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(CORRECTED) MPEL: EVEN WE CAN’T GET TO 250

In the category of setting expectations too high, DB's US analyst just moved their Q3 EBITDA estimate to $250 million. Good thing the stock is dirt cheap and consensus still too low.

 

 

We just can’t get to $250 million.  That doesn’t mean we don’t think MPEL is ridiculously cheap and Q3 consensus is way too low.  The stock should trade up into the quarter but if whisper expectations are for $250 million, the actually print could be a disappointment.  We are at $228 million in Q3 EBITDA which is still almost 20% above the Street.  With some tweaks we can certainly get higher but $250 million looks like a stretch.  The stock does trade at only 7x 2012 EV/EBITDA so really, what's a few million?   

 

So why is $250 million unlikely?  The only way it happens is if City of Dreams and Altira held abnormally high on the rolling chip junket programs and much lower at the revenue share junkets.  We’re pretty sure overall VIP hold percentage was around 3.08%, which is above normal but already reflected in our model.  However, only a statistical anomaly favoring the rolling chip junkets could help boost EBITDA up to $250 million.  Of course, there are more subtle areas that could contribute: lower promotions (doubtful), better cost controls (possible), but the junket mix would have to be extremely favorable.

 

We’re not trying to be too cute here.  The fact is the stock looks very cheap and estimates need to go higher.  That’s usually a recipe for share appreciation.  We just want to keep expectations realistic.


SLOTS: THE TEETH BEHIND THE REPLACEMENT LIP SYNCHING

Everyone seems to offering the same rhetoric about replacement demand but a closer look reveals some interesting developments 

 

 

It’s probably fair to say that the consensus at G2E and the investment community is that replacement demand is likely to stay stagnant - 18 years - for the foreseeable future.  Never mind the math that shows replacements bottomed out in 2008 or that the physical life of a machine is on average no more than 12-13 years.  Interestingly, while suppliers are outwardly espousing the same rhetoric, internally, they are all cognizant of the fact that the 2 major subsectors of the slot market –video poker and 3 reel mechanicals – are older, fully depreciated, on platforms that are no longer supported, and have waning performance.  Dare we say that, despite the conservative rhetoric to investors, a few suppliers are gearing up to replace this aging base of machines?

 

We touched on this topic in our note, “G2E TAKEAWAY” (10/06/11).  For the first time in a long time, IGT had new video poker products on display at G2E.  IGT has an install base of 130,000 video poker machines – 100,000 of which are on the old 8960 platform – which to our understanding is about 9 years old.  WMS was also making another foray into the video poker market with a product that should be commercial in about 12 months.  Could this be a coincidence?  We think not.  Of course, the high likelihood of IL coming online doesn’t hurt either.

 

3 Reel spinners are the other oldie but goodie market garnering a lot of attention (not investor attention) these days.  Mechanical spinning represent roughly 30% of the total slot market in the US with 3 reel spinners being the older product.  IGT believes that they have about 130,000 3 Reel Spinners out there today, making up the majority of their total spinner product.  Given the vast install base, we’re not sure how old their install base is but we’re pretty sure that it's over 5 years old.  IGT has a new 3 Reel, one line product out – also targeting the Australian market – 36% of which is comprised of old 3 reel product.   IGT also has some neat features on its MLD platform which it hopes will garner some of the share of 3 reels being taken out.  

 

BYI’s has confirmed that there are about 35-40,000 legacy S-6000 high denomination, 3 Reel Spinners that are basically approaching obscelence.  BYI is hoping to replace some of those units with its new Pro-Curve cabinet. 

 

Konami agrees that the 3 Reels out there are old and in need of replacements but hopes that most of the new products gets replaced with video product. After many failed attempts to penetrate the spinner market, Aristocrat is out with a new hybrid stepper that also hopes to grab a share of the maturing market.

 

We expect to see the incumbents offering deep discounts on very expensive ‘retail’ price tags on new cabinets – mostly in form of trade-ins in order to garner as large of a share of any replacements that occur.  New entrants should also benefit as this will offer operators a chance to diversify their existing floors.  IGT is really the only video poker player to speak of, although the roll off of their Moody patents over the next 2-3 years should spur more competition in the sub-segment of the market.  IGT, followed by BYI, are the manufacturers behind almost all of the legacy spinner product installed on casino floors today.  WMS entered the spinner market with their transmissive reels about 5 years ago and ALL has never been able to get traction in spinner segment from past attempts. 

