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ISLE F1Q12 CONF CALL NOTES

ISLE F1Q12 CONF CALL NOTES

 

 

"This quarter clearly contains numerous outside factors that make it difficult to compare our progress to prior year... As we look past the recent rather sudden economic nervousness among American consumers, we feel confident that we have the right operating plan, the right marketing programs and the right cost structure to improve results even further."

 

- Virginia McDowell, President and CEO

 

HIGHLIGHTS FROM THE RELEASE

  • "The Company currently estimates the impact of flooding on EBITDA to be greater than $7 million, including a $1 million deductible. "
  • "Flooding along the Mississippi River during the quarter impacted results at our properties in Davenport, Iowa, Caruthersville, Missouri and Lula, Natchez and Vicksburg, Mississippi. Each of these facilities was closed for a minimum of six days during the quarter and up to 41 days for our Natchez facility. In addition to the actual days closed, the properties did not operate at normal levels for some period of time before or after their respective closure due to conditions in the surrounding areas. In Lula, we still are operating with only one of the two casinos as remediation efforts continue to get the remaining casino open."
  • "While visits were slightly down from last year, both our rated and retail revenue increased across the portfolio of properties not impacted by the flooding."
  • "In Colorado we increased our promotional spending in an effort to promote our renovated casino floor, expanded poker room, new Asian-themed restaurant and newly renovated Tradewinds grab-and-go restaurant. Moving forward we will be modifying the marketing spending to match business levels."
  • "Regulatory changes in Florida were effective for the entire quarter this year as compared to only 25 days last year. "
  • "During the quarter the Company selected the general contractor for its $125 million Isle Casino Cape Girardeau and expects to finalize the documentation on the guaranteed maximum price contract in the near future. Construction is proceeding on time and on budget, and the facility is planned to open late in 2012."
  • Nemacolin Woodlands Resort: "An appeal of the award has been filed by a competing party. The plaintiffs briefs must be filed by September 12, 2011. The timeline for ultimate resolution of the matter is not known at this time."
  • Capex in the Q: $14.6MM; $4.1MM at Cape Girardea and balance was maintenance
  • "The Company expects maintenance capital expenditures for the remainder of the fiscal year to be approximately $40 million and project capital expenditures for the remainder of the fiscal year to be approximately $50 million. We have removed any previously planned capital expenditures related to Nemacolin for the remainder of the year from our guidance pending resolution of the appeal"

 

CONF CALL NOTES

  • In Lula, they are still operating with just one casino open 
  • $20MM on R/C drawn at 1Q
  • Capitilized interest $600k
  • Debt: $20MM drawn on revolver; $498MM in term loans; $300MM 7.75% senior notes; $357MM of sub notes; $4MM of other debt for total of $1.17BN.
  • Leverage: 6.4x
  • $155MM of available borrowing capacity

 

Q&A

  • Their insurance proceeds/claim should exceed the $6MM of lost EBITDA less deductible
  • Consumer trends - with the exception of Lula - they are very happy with the way their properties recovered.  Choppy at best is the way that they would describe August observations.
  • Going forward, Pompano current margins are probably a good run rate. Remember they have new competitors too.
  • Seminoles in Coconut Creek are moving ahead with their project despite their appeal
  • Lula is currently at 60-65% of capacity; should be back to 1100 positions after Sept 2nd
  • They do anticipate to be in compliance with their covenants despite the flooding impact as long as they get settled in any reasonable time frame. They are currently one full turn inside of their covenant.
  • FY guidance: $6MM stock comp in corporate and $200k of property level stock comp
  • They are using electronic table games at Pompano.  At Lula the electronic table games will offer a lower betting limit table game.
  • Colorado: There are some road closures that have impacted them and therefore they have had to promote more.
  • They are doing about 2 systems conversions a year (re: BYI)
  • They are not actively pursing a license in MA even if gaming gets legalized
  • Putting in 3 SHFL E-tables at Lula
  • Proceeds from Crown casino sale and timing. Project was approved by gaming board last week. Now the referendum just needs to pass in Bossier. Then the sale would close in November.  The proceeds would go into renovations at the Lake Charles property. They aren't required to reinvest that money in Lake Charles but they were planning those renovations for a while anyway.
  • They are still working with a potential buyer on Davenport
  • Their Pompano property is 20 miles from Dania Jai Lai

BAC: HOW DOES BUFFET CHANGE THE GAME?

