Galaxy is scheduled to report their 3Q results in the wee morning hours (at least for those of us in the states) tomorrow, and we’re expecting a pretty strong quarter with bullish commentary about their prospects.  Of course they will be positive since they are holding well in the first half of what should be the biggest month ever in Macau.  However, going forward, market share will moderate with hold and Galaxy Macau is vulnerable to the opening of Sands Cotai Central.



3Q Detail:

We project Galaxy Group will report HK$13.44BN of revenue and HK$2.08BN of EBITDA (US$268MM).

  • We estimate that Starworld will report HK$6.44BN of revenue and Adjusted EBITDA of HK$902MM
    • VIP gross win of HK$5.83BN
      • VIP turnover of HK$179.4BN, up 31% YoY and a 3.25% win percentage
      • 45.5% rebate rate (in-line with last quarter) or 1.48% - this likely includes rebates for Mass play as well
    • Mass win of HK$434MM and slot win of HK$64MM
    • HK$114MM of net non-gaming revenue
    • Variable expenses of HK$5,164MM
      • Rebates and commissions: HK$2.65BN
      • Gaming taxes & premium: HK$2.48BN
    • HK$375MM of assumed fixed expenses
    • Net comparable US GAAP revenue would be HK$3.8BN (netting out of rebates) and would result in a comparable GAAP margin of 23.8% vs. a reported margin of 14%
  • We estimate that Galaxy Macau will report HK$6.54BN of revenue and Adjusted EBITDA of HK$1,188MM (US$152MM)
    • VIP gross win of HK$5.035BN
      • VIP turnover of HK$168.4BN, assuming 4% direct play and a 3% win percentage
      • 33.5% rebate rate (in-line with last quarter) or 1%
    • Mass win of HK$1,045MM and slot win of HK$240MM
    • HK$222MM of net non-gaming revenue
    • Variable expenses of HK$4,754MM
      • Rebates: HK$1.69BN
      • Commissions: HK$470.5MM (25bps/ 10% of win)
      • Gaming taxes & premium: HK$2.46BN
    • HK$600MM of assumed fixed expenses
    • Net comparable US GAAP margin of 24.5% vs. a reported margin of 18.2%
  • We estimate that City Clubs will report HK$150MM of revenue and Adjusted EBITDA of HK$37.5MM
    • Most of City Clubs had miserable hold this quarter – which came in at just 1.9% in 3Q (September was actually negative for 2 properties) vs. low hold of 2.3% last quarter.
    • RC volumes at City Clubs declined 11% YoY – in-line with the YoY decline experienced in 2Q11
  • We estimate that Construction Materials will report HK$310MM of revenue and Adjusted EBITDA of HK$76MM
  • Other:
    • Net corporate expenses of HK$125MM
    • D&A:  HK$269MM
    • Finance costs:  HK$155MM
    • JV share of PNL:  HK$40MM 


In preparation for PENN's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



Beulah Park gets upgrades, despite possible move to Dayton (10/19/2011)

  • After spending about $700,000 on capital improvements last year, Penn has put another $200,000 into Beulah to get it ready for this racing season.


Post Earnings Conference Commentary (Deutsche Bank AG/UBS Gaming Investment Forum; Telsey Advisory Group Fall Consumer Conference)

