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THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP - October 26, 2011

 

This is what Bernanke and Dudley call The Price Stability!!

 

As we look at today’s set up for the S&P 500, the range is 32 points or -0.57% downside to 1222 and 2.03% upside to 1254. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - hrmsv

 

THE HEDGEYE DAILY OUTLOOK - bpem1

 

THE HEDGEYE DAILY OUTLOOK - hrmsp

 

EQUITY SENTIMENT:

 

SENTIMENT - This morning’s II Survey is a big blow to the bulls as Bullish Sentiment pops from 35.8% to 40% and Bears drop to 37.9%, making the Spread Bullish by +2pts vs the -12pts to the Bear side in early October.

  • ADVANCE/DECLINE LINE: -1979 (-3970) 
  • VOLUME: NYSE 1008.45 (+8.75%)
  • VIX:  32.22 +10.12% YTD PERFORMANCE: +81.52%
  • SPX PUT/CALL RATIO: 1.94 from 2.24 (-13.38%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

  • TED SPREAD: 41.71
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.14 from 2.25    
  • YIELD CURVE: 1.88 from 1.95

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week Oct. 21
  • 8:30am: Durable Goods Orders, Sept., est. -1.0%, prior - 0.1%;
  • 10am: New Home Sales, Sept., est. up 1.7% to 300k, prior 295k
  • 10:30am: DoE inventories
  • 1pm: U.S. to sell $35b 5-year notes
  • 2pm: Bank of England’s Adam Posen speaks in New York
  • 5:15pm: Bank of Canada Gov. Carney speaks in NY

WHAT TO WATCH:

  • European leaders meet in Brussels today to discuss Greece’s second bailout, the recapitalization of banks, strengthening the EU440b ($612b) rescue fund
  • Nokia hosts conf. in London, unveils Lumia smart phones with Microsoft’s Windows OS
  • President Obama speaks on American Jobs Act at University of Colorado - Denver, 12:45pm
  • Democratic members of Congress hold news conference to call on supercommittee members to preserve Medicare, Medicaid and Social Security benefits, 1pm
  • Bullish sentiment increases to 40.0% from 35.8% in the latest US Investor's Intelligence poll; bearish sentiment decreases to 37.9% from 41.0% and those expecting a market correction decreases to 22.1% from 23.2%

COMMODITY/GROWTH EXPECTATION                                             

 

OIL – zoom; with the flick of a headline, Dudley’s role at the NY Fed is fulfilled, keeping the USD under pressure this week and Oil ripping US Consumption at exactly the wrong time (pre Halloween and Thanksgiving). The good news is that WTI is failing at its long-term TAIL of resistance ($93.89) this morning as the USD holds TREND and TAIL line support. Short Oil, buy the USD.

 

THE HEDGEYE DAILY OUTLOOK - dcommv

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Thai PM Warns ‘50-50’ Chance Inner Bangkok May See Floods
  • Oil Contango’s End Sparked by Falling Stockpiles: Energy Markets
  • Gold Climbs to One-Month High as Europe Debt Woes Spur Demand
  • Floods Ruining 14% of Thai Rice Erases Global Glut: Commodities
  • Oil Trades Near 12-Week High as China Considers Economy Stimulus
  • ArcelorMittal Quits $5.1 Billion Peabody Bid for MacArthur
  • Agriculture Puts Surge After ETF Rises Most Since 2009: Options
  • Russia to Sell $4 Billion Rail Fleet to Billionaires: Freight
  • Copper Advances on Speculation China May Ease Monetary Policy
  • Freeport Declares Force Majeure on Indonesian Mine Strike
  • Jiangxi Copper Sees ‘Good’ China Demand on Building Projects
  • Corn, Soybean Imports by China Seen Surging in ‘Golden Age’
  • Copper Rises on Speculation of More Demand in China: LME Preview
  • Iron Ore Price Slides 7.2%, Biggest One-Day Drop Since 2009
  • Corn Gains as Imports Into China May Surge; Soybeans Advance
  • Goldman Sachs, JPMorgan Raise Stakes in London Metal Exchange
  • Cosan Gets No Respect as Barclays Sees Upgrade: Brazil Credit
  • Argentines Ditch Steak as Beef Beats Inflation: Chart of the Day

 

CURRENCIES                                                        

 

THE HEDGEYE DAILY OUTLOOK - dcurrv

 

