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BYD: TRADE UPDATE

Improving Strip trends and MGM’s earnings release could make BYD the derivative play

 

 

Keith added BYD to the Hedgeye virtual portfolio as a LONG this morning at $8.93.  While there were some encouraging signs from its latest quarterly report (i.e. margin improvement, strong regional results, and stabilization of the LV Locals market), the stock has traded off. 

 

We believe there are a couple of catalysts ahead for BYD.  First up is MGM’s earnings call on August 8th, where we think management will praise the robust LV Strip results in Q2.  BYD could be bid higher as investors look for other ways to play gaming – the thesis being that LV locals improvement should follow the Strip.  July-to-date, BYD’s stock is down -2% while MGM is up 14%.  The second catalyst should be a Q3 beat.  BYD’s decision to resume issuing guidance, its first since it guided for Q3 2008, is a good sign.  We think its 3Q 2011 guidance is conservative and results may come in at the high end of the range.

 

BYD: TRADE UPDATE - BYD


European Equity Watch: EUR-USD, DAX, FTSE

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


As Keith noted in today’s Early Look, alarm bells sounded yesterday on a confluence of factors: 

  1. EUROPE – both European stocks and bonds are turning into a proactively predictable train wrecks. Our research catalysts remain crystal clear (accelerating debt maturities for the majors through September) but, more importantly, now all of our TRADE and TREND lines across every major European stock and bond market (ex-Russia) have been broken and confirmed by volume and volatility studies.
  2. USA – stocks broke their intermediate-term TREND line of support (1320 in the SP500) and short-term bond yields finally busted a move above my 2-year yield TRADE line of resistance (0.41%).  Credit risk derived by market morons in Congress will be priced on the short-end of the curve (where Bernanke has tried to mark it to model for 2 years), so watch that 0.41% line like a hawk.
  3. GLOBALLY – China’s Shanghai COMP TREND line = 2831 (broken); India’s BSE Sensex TREND line = 18,578 (broken); German DAX TREND line = 7251 (broken); FTSE TREND line = 5985 (broken); SP500 TREND line = 1320 (broken); Russell2000 TREND line = 827 (broken); WTIC Oil TREND line = 103 (broken); EURUSD TREND line = $1.43 (whipping around the line)

European indices have been down for the last four days and hit lower today on declining Eurozone confidence readings and a slew of bellwethers missing earnings. We continue to think that European sovereign debt contagion will erode confidence and slow growth across the region, with no country insulated. To this point, Germany’s high frequency data has slowed in recent months with inflation bumping up marginally.

 

Eurozone Business Climate Indicator     0.45 JUL vs 0.95 JUN (down for 4 straight mths)

Eurozone Consumer Confidence            -11.2 JUL vs -9.7 JUN

Eurozone Economic Confidence             103.2 JUL (vs expected 104.0) vs 105.4 JUN  (down 5 straight mths)

Eurozone Industrial Confidence              1.1 JUL (vs expected 1.6) vs 3.5 JUN  (down 4 straight mths)

Eurozone Services Confidence                7.9 JUL (vs expected 9.2) vs 10.1 JUN

 

European risk, as indicated by sovereign bond yields and cds prices, has ticked up in recent days following a massive plunge after the announcement of Greece’s second bailout package on 7/21. Critically, the 10YR Spanish government bond yield is above 6%, as Italy’s flirts just below it, and CDS spreads are above the 300bp line for Spain and Italy, two critical (historic) break-out levels (see charts below). Confirming the trend of higher yields, Italy sold €2.7 billion of 10-year government bonds today at an average yield of 5.77% vs 4.94% on June 28.

 

European Equity Watch: EUR-USD, DAX, FTSE - 1. a

 

European Equity Watch: EUR-USD, DAX, FTSE - 1. b

 

Below we show our price level charts for the EUR-USD, DAX, and FTSE. The EUR-USD has held in a band between $1.40 – $1.45 since mid March, and we think has largely been supported by implicit guarantees from European officials to fund fiscally imbalanced countries with favorable short-term bailout packages, and in some cases refuse that possibility of default/exit of any Eurozone member country (Trichet and ECB). 