  • “We have seen no changes in our business lines over the last 60 days or so, so things are steady as they go, no upside, no downside. It’s been more of the same, and we continue to see out there in the competitive markets a very rational level of promotional spending. So, the message we gave at the end of the second quarter with what we were seeing is very consistent in what we’ve seen so far in the third quarter.”
  • “I’m fairly confident we could go out and raise more capital if we wanted to. Maybe not at 6%, but probably something in the 7%, 7.5% range on a sub debt basis, I think, we could still get done even – if we had to – in this market. Nobody wants to go out when everybody’s in a panic mode.”
  • “We’re on schedule for second quarter ‘12 opening in Toledo. Everything there is very much on Columbus, we’re still looking for a fourth quarter ‘12 opening.”
  • [M Resort target market] “There are really four segments of business they’re serving. The biggest and clearly the most distressed is the Las Vegas locals. That continues to be a very aggressive, competitive market that’s just dog-eat-dog. But the other three are showing better signs of life. The group and convention business continues to be stronger than ever. The California drive-in business, which, being the first right-hand turn off of Interstate 15, has been very, very good. And most recently, the introduction of the Penn database, the regional customers that we have coming to Las Vegas, and we now have generated about 6,500 room nights to this point.”
  • [M Resort] "Hotel occupancies have jumped nicely year-over-year, and they continue to show strength. We’re going to be adding about 25,000 square feet of exhibit space to the facility in a tent-like structure that’s going to open up in the first quarter of ‘12.”
    • “We’re going to continue to watch the business, and as we continue to see appreciation in ADR and occupancy, somewhere down the road, we can get comfortable with another room tower. It’s already been master-planned, but we still want to understand the business for a few more quarters before we pull that trigger.”
  • “We spend a lot time in Japan... at least for the moment... efforts in Japan are glacial. It’s just the nature of how they work. It’s a consensus process. We have a very interesting opportunity in Japan should that ever happen; spend a lot of time there, but we’re not holding a lot of breath on it. Korea would be terrific. We’ve been in Korea for actually several years, closely engaged there, just kind of taking the temperature. There’s some reason to think that that may heat up over the next year, so that’s one place as an example where we are paying close attention.”
  • “Yeah, I’m thinking that we’re probably 75%, 80% of the way there in both Toledo and in Kansas, and probably 50% in Columbus, so we don’t see any major deviation on that total spend of $850 million that you just stated.”
  • [Kansas market] “We operate in this market today, so this is one that will actually cannibalize ourselves along with the other participants. We do know that we have people driving from the east past the Ameristar to come to our existing Riverside facility. So it will be a little bit of shift in market share with some additional growth in the market just because you’re reaching further out to the west.”
  • [Ohio VLTs] “It will come with a 33.5% tax rate, but in addition to that there will be a takeout for the horsemen’s purses. So most of you are familiar in cities where we have slots at the racetracks, a percentage of the gaming revenue goes to the horsemen’s purses. Right now from a negotiation perspective and this is a very live issue, it’s going to be somewhere between 5% and 15% which would put us somewhere between 38% and 50% on the all-in tax rate.”
  • “In July, we called the $250 million 6.75% sub notes and the redemption was completed in August and funded with the revolver and cash on hand... We now have $540 million of liquidity with a $160 million balance on the revolver. The cap leases in there where our fee services are relatively immaterial, the cap structure in about $53 million of excess cash. So that’s reflective of the sub-debt call, but not any additional operations beyond 6/30.”


Q2 Conference Call:

  • “When you get into the details of what segments of business are doing what, the only strength we’re seeing is in the VIP segment. The customers spend in excess of $400 a day with us on our casino floors. That is showing some modest growth. Below that, it’s still struggling. It’s not getting, as we’ve seen over the past five or six quarters, any worse, but there’s really no strength in the lower level segments of our business.”
  • “If we see any nice lift in revenue across these regional markets, when the economy does turn in our favor, I think we have cost structures that will yield those improved margin results even above what we’re showing today.”
  • [M Resorts] “We have engaged with the property management there very, very recently and are working on continued refinement of our marketing reinvestment that’s going to roll out in the third quarter there. They continue to look at other areas of costs to take out of that business. And we’re encouraged with what we’re seeing in the general trends there and think there are still more opportunities to improve the margins in that business and hopefully down the road, and we’re not expecting it in the near-term. The Las Vegas locals will get better, and we still have a very bright expectation for very good returns for that investment we made there.”
  • “Relative to Perryville, we really don’t expect much impact from the opening of Anne Arundel. I think Perryville’s impact will come at some point in the future when downtown Baltimore finally gets their casino up and running. That’s really what’s going to have an impact, whatever impact is going to be in Perryville. We really don’t see much impact from the opening next year.”
  • “We’re done in Lawrenceburg. We are working with the city, who has proposed a hotel very close to our casino where we would partner with them and operate it and manage it for them, and be a minority investor initially in that development. That would be the only thing that we’re looking at in Lawrenceburg to add about another 150 to 200 rooms in that downtown Lawrenceburg area. But beyond that, we’ve completed our capital program in Lawrenceburg and we’re going to be prepared for what happens in 2013. Certainly it’s going to have an impact when Cincinnati does open. Again, in Indiana, we have the ability to offer smoking to our patrons on the casino floors, which Ohio will not, which we believe will continue to create an advantage for us, but certainly, it’s going to have an impact when Cincinnati opens in 2013 on Lawrenceburg.”
  • [Grand Falls Casino impact on Sioux City property] “We haven’t seen much effect. There’s been a lot of noise out there in western Iowa. We’ve had a couple of the Indian casinos close due to the flooding, coupled with the opening of the casino in Lyons County. So, it’s tough to say what the effect has been, but as you said the June results in Sioux City were very solid. We haven’t seen any material effect on that operation, which as you said is about 85 miles away from us, affecting our business there yet.”
  • [Capitalized interest] "I think we’re projecting $1.75 million in the third quarter, and then cap interest for the year of $6.2 million."
  • [M resorts depreciation] We’re looking on a going forward basis, depreciation rates at the end should be roughly $1.75 million a quarter.”
  • “First half of the year is generally better in Las Vegas than the second half, but we’re also ramping. And the numbers we’ve given have kind of taken out some of the abnormal one-time type charges on the restructurings, and what-not that we’ve had going on at the M.”
  • “I don’t see anything yet on the slot technology side that’s going to jump start any new sources of revenue out there for us. Obviously, the gaming shows coming up in the fall, and everybody’s going to be introducing new products there. But there’s nothing yet that has been put in front of us that says there’s something new and emerging that’s going to create new segments of business for us.”
  • [Atlantic City] Revel’s going to open up next year. There is some potential for the smaller casinos to open up with the new legislation that was passed in Trenton. I still see that market contracting over the next couple years. Aqueduct is going to open up in the fall. Pennsylvania is still just one year anniversary table games introduction. There’s still product there that I think is dated that needs to go out of the market. It continues to be a market that we don’t have an interest in right now because of all those macroeconomic factors. So, Revel opening will certainly be new and exciting, but there’s still too much supply in the market to cater to the demand levels.”