EUROPEAN MARKETS

 

ITALY - Monster Pig Paper issuance by the Italians this morn, selling €8.5B 6-mth fiat with yield 3.53% vs 3.07% - ECB running out of bullets? The ECB has been supporting the Italian sovereign bond bid and its not working anymore – with yields rising like this, does the market have it wrong? We don’t think so. Italy has their guy running the ECB by next week – I’m sure the German people are just going to love that…

 


<CHART6>

 

ASIAN MARKETS

 

China’s 3Q job creation (+3.4 million QoQ; +6.8% YoY YTD; and 4.1% unemployment rate – flat sequentially) was rock solid and is supportive of our belief that the gov’t is actively supporting a rebalancing of the economy towards consumption growth. We don’t think it is sustainable if the EU and US slow incrementally from here, but it does quiet hard landing speculation for now.

 

Hong Kong exports (-3% YoY) are a very negative leading indicator for global demand. Went slightly negative in back in June ’08 and then decidedly so in Nov ’08.

 

 

THE HEDGEYE DAILY OUTLOOK - bpam1

 

MIDDLE EAST

THE HEDGEYE DAILY OUTLOOK - me

 

The Hedgeye Macro Team

Howard Penney

Managing Director


BYI YOUTUBE

In preparation for BYI's FQ1 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

YOUTUBE from FQ4 earnings call

 

“Our fiscal 2012 is a tale of two years with the first part of the year being more investing; in the second half, more harvesting.”