 

European Equity Watch: EUR-USD, DAX, FTSE - 1. c

 

We think Spain (IBEX) and Italy (MIB) have more room to run on the downside, despite being down -13.5% and -20.4% since intermediate term highs on 2/17, respectively. We’re currently short Italy via the etf EWI in the Hedgeye Virtual Portfolio.  We covered our position in Spain (EWP) on 7/26.  Germany has now broken its TREND line of support, an additional ominous sign in our models, as is the UK (FTSE) on sticky stagflation. 

 

European Equity Watch: EUR-USD, DAX, FTSE - 1. d

 

European Equity Watch: EUR-USD, DAX, FTSE - 1.e

 

Matthew Hedrick
Analyst 


HOT 2Q CONF CALL NOTES

HOT 2Q CONF CALL NOTES

 

“We continue to see strong demand across both business and leisure travelers. This demand fueled growth across each of our nine distinct and compelling brands. Our efforts to hold the line on costs enabled us to beat EBITDA and EPS expectations in the quarter."

- Frits van Paasschen, CEO

 

HIGHLIGHTS FROM THE RELEASE

  • Adjusted EBITDA $262MM and EPS of $0.50 (excluding special items) vs. guidance of $245-255MM and $0.42-$0.46 and consensus of $256MM and $0.46
  • WW Systemwide SS RevPAR: 11.8% (8.2% in constant $) and SS NA RevPAR: 9.5% (8.7% in constant $)
    • In line with constant dollar guidance
  • "Excluding special items, the effective income tax rate in the second quarter of 2011 was 25.4%"
  • "International gross operating profit margins for Same-Store company-operated properties were flat, negatively impacted by political unrest in the Middle East and North Africa, as well as the earthquake in Japan. North American Same-Store company-operated gross operating profit margins increased approximately 170 basis points, driven by REVPAR increases and cost controls."
  • "Management fees, franchise fees and other income were $201 million, up $24 million, or 13.6%... Management fees increased 11.0% ...and franchise fees increased 19.5%... Excluding North Africa and Japan, management fees increased 16.1%."
  • "At June 30, 2011, the Company had over 350 hotels in the active pipeline representing almost 90,000 rooms."
  • During the second quarter of 2011, 13 new hotels and resorts (representing approximately 2,900 rooms) entered the system. Six properties (representing approximately 1,700 rooms) were removed from the system during the quarter"
  • [Owned, leased, consolidated JV]: "Second quarter results were impacted by the effect of the earthquake at the new leased St. Regis Osaka, five renovations and three asset sales."
  • "Originated contract sales of vacation ownership intervals increased 8.1% primarily due to improved sales performance from existing owner channels and increased tour flow from new buyer preview packages. The number of contracts signed increased 5.3% when compared to 2010 and the average price per vacation ownership unit sold increased 2.0% to approximately $14,800, driven by inventory mix."
  • "Selling, general, administrative and other expenses decreased 4.3%...due to lower accruals for incentive compensation and lower legal expenses, offset by a weaker dollar."
  • Capex: $51MM of maintenance and $32MM of development capital. Net investment spending on VOI & residential was $31MM
  • During 2Q, HOT "completed the sales of... Westin Gaslamp (San Diego) and W City Center (Chicago), for cash proceeds of approximately $237 million. These hotels were sold subject to long-term management contracts. Additionally ... the Company sold a consolidated joint venture hotel, the Boston Park Plaza, for cash proceeds of approximately $44 million and the buyer assumed $57 million of debt...The Company recognized an after-tax loss in discontinued operations of $18 million as a result of the sale."
  • 3Q Outlook: 
    • Adjusted EBITDA $225 - $235MM (includes impact of asset sales which reduced EBITDA by 8MM)
      • Guidance is below consensus of $240MM - The Westin Gaslamp and W Chicago were previously announced but the Boston Park Plaza announcement is new
    • SS Company Operated WW RevPAR:  7-9% in constant $ (500bps higher at current FX rates)
    • Branded SS Owned WW RevPAR:  8-10% in constant $ (700bps higher at current FX rates)
    • Fee growth of 13-15%
    • VOI and residential earnings:  Flat
    • D&A: $76MMM
    • Interest expense:  $55MM
    • Income from continuing ops: $70-78MM
    • Tax rate:  25%
    • EPS:  $0.36-$0.40 (consensus $0.37)
  • 3Q Outlook 
    • Adjusted EBITDA $975MM - $1BN
      • Unchanged from prior guidance. 4Q consensus is $293MM vs. implied guidance of $280-295MM
    • SS Company Operated WW RevPAR: 7-9% in constant $ (300bps higher at current FX rates)
    • Branded SS Owned WW RevPAR: 8-10% in constant $ (400bps higher at current FX rates)
      • 1% higher than prior guidance
    • EBITDA impact of asset sales: $20MM
    • Branded SS WW Owned Margins: 150-200bps
    • Fee growth of 11-13% (1% higher)
    • VOI and residential earnings: $130-140MM (Unchanged)
    • SG&A growth: 4-5% (unchanged)
    • D&A: $310MMM (vs. prior guidance of $320MM)
    • Interest expense: $230MM (prior guidance of $240MM)
    • Cash taxes: $80MM
    • Tax rate: 25%
    • EPS: $1.67-$1.77 ($0.07 raise)
    • Capex: $300MM for maintenance; $150MM for investment projects & JVs. VOI ex Bal Harbour: $165MM of positive cash flow
    • Closing of Bal Harbour units to commence in late 4Q11. Capex of $150MM

