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Hard to find much positive in this quarter and the conference call didn't exactly alleviate intermediate concerns. We'll have more opinions in an upcoming note.



“Given our outlook for flat near-term industry replacement demand and the industry’s current pace of new technology adoption, we recently conducted a thorough review of our business strategies and product plans"


- Brian R. Gamache, Chairman and Chief Executive Officer




  • $203MM of revenues and $0.44 of Adjusted EPS - missing street expectations and guidance and took down the top end of their FY12' to 3-5% growth from 3-7% top line growth
  • New unit sales: 6,510
    • NA: 4,043 with 3,700 replacement units
    • International: 2,467
    • "Ongoing growth in Australia and Asian markets was more than offset by lower shipments to Europe and Latin America."
  • ASP: $16,951
    • "The average sales price for new units increased 9%... largely reflecting a higher mix of Bluebird2 and Bluebird xD gaming machines coupled with a higher mix of premium products. Bluebird2 and Bluebird xD units accounted for more than 98% of total global new unit shipments"
  • Other product sales declined "primarily reflecting a decline in revenues from conversion kit sales and other higher-margin products."
  • Install base at QE: 9.870
    • "The quarter-end and average installed base were negatively impacted by idle participation units at certain casinos that were closed during a portion of the June 2011 quarter due to flooding along the Mississippi, Missouri and Ohio rivers. The estimated impact during the quarter from these idle units, including an above-average number of high-performing coin-in units, totaled nearly 8,000 lost unit revenue days, with an estimated impact to earnings of approximately $0.01 per diluted share."
    • "During the June quarter WMS received approvals for two new participation games – the STAR TREK Battlestations and Alice themes – and, including new games that received approval in the preceding quarter, installed over 500 of these new games"
  • Average win per day: $76.13
  • "Total gross margin was 57.4% compared to 60.7% in the March 2011 quarter and 63.8% in the year-ago period, and includes a 320-basis point impact of inventory, other asset write-downs and other charges, coupled with a lower mix of high-margin gaming operations revenues and a decrease in product sales gross margin"
    • "Product sales gross margin was 44.9% in the June 2011 quarter, including the $4.9 million, or 380-basis point, impact of inventory and other asset write-down charges included in cost of product sales"
    • "Gaming operations gross margin was 79.8% in the June 2011 quarter compared with 81.1% a year ago, reflecting the $1.7 million, or 230-basis point, impact of the asset write-downs and other charges included in cost of gaming operations, partially offset by favorable jackpot experience."
  • "We are streamlining our product management and product development functions, simplifying product plans and further prioritizing on-time commercialization of new game themes, products and portal gaming applications for our core product sales and gaming operations businesses. These actions are expected to better direct resources and focus on near-term revenue opportunities and will reduce our overall organizational staffing by approximately 10% to a level that better correlates with the current operating environment, while maintaining our ability to create great games that engage current players and attract new players. We expect these actions to further strengthen our operating efficiencies and effectiveness, meaningfully reduce costs and improve our operating margin. The tough decisions we made as part of the strategy review also led to the impairment, restructuring, asset write-down and other charges recorded in the fiscal fourth quarter. We expect to record further pre-tax charges of $11-to-$14 million, or $0.12-to-$0.15 per diluted share, in the September 2011 quarter, largely to complete the restructuring actions."
  • "Total revenues in the June quarter were less than anticipated principally due to lower product sales revenues resulting from the Company entering into an operating lease arrangement with the Seminole Tribe of Florida for 600 new units in lieu of prior expectations of a comparable unit-sized product sales order in the June quarter."
  • "During the June quarter, we began to realize benefits from initiatives announced in April aimed at improving operating execution and the ratable launch of new products, as quarter-end compression was reduced and the flow of new product approvals improved in the June quarter."
  • "We also decided to provide operating leases to selective customers as a way to leverage WMS’ solid financial position and strong balance sheet to bring our latest cutting-edge products to customers’ gaming floors.... Our new, multi-year operating lease agreement with the Seminole Tribe of Florida includes many of our most innovative new gaming entertainment products, such as the G+ Deluxe and Reel Boost series of video games and our Networked Gaming Portal applications. We will consider similar mutually beneficial operating lease arrangements with other customers when WMS can achieve an attractive return on investment.”
  • "WMS repurchased 674,664 shares, or $21.5 million, of its common stock in the June 2011 quarter at an average price of $31.83."
  • "WMS today narrowed its revenue guidance for fiscal 2012 and now expects 3%-to-5% growth over fiscal 2011. Overall, the Company’s guidance assumes that the general industry and economic environment will remain lackluster, with customers’ capital spending plans remaining flat with prior-year levels during the remainder of calendar 2011 and into calendar 2012."
    • further international market penetration
    • increased Class II opportunities
    • modest resumption of growth in the second half of the fiscal year in WMS’ participation business
    • a modest contribution from the commercialization of the Company’s initial portal game applications
    • a modest increase in online gaming revenues
    • expected improvement in new unit demand from an increase in new casino openings and major expansions in the second half of the fiscal year.
    • The Company expects the replacement cycle for gaming machines in the U.S. and Canada, along with overall average pricing, to change minimally on a year-over-year basis.
    • Guidance does not reflect any incremental revenues from the potential expansion of Illinois gaming or the opening of the Illinois or Ohio VLT markets.
    • R&D spending equivalent to about 13% of total revenues
    • Operating margin improvements
  • "Consistent with fiscal 2010 and 2009, quarterly revenues and operating margin are anticipated to be lowest in the September 2011 quarter and increase in each subsequent quarter with the highest revenue levels and operating margin in the June 2012 quarter. WMS expects quarterly revenues in the September 2011 quarter to be slightly below the percentage of annual revenue achieved in both fiscal 2010 and fiscal 2009, reflecting anticipated lower year-over-year demand as a result of the change in timing of the G2E industry trade show moving from the third week of November to the first week of October and a slightly higher percentage of revenues in the June 2012 quarter due to an anticipated increase in new casino opening activity."