  • “We released the Pro Curve, the first of its kind gaming device with a curved LCD display.  All of our ALPHA 2 cabinets are equipped with the iDeck, another first for the industry.  We continue to develop exciting player-centric applications for iVIEW network and now we have acquired MacroView, a leader in mobile gaming applications”
  • “While opportunities in our systems business had been frustratingly slow to convert to revenue, we are now confident more than ever in the long-term outlook for this segment.”
  • “During the quarter, we fixed the interest rate on the entire term loan of our new facility through its maturity at approximately 2.07%.  For the foreseeable future, we anticipate continuing to allow the rate on the revolver, which amounted to approximately $219 million as of June 30, 2011, to float with LIBOR.”
  • “We also began shipping our Pro Curve this quarter, which contributed to our record ASP.  We are very happy with the success of our Pro Series cabinets; however, this success has come at a short term impact to our game sales margins”
  • [Systems] “We anticipate similar growth in maintenance revenues in fiscal 2012”
  • “We expect that our effective tax rate for fiscal 2012 will be between 36% and 37%.”
  • “Our replacement game sales grew by 18% since the fourth quarter of fiscal year 2010, the first meaningful increase in replacement sales in four quarters.  Approximately 77% of our domestic sales this quarter consisted of video, which exclude sales of our new Pro Curve.  Our Pro Series cabinets, which made up almost 50% of our worldwide shipments for the year and 72% in the current quarter, helped to drive our North America ship share for the quarter to around 19%.”
    • “Playboy Hot Zone was our top-selling domestic team this quarter. We sold 1,015 games in international markets.  We officially launched in Australia with almost 100 units.”
  • “Gaming operations had a record quarter in many different ways including overall revenue and our best revenue per day levels ever.  Our premium units increased by 7% during the quarter and by almost 20% during the year and we established a quarterly record in terms of revenue per unit. This was driven by the successes of Cash Spin, Vegas Hits and Cash Wizard.  There are over 500 Cash Wizard units in the field today.  With the release of Betty Boop and Money Vault during the third quarter of fiscal 2011, we are now seeing a steady increase in the number of WAP units, win per day, and overall revenue.”
  • “For the year, more than 80% of the systems revenue came from current customers.  About half of the major go-lives during the quarter were at relatively smaller sized casinos, a segment we are penetrating at an increasing pace now. We will be releasing SDS on Linux solution on the same SDS code base, providing smaller casinos with a platform choice, Windows and Linux.  Our systems market share in Macau in terms of slot machine connections has grown from 30% in 2009 to 64% in 2011.  In terms of the number of tables and our TableView system, our market share in Macau has grown from 7% to 33%.  I think it’s reasonable to expect that we can repeat that kind of performance in other international markets as well during the next couple of years.”
  • “Due to a seasonally low number of planned implementations and go-lives, our first quarter fiscal 2012 is expected to represent a slow start to the year in terms of systems revenues. However, in spite of the lower system revenue level in the first quarter we expect systems revenues to get back to a good growth mode this year”
  • “We positioned ourselves to be the leading U.S. company in the new Italian market with orders for over 5,000 machines which should start to generate long-term revenue for us by the end of this calendar year.”
  • “We were selected as the preferred systems provider for major Canadian provinces and expect the initial revenues from these Canadian systems to begin within six months and run for about three years thereafter.”
    • “We expected initial revenues from Canada system procurements to begin toward the end of this calendar year.  We still feel that way”
  • “We signed major new systems deals in Sun International to include iVIEW or iVIEW DM across 12,000 games: Caesars DM, Golden Nugget, Navajo Nation and others.”
  • “Financial guidance for 2012, we currently expect fully diluted earnings per share to exceed $2.15 a share and first quarter to exceed $0.40 a share… we’ve included things and we’ve talked about in our release that we do expect some contribution from Canada.  We do expect a contribution from Italy.  We expect contribution from Aqueduct; but we thought it prudent at this point to put in a minimum EPS target because the timing of those large projects have moved around a little bit over the last year and so we wanted to put out a number that we know we can exceed.”
  • “We would have roughly the 5,400 units that we’ve announced in Italy; an average cost of anywhere between $7,500 and $8,000; and then 50% of the Aqueduct units, so that’s roughly 2,250 units at about the same cost.”
  • “We do believe that SG&A will grow slightly YoY during the year.  If you look at the fourth quarter run rate that’s more in-line with what we might anticipate for the year.”
  • “At this point we’ve identified 10% to 12% cost reductions that we think we can get out of Pro Series over the next say 12 months or so and that will be gradual.  We’ve achieved some cost reductions already, but we’ve also had some royalty expense that hit this latest quarter.  So look for our margins to sort of steadily increase over the next three to five quarters and get back to reasonable as we enter fiscal fiscal 2013.”
  • “The largest impact in this quarter was the fact that more of our cabinets and our conversion kits were weighted towards royalty-based themes as opposed to non-royalty based themes.”
  • “Obviously in this kind of environment, we’re not assuming a strong replacement cycle this year at all, not much uptick at all in that.  We are assuming a little improvement in our ship share that we’ve shown the new Pro Series can do and we know our historical innovation and what we’re doing in game ops should allow us to regain some ship share.  We are assuming some improvement in gaming ops because of the great product offering we have as well as Italy and New York coming online.”
  • [iVIEW DM Margins]: “Well, in general we expect margin on that product to be in excess of 50%, and it sort of depends on volume purchases.  We’re also working aggressively on our cost for that product as we see volumes coming up.  But we do expect it to be sort of above most hardware margins but below our software margin.  Also keep in mind that we expect iVIEW DM to drive a whole lot more software application sales as well.  It is not just about the margin of DM alone.  That has a much higher potential to drive our other Elite Bonusing Suite and other bonusing kind of applications behind it”
  • “Well, first of all, we are pleased with the performance of our games in Australia, and right now we’re just in New South Wales.  By the end of this fiscal year, we expect to be in Victoria, so we’ll have the two largest markets of Australia covered.  So Australia requires a pretty big investment because of the technical complexity of the market, the size of the market.  We’ve also added a game development studio there for which we don’t yet have game content.  So it’s been an expensive market for us but one we’re excited about long-term. So look for us to continue to do better in Australia as the year progresses.”

Global Growth Update: Incremental Deterioration Forthcoming?

Conclusion: Given both economies' leading-indicator status, the latest Hong Kong and Singapore manufacturing and trade data is likely to be a canary in the coal mine that it won’t ultimately pay to ignore. Furthermore, an introduction of QE3 from current levels of inflation may send the global economy into a recession on a real-adjusted basis, given current low levels of economic demand.

 

Positions: Short U.S. Equities (SPY); Long the U.S. Treasury Curve Flattener (FLAT); Long 20+ Year U.S. Treasuries (TLT)

 

When we look for read-throughs on where U.S. and E.U. demand might be 3-6 months for now, we don’t take corporate America’s word for it, largely because: a) most corporate executives don’t have a Global Macro process to accurately forecast inflection points and deltas within the economy; and 2) they rely heavily on both consensus and gov’t forecasts, which we’ve shown to be incredibly inaccurate at the turns of 2008 and 2011.

