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Here is part one of our notes



Timing of timeshare spin-off:

  • 11/8: Trading of issued shares begins
  • 11/7-11/17: Roadshow
  • 11/22: Regular trading begins


Carl Berquist (CFO of MAR)

  • This is not a way for them to exit the timeshare business but rather a way to grow it faster
  • Why do the spin-off?
    • In 1996, they spun off their owned real estate to Host Hotels
    • Having a company with a singular focus makes it easier to implement strategies faster which will grow their value
    • Allow them to roll out more products
    • MVW will have ample inventory and a good capital structure that will allow them to grow successfully and MI will benefit from this growth through their management fee
    • In 1984, they were the first hotel company to enter the vacation ownership business
    • Have 64 resorts and 400,000 owners
    • Once the spin-off is executed, MVW will become the largest publicly traded timeshare company


Steve Weisz (President and CEO of MVW)

  •  What do they do?
    • Sell timeshare products, manage resorts, provide services for owners and members, finance consumer purchases, rent vacation ownership inventory
    • 45% of their customers finance with them
    • Have exclusive use of the Marriott and Ritz Carlton brands
  • Life cycle of a buyer:
    • Initial purchase, finance income, rentals, additional purchases, and referrals
    • Recurring revenue: club dues, management fees, on-site spending, and interest income
  • Strategic priorities:
    • Drive profitable sales growth and focus on their existing owners and guests
    • Expect to opportunistically dispose of excess land.  They do not intend to develop new projects in the near term.  When they do need to develop new projects, they will seek to do it through capital efficient asset light deal structures
    • Look to pursue new opportunities such as enhanced amenities on site and adding new partnerships
  • Strategy:
    • NA:
      • 80% of the business is NA driven ($530/705MM)
      • Expect to enhance their points program by adding new partnerships
    • Plan to expand their Asia ownership base ($68MM); plan to sell out their European inventory base and no longer develop new inventory there ($63MM) In the Luxury segment; they are selling excess inventory as they have recently been doing ($44MM)
  • Why do the spin now?
    • Success launch of the points program
    • Have a large amount of finished inventory
    • Transaction will open more doors for them, allowing them to pursue new business opportunities that they could not do as part of MI
    • Seamless from a customer standpoint
    • Allows for greater future growth 


Lee Cunningham (COO of MAR)

  • They refurbish their rooms about every 5 years
  • Have seen higher satisfaction service ratings from points owners vs. deeded ownership
  • Points based program was introduced in June 2010:
    • Allows customers to buy into a portfolio vs. a location
    • Allows MAR to sell product from any of their location irrespective of inventory in NA
    • Have 365,000 NA owners that own 550,000 weeks of vacation.  More than 83,000 owners have enrolled in 153,000 weeks in the points program thus far. They have made $46MM in 1x enrollment fees thus far.
    • Point program users have access to a pool of properties: they can bank/borrow points, trade them for MAR Timeshare/Rewards/ II and other Global vacation opportunities.
  • Various MAR collections - access to these are 2500 points:
    • Marriott collection gives access to MAR branded hotels and resorts WW
    • Explorer Collection is provided by partners which include exotic tours, adventure travel,cruises and packages for sporting events
    • World Traveler Collection: access to 2500 affiliated resorts in 75 countries, II, and a wide range of experiences
  • Annual cost of ownership:
    • 60%: resort operations; 20% towards FF&E reserves, 10% to property taxes and insurance, 10% mgmt fees


Brian Miller  (Sales, Marketing and Service Operations EVP)

