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Old Men

“By 1918 everyone under the age of forty was in a bad temper with his elder…there was among the young, a curious hatred of “old men”.  The dominance of “old men” was held to be responsible for every evil known to humanity”

-George Orwell


The easiest path for an individual to take when faced with a suboptimal set of circumstances is to shift the blame, or burden, to another party.  For anyone that has been part of a team, be it a sports team or any group of people striving towards an individual goal, what sets a good team apart from a bad team is that the individuals therein do not shirk from responsibility or duty – they seek it and thrive as a result. 


Lately Keith has been constantly highlighting the (wit and) wisdom one of the great American winners of recent times – Vince Lombardi.  During a time of political and economic turmoil, the philosophies of leaders like Lombardi are far more likely to lead us out of the situation we face than those currently holding court in Washington D.C. 


“Old men” being hated in 1918 sounds quite similar to “old men” being hated in 2011.  The hatred of 2011, in my imagination, is not aimed solely at men of a certain age – I hope to become an old man one day – rather, it is aimed at men, typically old, that are stuck in old methodologies that have failed time and again. 


Rather than stopping, rethinking, reworking, and evolving, “old men” in 2011 simply press replay all the while expecting a new outcome.  Political and economic dogma is what is drawing ire among voters and market participants. 


Yesterday rumors that the most recent of the “old men” to head up the Federal Reserve in this country, Ben Bernanke, will start a fresh round of stimulus may have prevented the longest slump in performance of the Dow average since 1978; the Dow had fallen for eight consecutive days on the back of growing concern that the U.S. economy may slow further and that the $1.07 trillion in lost market value from American equities over the eight-day slump could begin to negatively impact consumer spending. 


History shows that “Old Men” in the financial industry have generally been put out to pasture by fresher, more original and adaptive players.   It is Hedgeye’s view that dogma and opacity will be exposed, real-time, in the finance world of tomorrow.  Whether it is via Twitter or another medium, the hatred of “Old Men”, and the conventions of their era, is driving the debate into the open.  In the research world, that is where Hedgeye is positioning itself.


The hedge fund industry is also changing.  It always has.  The book “More Money Than God”, by Sebastian Mallaby chronicles the history of a small group of people that shaped the hedge fund industry.  From the creator of “hedged” funds, Alfred Winslow Jones, to George Soros, the professional longevity of each character was largely defined by his ability to stop and rethink.  Jones did not adapt and so his protégés abandoned his firm upon realizing that the fund’s successes were down to them and not Jones. 


Soros, having studied the philosophy of Karl Popper at LSE in the middle of the twentieth century, held firm the belief that humans simply cannot know the truth.  He then developed this own idea of how markets work, building off the thoughts of Popper, called the Theory of Reflexivity.  The development of this theory enabled Soros to retire as a hedge fund manager with his abilities as an investor almost never questioned, nor deemed out of date, by his peers.  In terms of managing money, specifically, Soros may now be a man of a certain age but he never allowed himself to be one of the “Old Men”.


What’s clear at this point is that the bad team of “Old Men” in Washington is spending the majority of its time apportioning blame and jostling for media limelight.  The signs of Americans’ hatred for these “Old Men” are everywhere to see: consumer confidence, the stock market, 45.75 million people on food stamps (no double-dip for these folks, just one long downturn).  The number of people receiving food stamps increased 12%, year-over-year, in May 2011.  Alabama is the state that saw the largest increase at 120%.


Our troubles are causing the “Old Men” abroad to respond because it is starting to hurt other economies too.  Japan is following Switzerland in intervening in the currency markets as the currencies’ “safe haven” status could hurt their respective economies.   Europe is constantly on edge, fearful of contagion, and ready at a moment’s notice to extend further bailouts to periphery nations.


Blaming “Old Men” won’t fix any problems in the financial system, nor will it fix any problems in Washington D.C.  Leaders stepping forward to enact change for the better have to have the courage to do so. 


That is what Hedgeye is attempting to do in our small part of the world and our clients, critics, and supporters help us sustain our efforts.  Globally, governments are being overrun by dogmatic “Old Men” eager to get, and stay, in office. 


Irrespective of the performance of the S&P 500, the fortunes of Main Street America have not been improved over the past two years; some new ideas are needed.


Function in disaster; finish in style


Howard Penney

Managing Director


Old Men - foodstamps may 2011


Old Men - Virtual Portfolio


Pardon the length of this note, but we think BYI could be the next big thing.  The story isn’t this past quarter or next quarter but we will give you the preview on both.