 

CONF CALL NOTES

  • Many developers around the world are interested in investing in hotel development. Their corporate clients and affluent leisure customers are healthy.
  • Rate and occupancy are now equally contributing to RevPAR growth and expect that going forward, ADR will be more of a driver
  • Latin America was their fastest growing region.  Europe performed well despite soveriegn debt issues. Mexico is recovering. Asia Pacific grew 16% outside of Japan and Shanghai.
  • 8th quarter in a row of RevPAR index growth
  • Rates on newly booked business for 2012 are up 9% and 12% for beyond 2012
  • Business transient revenue is up 9%
  • Forsee strong rate increases for corporate rate negotiations next year and the balance of this year
  • Leisure business - 7% price increase this quarter
  • VOI:  For the first time in 4 years realized price increases.
  • Expect solid group and transient pace for the balance of 2011
  • SPG drives 50% of their occupancy in China
  • Exceeded the high end of their guidance despite the sale of 3 large assets which cost them $5MM in the quarter
    • Gaslamp was already announced and factored into their guidance
  • Core business is performing better than they expected at the beginning of the year
  • So far in July, the momentum of the second quarter is continuing. They see no change in trends so far and therefore assume that the normal RevPAR recovery will continue.
  • No change in US momentum headed into 3Q
  • No improvement in sight for the Middle East. The Gulf continues to work through oversupply issues as well. Most significant impact on their business is on incentive fees.
  • Asia is now their 2nd largest region which should double in 5 years. Demand continues to outpace supply in Asia. China ex Shanghai was up 12%.
  • Vacation ownership - default rates are back to 2007 levels.  Remain focused on cash flow generation with a securitization planned for 4Q.
  • More comfortable for the midpoint of their guidance range than the high end reflected by the Street. Their guidance for FY11 has remained unchanged despite the events in Japan and the sale of 3 assets.
  • North Africa and Japan are projected to negatively impacted management fees by $18MM for FY11. 4Q growth will be lower than in the first 3 Q's of the year.
  • 40% of their fees are earned in the US
  • Remain on track to open 70-80 hotels in 2011
  • Bal Harbour:  Plan to start closing in November. Sales pace is good - especially from Latin American buyers