This note was originally published August 25, 2011 at 10:26 in Financials

Past as Prelude?

Warren Buffett announced a $5 billion investment in Bank of America this morning. Goldman Sachs was a nearly identical investment for Buffet back on September 24, 2008. How did he fare on that one? The chart below shows Goldman's stock price following the investment. He invested $5 billion in 10% preferred with warrants struck at $115 when Goldman was trading at $125. Following the investment in Goldman, the stock closed 6% higher, but, importantly, went on to lose 58% over the next two months. Ultimately he made a solid return on the investment, but how many investors would be as comfortable as Buffett riding out a 58% drawdown?  

 

Remember that Preferred is Senior to Common 

Interestingly, we're not opposed to the idea of being invested at a level senior to the common equity. We share Buffett's sentiment that Bank of America is too big to fail. Remember that his original thesis for investing in Goldman was that the US Government wouldn't let them fail. Ultimately he was right. What's interesting is that his attachment point with the preferred puts him senior to the common holder and enables him to sidestep further dilution that may arise. While that dilution wouldn't be good for his 700 million common warrants at $7.14, he wouldn't lose any capital and he'd still earn his 6% return even if BAC ultimately has to raise an enormous amount of additional equity capital. This is a relatively risk free trade for Buffett and we applaud him for being creative in the midst of fear. That said, Buffett's investment doesn't create a risk-free trade for everyone else -  investors who don't have access to the preferred shares. Don't make the mistake of thinking that a straight up investment in the common is comparable to what Buffett has just architected. 

 

Bank of America Has Just Taken a Step in the Right Direction

We're not BAC curmudgeons over here. We try to evaluate the data for what it is. We acknowledge that this investment moves Bank of America forward in two important regards. First, they now have $5 billion more in capital than they had before. Considering the market was clamoring for them to sell China Construction in full so as to monetize roughly $7 billion in additional capital, this gets them almost as far along. Second, Buffett's "seal of approval" has significant intangible value, we get that. Nevertheless, as we stated yesterday, there are significant macro factors outside of Bank of America's control (and Buffett's for that matter) that the bank will continue to face in the next 6-12 months. Namely, the European banking crisis, a US growth slowdown, mortgage putback uncertainty and the conjunction of huge NIM pressure and ending reserve release. For reference, our firm's view on the US growth outlook is very different from Buffett's, and for Bank of America's outlook that difference matters.

 

BAC: HOW DOES BUFFET CHANGE THE GAME? - GS comp

 

The Quantitative Setup

The chart below incorporates this morning's squeeze into our quantitative model. The heightened volatility this morning has widened the range in our model and we now see TRADE support at $6.02 and TRADE resistance at $8.64. This implies upside of 6% and downside of 26%. We are sticking with our short position based on that asymmetry. The chart below summarizes the setup.

 

BAC: HOW DOES BUFFET CHANGE THE GAME? - BAC levels

 

Joshua Steiner, CFA

Allison Kaptur


BWS: Bad Choice

 

BWS, you picked a bad day to print a poor quarter. PSS ripping is not going to make you feel too good today.

 

Pretty simple – any and all ‘strength’ was driven by ASG acquisition layered over last year’s numbers. Comps at Famous Footwear (~60% of sales) were +0.2%, and while decent at face value, this was entirely to clear out inventories. SIGMA headed in the right direction, but not out of the woods. Might take the award for biggest guide-down of the quarter. What a bad company…

 

BWS: Bad Choice - BWS SIGMA 8 11

 

BWS: Bad Choice - BWS quick hit part 1 8 11 

 BWS: Bad Choice - BWS part2 8 11

 


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IT’S NOT THE ECONOMY STUPID!