  • Marketing efforts are highly directed
  • Their biggest competitive advantage is the trust behind the brands of Marriott and Ritz.  Marriott.com is the 8th largest e-commerce site in the world.
  • Also use various Marriott Rewards and travel packages when they sell points
  • Baseline demographic target: Homeowners with household incomes > $100k, college educated, married 35-65 with kids
  • Average owners: 95% are homeowners, 150k income, 80% college educated, 75% married, 56 yrs old
  • Have a proprietary database with 25MM prospect households
  • Various marketing channels mix:
    • In house sales (54%) (on site during a stay)--costs them 9.3% of sale
    • Direct sales (11%): 7% cost of sales
    • They use central marketing previews during shoulder seasons which is their most expensive marketing channel (28% cost of sale)
    • Their average cost of sale is 12% and commission expenses represent 10% of costs.  Think that they can lower costs by being efficient and driving total sales and marketing costs to the low - mid 40s.
  • Have a talented sales force sourced through testing - 1 in 11 are hired;  Have effective sales tools that pre-screen all prospects to make sure that almost all prospects qualify for financing
  • Average contract price was $27k in 2Q2010 before switching to weeks.  Then when they switched to points which allowed customers to buy add-ons, the sales price dropped to $17k due to mix. Last quarter the price increased to $24k as they sold more to new customers and less add ons.
  • Since 2008 owner reloads have increased from 35% to 53%of total sales.  The good news is that this is the most efficient sales channel.  It's not so much that new owners are purchasing so much more but rather the absence of new purchasers.  In 2010, 4.6% of owners bought more product.  In 2012 they are launching a new owner referral program.  1 in 3 new buyers are owner referrals.
  • The points program allows them to market to customers that live locally making the selling process more efficiently.  They are having great success in select international markets: Latin America, Dubai, and some Asian destinations


AMZN: Selling

"McGough likes it closer to the long-term TAIL line of support ($191); TREND resistance remains intact at $217." -KM


AMZN: Selling - AMZN 10 28 11






Consumer Data


Personal Income growth in September came in at +0.1% versus expectations of +0.3% while Personal Spending came in at +0.6%, in line with Street expectations.  PCE Core came in at +1.6% y/y in September versus +1.7% expectations.  Consumers are decreasing their savings rate to spend.  This is not sustainable but, as we have seen in the past, stimuli can come via many different levers.  Nevertheless, the slow quarter-over-quarter personal income growth – worst since 2009 – is a looming cloud over the economic data this morning.



One of the top stories on Bloomberg this morning is titled “Restaurants Lift Prices to Catch Food-at Home Inflation”.  As we have been highlighting for some time, restaurants have some room to raise prices given the much bolder price hikes being taken in the grocery aisle.  The article is an interesting read, highlighting the “low cost entertainment” that eating out represents.





THE HBM: ARCO, EAT, MRT, CPKI - subsector fbr





ARCO: Arcos Dorados reported third quarter earnings and cut its revenue and EBITDA growth ranges.  Company sees full-year revenue growth 21-23% and adjusted EBITDA growth of 14-16%. 





EAT:  Brinker was the target of many skeptics over the past 24 or 36 hours.  Sterne Agee’s take on the stock was known yesterday but republished in Barron’s subsequently.  As we had suspected before seeing the details, caution on “Brinker’s ability to grow top line on a sustainable basis” is the reason behind the downgrade.  We take the other side of that bet, see our post from yesterday. 


MRT: Morton’s Restaurant Group reported a 3Q loss of -$0.11 versus expectations of -$0.112.  Comps came in at +5.1% which, as the chart below illustrates, implies a decline in two-year average trends.  On beef prices, Morton’s sees 5-10% inflation in 2012 but “have no real basis” for that number yet other than the bullishness they perceive from the beef processors on their pricing power.  Even as beef prices continue to go higher, MRT has 70% of beef needs for 2011 on a floating basis.  70% of 4Q needs are contracted, however.  In terms of demand and/or mix, Morton’s has not seen any substitution to seafood or other substitutes.  Of course, the consumer profile at Morton’s is not analogous to the general U.S. consumer but it is an interesting data point nonetheless that could indicate further pricing power for the brand.  Wall Street and Corporate America layoffs may be changing this however.





CPKI:  Golden Gate Capital has closed its latest fund at $3.5 billion, according to the NYT.  The fund had purchased a wide range of companies over the last twelve months, including California Pizza Kitchen.


THE HBM: ARCO, EAT, MRT, CPKI - stocks 1028




Howard Penney

Managing Director


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TODAY’S S&P 500 SET-UP - October 28, 2011

We’ve just seen the biggest 4 week rip in US stocks in 40 years and that’s a long time.  As we look at today’s set up for the S&P 500, the range is 24 points or -1.45% downside to 1226 and 0.42% upside to 1290.