 

Take CAT, for instance, whose earnings and guidance yesterday got a lot of equity bulls horned up (pun intended). This is the same CAT that in 2Q08 raised both revenue and earnings to the high end of each guided range – six months into the deepest t U.S. recession since the Great Depression! Without explicitly stating that this time is or isn’t different, the point remains the same: using the wrong sources can lead one to a dramatically incorrect conclusion.

 

Is the Global Growth Slowdown Accelerating?

As it relates to Hedgeye’s sources for the outlook for global growth, a great deal of our signals stem from how securities and asset classes trade relative to their quantitative setups. “Last price” rules. In addition to market-based data, we’ve figured out where to mine for some of the more prescient economic data globally.

 

To that effect, Singapore and Hong Kong trade and manufacturing data remain some of the better forecasters in all of Global Macro. We use them as front-runners for the slope of global growth given that they are arguably the world’s two most trade-heavy economies.

 

It’s beyond trivial to state that the stuff Asia makes and ships all over the world winds up being consumed by consumers on a 1-3 quarter lag. Consumers can’t consume what hasn’t first been produced and shipped to them. This common sense relationship is what makes Asian trade and production data invaluable as leading-indicators of the global demand cycle. As we’ve highlighted in previous notes (Nov. 2010: Slowdown in SE Asia: A Leading Indicator For Global Growth?; Jan. 2011: Asian Trade Data Exposes Façade of U.S. Growth): 

  • Exports account for roughly 40-45% of Asia’s GDP in aggregate;
  • The U.S. and E.U. combine for roughly a third of Asia’s export destinations; and
  • 40-50% of intra-regional trade within Asia is basic and intermediate goods meant for re-export outside of the region, increasing the U.S. and E.U. share of Asian exports to somewhere closer to 2/3rds.  

Going back to our two favorite leading-indicators (Singapore and Hong Kong) specifically, consider the following metrics pertaining to the openness of both Singapore and Hong Kong: 

  • As of 2010, exports of goods and services accounted for 211% of GDP in Singapore and 223% of GDP in Hong Kong (both ratios completely dwarf other trade-heavy Asian nations: Japan at 13%, China at 29%, S. Korea at 50%, and Thailand at 71%);
  •  Per the latest available data from the American Association of Port Authorities, Singapore and Hong Kong are home to the world’s busiest and third-busiest shipping ports, with 25.9 and 21.0 thousand TEUs, respectively; and
  • Given their setups as trade hubs, both economies account for a disproportionate share of global exports relative to their share of global GDP (Singapore at 6.7x and Hong Kong at 7.2x, which compares to 1x for China, just under 2x for S. Korea, and ~2.5x for Thailand). 

Unfortunately, neither economy is cooperating with the V-bottom melt-up in equities globally since Keith made another Short Covering Opportunity call on October 4th. This morning, we received not one, but two ominous data points out of both economies: 

  • Hong Kong export growth slowed to -3% on a YoY basis in September. This is the first yearly decline since October ’09 and is eerily reminiscent of when the territory’s export growth went briefly negative on a YoY basis in June of 2008; and
  • Singapore’s YoY industrial production growth got halved in September, falling from +22.8% to +12.8%. The slowdown was driven by continued weakness in electronics production (-26.5% YoY vs. -21.9% prior). 

Global Growth Update: Incremental Deterioration Forthcoming? - 1

 

Global Growth Update: Incremental Deterioration Forthcoming? - 2

 

This data rhymes with the recent string of nasty trade and production data we’ve seen out of both economies: 

  • Singapore’s non-oil domestic export growth slowed in September to -4.5% YoY vs. +3.9% prior and, like Hong Kong, this was the first yearly decline since October ’09;
  • Singapore’s manufacturing PMI ticked down in September to 48.3 vs. 49.4 prior – the lowest reading since March ’09; and
  • Hong Kong’s manufacturing PMI also ticked down to a multi-year low in September: 45.9 vs. 47.8. 

Global Growth Update: Incremental Deterioration Forthcoming? - 3

 

It is data points like these that have proven instrumental to us maintaining our conviction in our various Global Growth Slowing research calls amid the forceful counter-trend rallies of 2008 and 2011. For those investors who remain long-term enough to look past the short-termism and irrational expectations associated with this latest rally, we think the trend in equities as an asset class remains negative over the intermediate term.

