -2 to -15.6.

 

Looking at the overall set up, confidence and manufacturing data are decidedly bearish.  This bearishness is being compounded by a volatile political climate.  The uncertainty is hurting business confidence, which is discouraging hiring and impairing income growth.  While I would like to strike a more positive tone this Friday afternoon, the preponderance of the evidence suggests that confidence will remain in the doldrums for, at least, the immediate term.

 

CONSUMER CONFIDENCE - THE OPTIMISM SPREAD COLLAPSES - UMICH V CONSENSUS

 

 

Howard Penney

Managing Director


BYI CRFA/GRADIENT REBUFF

Not much to worry about here other than the timing of a replacement demand recovery. Didn’t need accounting specialists to tell us that.

 

 

On June 29th, Gradient initiated on BYI with “D” – basically a sell rating. The crux of Gradient’s opinion rest’s on BYI’s exposure to the weak replacement cycle coupled with concerns over declining deferred revenues and rising inventory and accounts receivable balances.  The ‘flags’ that Gradient raises are not new.  CFRA has been blowing the same horn for at least a year now.  While we won’t deny that BYI has some issues, we’re not concerned about the ones raised by Gradient and CRFA.

 


ISSUES:

 

Point 1: Negative fundamental trends

“The domestic replacement cycle seems to have been prolonged as casino operators take longer to make purchasing decisions. As a result of a decline in international sales, the company now sources 81.3% of its revenue from the United States and Canada—raising our level of concern as BYI’s exposure to the slow domestic replacement has increased at an inopportune time”

 

HE Response: The replacement cycle is at a trough.  Current levels are unsustainable and this is exactly why we like the slot manufacturers.  We’ve written extensively on this topic (see UNDERSTANDING THE REPLACEMENT MARKET  published on 8/17/2010) so we won’t rehash our entire thesis but in a nutshell,  an 18 year replacement cycle is not sustainable since even poker machines die and yes, get replaced after 12-15 years.  Mechanical spinning reels last about 8-12 years while video slots become obsolete after about 8 years.   While we don’t know exactly when the replacement cycle will make its big upswing we do think that the new markets coming online over the next few years will help spur at least defensive investment by casino operators.

 

Point 2: Divergence between earnings and cash flow

“In recent periods, both earnings and cash flow have declined. However, cash flows have experienced much larger declines”

 

HE Response: This is a fair point, but the correct comparison would add back the investment that BYI makes in their gaming operations business to Cash Flow from Operations.  The balance of the divergence are explained by growth in A/R and Inventory.

 

 Point 3: Increase in accounts receivable

Throughout FY2011, accounts receivable have increased disproportionally faster than sales have increased. The rise in total receivables is driven by a large increase in long-term receivables. According to the company’s most recent 10Q, BYI has extended payment terms for select customers. This may indicate that the company has (1) potentially pulled forward demand from future quarters, and/or (2) taken on

a greater level of collection risk.”

 

HE Response: $26MM of the increase in accounts receivable since 2010 is due to loans that BYI made to the Italian concessionaires to help them finance the VLT licenses (Euro 15k/device).  The loans will be paid back in 5-9 years.   Floor financing for customers is more typical in international deals since they tend to be longer in nature.   As Bally expands more internationally, we will likely see a continuance of this trend.

 

Point 4: Increase in inventory

The largest driver behind the increase in accruals was the change in BYI’s inventory level. Inventories consumed $89.8 million in CFOA for the 12 months ended 03/31/11. In our opinion, the increase in inventory is likely related to the introduction of the company’s Pro Series cabinets”

 

HE Response: The vast majority of the increase in inventory is Italy.  Bally has contracts to place 5,000 VLTs in the Italian market over the next year and to provide systems for those units.  Most of the units will be in gaming operations and so far BYI has not started collecting revenue on those units.  Gaming operations expenditures sit on the balance sheet of the supplier and get depreciated over the life of the machine.   A small part of the inventory increase is due to BYI stocking up on parts for the new Pro Series cabinet – particularly the Alpha 2 processor.

