ASP’s have been stable despite historically weak demand.



Over the last 5 years, average selling prices (ASP’s) for slots have increased at a healthy clip.  Since 2007, ASP’s for the 4 public suppliers increased 22%. Over the last year though, we’ve seen ASP growth decelerate to about 3%. 


SLOT ASP’S STILL STRONG - slot supplier


The industry also experienced some dramatic shifts in wallet share since 2007 among the ‘Public 4’.   WMS’s wallet share jumped 15% from 19% in 2007 to 34% in 2010 at the expense of BYI, IGT and to a smaller extent, ALL.  During the first half of 2011 we saw some reversal of this trend as WMS was the biggest wallet share donor – losing 3% YoY mostly to BYI and IGT, who each garnered 2% more of operator wallet share.


Despite the big moves down in their stocks following calendar Q2 earnings releases, both WMS and BYI increased their wallet shares this past quarter.  Consistent with our replacement demand analysis, the pricing picture does not seem as dire as the recent stock price performance suggests.




The slot picture is not as ugly as many believe.



Replacement demand is growing nicely.  The problem is that the industry is in a bad stretch for new casinos and expansions.  Next year, the two start to grow at the same time.  Is this the beginning of the long awaited growth phase for slot suppliers?


Now that the numbers for Aristocrat are out, we know how many units and dollars the “big five” manufacturers reaped from this ‘challenged’ market in the first half of 2011.  We estimate these suppliers represent about 95% of total North American slot sales.


Approximately 34k new slots were sold in 1H11, a 3% increase from 1H10.  The vast majority of new slot sales came in the form of replacements – which we estimate accounted for 84% or 28.6k of total slot sales compared to 77% of total slot sales in 1H10.  Replacements increased 13% YoY while sales of new and expansion slots declined 31% YoY.  Based on our research, replacement shipments bottomed out in 2008 at 38k units and have been increasing ever since.  Unfortunately, any growth in replacements has been offset by the absence of new market growth and lack of expansions.  That should change in 2012. 





In the first half of 2011, Konami and IGT gained market share YoY.  BYI’s share market share remained flat YoY, while WMS lost 4 percentage points of share YoY and ALL’s share fell 1% YoY. For 2Q11, BYI, IGT and Konami gained share YoY while ALL and WMS lost share YoY.

  • IGT:  2Q ship share of 28% and 29% in 1H11, compared to 28% and 27% for the same periods in 2010 and better than full year 2010 share of 27%
  • WMS:  2Q ship share of 25% and 23% in 1H11, down from 28% and 26% for the same periods in 2010 and full year 2010 share of 25%.  We believe WMS overshot for a couple of quarters but share around 25% is probably reasonable going forward
  • BYI:  2Q ship share of 18% up from to 17% in 2Q10. 1H11 ship share increased 1% to 15%. 2010 ship share was 15%.  With its new platform, BYI should stabilize in the high teens
  • Konami:  2Q ship share of 9% and 15% in 1H11, up from to 8% and 12% figures for the same periods in 2010. Konami’s 2010 ship share was 13%.
  • ALL:  1H11 market share declined 1% YoY to 11% 





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




SAFM reported a disastrous quarter yesterday and the stock was only down 2.3% on accelerating volume studies (+117%).  The short interest at 30% is the highest in the group and is a RED flag not to be short.  We are looking to pick our spots on the long side.






The FSR names significantly underperformed yesterday.  I believe that the underperformance is due to a rumor in the market that the “KNAPP” numbers for August are looking ugly. 


EAT, DRI and TXRH are the notable standouts from yesterday’s performance






  • KKD Q2 SSS: Company-owned +2.5% vs consensus +3.5% and domestic franchise +6.3% vs consensus +4.5%
  • YUM - Taco Bell chief marketing officer David Ovens has resigned for personal reasons after four years.




  • CBRL - As pointed out by Jonathan Maze at the Restaurant Finance Monitor Biglari Holdings owns the website domain name "" (BH registered the domain back in July.) 
  • “This is a key element in the Biglari Corporate Takeover Playbook. When the San Antonio investor tried to win seats on the board at Friendly's, he started a website called "" That effort resulted in the chain's sale to Sun Capital Partners. He did so again when he tried to win board seats at Steak N Shake (—an effort that won him seats on the company's board and ultimately its chairmanship, from which he turned the chain into a hedge fund-style investment vehicle. A group of copycats last year did the same thing in an effort to win board seats at Denny's. That effort failed. The investors use the websites to help fuel a broad media blitz against the company. The sites are filled with numerous press releases and other information that is laced with hyperbole. Biglari has also employed billboards outside corporate headquarters in his proxy fights. (For now, at least, there is nothing on the site.)”





Howard Penney

Managing Director



Rory Green


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TIF: Quick Take

Crusher number. But hindsight matters not. Things are turning down for the high end consumer in 4Q.