We’re not expecting much this quarter from BYI, nor are we expecting terrific guidance for FY2012.  In fact, guidance will likely be heavily back end loaded with a range big enough to drive a truck through.  The Street may be closer to the high end of guidance than the low end.  How will investors react?  Hard to say but this isn’t a call on the events of August 9th.


We believe BYI is a calendar 2012 story, which is to say we buy the back end loaded earnings outlook – before management even articulates it.  Replacement demand is a big part of the long-term thesis but not over the intermediate term.  Rather, BYI’s systems business should provide a huge boost to the bottom line beginning, in earnest, in FQ3.  While we are below the Street for FQ1, we are well ahead for the back half.  The stock trades at 14x our forward estimates while we expect EPS growth to accelerate, potentially at a 20% annual clip for 3-5 years.  




Our projection is that BYI’s FYE quarter will come in-line with consensus estimates of $203MM of revenues and $0.55 cents.  As long as there are no big surprises in the quarter, we expect much of the call will be focused on the year and the opportunities ahead.  Clearly, there is a fair amount of skepticism over the company meeting over consensus expectations, and part of the issue is the backend loaded nature of BYI’s opportunities.  We’re below the street for F1Q12 but ahead for the back half of FY2012 given:

  • Lack of new openings and expansions in NA in the September quarter
  • Italy and Canada not hitting until the December or March quarter
  • Full benefit of Acqueduct opening not until the December/ March quarter
  • Full library of 50 Alpha 2 titles not available until calendar year end 


Systems driving the intermediate growth

On the systems’ side we have identified over $230MM of announced systems new install contracts – over 75% of which we believe will be realized between December 2011 and June 2013.   This amounts to an average of over $25MM per quarter. BYI’s current system’s run rate of $50MM/Q consists of over 70% upgrade sales to existing customers and recurring revenue.  If BYI can maintain its current run rate of upgrade and recurring revenue, we believe that they should be able to achieve a $60MM run rate and even have some $70MM quarters.  




Other growth drivers

In addition to new systems installation opportunities, iVIEW DM can potentially provide a new layer of growth for BYI.  On June 14th, BYI announced that it reached an enterprise wide deal with CZR to install iVIEW DM across a number of properties.  The first installation will occur at Horseshoe Hammond, which has 3,160 slot machines – of which roughly 50% (video slots) should be eligible for an iVIEW DM install.  If BYI can deliver a compelling value proposition on the initial installs, they will have the potential to install iVIEW DMs across CZR’s portfolio of over 60,000 slot machines - of which roughly 50% could support an iVIEW DM without upgrading machines.


BYI’s gaming operations is also set to show compelling growth over the next two years.  Their Italian units should start coming online late this year (in the December quarter).  According to Lottomatica, there were roughly 23,000 VLTs in operation at the end of June in Italy – the vast majority of which were produced by Speilo and Novamatica.  By the end of the year, they expect that 75% of the allotted VLTs to come online.  LTO’s VLTs are generating approximately $260/day while the market as a whole is generating a daily win of roughly $245/day –both of which augur well for BYI’s 4,500 or so units which get installed as daily fee games.  We estimate that once all the units are installed, they will generate about $40MM/year in revenue. 


The slots at Acqueduct are also slated to open in two phases by the end of 2011/early 2012.  BYI will get 50% share of the 4,500+ slots that are coming online, which we estimate will add roughly $14MM of annual revenue to BYI’s gaming operations business.  This is before we take into account the success of Cash Spin and iDeck.


Lastly, BYI is poised to gain market in the game sales market as more Alpha 2 content comes online.  By the end of the year, BYI expects to have 50 Alpha 2 titles available.  The June quarter will be the first quarter of shipments to Australia, and if their games perform well, BYI should be able to ship at least a 1,000 units a year into that market.  Even excluding Canada, we estimate that new openings and expansions should grow by 40% YoY in 2012.  We also estimate that replacements should increase by at least 15% YoY. All of this bodes well for BYI’s product sale opportunities.


When you add this all up, BYI should be able to hit the $3 annual earnings bogey over the next 18 months. 



FQ4 estimate detail 


We expect BYI to report $203MM of revenue and $0.55 of earnings.