 

Point 5: Decline in deferred revenue

“Revenue sustainability may be at risk as the company’s deferred-revenue balance has declined significantly in recent periods. Growth in deferred revenue has trailed revenue growth for 11 consecutive quarters. As a result, deferred revenue is now at a level not seen since FY2007. While a portion of the decline relates to a change in the company’s revenue-recognition policy, at a minimum the decline in deferred revenue suggests less balance-sheet support for future revenue growth.”

 

HE Response: As Gradient points out, in 2009, there was a change in account policy that allows BYI to book non-software revenue at the time of delivery.  Previously, BYI often had to defer revenue from contracts that ‘bundled’ systems and unit sales.  The best example is what happened with the 2,300 unit sale to Oregon in 2008 which BYI had to recognize over 7 years (the life of the systems contract with the state).  The change in accounting policy affects all industry participants, not just BYI, and allows GAAP to more accurately reflect cash revenue.



CPI: GROCERY BILLS OUT-INFLATING RESTAURANT CHECKS

Food at home inflation is heading straight up.  Restaurants seem to be holding firm.

 

As inflation has ramped up from the trough in 2009, Food at Home CPI has outstripped Food Away From Home CPI.  Restaurants may be seeing a benefit from this as grocers have moved first in raising prices to protect margins in the face of food inflation.  This could be aiding traffic trends in the restaurant industry, which, have generally been robust over recent quarters.  Additionally, the price action in the space – on a relative basis – has been particularly strong of late.

 

The question of “when might the supermarkets’ aggressive stance with regard to pricing backfire?” remains important.  To the degree that price increases begin to drive traffic away from grocers, restaurants would be the primary beneficiaries. 

 

CPI: GROCERY BILLS OUT-INFLATING RESTAURANT CHECKS - food at home

 

CPI: GROCERY BILLS OUT-INFLATING RESTAURANT CHECKS - food away from home

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.62%

Q3 KEY MACRO THEMES PRESENTATION: DIAL IN & MATERIALS

HEDGEYE MACRO: Q3 THEMES: Policy Pong, Risk Ranger & Chinese Cowboys

DIAL IN & MATERIALS

Today, July 15, 2011.

 

Valued Client,
 
5-10 minutes prior to the 11 AM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 639275#
  

Materials: "MACRO Q3 THEMES PRESENTATION"

                 
To submit questions for the Q&A, please email .

****************************************************************************** 
 

"MACRO Q3 THEMES PRESENTATION"    

Topics will include: 

  • Policy Pong - Between the debt ceiling debate, spiraling sovereign debt issues in Europe, and updated growth/inflation dynamics, the Fiat Fools will continue to play monetary and fiscal policy pong, which will inform the EUR/USD exchange rate.
  • Risk Ranger - Given the sharp oscillations in investor sentiment and the danger of Fiat Fool experimentation, many global asset classes are range bound and keeping these ranges in focus will be key to managing risk over the intermediate term.
  • Chinese Cowboys - In a marriage of research and timing, we are long China. We believe inflation and the pace of tightening in China will moderate in 2H and that fear has made Chinese growth cheap.

Please contact if you have any questions.  

Regards,

 

The Hedgeye Macro Team


TALES OF THE TAPE: SBUX, MCD, YUM, PEET, GMCR, CBOU, CBRL

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

 

 

MACRO

 

The CPI for food was 0.2% in June, half the pace seen in each of the previous two months and noticeably weaker than the 0.8% gain in March. Food prices were up 3.7% year-over-year in June, compared with 3.5% in May and the strongest since March 2009.

 

While YUM’s US business has plenty of problems specific to its businesses, management also pointed out that high gas prices are making the U.S. recovery harder.  Gas prices are down 8% from early May but have rebounded 4% from the low on June 29.

 

Restaurant stocks have been performing extremely strongly and food processors continue to underperform.