 

Bottom line: while the perception is that there is only a small replacement market to speak of, there are some pretty hungry bears out there chomping at the bit.  Of course the easiest solution to aging machines is simply a refurbishment, but we’re pretty sure that if manufacturers have any say in the matter they will use this as an opportunity to force replacements. 


(CORRECTED) MPEL: EVEN WE CAN’T GET TO 250

In the category of setting expectations too high, DB's US analyst is pushing Q3 EBITDA of $250 million. Good thing the stock is dirt cheap and consensus still too low.

 

 

We just can’t get to $250 million.  That doesn’t mean we don’t think MPEL is ridiculously cheap and Q3 consensus is way too low.  The stock should trade up into the quarter but if whisper expectations are for $250 million, the actually print could be a disappointment.  We are at $228 million in Q3 EBITDA which is still almost 20% above the Street.  With some tweaks we can certainly get higher but $250 million looks like a stretch.  The stock does trade at only 7x 2012 EV/EBITDA so really, what's a few million?   

 

So why is $250 million unlikely?  The only way it happens is if City of Dreams and Altira held abnormally high on the rolling chip junket programs and much lower at the revenue share junkets.  We’re pretty sure overall VIP hold percentage was around 3.08%, which is above normal but already reflected in our model.  However, only a statistical anomaly favoring the rolling chip junkets could help boost EBITDA up to $250 million.  Of course, there are more subtle areas that could contribute:  lower promotions (doubtful), better cost controls (possible), but the junket mix would have to be extremely favorable.

 

We’re not trying to be too cute here.  The fact is the stock looks very cheap and estimates need to go higher.  That’s usually a recipe for share appreciation.  We just want to keep expectations realistic.


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JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE

Jobless claims came in this week at 404k.  Backing out the revision to last week's data, claims moved higher by 3k.  Looking at the non-seasonally-adjusted series, there was an increase of 66k claims week over week - an apparently large number but not atypical for the week following quarter-end.  

 

We are struck by the fact that the supposedly "technical" factors that caused the sudden decline in claims a month ago have not reversed.  Distortions around quarter-end are typical, and the decrease didn't show up as an aberration in the non-seasonally-adjusted data.  Meanwhile, the spread between claims and the S&P remains as wide as it's ever been in the last three years.  If claims move to the level implied by the S&P, that would be roughly 475k.  For reference, a 475k claims level would be consistent with 0% or lower GDP growth.

 

Bigger picture, monetary stimulus has had a tight correlation to improving initial claims. The lack of further easing from the Fed means that this tailwind is now gone.  With further fiscal stimulus also off the table, we expect that initial claims will reflect growing weakness.  

 

JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - rolling


JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - raw

 

JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - NSA

 

JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - claims and fed

 

JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - sp and claims

 

2-10 Spread

The 2-10 spread widened by 29 bps versus the prior week as the market rallied. 

 

JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - 2 10 Spread

 

JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - 2 10 Spread QoQ

 

Subsector Performance 

The table below shows the performance of financial subsectors over various durations.

 

JOBLESS CLAIMS RESILIENCE SEEMS UNSUSTAINABLE - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

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LIZ: Playing Out in Black Book Fashion

 

Liz is changing exactly what it should be changing -- EVERYTHING. Could not be more spot on with what they need, and our thesis. The valuation profile and investor base will change dramatically here.

 

 

Liz is changing exactly what it should be changing -- EVERYTHING. Could not be more spot on with what they need, and our thesis, as we outlined in our Sept. 13th Black Book (LIZ: Get In While You Can). The valuation profile and investor base will change dramatically here.

 

What the company looked like yesterday – a highly levered (~4x Net Debt-to-EBITDA on 2012 numbers) weak primary brand, inactive management/board, no earnings, and valued largely by hopeful EBITDA numbers and phantom breakup values; to being one that has a much more defendable portfolio that is, by and large - actually growing (or just returning to growth after years of investment) has just had its debt levels decimated to 1.7-1.9x Net Debt/EBITDA on 2012 numbers – virtually eliminating bankruptcy risk. It has one division alone with a growth profile like few others in global retail that accounts for over 50% of the company’s cash flow.

 

We've heard nothing but silence by most investors as we worked this name as our top idea over  the better part of this year. But now people will start to value it like a viable stand-alone company with earnings power better than a buck within reason.

 

Slap on a reasonable EBITDA, PE, sales, FCF, or just about any other metric you want, and the stock still looks attractive even after yesterday's 34% run.

 

LIZ: Playing Out in Black Book Fashion - LIZ LevRatio 10 11

 

 



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