Gaming equipment sales of $68MM at a 45% gross margin             

  • 3,900 new unit sales at an ASP of $15.5k
    • 2,700 NA machine sales (primarily replacement sales) and 1,200 international unit sales
    • “I think we would expect to see some seasonal increase in the number of replacements going into Q4.” Replacements last quarter were ~2,220
  • $7.2MM of parts, conversion and other sales
    • “I think we’re certainly focusing on used game markets these days. It’s something that, from an international perspective, we haven’t really focused on over the last couple years, so I would see some increases in used games going forward.”
  • Last quarter game sale margins were negatively impacted by 300bps of “write-offs related to the warranty of older technology platforms”. Adjusted for the write downs, margins would have been 45% - 46%
    • Margin guidance from the last call: “I think they’ll be in the mid-40 neighborhood. You have to remember we did just release… the Pro Curve, and the V32 is now out in the Pro series, which will put a little bit more pressure on our margins in the upcoming quarters… Longer-term, we expect to bring margins back to the low to mid-50s”

Systems revenue of $53MM at a 73% gross margin

  • BYI should be able to recognize the Galaxy Macau contract which we estimate was worth about $8MM in revenues
  • “iVIEW DM, and the Elite Bonusing Suite continue to generate strong customer interest… combined with our strong pipeline and industry leadership position, should result in increased systems revenues in the coming quarters.”

Gaming operations revenue of $82MM at 70% margins

  • Over the last 4 years, there has been an average 11% sequential increase in gaming operations revenues from 3Q to 4Q
  • “Cash Spin continues to perform well. Deployment of Vegas Hits has now gone past 550 units, and is currently our best-performing premium game. We recently released Cash Wizard, our first Pro Series ALPHA 2 premium game. The total orders for Cash Wizard, including those already installed, has now crossed the 700 mark.”
  • “We are very well-positioned to continue our solid growth in the WAP and Premium market segments.” 

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JCP: Retirement Plan a Drop in the Bucket


Two days into Johnson’s tenure on JCP’s Board, the company initiated JCP an early retirement program, which is a nice move for Johnson at face value. He is effectively throwing his feelers out to see which senior members of the organization are interested in taking the offer helping shed overhead. Here are a few thoughts on the news:

  1. There are few details regarding the scope and size of the voluntary-retirement program. We have run a few numbers on what this could mean, but in doing so, assume this plan is intended only for those at corporate.
  2. With roughly 150,000 employees and using the general rule of thumb for a big box retailer that corporate accounts for ~2% of employees, we are talking 3,000-4,000 eligible heads. Of that number, there are likely 20% that have 20-years under their belt, which further narrows the pool of eligible employees down to 600-800 potential takers, or 0.5% of JCP’s entire workforce.
  3. On a dollar basis, this equates to roughly $140mm or 10% of JCP’s total salary expense, and ~2% of SG&A according to our math (see below).
  4. This implies an opportunity to shave 80bps off SG&A if every single employee took the offer and the company doesn’t back-fill vacated posts with new talent, which is highly unlikely. More realistically, we’re talking maybe 10%-20% of those eligible “cash out” early, which equates to 7-15bps margin opportunity.
  5. In fact, given that the company will have to payout severance expense associated with early retirements that most likely include at least 3-years of salary, we’re looking at ~50bps hit to margin before the company starts to realize its 15bps benefit.

The bottom-line here is that we agree that this is step in the right direction for the company over the longer-term as it looks to reduce fixed overhead costs.  It’s also a great way to get rid of ‘C’ and ‘D’ players.


But in the grand scheme of what needs to be fixed at this company, it is only a drop in the bucket. We still think that this will prove to be an extremely ugly CEO transition, and that earnings will go much much lower before they go higher. Johnson’s duration of 7-years is much greater than the average investor.


See our recently released JCP Black Book for more detail on this and other factors that have us squarely in the bear camp on JC Penney. If you are interested in receiving a copy, please contact .


JCP: Retirement Plan a Drop in the Bucket - JCP Emply 3 8 11


JCP: Retirement Plan a Drop in the Bucket - JCP Emply 2  8 11


JCP: Retirement Plan a Drop in the Bucket - JCP Emply 8 11



Casey Flavin



Solid quarter in a tough environment. ASCA continues to be prudent in capital deployment as cash flow accelerates.



“The second quarter of 2011 may be considered one of the most significant periods in Ameristar’s history because of the foundation it set for future growth.  As we seek external growth opportunities, we believe the combination of our ability to generate substantial free cash flow and our recent strategic transactions will help to deleverage the Company at a solid pace, particularly when the economy begins to show meaningful recovery."