 

Will QE3 Send The Global Economy Into Recession?

As recently as yesterday, there was a great deal of speculation surrounding the prospect of the Federal Reserve perusing incremental forms of monetary easing. Our omission of the word “stimulus” is highly appropriate. Recall in our November 2010 note titled, “Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth” we published a simple, common sense equation that was being grossly misunderstood by many market participants at the time:

 

Quantitative Guessing = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]

 

Inflation readings on a global basis were much lower in August of 2010 when QE2 was announced. Now, with global CPI readings elevated on an absolute basis, we think it’s worth flagging the risk that a pickup in inflation from current levels might completely eradicate what little real GDP growth is left – particularly in the developed world.

 

Global Growth Update: Incremental Deterioration Forthcoming? - 4

 

It’s important to remember that real GDP is simply the difference of nominal GDP less the GDP deflator – a commonly-obfuscated measure of inflation. If the Fed chooses to further inflate global GDP deflator readings from current levels without a commensurate pickup in demand (see analysis above), we could potentially be entering a scenario whereby global growth becomes negative on a real-adjusted basis.

 

That is a key risk to consider coming off the hopeful melt-up we’ve just witnessed.

 

Our updated analysis continues to leave us with the conclusion that any form of QE3 is likely to be a 2012 event (if at all), and from much lower prices – both market (S&P 500) and consumer (headline and core CPI). Moreover, some deterioration in the labor market – of which we’ve had none YTD – is likely necessary given their dual mandate.

 

Global Growth Update: Incremental Deterioration Forthcoming? - 5

 

This doesn’t preclude Chairman Bernanke and his ultra-Keynesian Fed-head cronies (Bill Dudley of New York and Chuck Evans of Chicago) from hinting at or even jumping the gun and perusing additional measures of quantitative easing. If they do decide to buck the mounting rhetorical resistance emanating from the political right, they risk completely wiping out any U.S. real GDP growth heading into a pivotal election year – an outcome that is likely to have a disastrous effect on Obama’s chances of reelection.

 

As Keith has penned many-a-time in his Early Looks, just because you think a bureaucrat won’t do something, doesn’t mean he/she won’t try. Their incessant trying [to get re-elected and re-appointed] remains one of the largest headwinds to structural organic economic growth over the longest of long terms. Just as politicians get paid to politic, central bankers get paid to central bank and it’s important to avoid overlooking this very simple concept.

 

En garde!

 

Darius Dale

Analyst


Early Look

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CONSUMER FEARS ACCELERATE BUT RESTAURANTS TRENDS LOOK IMMUNE

Consumers have not stopped spending (especially on eating food away from home); while overall growth remains challenged and today’s MACRO data points suggest that the environment for consumer-facing businesses is difficult.  Little or no growth in jobs or income, volatile stock prices, falling house prices, higher gasoline prices y/y, and low confidence are among the chief concerns.

 

Although the consumer is under pressure, the most important question to focus on is where will the discretionary income that is available be allocated.  While it’s still early in the 3Q11 earnings season restaurant demand appears to be one of the sectors that is holding up well.  The third quarter was not kind to the restaurant space.  To the extent that this underperformance was related to fears around the top-line, it appears that sales are holding up slightly better than investors may have been anticipating. 

 

Within the domestic casual dining space, 10 concepts have reported same-store sales results for the third (calendar) quarter.  Of those, two have reported negative comps and five have reported sequential decelerations in two –year average trends.  Within the domestic QSR space, five concepts have reported same-store sales results for the third (calendar) quarter.  Of those, three (YUM) have reported negative comps and two have reported sequential decelerations in two-year average trends.

 

The quantitative set up for the Hedgeye sector models have all nine sectors bullish from an immediate-term TRADE perspective.  Yesterday, Healthcare (XLV) joined four other sectors in the Bullish TRADE and TREND camp. 

 

Keith models have the top three sectors on the long side are Utilities (+10.8% YTD), Consumer Discretionary (+6.7% YTD) and Healthcare (+6.7% YTD).  Market prices and the current earnings season are saying that the consumer looks good, but the MACRO data continues to look challenged.  With the MACRO set up for the consumer is depressing and potentially decelerating, could things get margionally worse from here.