  • Expect further margin improvement for product sales in FY12
  • Expect revenues from new unit sales to increase slightly in FY12' but to be back end loaded
  • Expect that installed footprint will grow in F2012 and average daily revenue will remain flat
  • Expect that D&A will increase sequentially due to higher leased units and the BB2 refresh
  • Have 18 approved game themes in Australia and continue to have traction there
  • Progressing with approvals and field trials for their portal application products. Will continue to maintain pricing flexibility with early adopters.



  • Based on their expected revenue increases and expected margin improvements they would be very disappointed if they don't meaningfully increase EPS in FY2012
    • This may be the only positive takeaway from the call but management did hedge by saying they are not providing EPS guidance - do they have credibility?
  • Pricing elasticity - are they pricing too high vs. their peers?  The ASPs they are quoting are already net of discounts
  • Thinks that their ship share is in the mid-20s this quarter. Expects that pricing will continue to be challenging in the next quarter or two.
  • When they spoke about margin improvements in '12 they are looking at adjusted margins
  • Pricing for used games is down even though units are flat
  • Think that the SG&A savings will be north of $20MM on a run rate basis
  • The cost savings will be through R&D, SG&A, and product margins too - since they are all headcount related
  • Operating leases will show up in other revenues in gaming operations. The current other game ops revenue includes royalties, operating lease revenue, and daily fee machines.  The current quarter doesnt include a full quarter of the Seminole fees.
  • Q1 will be lower than F09 and F10 as a % of year revenues
  • They are not actively pursuing deals
  • Replaced a third of their BB1 participation footprint. Feel like they have some pent up demand for their new participation titles. Pirate Battle was just approved in NJ.
  • Have 300 portal application units today, expect it to double by YE. By end of F12', think that they will have 100 customers. Feel like they can generate their own replacement cycle with the rollout of portal applications.
  • Product sale margins - think that 48-49% was a normalized level for the quarter when you add back the writedowns. Think it will be a ramp up from Q1 to Q2.
  • Italy - one regulator.  One of the early international providers is ahead of everyone in the queue so they are just patiently waiting. They haven't included Italy.
  • Capex - they will continue to convert the install base of their gaming operations business


PFCB is starting to show up as a long idea in some people’s models.  Is now the time?


I’m getting a lot of questions about PFCB on the long side following the recent EPS miss and strong underperformance of the stock.  I agree there is big money to be made catching these mid cap restaurant turnarounds but, like catching falling knives, timing is critical.  The risk of sitting on the sidelines for now is that a PE firm or an activist investor may decide to make a run at PFCB.  However, at this point, we think there could be some downside risks, but we lack the catalyst to see how the turn is going to unfold.


From a valuation standpoint, PFCB is trading at 5.47X EV/EBITDA or about one multiple points away from the low multiple of 4.52 set back on 11/21/08.  Certainly, the stock is cheap but - in our view - it’s cheap for a reason. 


In order to become more constructive on the stock, we need a catalyst and visibility that there is a clear path to financial recovery.  While the company is addressing the needs of the core customer, it is very difficult to get a grip on how the company’s turnaround plans will impact the financial performance.  Until that becomes clearer, we will remain cautious on this name.