- Gordon Kanofsky, Ameristar’s Chief Executive Officer




  • As a result of ASCA's debt refinancing and stock repurchase they "recorded on a pre-tax basis an $85.3 million loss on early retirement of debt and $3.4 million in non-operational professional fees during the 2011 second quarter.  The refinancing extended the maturity of all our debt, reduced our weighted-average interest rate, resulted in more favorable covenants and provides us with flexibility for meaningful growth opportunities in the future.”
  • "While gross revenues were relatively unchanged, promotional allowances decreased $12.7 million (15.5%) from the prior-year second quarter. Promotional costs were reduced as a percentage of gross gaming revenues at each property, with an overall decrease from 26.0% in the second quarter of 2010 to 21.9% in the second quarter of 2011."
  • "In May 2011, Indiana reduced its state income tax rate from 8.5% to 6.5%, which will be phased in over a five-year period beginning July 1, 2012. This change reduced the value of our state deferred tax assets (net of federal taxes) that can be realized in the future."
  • "Adjusted EPS for the 2011 second quarter was favorably impacted by $0.15 (net of fees and taxes) by the reduction of approximately 21.0 million in the weighted-average number of diluted shares outstanding from the April 19, 2011 share repurchase. The increase in Adjusted EPS from the prior-year second quarter was also attributable to efficient revenue flow-through and decreased interest expense resulting from the termination of our interest rate swap agreements in July 2010 and the lower interest rates achieved through the refinancing."
  • Debt: $2.01BN. "In July 2011, we repaid an additional $35.0 million. After taking into consideration the July debt repayments, we have $221.8 million available for borrowing under the revolving credit facility." 
  • Net Leverage Ratio: 5.48x
  • Capex: $16MM
  • 3Q Outlook: “Although the magnitude of the year-over-year growth seen in the last two quarters may be difficult to sustain for the entire year, we expect our stream-lined operations, profitable marketing strategies and top-flight product and service offerings to result in another strong and efficient financial performance for the third quarter"
    • D&A: $26-$27MM
    • Interest expense: $27-28MM (incl non cash interest expense of $1.3MM)
    • Tax rate: 20-25%
    • Capital spending: $10-15MM
    • Stock comp: $3.5 - $4MM



  • Operating in a stable promotional environment.  5 of their properties grew their net revenues.  6 of their properties grew their adjusted EBITDA. Their promotional spend was down across all of their properties.
  • No significant guest impact from flood waters. Had $400k of flood related expenses excluded from Adj EBITDA.
  • East Chicago - strong performance across all key metrics including 100% flowthrough of revenue growth. Attribute the improvements to normalization of hold at table games, marketing and cost efficiencies
  • Kansas City: EBITDA growth was more than 2x net revenue growth
  • Very confident that they can continue to achieve strong flow through in the coming quarter
  • Blackhawk - construction on Canyon Rd that has had some negative impact on the property's performance
  • They had a number of deferred tax assets in Indiana calculated at the higher tax rate, now that the tax rate is lower they had to revalue and write down the value of the deferred asset
  • Share count going forward: 34.5MM shares and 41.7MM average weighted at year end
  • New facility allows them more flexibility to pursue growth opportunities
  • FCF is $7MM higher post transactions
  • YTD $156MM of debt repayments have been made including the July repayment
  • R/C has a $200MM accordian feature which they haven't used yet
  • Now they have a total 'Net' leverage ratio vs a Total Leverage ratio.
  • Sr. Secured Ratio was 3.2x vs 4.5x
  • Interest coverage is still over 3.5x times - can't be lower than 2x
  • Lower tax rate going forward is due to certain state allocation changes that will impact them in the quarter. In Q4 the blended tax rate will be 40%.
  • Expect to continue to generate significant FCF - retire $40-45MM of debt in 3Q (prob closer to $45MM)



  • East Chicago - surface street project will help them but timing is uncertain
  • Confident that they can continue to grow YoY for the balance of the year.  Seeing greater signs of stabilization in consumer spending.  Saw increases in consumer spending in 2 of their markets despite lower promotional spending
  • Vicksburg had a good quarter despite elevated water levels.  2 operators in the market were closed and two remained opened (incl themselves) - so they obviously had some benefit from decreased competition
  • Favors acquisitions over greenfield opportunities.  Would rule out acquiring an entire company - not a top priority.  Opportunities that allow them to diversify revenue and EBITDA. There are a lot of assets that they could improve operating performance if they folded them into their system.
  • Have a lot of flexibility (financially and from a leverage standpoint) regarding acquisitions - their covenant is 7x
  • Is most of the improvement driven by their high end customers?
    • See that admissions have declined while the average loss per customer has gone up- all of which adds up to them getting higher quality of revenue
  • Bridge construction will last next year (St Charles).  Will close the Westbound span for about a year- currently there are 5 lanes going in east direction will go to 3 lanes with dividers. Shouldn't be too disruptive since there are lots of options to avoid the traffic, but they will likely suffer some revenue losses.
  • Blackhawk - 2 projects- sewer line work - finishing up and will pick up later this year down the hill.  There is also a project to straighten and widen I114 - encompasses an area a mile or so from Blackhawk. Construction is mostly during off hours - but it likely still has some small impact on them.

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