 

TALES OF THE TAPE: SBUX, MCD, YUM, PEET, GMCR, CBOU, CBRL - subsectors

 

 

QUICK SERVICE

  • SBUX will launch a JV with a Chinese coffee-growing company, the Ai Ni Group, later this year as the two sides signed an MOU Thursday.  Ai Ni Group is a coffee-growing and –processing firm in the southwestern province of Yunnan.
  • MCD has “adjusted” some prices in China after inflation has hit a three-year high.
  • YUM traded higher thanks to extremely strong reported China top-line trends.  Low quality EPS and down margins remain a concern.
  • The coffee concepts declined on accelerating volume.

 

CASUAL DINING

  • CBRL is almost certainly going to miss the quarter, in our view, as they announced news this morning that they are reducing management and staff positions.  The charge is estimated to be $0.14-$0.17.

TALES OF THE TAPE: SBUX, MCD, YUM, PEET, GMCR, CBOU, CBRL - stocks 715

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 15, 2011

 

Our Q3 Macro Themes call is at 11AM EST today – ping me if you still need the dial in info. Our presentation of European debt maturities might grab your attention.  As we look at today’s set up for the S&P 500, the range is 19 points or -0.75% downside to 1318 and 0.70% upside to 1318.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 715

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1732 (-2696)  
  • VOLUME: NYSE 925.21 (4.71%)
  • VIX:  20.80 +4.47% YTD PERFORMANCE: +17.18%
  • SPX PUT/CALL RATIO: 2.0 from 1.86 (7.89%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 24.47
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.98 from 2.92
  • YIELD CURVE: 2.60 from 2.55

 

MACRO DATA POINTS:

  • 8:30 a.m.: Consumer Price Index, M/m est. (-0.1%), prior 0.2%
  • 8:30 a.m.: Empire Manufacturing, est. 5, prior (-7.79)
  • 9:15 a.m.: Industrial production, est. 0.3%, prior 0.1%
  • 9:15 a.m.: Capacity utilization, est. 76.9%, prior 76.7%
  • 9:55 a.m.: UMich Confidence, est. 72.0, priopr 71.5
  • 1 p.m.: Baker Hughes Rig Count

WHAT TO WATCH:

  • President Barack Obama told congressional leaders to report to him within two days on what debt-limit options members can support after yesterday’s talks
  • Treasury Secretary Timothy Geithner warned there’s no possible extension to time limit to raise debt ceiling as S&P joined Moody’s in reviewing U.S.’s top credit rating

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Pizza Demand in Asia Boosts U.S. Cheese Exports to Record, Kraft’s Costs
  • BHP Agrees to Buy Petrohawk for $12.1 Billion in Cash to Add Natural Gas
  • Crude Heads for First Weekly Decline in Three Weeks on U.S. Debt Concern
  • Gold Falls, Paring Weekly Advance, as Rally to Record Price Spurs Selling
  • Wheat Slides for a Second Day as Importers May Favor Russia Over U.S., EU
  • LME Doubles Minimum Delivery Rates for Warehouses Holding the Most Metal
  • Rice Exports From Vietnam May Beat Target on Bigger Harvests, New Markets
  • Copper May Gain on Reports Predicted to Show Stronger U.S. Manufacturing
  • Sugar Drops as Banking Stress Tests Weigh on Commodities; Cocoa Declines
  • China Is Tightening Rare-Earth Access Even as Sale Quotas Climb, EU Says
  • Glut of Natural Gas Produces Record U.S. Exports to Mexico: Energy Markets
  • Beef Contamination Spreads in Japan as Fukushima Radiation Taints Straw
  • Wheat Exports From Australia Climb as China Boosts Purchases After Drought
  • Oil May Advance Next Week on Speculation About Fed Stimulus, Survey Shows

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: plain ugly TRENDs continue to develop with Italy in crash mode (down -20% since February) and Greece is gone (down -31% since February)

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: solid is as solid does; China up for the 4th day in 5 (were long $CAF) and the rest of region continues to shape up (Korea, Indonesia)

 

THE HEDGEYE DAILY OUTLOOK - asia performance 

 

 

 MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


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