In preparation for IGT’s FQ3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its FQ2 earnings release/call.



Youtube from FQ2 Conference Call

  • “We expect our current trends of moderate revenue and earnings growth to continue for the remainder of this year and into fiscal year 2012.”
  • “I am quite enthusiastic about our international business opportunities.”
  • “Our [Gaming Operations] yields should continue their modest sequential improvement, assuming normal seasonal trends continue.”
  • “Approximately 82% of our install base is comprised of variable-fee games that earn a percentage of machine play levels rather than a fixed daily fee. For the remainder of the year, we expect our Gaming Operations’ installed base to continue its moderate growth.”
  • “Given the current selling environment and volume levels, we expect average selling prices to rebound modestly from this quarter’s levels, mainly due to mix, but margins to be under pressure for the remainder of the year.”
  • “Internationally, the average selling price was up 10% year-over-year to $13,000, due to favorable geographic mix, specifically higher shipments in Argentina and Australia.”
  • “We expect a modest, upward trend in SG&A for the remainder of this year as we invest in people and processes necessary to take advantage of new business opportunities.”
  • “The new facility will reduce interest expense including deferred offering costs, amortization, by about approximately $13.5 million on an annual basis. Additionally in April, we entered into arrangements to swap fixed rate interest for variable rate interest, which is expected to save an incremental $7 million in annual interest expense at today’s rates.”
  • “Roughly 12 months ago, we installed our very first Center Stage platform, and we now have over 500 units on that platform with another 500 units on order."
  • “We expect our International unit sales to keep pace with our North American sales for the remainder of the fiscal year, which is another testament to the strength of our global reach. We will combine that with growth in international Gaming Operations, to further enhance our strengths outside North America.”
  • “We have been deploying Wheel of Fortune Triple Spin onto the Center Stage platform and in many instances seeing meaningful increases in daily play levels versus older versions.”
  • “On a macro level, we are still very much in a promotional environment for the replacement business, and it may become more so in the upcoming quarters. To date, we have had some well received promotions that generally speaking have increased our ship share and generated sales in other areas as we bundle our offerings. To help offset these promotions, we continue to gain efficiencies in our manufacturing processes.”
  • “For the remainder of fiscal year 2011, we see very limited opportunities for new and expansion shipments in the for sale business. For fiscal year 2012, there is more optimism, but still no certainty.”
  • “Our systems business is also performing well. Year-to-date our consolidated systems revenues have grown in the high single-digit range. We currently have 65 sbX contracts in our sales funnel from all over the world, indicative of potential future revenue opportunities. This is another area of our business that we anticipate seeing earnings leverage as the overall gaming environment improves.”
  • “For the current fiscal year 2011, we are raising our earnings guidance to $0.84 to $0.90 per share, excluding the $0.04 of special items for the first quarter.”
  • “We have seen the WAP installed base start to stabilize and improve slightly in terms of the installed base. Performance obviously is much better with a new line-up of great performing games and a little help from the macro environment. I think on the margin we see consumers freeing up a little more money.”
  • “On the margins and Product Sales, I think you’re probably safe if you assume a run rate domestically of say 52%. Somewhere in that, plus or minus, probably seems like a good range. And then on, as far as R&D spend, I think we’re working hard to try and keep that relatively flat.”
  • “We are seeing some of our competitors’ price lower than our for-sale games are in the market at. What we find is our promotional activity is very disciplined, and we stick to a particular formula.”
  • “Our guidance, at the low end, assumes kind of flattish to the first half. At the higher end, it’s assumed some uptick there, but it also assumes at the higher end, some uptick in both the units and the play levels in the Game Operations business. But still, I think relatively modest.”

European Risk Monitor: Risk On/Risk Off

Positions in Europe: Short EUR-USD (FXE); Spain (EWP); Italy (EWI); UK (EWU)

We don’t subscribe to the theory that securities or countries have “risk on” or “risk off” profiles, rather risk is always “on”. Over the last 24 months European capital markets (particularly the PIIGS) have shown a pattern of underperformance alongside sovereign debt contagion, with positive performance in the days directly preceding discussions or announcements on bailout and austerity packages followed by renewed underperformance after the event. Credit rating downgrades from the rating agencies have also done a number to drag down performance following the announcement. 


And Greece’s second bailout announced last Thursday (7/21) follows this mold to a “T”: buy the rumor sell the news, and sovereign debt contagion is far from over. And just today Moody’s chummed the water further by downgrading Greece’s debt from Caa1 to Ca. [For more on the terms of the bailout see our post from 7/21 titled “Framework of Greek Bailout Part II: Skepticism Abounds”].


Now we appear to be playing a game of semantics in determining if Greece is in default.  What’s clear is that these short term “band-aid” bailouts or obfuscating language will not solve Europe’s longer term fiscal imbalances and therefore we expect peripheral capital markets to trend lower over the intermediate term.