Keith traded SPY as well as he could have this week (short Monday at 1258, covered Wednesday 1227, re-shorted Thursday 1290) but got killed in the long US Dollar position:




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +2321 (+482) 
  • VOLUME: NYSE 1430.62 (+28.99%)
  • VIX:  25.46 -14.74% YTD PERFORMANCE: +43.44%
  • SPX PUT/CALL RATIO: 1.60 from 1.63 (-16.23%)



  • TED SPREAD: 41.79
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.42 from 2.23    
  • YIELD CURVE: 2.11 from 1.95


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Employment Cost Index: est. 0.6%, prior 0.7%
  • 8:30 a.m.: Personal income, est. 0.3%, prior -0.1%
  • 8:30 a.m.: Personal spending, est. 0.6%, prior 0.2%
  • 9:55 a.m.: UMich Confidence, est. 58.0, prior 57.5
  • 1 p.m.: Baker Hughes rig count



  • MF Global said to draw down its revolving credit lines this week
  • European officials are studying the potential for an IMF channel for money for their enlarged rescue fund, as China considers contributing
  • Sprint Nextel, Clearwire said to be near agreement to extend their existing network-sharing agreement for 3-5 yrs
  • HP CEO Meg Whitman abandoned Leo Apotheker’s proposal to spin off the personal computer unit


COMMODITY/GROWTH EXPECTATION                                             


COMMODITIES  - with USD down hard, I’m happy I wasn’t short anything Commodities yesterday, but looking at the short side again today as the core 3 lines of resistance (CRB Index TREND = 327, Oil’s TAIL of $93.87, and Copper’s TREND of 3.91 remain intact).


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Thai Floods Swamp Grand Palace as Bangkok River Reaches Record
  • Copper Traders See Rally Ending as China Use Slows: Commodities
  • S&P 500 Extends Best Month Since ’74, Euro Rises on Debt Accord
  • Cheapest Gas Spurs Canadian LNG Boom for Asia: Energy Markets
  • Oil Drops on Japan Output, Pares Biggest Weekly Gain Since March
  • Gold Heads for Best Week Since August After European Debt Accord
  • Thai Floods ‘Underestimated’ as Stocks Rally: Chart of the Day
  • Hello Kitty Coin Is New Weapon in Swiss Refiners’ Currency War
  • Copper Pares Biggest Weekly Advance Since 1986 on Japan Data
  • Vale Ready to Sell Iron Ore on Spot Market as Prices Slump
  • China’s Pork Imports May Rise to Record on Low U.S. Prices
  • COMMODITIES DAYBOOK: Crude Oil Declines After Japan Output Data
  • Wheat Drops on Higher Global Reserve Estimates, Corn Declines
  • Copper Falls in London After Japan’s Factory Output: LME Preview
  • Zinc May Rebound 30% on TD Buy Signal: Technical Analysis
  • China’s Hu Will Focus on EU Debt, Commodity Prices at G20: Cui
  • Palm Oil Drops as Investors Sell After Rally to One-Month High
  • Oil Drops, Paring Biggest Gain Since March on Japanese Output
  • Oil Rises to 3-Month High on U.S. Economy, European Debt Deal
  • Rubber Caps Best Week Since November as Growth Outlook Improves




US DOLLAR – closing below my 75.37 TREND line of support on a meltdown day for the US Dollar Index (squeeze in the Euro) is the #1 factor in all of my Global Macro model (the USD has a -0.95 and -0.97 inverse correlation to US and European stocks, respectively = one way risk that works both ways). If the USD can’t recover by TREND line in the next 3 weeks, I’m out.


THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





ASIA – after closing down -4.7% last week, China closed up every day this week… having fun w/ the China is going away thesis yet? We have not been in that camp, but we do think Chinese GDP doesn’t bottom sequentially until Q1 of 2012, so watch the Shanghai Comp closely now that it has recovered it’s TRADE support line of 2411 (still bearish TREND up at 2563.