Q&A

  • Usually 1/3 of their group business in 2011 was booked in 2011, 1/3 was likely booked in 2010 and 1/3 was booked in the year for the year...which is typical
  • Their leverage ratios are approaching investment grade, but rating agencies are more conservative in calculating leverage. They include leases and don't give credit for cash on the balance sheet. They have $650MM of maturities next year.
  • Have no philosophical issues with returning excess cash to shareholders, it's really an issue of timing for them
  • They are signing most of their new deals in Asia and Latin America for fresh construction. North American signings have more conversions.
  • Their NA hotels will have margin improvements above 200bps, but international will be below 150bps - given the margin pressures in Latin America.  L.A. had 75bps of negative impact on the quarter's margins.
  • As time passes they do believe that there will be good ROI investment opportunities for timeshare, but the business will not get back to its prior scale
  • The group pace for 2012 continues to improve, but today it's mostly volume driven rather than rate for what's on the books. However, new business being booked is at much higher rates.
  • Approaching 60% of the value of the condos at Bal Harbour under contract ($1BN in total). Indications are that closing rates will be high.  Prices are still at pre-crisis levels.
  • M&A environment - not deep enough for a large portfolio sale. See pricing improving substantially, but it's a one's and two's market

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JCP: Shorting, Again…

Keith re-shorted JCP after an analyst upgrade offered the opportunity for more downside. Hedgeye Retail remains negative on all durations (TRADE, TREND and TAIL). Too much storytelling around Ackminism obfuscating poor positioning in the face of major industry risks, and what is likely to be a very sloppy management transition – both of which should take estimates (and the stock) down before they can ultimately go up.

 

This afternoon, the Hedgeye Retail team will be releasing our RETAIL Black Book, JCPENNEY - WHAT ACKMANISTS ARE MISSING, following up with a conference call on Tuesday August 2.

 

Please contact  if you would like to receive the report and/or participate in the conference call.  

 

JCP: Shorting, Again… - JCP SNAG


RCL 2Q CONF CALL NOTES

Lower FY 2011 guidance was expected but the Q2 miss in yields showed Mediterranean weakness played a much bigger role on RCL than initially thought.

 

 

“Since our last guidance, the turmoil in the Eastern Mediterranean has caused pricing to deteriorate even further for this region. Fortunately, our other markets are performing exceptionally well and we have been able to take our cost reductions to the next level.  As a result, profitability is still growing nicely year-over-year, but these disruptions have undermined our expectations for even better performance this year. Our long-term outlook remains highly positive and, with a strengthening balance sheet and solid liquidity, we are pleased to reinstate our dividend.  It is our intention to continue paying quarterly dividends at this level or higher as our performance improves and we work toward our goal of returning to Investment Grade.”

 

-Richard D. Fain,  RCL chairman and CEO

 

 

HIGHLIGHTS FROM RELEASE

 

2Q results

  • $0.47 EPS in-line with consensus, higher than $0.40-0.45 guidance
  • Net Yields (current currency) rose 3.8%, short of the Street's 4.8% and guidance of 5%
    • On a constant currency basis, yields rose 0.8% (Street: +1-2%)
  • Net Cruise Costs per APCD ex fuel:  +2.3%, lower than Street's +4-5%
    • On a constant currency basis, yields fell 0.1% (Street: +2%)
  • Fuel: ~$599 per metric ton

3Q guidance

  • Net yields: +5% (current)--(consensus: +7.1%); +1-2% (constant)
  • NCC: +6% (current); +4-5% (constant)
  • NCC ex fuel: +4-5% (current); +2% (constant)
  • EPS: $1.85-$1.90
  • Capacity: +6.3%
  • D&A: $175-180MM
  • Net Interest Expense: $88-93MM
  • Fuel consumption: 335k
  • % fuel hedged: 53%
  • 10% fuel price change sensitivity ex fuel options: $10MM