First, the company will be making several changes to the menu.  Enhanced Happy Hour offerings will likely drive traffic at the Bistro but judging the impact on margins from the new lunch menu will be difficult to do.  The company is attempting to boost its lunch business.  Management said that the change centers on a shift from serving dinner at lunch to serving lunch at lunch.  A standalone lunch menu has been rolled out in test markets with lighter fare that is portioned and priced for lunch and provides a wider variety of items.  At the same time, the new dinner menu will offer lower-priced entrées ($8-$12 range).  These initiatives are in the testing phase and, in our view; do not serve as catalysts on the long or short side.  We will be sitting and watching to see how these initiatives pan out.


Second, the guest service enhancements Bistro, through targeted staffing increases have not fully impacted the P&L yet.  Most importantly, spending on the new restaurant look and feel has been accelerated but how the capital will be deployed and what the return on that capital will be is unclear.


I’m not ignoring the changes at Pei Wei but the issues are largely the same. 


As you can see from the PFCB Hedgeye quadrant charts below, it will be another six months before investors will likely see improvement in the financial performance of the company.  In contrast to Brinker, a casual dining company that had successfully turned around its sales and margin trends before the stock worked. 


PFCB - IS IT TIME TO BUY? - pfcb quadrant chart


PFCB - IS IT TIME TO BUY? - eat quadrant



Howard Penney

Managing Director


Rory Green





Conclusion: This market is as cheap as consensus wants it to be – if you use the wrong forward EPS assumptions.


Position: Zero Percent US Equity Allocation.


When stocks get tagged like they are today, the fall back for equity investors is to point to valuation as a reason to remain positive on the outlook for equities.  While this can have credence at times, whether equities are truly a good value depends on the reliability of the forward earnings projection.


Currently, the S&P500 is broken from across all three of our key risk management durations, which is confirming our fundamental call for Growth Slowing on an intermediate-term basis. Although it is now morphing into consensus, we have held this contrarian view since the start of the year and both our bottom-up macro models and our top-down quantitative models continue to validate this conclusion.


Speaking to 2H11 specifically, Bloomberg Consensus (78 buy-side and sell-side institutions) forecasts for 3Q11 and 4Q11 GDP growth are still at +3.2% apiece on a QoQ SAAR basis. Our models continue to point to rates of U.S. economic growth that are half, or less, of those consensus estimates. We expect the consensus forecasts to once again be revised down intra-quarter, but to likely still be too high when it’s all said and done. If 1Q11 and 2Q11 have taught us anything about the merits of consensus growth forecasts, it’s that they are not to be trusted.








Perhaps the largest problem with consensus growth forecasts is that they are trusted. Be it corporations in their inventory planning, entrepreneurs in their plans to start businesses, consumers in their plans to lever up or spend, or bottom-up/fundamental equity investors in their EPS models, consensus estimates for U.S. GDP are pervasive throughout our economy. Given this construct, the biggest risk to this market and the U.S. economy at large remains that consensus assumptions for U.S. (and global) economic growth could continue to be way off the mark.


What if 2012 U.S. GDP growth is not in the area code of the +3% YoY rate currently forecasted by Bloomberg consensus? What if consensus’ +3.2% YoY assumption for 2013 U.S. GDP growth is equally as far off as their +3.2% YoY assumption for 2011 GDP growth has been? We would submit this scenario analysis would materially adjust the 2012 and 2013 EPS targets embedded in many bottom-up company models to the downside.




We’ve been vocal YTD on our call that the Street’s earnings assumptions are simply too rich.  With an S&P 500 NTM EPS forecast $99.73, consensus is clearly expecting a rebound in U.S. economic growth in their current modeling assumptions. We arrive at this conclusion based upon the conviction we have in our call for historically overstretched U.S. corporate margins to compress on a go-forward basis. Simply put, if margins are compressing, a company needs topline growth to outpace the rate at which its operating performance is deteriorating in order to drive earnings growth. We do not see that happening. 




In fact, slowing or declining GDP growth can lead to dramatically decelerating earnings. In the last decade we have seen this in spades as noted by the -21.5% decline in SP500 TTM earnings from March '01 through June '02 and -44.0% decline in S&P 500 earnings from September '07 through September '09. Going back the last thirty years, there have been five periods in which earnings for the S&P 500 broadly have declined.  On average, the decline has been a peak-to-trough decline of -25%.  In a scenario analysis where we assume we are entering a period in which earnings are on decline and they decline by the average of the five declining periods over the last thirty years, the implied earnings of the S&P 500 over the next twelve months is ~$74.79.  Based on the current price of the S&P 500, this is a ~16.2x earnings multiple.  Not exactly cheap.