THE HEDGEYE DAILY OUTLOOK - asia performance








The Hedgeye Macro Team

Howard Penney

Managing Director




The Macau Metro Monitor, October 28, 2011




Prices of private residential properties increased by 1.3% in 3Q 2011, lower than the 2.0% rise in 2Q 2011.  This was the eighth consecutive quarter in which the rate of increase in overall private housing prices had moderated, according to the Urban Redevelopment Authority (URA).


Cries of bad luck are starting to ring hollow.  So VIP hold needs to be adjusted but high Mass hold is normal?



Q3 was a strong one for LVS.  We don’t want to take away from that.  We’ll leave the question of whether it was as good as the whisper expectations.  However, the company’s recent pattern of providing hold adjusted EBITDA adjusted only for VIP hold is misleading, in our opinion.  Swings in Mass hold can be impactful too, even more so on profitability given the higher flow through. 


So despite all the talk of low hold, we estimate “bad luck” only impacted EBITDA by $6MM across all 3 regions.  That might matter for a company like Isle of Capri but for LVS with over $900 million of quarterly property level EBITDA, was it even worth a discussion?


So let’s move on to what does matter.  Singapore VIP volumes were terrific and the October commentary was impressive.  However, despite the conference call drooling by the bullish analysts, should the Q3 numbers really be a surprise?  LVS indicated at their analyst day that they had already eclipsed Q2 VIP volume levels by the end of August.  With that math in mind, it wouldn’t have been a stretch if Q3 volumes grew 50% QoQ.  They actually grew 36%.


Macau beat our estimate due primarily to a higher percentage of Direct VIP business which is good for margins.  Of course, as they try to stem the market share declines in junket VIP, margins may suffer.  However, if they are successful, the revenue upside should more than offset the margin decline.  We think Venetian/Four Seasons has already begun to advance junket commissions on a two month basis (versus 15-30 days) to boost the business.  November should be telling.


Here is our detailed commentary on Q3:







Property net revenue across LVS’s 3 casinos came in 2% above our estimate while EBITDA came in 7% stronger.  Despite Sheldon’s assertion that EBITDA would have been $11MM higher if not for poor hold, when you adjust for higher than ‘normal’ Mass hold, we estimate that hold only negatively impacted EBITDA by $1MM and revenue by $3MM.


Sands Macao

Sands net revenue was $12MM lower than our estimate and EBITDA was $10MM lower due to what appears to be higher fixed expenses but was likely due to an unlucky mix (i.e. lower hold on the RC junket play).

  • Despite $9MM of higher gross gaming revenues, net gaming revenue was $11MM lower than we estimated due to higher rebates 
    • VIP gross win of $210MM was $9MM better than we estimated but net revenues were lower by $10MM. Either rebates went up in the quarter or Sands started offering some rebates to mass players
      • The rebate rate was 1.04% or 39.4% of win - much higher than Sand’s run rate of 33% and our estimate
      • Direct play in the quarter increased to 15% from 12% last quarter 
      • The win rate was 3bps better than we estimated and drop volume was 3% higher than our estimate
      • Low hold cost Sands $16MM in gross revenue, $9MM of net revenue and $4MM of EBITDA
    • Mass win was $1MM below our estimate while slot win was $1MM better
  • Net non-casino revenue was $1MM below our estimate
    • Promotional expenditures were 60% of non-gaming revenue
  • Implied fixed expenses appear to be $59MM, up 13% YoY and up $12MM sequentially.  We suspect that aside from playing generally unlucky, Sands also held worse on its RC junket business.

Venetian Macao

Venetian’s net revenues were 3% above our estimate while EBITDA was 11% better than we estimated.  While VIP hold was low, we suspect that the mix may have been favorable and Mass held better than ‘normal’.  Net/net we don’t think that hold had any impact on EBITDA this quarter at the Venetian.