A HOUSING BOMBSHELL - The issues with employment, housing and policy-induced stock market volatility continue to weigh on economic growth and our overall prosperity.. For the week ending October 14, 2011, the MBA mortgage app composite index fell 14.9% WoW. The purchase index dropped 8.8% reinforcing the downward trend since April. Housing demand continues to struggle as homebuyers remain concerned over further price declines. The refinance index also plunged 16.6%, due in part to a jump up in mortgage rates. 


Headline consumer prices rose 0.3% in September (in line with consensus), but accelerated to 3.9% YoY. The energy index accelerated to 19.6% from 18.5% YoY and food prices accelerated to 4.75 from 4.6% YoY.  Inflation is not raging out of control, but is showing a worrying tendency to stickiness.


As we head into the EPS season the Hedgeye Restaurants Alpha list has MCD, YUM and EAT as LONGS and BWLD, PNRA and DNKN as SHORTS.




Food processing continues to gain ground as we continue to “Deflate The Inflation”.  In that same vein, Keith bought is now long the XLY.  As Keith said yesterday “The US Consumer Discretionary is making a credible threat to establish a bullish TREND as US Dollar strength continues to “Deflate The Inflation”..








Sonic (SONC) 4Q EPS missed estimates and SSS remain challenged.  We cannot get behind the LONG side of this story. Although, comparisons get get very easy next quarter.






Arby's new marketing campaign, featuring the "Good Mood Food" original song, was named one of the worst ads in America by  Arby's "Good Mood Food" was listed as an "original jingle that should be junked."


CMG initiated neutral at UBS - We still have CMG missing estimates this quarter by $0.04.


MCD - Janney franchise survey confirms our bullish thesis on MCD




CAKE EPS AMC the bar is set low for CAKE Consensus EPS growth is 2% on 4% sales growth.  That being said, this is going to be a challenging quarter for the company - The trends in California could be an issue


BWLD EPS AMC - the consensus is at $0.59, which represents 25% EPS growth vs 16% in 2Q11.  The revenue growth estimate of 26% also looks aggressive.


CHUX - announced a sale-leaseback of 50 units to STORE Capital, and plans to use the $105 million from that sale, plus cash reserves, to pay off debt. The stock was up 13.9% on big volume.




Howard Penney

Managing Director



Rory Green


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Fighting the Bull

“Bullfighting is the only art in which the artist is in danger of death and in which the degree of brilliance in the performance is left to the fighter's honor.”

-Ernest Hemingway


Keith and a few other members of our senior management team are up at the Pop Tech Conference in Camden, Maine, and as a result I’ve been handed the proverbial hockey stick on the Early Look this morning.  Given that one of the last major Republican primary debates occurred last night, I wanted to touch upon a topic that we all have an opinion or view on: politics.


The most noteworthy news in the Republican political arena in the last few weeks has been the startling decline of Texas Governor Rick Perry.  According to the Real Clear Politics poll aggregate, on September 13th, Perry was at 31.8% in a poll of the major candidates, while Romney was at a distant second with 19.8%.   As of yesterday, Perry’s support had declined dramatically to 12.9%.  As the public has seen more and more of Perry in televised debates, they have seemingly become less and less comfortable with his ability to be President of the United States. 


Last night appears to have been Perry’s best debate showing, though this largely came on the back of a more personal attack on former Massachusetts Governor Mitt Romney related to hiring illegal aliens in his home.  Specifically, Perry stated:


“Mitt, you lose all of your standing from my perspective because you hired illegals in your home.  And you knew for — about it for a year.”


Perry has actually been effective at raising money in this race and according to recent reports currently has more money on hand than Romney.  Money aside, though, Perry appears to have outworn his welcome on the national stage and attacks like the one above are starting to reek of desperation.