The Semantics of Default

The big debate is whether or not Greek debt is in default and the pricing of risk based on this rating. The International Swaps and Derivatives Association (ISDA), which governs CDS pricing, has ruled that the Greek restructuring does not constitute a credit event, which means that CDS will not be triggered. 


However, the credit rating agencies have said that under technical definitions, any restructuring of debt is a default, so the current plan (as defined under Greece’s second bailout) for banks to roll over shorter term Greek debt into long term debt (~ 15 to 30 year maturities) should constitute a default. In fact, the language has morphed into an “orderly” default and “partial” default, and is expected to be rated as such only during the window of late August and early September when the banks may voluntarily decide to participate in this bond swap.  Thereafter, the expectation would be that a rating above default would be returned.


Further, ECB President Trichet refuses to recognize any member state in default and does not see Greece’s newest package triggering a credit event (default). In fact, Trichet along with other EU officials went so far as to say they’ll rely less on the ratings from the main ratings agencies, without indicating a surrogate rating source.


Certainly these results leave plenty of gray areas, including how risk is priced. It appears CDS swaps will be a useless instrument for pricing default or hedging default. Conversely, bond yields may flip around in the next weeks and months depending on the “success” of the bank swap, the actions of the ratings agencies (including their language); and the general psychology of the market which over the last 18-24 months has turned violently against those peripheral countries in the spotlight.



More Kinks in the Chain

To add more fuel to the fire, amendments to the European Financial Stability Facility (EFSF), which to date has provided the bailout funding to Ireland and Portugal, must receive approval from all EU countries, which cannot happen until mid-September when the parliamentary returns from summer break.   Therefore the risk profile of the peripheral is further heightened as indecision about increasing the facility and the terms of debt could arise, and not until mid-September.



Risk Swings

Of note is that sovereign bond yields and cds across the periphery fell off a cliff last week on a week-over-week basis. Over this period 10YR government bond yields fell -323bps in Greece; -208bps in Ireland; -168bps in Portugal;-50bps in Italy; and -46bps in Spain. On Friday (7/22) alone, following Thursday’s late day announcements, 5YR CDS fell a monster -644bps in Greece; -261bps in Portugal; -249bps in Ireland; -59bps in Spain; and -55bps in Italy!!! Our call remains that despite these massive dips, the trend line will resume up and to the right.


European Risk Monitor: Risk On/Risk Off - 1. HHa


European Risk Monitor: Risk On/Risk Off - 1. HHb


Our European Financials CDS Monitor showed that bank swaps in Europe were mostly tighter last week, with 34 of the 38 swaps tighter and 4 wider, which rhymes with the “risk-off” trade following the announcement of Greece’s second bailout package.


European Risk Monitor: Risk On/Risk Off - 1. HHc


We remain short the EUR-USD via the etf FXE in the Hedgeye Virtual Portfolio and expect the pair to trade in a range of $1.41 to $1.43. The EUR-USD is dancing around our TREND line of $1.43, an important momentum level. We’ve position ourselves to take advantage of downside in the periphery, being short Italy (EWI) and Spain (EWP). Further, with stagflation sticky in the UK, we’re short the country via EWU.


Matthew Hedrick




Keith covered JCP this morning – strictly as a TRADE (3-weeks or less). Everyone reading this already knows that our fundamental view on the name and its earnings power is quite ugly and is very much out of consensus. Not an iota of our negative outlook on TREND (3-months) or TAIL (3-years) has changed. Per KM on the trade “Brian McGough remains the bear on JC Penney - Ackman the bull. The stock is immediate-term TRADE oversold here so we'll book another gain and look for re-entry on strength.”



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 80.52%
  • SHORT SIGNALS 78.70%

Weekly Latin America Risk Monitor: A Leopard and His Spots

Conclusion: Newly-elected Peruvian president Ollanta Humala made a key decision to central bank president Julio Velarde. Markets took this as a sign of long-term stability; we view it as a leopard attempting to hide his spots for the sake of short-term political gain.


This is the third installment of our now-weekly recap of prices, economic data, and key policy action throughout Latin America. We’re aiming to keep our prose tight here, so if you’d like to dialogue more deeply regarding anything you see below, please reach out to us at .




From an equity market perspective, the delta between the region’s best performer (Peru’s Lima General Index up +8.4%) and the region’s worst performer (Chile Stock Market Select down -2.1%) was over 1,000bps wide – a rather sizeable divergence from a week-over-week perspective. The Brazilian real’s (BRL) +1.4% gain led the way on the currency front. Though bond yields were little changed, Latin American credit markets had some fairly sizeable moves from a CDS perspective. Peru led the way here (-9bps or -7%), confirming the strength we saw in its equity market.


