Gaming stocks have gotten blasted since WMS reported their fiscal Q4 on 8/5/08. WMS is no exception, down 37% in almost 3 months. The suppliers have actually outperformed their operating brethren, if I can take the liberty of using the term “outperform” for such a dismal performance.

The world has changed. The credit crisis has hammered the sector. WMS is in great shape financially but its customers are not. That is a problem. I fully expect management to capitalize on the opportunity to lower guidance.

I think it is instructive to keep in mind what was said in the prior quarter’s release and conference call. To make it easy to examine the sequential change in management’s tone, I’ve put together a table detailing fiscal 2009 and Q1 guidance. I’ve also YouTubed some important metrics discussed last quarter in preparation for Monday.

• Open orders for new gaming machines and platform conversion kits totaled more than 11,700, which represents 40% of expected fiscal 09 unit volume guidance and is 700 units ahead of last yr's compare
• Average selling price guidance for fiscal 09 represents a 3-8% increase over realized results in 4FQ-08.
• They expect to continue to charge for the value-add in their products, contrary to the belief that discounting runs rampant
• Typical revenue breakdown: Q1 20-21%, Q2 23-25, Q3 25-27%, Q4 28-30%

In addition to revised guidance, the open order metric will be critical to understanding underlying demand vs. last year but also to gauge the conservatism in management’s guidance. For example, open orders exceeding 40% of next 12 month expected demand could be indicative of conservative guidance. Hopefully, that will be the case.

Fiscal 2009 guidance given last quarter


The Yen has gained 7% against the dollar so far this week as the “borrow cheap, lend dear” game ended for arbs and the great deleveraging continues to drive depositor towards perceived safety. Japanese conglomerates will be scrambling in the coming months to adjust to a new “strong Yen” environment as they watch the currencies of their export markets and manufacturing bases swing wildly –some will be caught flat footed and lead to serious margin compression.

On the other side of the ledger, the collapse of the Rupee is further indication that the wheels are coming off the track for the “I’ in BRIC. With a greater than 20% slide against the dollar YTD and foreign currency reserves that have declined by 15% since May the risk for the government in India is a flight of any capital. This rapid decline stands to offset any positive impact that the oil correction could have on inflation in this import dependent nation. There will be no easy policy fix for PM Singh’s coalition as they face the abyss.

Andrew Barber


Emotions have changed but our math hasn’t.

We held the BUY trade line at 858.33 yesterday and we continue to today. Our ultimate threshold to capture capitulation selling is 820 –at that point we are buyers of any quality stock that people will sell us.

We like sales, especially in stocks.

Andrew Barber for KM

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The SEC release 34-58809, dated October 17th was just brought to our attention by our compliance department. It seems that NASDAQ has suspended the application of continued listing requirements related to the bid price and market value of shares until January 16, 2009.

According to the filing, “Nasdaq believes that this temporary suspension will permit companies to focus on running their business, rather than satisfying market-based requirements that are largely beyond their control in the current environment”.

As with the short sale ban, our immediate concern is that this type of temporary rule change carries the risk of unintended consequences that might dwarf the problems it was intended to relieve.

Andrew Barber

The Maestro

Due to a lack of connectivity this morning up here in Maine, I am writing the intro to this morning's note, and my new partner on the Macro Research front, Daryl Jones, has my back with the global macro recap. Daryl is also a hockey player, but he is what they call a “stay at home defenseman”, which in laymen’s terms means that he is not afraid of the rough stuff, so this is a great morning for him to be stepping up.

When my laptop bonked on me at 4:45am this morning, I was not enthused...After a strong cup of 'The Victorian by The Sea's" coffee however, I found my resolve in an inspiring talk that the renowned maestro of the Boston Philharmonic gave to us last night.

Ben Zander has been teaching music in New England for 43 years, and when it comes to understanding life, he gets it. Last night, Zander walked us through a simple yet profound mental model. He said "look, you have one of three choices when faced with challenges in your life... Resignation, Anger, or Possibility”.

I'd like to thank Zander for this clarity. From a market strategy perspective, this morning it is the most appropriate thought that I can pass along to you from Camden, Maine … Maybe you've resigned yourself to the bearishness of the moment, or maybe the market angers you throughout your day... The reality is that if you have chosen either of these two resolves, you are now transcending consensus.

I see this point in American financial history as the most exhilarating of opportunities. This is the time to be a capitalist. This is the time for new possibilities. This is the time, as Ben Zander would say, to "get up, and conduct!"

As an athlete or an investor, this is when we want to be on the ice, on the field, or in the market. The CNBC talking heads are highlighting that futures in the U.S. are limit down. This is on the back of most global markets being down between 7 – 10%. We won’t mince words, it is ugly out there.

All global asset classes are on sale this morning – commodities, currencies, bonds, and equities alike. Even purportedly positive news, like OPEC cutting production by 1.5mm barrels, is having no impact as crude oil is trading down over 5%.

The dramatic decline in oil from the “It’s global this time” peak has been vicious. As we highlighted in a note to clients last weekend, in the last major recession oil demand in the U.S. was down for five years and down 19% peak to trough. Let us repeat, recessions are not the times to bottom pick commodities.

On the Japanese front, the Finance Ministry reported overnight that country’s trade surplus for the first half of the fiscal year (April – September) had fallen almost 86% y-o-y. This is a country we have and continue to be negative on and this data point clearly only bolsters the case.

We have been following former Fed Chairman Alan Greenspan’s testimony in congress the last few days. And there is a one word summary. Embarrassing. Not embarrassing that Greenspan is completely unwilling to admit any fault, for as we’ve seen the Washington and Wall Street elite never hold themselves accountable, but embarrassing in that he wants us to believe him. Greenspan in his testimony stated: “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”

"Shocking"? Mr. "Maestro", are you kidding me?

That sounds like the real maestro, Ben Zander's, "Resignation" excuse to us...

Undoubtedly, that excuse will perpetuate "Anger" out there in the market today - it should.

The music has stopped. The leverage game has ended. If you saw this ending coming, congratulations. This is the time for the proactively prepared to seize the promise of new "Possibility" that the accountable forefathers of American Capitalism envisioned.

Good luck out there,

Keith and Daryl

COLM: Post Q Follow Up

As usual, a noisy quarter from COLM, but what was unusual is that the company beat – big (i.e. 20%). While my team nailed the trends in underlying business (and KM nailed the stock), I definitely ‘missed the beat’ in translating it to the model. I expected a ‘guide down that won’t matter’, which I think we got. But my math tells me that the consensus is likely to come out too low.

The biggest negative is that the Spring backlog is down 11% and management’s tone was very guarded. But as outlined in my earlier post, we’re seeing retail sales pick up in dollars, units, and average price. Maybe reorders are not coming in at a robust rate, but it is not because the market is flooded with product and is being heavily discounted. We’re seeing quite the opposite. Not bad given that Columbia is gaining share in 4Q.

Even with the stock presumably trading up meaningfully tomorrow, I think we have better margin visibility with COLM than others in the group. The SG&A evolution is key here, as the company is finally at a spending level that will help ignite some top line growth.

It’s been a long time since I said this, but I kinda like this story. I think that COLM maintains its trajectory in the quadrant chart below for at least a couple quarters. See my two earlier posts for more color on my thinking on this name.

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