FY2011 guidance

  • "While most of the company’s product groups are performing at or above prior expectations, ongoing pressures from events in the Eastern Mediterranean have reduced Constant-Currency Net Yield expectations for the year by 150 bps since April."
    • Net yields: +5% (current)--(consensus: +5.5%); +2-3% (constant)
  • "Net Yields for the Mediterranean are now expected to be down approximately 4% for the year; ex Med, yields up 11% (9% on Constant basis).
  • "The company noted that with the exception of the Eastern Mediterranean, it continues to observe strong demand for its products, especially the Caribbean, Alaska and Northern Europe.  The strength of this demand (both rate and volume) reinforces that Eastern Mediterranean pricing softness this summer appears to be geopolitically related and that the economic demand for its products is strong."
  • "The company has been able to further reduce its cost outlook for the year and has reduced its Constant-Currency NCC excluding fuel by 100 bps."
    • NCC: +4% (current); +3% (constant)
    • NCC ex fuel: +3% (current); +1-2% (constant)
  • EPS:  $2.85-2.95.
  • Capacity:  +7.6%
  • D&A:  $705-710MM
  • Net Interest Expense:  $355-365MM
  • Fuel consumption:  1,319,000
  • % fuel hedged:  55%
  • 10% fuel price change sensitivity ex fuel options: $20MM

FX guidance

  • EUR: $1.45
  • GBP: $1.64

Other

  • Accounting change in interest expense revision revises Q2 EPS to 43 cents and FY 2011 EPS guidance to $2.85-2.95.
  • Quarterly dividend of 10 cents reinstated and payable August 30
  • RC facility amended in July with capacity of $875MM, which matures in 2016. Combined with $525MM revolver, company has $1.4BN in RC facilities.
  • Drew 12-yr, $632MM unsecured financing for delivery of Celebrity Silhouette
  • Fuel expense guidance: 55% hedged in 2012 at $72 bbl, 47% hedged in 2013 at $78 bbl, 30% hedged in 2014 at $87 bbl and 20% hedged in 2015 at $88 bbl. WTI fuel options at strike prices ranging from $90 bbl to $100 bbl cover an additional 8% and 11% of estimated consumption in 2012 and 2013, respectively. 
  • "Celebrity Silhouette will initially split her time between Caribbean and European itineraries."
  • Capex guidance: $1.1BN (2011); $1.2BN (2012); $500MM (2013); $1.1MM (2014)
  • Capacity guidance: 7.6% (2011); 1.9% (2012); 2.5% (2013); 0.7% (2014)

 

CONF CALL

  • Will have a very good year despite Mediterranean concerns
  • Booking volume and APD are up for the next 6 quarters
  • 2011--increased Med. itineraries the most since it was the most promising at the beginning of the year
  • Inflation pressures have not abated but good cost control in other areas keep overall costs down
  • Revisions to their interest expense – was in relation to their export credit loans.  There was a change in the timing of the payment of certain loans which required a change in the way they account for the interest on the loans.  There is no cash impact to the revision. 2009 was the first year of their mistake.

  • 2Q
    • Yields up 9% in Caribbean
    • Solid double digit growth in Alaska/Baltic regions
    • West Med: mid-single digits
    • East Med: down
      • April/May came in as expected but June close-in bookings were very weak
    • Solid pricing in NA and Europe, except Spain
  • Interest expense: 10MM higher than guidance due to new interest accounting but adjustments below the line
  • All brands showing positive trends for rest of year
  • Much deployment moved from Egpyt to Tunisia
  • 3Q/4Q: overall load factors and APDs higher YoY
  • 3Q:
    • Eastern Med. itineraries: 18% in 3Q
    • Western Med. itineraries: slightly higher yields in 3Q
    • For all other regions, strong demand (double-digit yield improvements)
  • Japan redeployment will linger until October but business is recovering
  • 2012: Slightly less than 25% booked but running ahead of a year ago; Europe also up in load factors and APD
  • Average cost of debt:  4.4%
  • 2012 average debt cost:  4.4%
  • 10 cent/Q for dividend is conservative
  • 10Q will be filed on Monday
  • Royal Caribbean brand:
    • Half deployed 50% of European ships this summer
    • Most capacity in Italy and Spain
    • 2012 deployment: shift European presence from South to North
    • Only marginal growth in Europe passengers in 2012
    • Alaska/US/Baltic environment positive in summer
    • Radiance of the Seas revitalized in June; Splendor of the Seas will be revitalized later this year
  • Celebrity brand:
    • Alaska, Bermuda, Northern Europe doing well in 2Q
    • Sailings in Eastern Med/ Holy Land difficult
    • Caribbean performing ahead of 4Q2010, 1Q 2011
    • 90% of fleet will be Solstice-class in 2012