The math says RevPAR growth should reaccelerate.  Adopting a positive stance about the lodging sector is new to us this year so we hope people recognize the pivot.   

 

 

Of course the economy matters for the hotel industry.  It is cyclical after all.  Our point is that the recent RevPAR slowdown was not macro economically driven.  Rather, the math suggests that the comparisons in May, June, July, and the first half of August are much more difficult than the rest of the year.  We’ve articulated our view in the past that there was significant pent up demand in those months last year where business people caught up on travel that had been postponed from the prior 12-18 months.

 

But we’re not talking about % growth last year as the comparison as every other analyst does.  We are talking about dollar RevPAR seasonally adjusted viewed on a sequential basis.  There has been too much volatility for three years now to look at YoY % comps.  So sequentially last year (again, seasonally adjusted), dollar RevPAR accelerated beginning in May through the first half of August and then normalized in the 2nd half.  This is why RevPAR growth should reaccelerate in the 2nd half of August this year through the end of the year, likely peaking in November. 

 

The chart below shows the math we are talking about.  Note the slight pick-up in August followed by strong RevPAR growth in each remaining month of the year.  With three weeks in, August is almost in the bag.  In fact, we saw the first week of reacceleration last week with Upper Upscale RevPAR climbing 8% versus 4% for the first 2 weeks.  So far, our math is proving correct.

 

IT’S NOT THE ECONOMY STUPID! - uup2

 

The slowdown in RevPAR growth coincided with the poor economic data, worsening investor sentiment, and a stock market correction so we can forgive people for making the correlation.  However, we saw this coming even in a stronger economy and likewise, we see the reacceleration coming even in a weakening economy.  Of course, the uptick will be short-lived should we enter a double dip – this is a cyclical industry after all.  However, this industry has been battered and bruised by investors.  Look at the recent stock price performance of some of the lodging stocks we follow:

 

IT’S NOT THE ECONOMY STUPID! - ytd

 

We think the reacceleration of RevPAR will provide a much needed boost to sentiment which should inflate multiples over the near term.  Lodging stocks look much better positioned than say gaming or cruise lines because of this math.  Within lodging, MAR seems most interesting to us because of the historically low relative and absolute valuation.  We haven’t seen relative sentiment this low on MAR in a long time.  We also think the Street is underestimating MAR’s free cash flow and propensity to buy back stock.  Finally, we think the time share spin-off is a strategically smart reallocation of capital that will return MAR’s timeshare fee business to one of growth. 

 

We always worry about the economy and the Hedgeye Macro team is not the most bullish on the economy.  Should the economy continue to struggle, MAR would clearly be one of the most defensive plays in the sector due to its soon to be close to 100% fee based business model.  In fact, as noted in our 08/25/11 post “HOW LOW CAN WE GO”, MAR has the least downside to its March 2009 trough valuation.  More on MAR in some upcoming posts.  


INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW

Initial claims rose 9k to 417k WoW (+5k after the revision to the prior week).  The Labor Department noted the Verizon strike as a factor in the last two weeks of claims, accounting for "at least 12,500" claims two weeks ago and "at least 8,500" claims this week.  Net/net, the Verizon strike represented a tailwind of 4k in today's print, and the +9k print is in spite of this.  

 

We have been noting a divergence in the usually-tight correlation between the S&P and initial claims, suggesting that claims would move higher, the S&P would snap back, or some combination.  We continue to expect claims to back up further to close this gap, based primarily on Challenger job cuts as well as the layoffs that have already been announced. If all the mean reversion comes on the claims side claims will rise to ~475k. This would reflect, and cause, a significant slowdown in US economic growth expectations consistent with our Macro team's call.  

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - rolling

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - raw

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - NSA

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - s p

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - XLF

 

Margins under Pressure 

We track the 2-10 spread as a proxy for bank margin pressures.   We will have a detailed report coming out on the impact to NIM from recent yield changes, which will quantify the impact across the big banks.  Stay tuned. This week's spread level of 207 bps is 10 bps wider than the previous week. 