 

MACRO CONSUMER FEARS ACCELERATE TO THE DOWNSIDE 

 

SALES TRENDS - Today, after four weeks of little change, the ICSC chain store index surprised by posting a sizable decline and came despite seasonably cool weather, which should have supported sales trends.  The 0.8% decline brought year-over-year growth to 2.4%, its lowest reading since mid-June.  The ICSC noted weak customer traffic at all types of retailers during the week.  Year-over-year growth softened as well, although it will take more than one soft week to suggest a change in behavior. Trend spending growth is nearly 3%, where it has been much of the year, with the exception of a dip in June and a jump in July.

 

HOUSING – The Hedgeye Financials team published a note today titled, “Case-Shiller Better, But Not Good Enough”.  The Case-Shiller Home Price Index posted a -3.8% decline y/y in August versus -4.2% y/y in July on a non-seasonally-adjusted basis.  This sequential improvement wasn't enough to live up to expectations, which were looking for a -3.5% y/y decline.  Drilling down to the city level, 17 of the 20 cities showed improvement on a year-over-year basis between July and August.  Atlanta, Las Vegas, and Miami were the exceptions.  The Financials team likes ITB as a good short it is the US Home Construction ETF. It is similar to XHB but has a larger exposure to the builders themselves as opposed to home goods retailers and other non-builder components. 

 

CONSUMER FEARS ACCELERATE BUT RESTAURANTS TRENDS LOOK IMMUNE  - case shiller 1025

 

Looking at the Hedgeye Consumer Sub-Sector Divergence table the Homebuilders have seen significant out-performance relative to nearly every other consumer sub-sector.     

 

CONSUMER FEARS ACCELERATE BUT RESTAURANTS TRENDS LOOK IMMUNE  - hcsd

 

CONFIDENCE – This morning’s print was a bomb, clearly.  The Conference Board’s Consumer Confidence Index decreased to 39.8 from a revised 46.4 reading in September.  Tellingly, this month’s reading was less than the most pessimistic forecast in the Bloomberg survey.  The expectations component fell to 48.7 from 55.1 (previously 54). The present situation component fell to 26.3 from 33.3 (previously 32.5).

 

CONSUMER FEARS ACCELERATE BUT RESTAURANTS TRENDS LOOK IMMUNE  - conf board conf oct11

 

CONSUMER FEARS ACCELERATE BUT RESTAURANTS TRENDS LOOK IMMUNE  - conf board exp oct11

 

CONSUMER FEARS ACCELERATE BUT RESTAURANTS TRENDS LOOK IMMUNE  - conf board pres sit oct11

 

 

RICHMOND FED - The composite index was unchanged from September at -6.  Details of the survey said that the employment declined for the first time since September 2010, as the index plummeted 14 points to -7 - the lowest level since November 2009.

 

The market seems hyper-focused on the European debacle and, by comparison, the issues in the United States may seem less threatening.  The macro trends are not encouraging  and earnings season, which is far from over of course, has been less than reassuring with results from 3M this morning not corroborating with the view many are holding that fears of sluggish economic growth are overblown.  The company said on its earnings call this morning that it expects sales trends 4Q to be flat versus 3Q.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


BYD 3Q CONF CALL NOTES

Solid quarter and guidance

 

 

“Our business continued to show improvement as we saw double-digit EBITDA growth in our wholly-owned operations for the third straight quarter. Our strategy of building a diversified portfolio and maintaining an exceptional customer experience,
while keeping a tight rein on costs, is delivering strong results.”

 

- Keith Smith, President and Chief Executive Officer of Boyd Gaming

 

 

HIGHLIGHTS FROM THE RELEASE

  • IP acquisition: "We are confident we will be able to drive significant efficiencies and generate additional revenue through cross-marketing opportunities"
  • Las Vegas Local: "Three of the four major properties in the region posted increased EBITDA, led once again the Orleans, as margins for the region improved..."
  • Downtown: "Successful marketing efforts with the Hawaiian customer segment drove strong increases in play and visitation, generating revenue and EBITDA growth for the third consecutive quarter.  Results continued to be impacted by significantly higher fuel costs associated with the Company's Hawaiian charter service."
  • Midwest and South: "Results reflect widespread improvement across the region, particularly in our southern Louisiana and Illinois operations."
  • Borgata: "Borgata's results reflect the mandated closure of the property for three days in late August due to Hurricane Irene; absent this closure, the Company believes Borgata would have reported growth in both revenue and EBITDA during the third quarter. Borgata continued to outperform the Atlantic City market, achieving an all-time record market share of nearly 20% during the third quarter."