Weekly Latin America Risk Monitor: A Leopard and His Spots - 1


Weekly Latin America Risk Monitor: A Leopard and His Spots - 2


Weekly Latin America Risk Monitor: A Leopard and His Spots - 3


Weekly Latin America Risk Monitor: A Leopard and His Spots - 4


Weekly Latin America Risk Monitor: A Leopard and His Spots - 5




Brazil: The key news out of Brazil last week was not necessarily the central bank’s decision to hike rates +25bps to 12.5%, but rather their accompanying commentary, which dropped mention of continuing to hike rates for a “sufficiently long” period. Though we see Brazilian YoY CPI peaking in August, we think consensus long-term expectations for Brazilian rates of inflation are low by ~100-200bps. As such, we believe long-term Selic Rate forecasts must also be revised up. We’ll be out with an extensive report on Brazil later this week.


Elsewhere in the Brazilian economy, we see that the central bank changed the formula for the way in which banks must calculate risk on payroll deductible cards. This “macro prudential” measure is designed to slow credit growth (YTD +20.6% YoY vs. central bank target of +15%) by forcing banks to raise capital provisions on loans with maturities exceeding 36 months. The previous measure to slow credit growth (an additional +3% tax on consumer credit operations) merely boosted the government’s tax receipts for such transactions (+71% YoY) rather than actually slowing the pace of credit growth. We continue to strongly believe credit is simply too cheap in Brazil (relative to historic costs) for piecemeal measures like these to be wholly effective in containing credit growth.


Mexico: The central bank and the central government’s forecast for economic growth diverged noticeably this week, with the central bank’s monetary policy board citing “weaker demand” as the culprit for a slowing economy and president Filipe Calderon increasing his 2011 YoY GDP forecast to +4.6% (vs. 4.3% in May). We continue to side with the Central Bank of Mexico here and remain bearish on Mexican equities and the Mexican peso (MXN). Last week, Mexico reported incremental data in support of this view: retail sales growth slowed to +1% YoY and its unemployment rate backed up +20bps to 5.4%.


Peru: Perhaps the most moving news out of the region last week was President Ollanta Humala’s decision to appoint Julio Velarde to another five-year term as central bank president. This sent a resounding message to the markets that Humala appears committed to providing macroeconomic policy stability and assuages fears that his socialist agenda will derail the country’s long-term growth prospects. We remain bearish on Peru from a long-term TAIL perspective and see maneuvers such as this one as mere window dressing designed to calm jittery markets. Though we do not think he’ll be able to implement his fiscal policies any better than his mentor Hugo Chavez did in Venezuela, we do see scope for Peruvian assets to continue higher in the near-term as he wins over some investors on the margin.


Darius Dale



Still +40% growth in July revenues



Through July 24th, MTD table revenues were HK$17.1 billion.  With one week left, we’ve narrowed our full month gaming revenue projection range to $22.5-23.0 billion, which includes slots.  This would represent YoY growth of 42-45%, not too shabby.  One slight negative though:  average daily revenue did slide the past week to HK$664 from HK$703 the week prior.  We don’t know if that is hold, normal seasonality, or a real slowdown.  It’s obviously too short of a period to make any real conclusions.


In terms of market share, WYNN took a jump up and joins MPEL and Galaxy as the only companies with higher share in July than the post Galaxy Macau opening period.  MPEL and WYNN continue to generate share in July, even above the pre-Galaxy Macau period.  MPEL looks on track already to best Q3 estimates as they will for Q2 as well.






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





Casual Dining


Malcolm Knapp released the Knapp Track Casual Dining data for June over the weekend.  Another strong month, as the estimated comparable restaurant sales change in June 2011 is 2.4% and traffic increased 0.5%.  I suspect that the strong performance of Red Lobster is helped to drive the 40 basis points sequential improvement from May to June.





In terms of commodity news, corn and soybeans may rise as the hot weather of last week threatens yields.   The Japanese Food Chain is being impacted by a radiation fallout from the Fukushima nuclear plant as unsafe levels of cesium have been found in beef in supermarket shelves and in vegetables and in the ocean.





Bucking a trend that has been in place for the last 6 months or so, food processing stocks outperformed over the last couple of months.  Full service restaurants lagged their food, beverage, and restaurant peers over the same duration.


THE HBM: DPZ, PNRA, TAST, MCD, CMG, RT, EAT - subsector fbr




  • DPZ UK and Ireland SSS increased +2.4%; UK increased +3.4%; Republic of Ireland (8.4%). Management is confident the company will see SSS growth in the next 26 weeks; marketing spend will be three times the amount versus last year, combined with new products. DPZ is set to report global results for 2Q tomorrow.
  • PNRA has been reiterated Buy, with a Price Target of $134, by Sterne Agee.
  • TAST, MCD, and CMG gained on Friday on accelerating volume.  COSI declined 7.4% on accelerating volume.


  • RT reported a disastrous quarter last week and its share price declined -14% on accelerating volume.  BJRI also declined on accelerating volume.
  • EAT gained on accelerating volume despite the nosedive in RT’s stock.  This also confirms out view that EAT is taking share from RT.


THE HBM: DPZ, PNRA, TAST, MCD, CMG, RT, EAT - stocks 725


Howard Penney

Managing Director


Rory Green


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