Big number from TIF, even though we think a cleaner number is $0.04 below the ‘adjusted’ print of $0.86 (a truer number is $0.70 due to $0.16 of HQ costs – but that was stripped out of expectations). The driver here was clearly in comps, which were up sequentially in every region sans Europe (where they still printed a healthy 11%. 2-year comps remain healthy, and accelerated meaningfully in Japan, which was the biggest surprise. The SIGMA chart swung to the upper right, which marks one of the few companies to do so this quarter. All-in, it looks quite healthy at face value.


BUT, and there’s a big but, this is all backward looking. We feel strongly that we’ve not only seen a meaningful slowdown in high end spending in August, but have also seen inventory of diamonds and gold backing up in the supply chain. Maybe TIF is strong enough to delay this for quarters past their competition, but all it can do is kick the can down the road. The inevitable will come it’s way.


It should be an interesting call.


We’ll be back w any relevant info after the 8:30 call.


TIF: Quick Take   - TIF SIGMA 8 11


TIF: Quick Take   - TIF QH Top 8 11

TIF: Quick Take   - TIF QH Bottom 8 11

Are We Human?

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“Are we human, or are we dancer?”

-The Killers


As many of you likely know, “Human” is a song by American Indie rock band The Killers.  Keith referenced it in Hedgeye’s last company meeting to note the infallibility of us all.  Sometimes we are right, sometimes we are wrong, but we are always human.  As well, sometimes things just aren’t as complicated as humans like to make them.


While I am prone to typos, the typo, or rather grammatical error, is not my doing in this instance.  The Killers actually wrote the song with dancer, and not dancers.  In fact, the song was motivated by a derogatory comment by Hunter S. Thompson, when he stated that America was raising a “generation of dancers”.  According to Wikipedia, in an interview in Rolling Stone, the lead singer of The Killers, Brandon Flowers, was asked about confusion over the lyric and responded:


“It’s supposed to be a dance song, the beat goes with the chorus . . . if you can’t put that together, you’re an idiot.  I just don’t get why there’s confusion.”


Certainly, Brandon Flowers and his band mates are human, but grammatical error and all, their song, “Human”, was voted the top song of 2008 by Rolling Stone Magazine.


The investment business is perhaps one of the most humbling of all professions and reminds its participants every day that they are human.  In the Chart of the Day, we show the SP500 versus 10-year Treasuries over the last six months.  Certainly, there were very few investors on the right side of both trades six months ago.


This morning I went back to our Early Look strategy note from exactly six months ago and on February 23rd, Keith wrote:


“And this is really where I can look myself in the mirror and say, despite the fierce lobbying for me to chase US stock market fund “flows” into their mid-February crescendo, I stayed true to the best top-down risk management process I know – when Global Inflation Is Accelerating, and Global Growth Is Slowing, it’s time to build up a large asset allocation to Cash.”


At that point, the SP500 had been chugging upwards since the start of the year and was up roughly 4% year-to-date and on trajectory for a more than 25% annualized return.  Back then, it was hard to be bearish, now it is pretty easy.


Akin to The Killers song, we aren’t bears, we aren’t bulls, we are only human.  While Keith, myself, and our team are happy that our research process helped us alert our clients early to the confluence of global economic issues that has led to the dramatic decline in global equities year-to-date, the next challenge is to have the correct view of the next major move in global equity markets. 


For us to turn more positive on U.S. economic growth we would likely need to see a positive change on the margin in three key areas: housing, employment, and debt.  It is really that simple.  The first two relate to the largest portion of the U.S. economy, which is consumer spending.  Stable house prices provide consumers the confidence to spend, and fuller employment broadens U.S. consumption.  The third factor, debt, relates to the U.S. government balance sheet.  Just like any corporate or individual balance sheet, the federal balance sheet has become constrained by debt, which will impede future organic growth.


Underscoring all of this, as it relates to securities prices, is, of course, the perspective of expectations.  That is, what is priced in?  With the SP500 now down more than 10% in the year-to-date, there is certainly a reasonable amount of bad news priced in.   Often, though, securities prices tend to be a leading indicator versus a lagging indicator and a key question to consider now is what the dramatic decline in equity prices we have seen in the last month means for confidence and economic growth over the coming quarters.


A couple of days ago, President Obama stated that he doesn’t expect a recession in the next twelve months.  This was supported this morning by a survey from the Associated Press that indicated that a majority of economists believe that another recession is unlikely in the next twelve months.  This is, of course, the same group of economists whose group GDP growth estimate for 2011 was +3.2% on February 23rd. . .


Flagging our competitors on their errors in groupthink only gets us so far, but looking at the consensus view does provide us some insight into what is priced into the market.  That said, we certainly understand, as former Yale President and Commissioner of Major League Baseball Bartlett Giamatti famously said:


“No one man is superior to the game.”


Isn’t that the truth . . .


Keep your head up and stick on the ice,



Daryl G. Jones

Director of Research


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