CONF CALL NOTES

  • Positive momentum that they have seen in the 1H11 continued in the 3rd Q
  • Las Vegas locals market - business is moving in the right direction. 
  • IP generated $36MM of LTM EBITDA as of Sept 30th.  $5MM of synergies from IP as well as benefits from cross marketing.  Closing was extended to Nov 28th and will be funded by secured financing
  • Strategy is deleveraging and diversifying their business.  Interested in acquisitions, management contracts, and opportunities from online gaming should it become legal.
  • Las Vegas locals business - margins rose by 320bps due to focus on maximizing returns on marketing dollars. EBITDA rose 28% at the Orleans - making it the 4th Q of growth at the property.  Elevated promotional environment has continued.  Stations remains aggressive and launched its 2nd large marketing campaign, but BYD will remain rational. No impact yet. Customers continue to choose BYD despite elevated promotional environment.
  • Downtown segment EBITDA hurt by $850k increase in fuel expenses.  All 3 properties experienced growth. Hawaii's economy has been strong and their marketing efforts continue to be successful.  Boeing 767 has increased their capacity by 12%.
  • Midwest & South: 4 out of 6 properties grew EBITDA.  Treasure Chest lead gains, followed by Delta Downs
  • AC: Estimate that the impact of Irene cost Borgata $10MM of revenue and $6MM of EBITDA. In September they reported an 11% increase in GGR and had record levels of table drop - with stable hold levels. 
  • Cash ADR's were up across the board and so they remain cautiously optimisitc
  • $2.4BM of debt; Borgata: $806MM ($16MM no R/C).  Consumated IP for $288MM right after the Q.  They borrowed $200MM under the R/C. $415MM O/S on their R/C. $215MM available in facility due 2015.  They expect to raise $300MM between now and the end of the 1Q12'.
  • $31MM of fully consolidated D&A. Decrease in D&A is due to a decrease in capex
  • Expect 4Q D&A to add $4-5MM from IP acquisition
  • Guidance 4Q: 
    • Wholly owned:
      • $73-78MM EBITDA (including IP)
      • EPS: $0.01 to a loss of $0.04 (including IP)
    • Borgata:
      • $34-37MM of EBITDA

Q&A

  • Trends in 4Q so far: 
    • December is slowest part of the quarter for locals
    • Overall they are seeing overall stable trends in gaming.  In August and September, their customers played very lucky.
  • On the gaming side of the business, they continue to see modest but stable growth in the locals business
  • There are some extenuating circumstances that impacted IP EBITDA.  They are very confident of the upside there.
  • They are not interested in MA
  • Impact of Mojito Point at Delta Downs?
    • They are already at capacity on weekends at the property, mid-week is more of an issue. Thinks that more people visiting the area will benefit them.
  • Write off was related to acquisition costs and flood expenses.  There shouldn't be any material acquisition costs in the 4Q.  The $1MM of other revenue was related to a payment from Dania.  Basically EBITDA from Dania was a $1MM loss.
  • Cost of funds/options for the $300MM financing? 
    • They have a lot of options across the capital structure - it's not just high yield notes.  For the right kind of acquisition they would consider equity but not for IP - it's more of a plug in acquisition not transformative
    • They never counted on Dania closing to fund IP
    • We think they are talking to the banks and negotiations are going well
  • They are not depending on market growth to make the IP acquisition make sense. They think that plugging it into their system will be important and the key driver of growth there. They believe that the there are more synergies than they thought.
  • FCF will be continued to be used to maintain their properties competitive. Maintenance capital is about $70MM or $15MM/Q in 2011 and $80MM in 2012.  Room refurb will be done in 1Q12 at Borgata. Borgata's maintenance is about $20MM/year. 
  • Expect 60%+ flowthrough going forward in 2012
  • Capex in the Q:
    • BYD:  $15MM in maintenance and $70MM or a little less in 2011. Boyd ex IP in 12' $75-80MM. Borgata $8MM of capex, and will spend $20MM on the room refinish.  Next year: $20MM of maintenance and $25-30MM of project capex.
    • IP:  $44MM of maintenance - including $5MM in 4Q
  • How long will it take to recognize synergies at IP?
    • Some will be immediate and some will take longer.  North of $5MM in year 1 - not pro-rata all year - will take a year to get to $5MM.
  • Treasure Chest is truly a local casino - most of their customers come within a 5 mile perimeter. Most of those clients also visit Biloxi as a destination market.
  • Bought back $8.5MM of bonds at Borgata late in the quarter
  • IP  - peak EBITDA? N/A - happened in the year following Katrina as they were first to open. 
  • Impact of Acqueduct opening? 
    • Will likely to have some small impact on AC but not really an impact on Borgata
  • Revel - not sure what exactly will open amenity wise. They do think that Revel will grow the market, but aren't naive to think that there will be no impact. They are doing a room refurbishment. They will be aggressive to maintain their #1 position in the market.  
  • IP is not limited in regards to second lien capacity