Alongside Rick Perry’s rapid decline, the other key surprise in Republican circles has been the rapid ascent of Herman Cain.  In the aforementioned poll aggregate from Real Clear Politics, Herman Cain has gone from barely registering, at 4.2%, to now running a close second to Romney with 23.4% support amongst the Republican field.  As we wrote about Herman Cain a few weeks ago to our Macro Subscribers in a post titled, “This Isn’t Herman Cain’s First Rodeo (Though It Could Be Rick Perry’s Last):


“In the current race for the Republican nomination, Cain has quickly gone from being a long shot candidate to being considered a serious candidate.  This has occurred on the back of a number of straw poll victories, including Illinois, Florida, and at the National Federation of Republican Women.”


Unfortunately for Cain, it all seems like too little too late.  Currently Romney has the fundraising and organizational advantage, as well as the advantage of being a known entity, for better or worse, to voters, so his potential of imploding has limited.  The InTrade market for political futures, which we flagged in the Chart of the Day today, reflects as much about Romney in a 65% probability that he will be the nominee.


On the Democratic side, of course, stands the incumbent, President Barack Obama.   To say Obama is in a world of hurt, currently, would be an understatement.  According to the Real Clear Politics Aggregate, Obama’s approval rating is 43.6% and his disapproval rating 52.0%.  His re-election chances are further thwarted by the fact that unemployment stands at north of 9%.  No incumbent in the history of the U.S. Presidency has been re-elected with approval and economic numbers this abysmal.


On the positive, President Obama still seems to be moderately well-liked.  In fact, despite the extremely negative numbers outlined above, Obama still outpolls all of his potential Republican challengers on a head-to-head basis.  Romney is by far the closest, but still trails by 0.6%.  So, while Obama is down, he is far from out. 


That said, the key missing factor in head-to-head polls is a measure of enthusiasm to vote.  According to a recent CNN poll, some 64% of Republicans say they are extremely enthusiastic to vote compared to only 43% of Democrats.  If this trend sustains, it will be the Republican nominee by a landslide.


The emerging wild card in this race appears to be the Occupy Wall Street movement.  I’ve spent a fair amount of time both researching the movement and visiting their headquarters in Zuccotti Park.  The mainstream media, especially CNBC, has certainly been validating this group with exposure, but so far, to me at least, it is very unclear that this group has the organizational skills or money needed to make an impact.


As well, even if the group does appear, so far, to represent largely leftist interests, they do represent a broad discontent with American elites both on Wall Street and in Washington.  Despite a lack of real leadership, Occupy Wall Street has flourished geographically.  Occupy Wall Street, ultimately, may be a leading indicator that the door remains open for a truly tenable independent candidate to run for President.   Who the candidate would be and where he or she would come from, though, remains to be seen.


I do have a recommended skill set for any third party candidate that enters the Presidential ring, which is that of bullfighting.  Ironically, a good friend of mine from home, Jason Hale, is taking on the political establishment in Alberta in a race for the Provincial legislature and, as you can see from his bio - - he has 10 years of professional bull fighting experience.  Not a bad skill set to have with all the bull in politics these days.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Fighting the Bull - Chart of the Day


Fighting the Bull - Virtual Portfolio


We’re expecting a solid Q3 report.  What limited visibility there is should be positive.



We expect Starwood to report $237MM of EBITDA and EPS of $0.40 – about 2% ahead of consensus and a little higher than the high end of management guidance for EBITDA.  That, in and of itself, should be a positive but it will really come down to guidance.  We recognize that visibility is not high and management can afford to be conservative given the low valuation and uncertain macro environment.  However, we expect the commentary to be positive.  Lodging fundamentals continue to look more favorable to us than domestic gaming and leisure. 


Here are our Q3 projections:



Q3 Detail

  • 3.8% increase in system-wide rooms
    • 5.7% increase in franchised rooms and 4% increase in managed rooms
  • $437MM of owned, leased, consolidated JV and other revenue and $89MM gross margin
    • $278MM of room revenue, up 2% YoY on a lower room base offset by higher RevPAR
    • $159MM of F&B revenue, up 3% YoY and seasonally down $3MM QoQ
    • CostPAR of $256.54 up 4% YoY  compared to an 8.6% increase last year
  • $193MM of fee and other revenue – driven by system-wide room and RevPAR growth
    • $157MM of management and franchise fees, up 14.6% YoY and in-line with the high end of HOT’s guidance
      • $77MM of base fees, a 15% YoY increase
      • $30MM in incentive fees, up 10% YoY
      • $51MM of franchise fees, up 18% YoY
    • $30MM of amortization of deferred gains and termination fees and $6MM of other revenue
  • $146MM of VOI and residential revenues and $35MM of operating profit – with similar top line growth and margins as 2Q11
  • Other stuff:
    • SG&A: $95MM
    • D&A: $67MM consolidated; $10MM unconsolidated
    • Net interest expense: $53MM; $4MM unconsolidated

Early Look

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