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BYD: JUST A TOUCH OF CONFIDENCE PLEASE

BYD reports Q3 earnings on Tuesday morning. The stock has acted like it will be ugly. In this case, looks probably won’t be deceiving. I’ve included a chart below that details management guidance and consensus estimates. They will all be too high, but I don’t care. I care about two things: 1) free cash flow per share will be at least $1 next year and 2) BYD can get into 2009 without busting the leverage covenant.

It looks to me like the 2009 consensus EBITDA estimate is too high by 5-10%. Even if I knock it down by 20%, BYD still generates $1.35 to $1.50 per share in net free cash flow and still doesn’t violate the leverage covenant in 2009. For those of you who haven’t looked in awhile, BYD is trading at $4. That is a yield of 34-38% on very conservative numbers. Pretty ridiculous I must say.

BYD benefits from an escalator in its leverage restriction covenant to 6.5x in 2009 from 6x in 2008. There is some risk of a Q4 covenant bust but BYD would have to see its EBITDA decline 30% below the current consensus estimate of $116m. Again, I think there is probably 10% downside to that number but certainly not 30%.

Anyone expecting a near term inflection point in business fundamentals need to look elsewhere. But BYD shouldn’t be lumped with the rest of the gamers. Liquidity is very good and free cash flow has the potential to be off the charts compared to the stock price.

Guidance and estimates are too high but $1.50 in net FCF is very doable

Charting the Chinese Yuan: Bullish "Trend" Remains...

In terms of our ‘Hedgeye Asset Allocation’ model, if there is one thing that 2008 has proven, it's that cash is king. All cash in this increasingly inter connected global marketplace of factors is not created equal, however...

The US Dollar's resurgence from the thralls of forever is pretty well known at this point. The Japanese Yen tacked on another +7% this week, making it one of the more impressive cash stories of the back half of the year. But the 2008 stability MVP in the currency market remains the Chinese Yuan (see chart below).

Given China's well publicized slowdown in economic growth this year, you have to be impressed with their currency's resilience. The new world order of economics and balance of power are changing. If you refuse to acknowledge that, your headache will not abate. China has $1.9 Trillion in currency reserves. Amongst the few kings that remain, their cash (and its valuation) seems to depend on the rest of the world, the least.
KM

Eye on Trust...

My friend, Paul Kedrosky, posted a very profound image (see below) this morning on his site in a note titled, "White Powder, Threats, and Financial Services Companies"...

This is what American leadership at "Investment Banking Inc." has brought us to. It's embarrassing, and sad, all at the same time.

Building back the trust of the people who's money Wall Street manages will be a process that will take time.
KM

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 80.33%
  • SHORT SIGNALS 78.51%

WMS: YOUTUBING AHEAD OF EARNINGS

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

ASIAN CURRENCY DIVERGENCE CONTINUES

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
Director

S&P LEVELS

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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