Keith shorted PNK in the Hedgeye Virtual Portfolio.  In addition to a lousy quantitative setup, PNK looks to be in a difficult spot in a deteriorating macro environment. 



Keith shorted PNK in the Hedgeye Virtual Portfolio at $12.49.  According to his model, TRADE resistance is only 2% above where he shorted it and TRADE support is 18% below.  While Keith is bearish on PNK from a technical perspective, the macro environment could cause some problems for PNK and investor sentiment surrounding the name.  If the Hedgeye macro view comes to fruition - stagflation - domestic gaming will come under pressure.  Gaming has proven to be an incredibly cyclical industry.  Sentiment could turn worse for PNK as it is the only domestic gaming company that is not in a deleveraging mode and not generating free cash flow.  That opens the stock up to a higher degree of multiple compression.




PNK has been a great story - we've been a big cheerleader - as management has done a terrific job with margin expansion.  With success, however, comes higher expectations.  Full year Street estimates are finally appearing reasonable rather than ridiculously low so the catalyst of continued quarterly blowouts may be behind the company (6 in a row).  With consumers struggling and 2H regional gaming trends already disappointing here in July, we struggle to find a positive catalyst.


Now, PNK had a pretty good july due in part to high table hold but domestic gaming revenue trends overall have already been disappointing.  As shown below, we estimate July gaming revenue in the mature regional gaming markets (aka riverboat markets) should decline slightly more than 1%.  We look at monthly sequential revenue based on the previous 3 months, adjusted by a historical seasonality factor.  Most of the riverboat states that have reported for July have posted same-store gaming revenues below our model, which would indicate sequential revenues have slowed.




It still wasn’t a good quarter, but not far off from our numbers – in-line on a hold adjusted basis.



There wasn’t a whole lot of love for the numbers that Genting reported this past Friday morning.   One of the issues is that the market had unrealistic growth expectations for Singapore (see our "Singapore 1Q Review," 5/16/2011) and the 2nd sequential decrease in RC volume was disappointing and likely unexpected.  Analysts also likely failed to fully adjust for the high hold that Genting experienced last quarter – which not only boosted their numbers but overall market growth.  With the difficult comparison, this quarter was set up to disappoint. 


We generally think that the Singapore gaming market will experience moderate growth until junkets are licensed which will provide some lift to the VIP RC volumes.  Much of the growth opportunity is in ramping up non-gaming revenues and normalizing margins on non-gaming amenities.  As long as people keep expecting Macau-like growth, we expect that results may continue to disappoint, although at 9.5x 2012 EBITDA, Genting Singapore isn’t exactly expensive.


So what happened in 2Q11?

  • Singapore Integrated Resorts Gross Gaming Revs (GGR) declined 5.6% QoQ
  • Average hold since 1Q10 has been 2.96% - this quarter hold was only 2.82% which dampened growth.  If we use the average hold rate for the last 3 quarters, sequential growth from 1Q to 2Q was 2% and 3% from 4Q10 to 1Q11.
  • Genting lost share QoQ due to difficult hold comparisons and a big drop in RC share
    • Since MBS opened, Genting’s average share of RC has been 58%; it dropped to 52% this quarter.
      • This is probably the most disconcerting takeaway from the quarter, although we should have expected share to migrate toward 50% over time.


2Q Details (in Singapore $s unless otherwise noted):

  • Net gaming revenue of $584MM and estimated GGR of $854MM
    • The difference between gross and net gaming revenues consists of VIP rebates, gaming points (loyalty points) for Mass, and GST
    • VIP RC: $16.4BN and hold of 2.66% for a gross win of $437MM
      • Rebate rate of 1.24% or $204MM and $15MM of GST taxes
  • We estimate that Mass drop was $1.4BN, roughly flat QoQ and slightly above MBS’s number according to the management
    • 19.5% win rate and Mass gross win of $273MM and net Mass win of $222MM
    • GST of $18MM
    • Gaming points of $33MM or 2.4% of drop
  • Slot & EGT handle of $3BN and win rate of 4.8%
    • Management mentioned that RWS’s hold is just below 5% and that their handle was a little better than MBS’s
    • Win rate on slots is over 7% while the win rate on EGT’s is between 2.2-2.5%
    • Non-gaming revenue of $132MM
      • Room revenue of $33MM
      • USS revenue of $78MM
      • F&B and other revenue of $21MM
      • We estimate that fixed expenses were flat QoQ


  • Assuming normal hold, we expect 3Q11 EBITDA of S$407MM and net revenue of S$774MM
  • For FY11, we expect EBITDA of S$1.78BN and Net revenue of S$3.3BN, 9% below and 1% above the Street, respectively.

Early Look

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Sarkozy/Merkel Meeting Leads Markets Lower

HD/LOW: Mind The Sentiment


Yeah yeah…we all know the differences in the comp spread and relative operating performance. The market knows that too. But LOW will not roll over and play dead. There’s no doubt it is having execution issues and is losing share to Depot as HD focuses heavily on its core. But HD was a year early (2009/10) in reaccelerating both store level capex and SG&A per square foot. Now it is benefitting. LOW’s uptick in investment spending over the past 12 months during a time of weakness in its business (and botched execution) has been particularly painful. Bigger picture, we like this space given the catch-up in deferred maintenance as the housing market continues to suffer. Would we buy either today? No. But the relative trajectory in revenue and margins is likely to turn in LOW’s favor over the next six months. On weakness, that’s where we’d look first.

HD/LOW: Mind The Sentiment - 8 16 2011 12 52 41 PM

HD/LOW: Mind The Sentiment - 8 16 2011 12 53 31 PM

HD/LOW: Mind The Sentiment - 8 16 2011 12 54 19 PM

HD/LOW: Mind The Sentiment - 8 16 2011 12 54 57 PM



Bearish: SP500 Levels, Refreshed

POSITION: Short Financials (XLF)


There really is no other way to summarize the US Equity market here. It’s bearish. Period.


I’ll be the first to concede that bear markets get immediate-term TRADE oversold (I made that call last Monday in note titled “Short Covering Opportunity” – time stamped 10:47AM on August 8th, 2011).


But, please, don’t confuse immediate-term TRADE oversold as anything other than what that is – immediate-term oversold.


Across our core 3 risk management durations (TRADE/TREND/TAIL), bearish is as bearish does: 

  1. Intermediate-term TREND resistance = 1314
  2. Long-term TAIL of resistance = 1256
  3. Immediate-term TRADE resistance = 1214 

Like 1192 and 1173, there are multiple short-term downside levels of TRADE support between 1214 and the YTD closing low of 1119 (establish August 8th, 2011), but since most people out there are still saying they are “long-term investors”, they probably don’t care about those. The long-term TAIL is bearish. So, “long-term investors” are probably going to become increasingly bearish too.


Bear markets bounce. This one just did. That’s yesterday’s news.



Keith R. McCullough
Chief Executive Officer


Bearish: SP500 Levels, Refreshed - 1

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