CONSUMER FEARS ACCELERATE TO THE DOWNSIDE

As we like to say at Hedgeye, markets don’t lie; politicians do. 

 

Having said that, the quantitative set up for the Hedgeye sector models have all nine sectors bullish from an immediate-term TRADE perspective.  Yesterday, Healthcare (XLV) joined four other sectors in the Bullish TRADE and TREND camp. 

 

Keith’s models favor Utilities (+10.8% YTD), Consumer Discretionary (+6.7% YTD) and Healthcare (+6.7% YTD) on the long side.  Market prices are saying that the consumer looks good, but the macro data continues to look challenged.  As prolonged as the jobless malaise has been for consumers, it could be getting worse.

 

As a word of caution, consumers have not stopped spending and many well-positioned companies continue to post strong results.  However, the anemic job and income growth, stock market volatility, falling house prices, elevated gasoline prices, and soft consumer confidence are all reasons for concern. 

 

RETAIL SALES TRENDS - Today, after four weeks of little change, the ICSC chain store index surprised by posting a sizable decline and came despite seasonably cool weather, which should have supported sales trends.  The 0.8% decline brought year-over-year growth to 2.4%, its lowest reading since mid-June.  The ICSC noted weak customer traffic at all types of retailers during the week.  Year-over-year growth softened as well, although it will take more than one soft week to suggest a change in behavior. Trend spending growth is nearly 3%, where it has been much of the year, with the exception of a dip in June and a jump in July.

 

HOUSING – The Hedgeye Financials team published a note today titled, “Case-Shiller Better, But Not Good Enough”.  The Case-Shiller Home Price Index posted a -3.8% decline y/y in August versus -4.2% y/y in July on a non-seasonally-adjusted basis.  This sequential improvement wasn't enough to live up to expectations, which were looking for a -3.5% y/y decline.  Drilling down to the city level, 17 of the 20 cities showed improvement on a year-over-year basis between July and August.  Atlanta, Las Vegas, and Miami were the exceptions.  The Financials team likes ITB as a good short it is the US Home Construction ETF. It is similar to XHB but has a larger exposure to the builders themselves as opposed to home goods retailers and other non-builder components. 

 

CONSUMER FEARS ACCELERATE TO THE DOWNSIDE - case shiller 1025

 

 

CONFIDENCE – This morning’s print was a bomb, clearly.  The Conference Board’s Consumer Confidence Index decreased to 39.8 from a revised 46.4 reading in September.  Tellingly, this month’s reading was less than the most pessimistic forecast in the Bloomberg survey.  The expectations component fell to 48.7 from 55.1 (previously 54). The present situation component fell to 26.3 from 33.3 (previously 32.5).

 

CONSUMER FEARS ACCELERATE TO THE DOWNSIDE - conf board conf oct11

 

CONSUMER FEARS ACCELERATE TO THE DOWNSIDE - conf board exp oct11

 

CONSUMER FEARS ACCELERATE TO THE DOWNSIDE - conf board pres sit oct11

 

 

RICHMOND FED - The composite index was unchanged from September at -6.  Details of the survey said that the employment declined for the first time since September 2010, as the index plummeted 14 points to -7 - the lowest level since November 2009.

 

 

The market seems hyper-focused on the European debacle and, by comparison, the issues in the United States may seem less threatening.  The macro trends are not encouraging  and earnings season, which is far from over of course, has been less than reassuring with results from 3M this morning not corroborating with the view many are holding that fears of sluggish economic growth are overblown.  The company said on its earnings call this morning that it expects sales trends in 4Q to be flat versus 3Q.

 

Howard Penney

Managing Director

 


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