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - spread

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - spreads QoQ

 

The chart below shows performance by subsector.

 

INITIAL CLAIMS RISE 9K, ROLLING AVERAGE RISES WOW - perf

 

Joshua Steiner, CFA

 

Allison Kaptur

 

 


THE HBM: YUM, MCD, DNKN, SAFM, HRL, CAKE, KKD

THE HEDGEYE BREAKFAST MENU

 

Notable macro data points, news items, and price action pertaining to the restaurant space.

 

MACRO

 

This past week Cheese prices have declined 14.9%.  On the margin this is bullish for CAKE and the company ability to hit guidance in 4Q11.

 

THE HBM: YUM, MCD, DNKN, SAFM, HRL, CAKE, KKD - cheese

 

THE HBM: YUM, MCD, DNKN, SAFM, HRL, CAKE, KKD - comm

 

  • SAFM EPS - Overall market prices for poultry products were lower in 3Q11 as cash prices for corn and soybean meal increased 84.7% and 25.8%, respectively.  Management commentary - “Market prices for poultry products were significantly lower than last year’s Q3. While retail grocery store demand has remained steady, food service demand remains sluggish, and will likely remain that way until the employment market gains traction and consumers regain their confidence and return to restaurants. We also incurred significantly higher costs for corn and soybean meal, our primary feed ingredients, compared with the same period a year ago.”
  • HRL reports Q3 EPS $0.36 vs Reuters $0.35; Guidance of EPS $1.70-1.75 vs prior guidance $1.67-1.73 and Reuters $1.72

 

SUB-SECTOR PERFORMANCE

  • The QSR names continue to be the go-to group on market up days.  See below for the names that are outperforming.

 

THE HBM: YUM, MCD, DNKN, SAFM, HRL, CAKE, KKD - hfbrd

 

QUICK SERVICE

 

  • KKD announced that it has signed new development agreements with its Japanese franchisee, Krispy Kreme Doughnut Japan Co., pursuant to which the franchisee has agreed to build 73 new locations in the Kanto, Kansai and Chubu regions of Japan over the next five years.
  • YUM - The Daily Telegraph reports that KFC Australia will announce it is removing toys from its children's meals in all 600 stores Down Under.  The move comes three years after the chain committed to stop advertising or actively promoting its kids menu.
  • YUM - The Anti-monopoly Bureau of the Ministry of Commerce is looking into Nestle SA's takeover of Chinese candy maker, Hsu Fu Chi International Ltd, and Yum Brands Inc's acquisition of Chinese hotpot chain, Little Sheep Mongolian Hot Pot. 
  • DNKN and EA said they are teaming up on a six-month initiative that will feature Dunkin’ Donuts products in a version of EA’s Sims Social Facebook game.
  • MCD has launched its developmental franchise business on the Chinese mainland as it seeks to accelerate development in the world's most populous market. Kunming North Star Enterprise Co, based in southwest China's Yunnan Province, on Tuesday signed a developmental franchise agreement with McDonald's - China Daily

 

FULL SERVICE

 

  • BH is now in a war of words with CBRL management.  CBRL responds to the BH letter that we are doing nothing wrong and that you don’t know our business model very well.  CBRL’s Management views restaurant and retail operations as two related and substantially integrated product lines. Furthermore, many of the operating expenses of a store cannot be broken down between restaurant and retail operations.  Company states they have concluded that “separate segment disclosure of our restaurant and retail businesses is neither required nor appropriate.”  (Just go away!)
  • Ruth's Hospitality Group Inc. has named Cheryl J. Henry chief branding officer, replacing former chief marketing officer Jill Ramsier.

 

THE HBM: YUM, MCD, DNKN, SAFM, HRL, CAKE, KKD - qsr

 

THE HBM: YUM, MCD, DNKN, SAFM, HRL, CAKE, KKD - fsr

 

 

 

Howard Penney

Managing Director

            

 

Rory Green

Analyst


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