With U.S. debt/GDP at 91.6% per the IMF (2010), we’d contend that consensus estimates for U.S. GDP growth over the next 2-3 years are as pollyanish as the Congressional Budget Office’s +2.9% average projected GDP growth over the next decade. Not only is the long-term trend of U.S. GDP growth over the last ten years far below that at +1.7% YoY, our 18-month-old work on the Sovereign Debt Dichotomy leads us to believe that U.S. economic growth may be more structurally impaired than not (email us for the relevant presentation materials).




Given the price action in the S&P 500, with the index crashing through its former long-term TAIL line of support (now resistance), we think the quantitative setup of this market is telling you that the above scenario analysis is now in play. Obviously Big Government Intervention in the form of additional easing out of the Fed could stand to limit any potential downside, but we’d be remiss to blindly trust our client’s hard-earned capital in the hands of the Central Planning Elite.




At a point, we think no amount of Quantitative Guessing will be powerful enough to overcome the likelihood that consensus (both buy-side and sell-side) has their 2011-13 EPS assumptions substantially off the mark. Again, the market can look as cheap as consensus wants it to look if they remain content with using the wrong denominator in their valuation studies.


Net-net, we need to do more work before explicitly making the call that both economic and earnings growth are going to come in substantially lighter than expected over the next couple of years, but, as market prices are signaling, it is a realistic possibility. And should that be the case, we’d expect the market to pay a lower multiple for that – QG3 or not.


Darius Dale


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Expectations are for a miss and we would have to agree.  With sentiment where it is, there may not be much of a reaction.



We expect that Genting Singapore will miss the mark on both revenues and EBITDA when they report their 2Q results on August 12th.  MBS likely gained significant share in Q2.  Here is the detail.


2Q Detail

We estimate that Genting will report net revenue of S$737MM and EBITDA of S$368MM.

  • S$615MM of gaming revenue, net of rebates and Goods & Services Tax
    • We estimate that total market Gross Gaming Revenues (GGR) will be down QoQ and that RWS market share slipped significantly in the quarter.  In 1Q11, RWS market share benefited from high hold, which makes this quarter’s comparison difficult out of the box.
    • Slot win of S$132MM
      • Slot handle of S$1.9BN (39% market share) and average win per day of S$1k
  • Mass win of S$224MM down 25% QoQ due to 12% QoQ decline in drop and a difficult sequential hold comparison.
    • Drop of S$1,226MM (47% market share – in-line with the last 2 quarters) – mass drop has been fairly stagnant since 2Q10 when MBS opened.
    • Hold of 18.3%
  • VIP gross win of S$574MM and net win of S$282MM
    • RC volume of S$20.1BN (57% market share vs 59% in 1Q11; up 22% YoY)
    • 2.85% hold
    • 1.35% rebate rate
    • $121.5MM of non-gaming revenue, up 11% QoQ
      • S$27MM of room revenue and F&B  and other equal to 100% of room revenue
        • RevPAR: S$231
  • USS revenue of S$67MM
    • 8.5k daily visitors
    • S$86.5 spend per visitor
    • S$370MM of total operating expenses compared to S$376MM in 1Q11
      • S$80M of gaming taxes – down S$16MM sequentially
      • S$289MM of fixed and other expenses compared to S$280MM in 1Q11


Drawdown Risk: SP500 Levels, Refreshed

POSITION: no position SPY


It’s getting a little gnarly out there now – as it should now that the SP500’s long-term TAIL line of support has been broken. So far, the April peak-to-today drawdown has been right around 10%. At my immediate-term TRADE line of support (1219) it will be -10.6%.


As a reminder, across all 3 of our core investment durations (TRADE/TREND/TAIL), the SP500 is now broken/bearish: 

  1. TRADE and TAIL resistance = 1256
  2. TREND resistance = 1319
  3. TRADE support = 1219 

When the TAILs in my model break, that’s really bad. I see zero irony in the SP500 and WTIC Oil having broken their TAILs this week in the face of a TREND line breakout in the US Dollar Index ($74.69 = TREND line support).


When the TAILs are broken, it’s critical to remember that’s an explicit signal of a heightening probability of lower-lows in the coming days and weeks (i.e. I’ll be giving you a lower-low of support than 1219 next week).


The entire global marketplace is highly correlated on an inverse basis to the US Dollar Index. If you get the US Dollar right, you’ll get a lot of other things right.


I actually just sold my long US Dollar position and covered some shorts. At 1219, I’d do more short covering. Then, on any rally back towards 1256, I’m a seller again.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Drawdown Risk: SP500 Levels, Refreshed - SPX

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