Q&A

  • Bookings slowed down in mid-May, particularly for Eastern Med. Higher YoY bookings at discounted rates in July for Eastern Med.
  • 45% of inventory will be in Med in 2011
  • FY 2011: 150 bps yield decrease due mostly to close-in bookings
  • 2012 summer pricing in Eastern Med: slightly better but too early to tell
  • 2012 itinerary breakdown: flat in Europe YoY (in terms of market share by region)
  • No capacity increase in Europe in 2012; current forward bookings better than at this time last year
  • $200-250MM maintenance capex run rate in 2012
  • No impact on investment-grade rating
  • 2011:  On-board guidance flat from previous forecast
  • North America strength: Solsticizing in Celebrity have driven strong growth
  • Western Med: yields will be higher this year
  • 2012 NCC: will continue to manage costs well
  • 2012 fuel expense: underlying bunker composition has not changed
  • Has not done any additional fuel hedges in 2011
  • Onboard spend: broadly flattish

THE HBM: WEN, MCD, GMCR, EAT, PFCB, KONA

THE HEDGEYE BREAKFAST MENU

 

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

 

MACRO

 

Unemployment

 

Initial jobless claims came in at 398k for the week ended 7/23, down 24k from the previous week’s revised number of 422k.  The four-week rolling number declined by 8.5k to 414k.

 

THE HBM: WEN, MCD, GMCR, EAT, PFCB, KONA - initial claims 728

 

 

Commodities

 

Coffee was weighed down by growing inventories at European ports and assessments of crop positions in top producer Brazil improved.

 

 

Europe

 

Eurozone economic sentiment worsened more than expected this month.  Optimism faded in all sectors, according to the data collected by the European Commission. The European Commission Economic Sentiment Indicator has been declining since February.  The monthly index, based on a survey of businessmen and consumers across the 17-nation euro zone, fell to 103.2 in July from 105.4 in June.

 

 

Subsectors

 

Restaurants continue to underperform, confirming further a change in how these sectors trade.  For much of the past year, restaurants have been outperforming; now it seems that the space is underperforming food and beverage categories.

 

THE HBM: WEN, MCD, GMCR, EAT, PFCB, KONA - subsector fbr

 

 

QUICK SERVICE

  • WEN rated “New Buy” at Janney on accelerating same-store sales.  We wonder if the QSR industry is doing that well; MCD is also seeing strong SSS.
  • GMCR reported after the close yesterday and blew away expectations. We expect some positive flow through for the coffee space today. 

 

 CASUAL DINING

  • EAT was upgraded to “Buy” from “Hold” at Miller Tabak.  This stock has been a Hedgeye favorite for some time.
  • PFCB was cut to sector perform at RBC Capital after it put up a terrible quarter and guidance yesterday.
  • KONA is the Teflon Don of the space, at least for now.  KONA gained 7.5% on accelerating volume in a horrible tape.  We believe that there is more to come from this company in 2011 and that their remodel program will support improved trends.

THE HBM: WEN, MCD, GMCR, EAT, PFCB, KONA - stocks 728

 

 

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 80.33%
  • SHORT SIGNALS 78.51%
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