  • Net gaming revenue was 1% ($7MM) better than we estimated
    • Net VIP win was $3MM higher than we estimated
      • Direct play in the quarter increased to 24% up from 22% last quarter and contributed to a lower commission rate than we estimated given the higher margin of this business
      • Hold was 3bps lower than we estimated due to higher direct play which resulted in 4% higher RC volume vs. our estimate
      • The rebate rate was 83bps or 31% of hold - just 2bps or 1% higher than we estimated
      • Low VIP hold cost the property $17MM of net revenue and $5MM of EBITDA
    • Mass win was $5MM better than our estimate due to better hold
      •  Mass hold was 60bps higher than the property’s 12 month trailing average and 1.2% higher than the last 6 quarter’s average.  If we take the mid-point of the 12 and 6 quarter average, higher hold on the mass business benefited revenue by $10MM and EBITDA by $5MM – offsetting bad luck on VIP
    • Slot win was $1MM lower than our estimate
  • Net non-casino revenue were $10MM above our estimate
    • Promotional expenditures were 21% of non-gaming revenue
    • Higher non-casino was driven by $5MM of better room revenue and $5MM better retail revenue – which has particularly high flow-through (basically 100%) since the source of the beat is likely incentive rents kicking in
  • Implied fixed expenses appear to be $90MM, down 11% YoY and up $3MM sequentially.  We suspect that aside from playing generally unlucky, Venetian may have held a little better on RC junket business than hold implies.

Four Seasons/Plaza

Four Season’s net revenue was 9% above our estimate while EBITDA was $11MM higher or 22%.

  • Net gaming revenue was $10MM better than we estimated due to better hold
    • Net VIP win was $7MM higher than we estimated
      • Direct play in the quarter fell to 38% from 41% last quarter; as a result, hold was better than we estimated
      • Hold was 21bps higher than we estimated due to 4% lower RC volume and no downward adjustment vs. monthly estimates (the past 6 quarters averaged a 3% downward adjustment)
      • The rebate rate was 84bps or 33%
    • Mass win was in line with our estimate
      • Mass hold was between 4-7% higher than the property’s 12 month trailing and last 6 quarters average.  If we take the mid-point of the 12 and 6 quarter average, higher hold on the mass business benefited revenue by $6MM and EBITDA by $3MM.
    • Slot win was $2MM higher than our estimate
  • Net non-casino revenue were $6MM above our estimate
    • Driven equally by higher non-gaming revenue and lower promotional expense
    • Higher non-casino of $3MM was due to better retail revenue as incentive rents kicked in
  • Implied fixed expenses appear to be $19MM, down 12% YoY and flat QoQ




MBS revenues came in 1% above our estimate while EBITDA was 5% ($20MM) lower than we estimated - $6MM of which was due to one-time charges.   Despite EBITDA being lower than we estimated, we must admit that it’s hard not to be impressed by the massive growth in RC volumes and by the Sheldon’s assertion that October saw an acceleration in current trends.  On the flip side, the incremental revenues came at a cost – namely, much higher rebates, promotional expenses and higher fixed expenses.

  • Net gaming were $18MM above our estimate
    • VIP gross revenue was $46MM higher than we estimated, driven by massive growth in VIP RC growth – which was 14% above our estimate.  However, net VIP gaming revenues were only $10MM above our estimate due to a higher rebate rate.
      • Higher volumes were moderately offset by lower hold
      • Hold of 2.69% was 6bps below our estimate and 8bps below the 6 quarter trailing average (excluding the current quarter).  If we use 2.8% as the normal hold rate for the property, we estimate that revenue and EBITDA were negatively impacted by $18MM and $16MM, respectively.  If we assume 2.85% as ‘normal’ hold, then Sheldon’s assertion of a $24MM drag on EBITDA is indeed accurate
      • The rebate rate increased to 1.3% from 1.2% last quarter
    • Mass table revenue was $4MM below our estimate due to 4% lower drop and hold that was 60bps below our estimate
    • Slot revenue was 9% better than we estimated due to 11% higher handle
  • Net non-casino revenue was $11MM below our estimate due to much higher promotional expenses
    • Promotional expenses increased to 27% of non-gaming revenue
  • Implied fixed expenses were $228MM in the quarter - $6MM of the increase was due to one-time expenses.  Excluding the one-time items, there was a $20MM QoQ increase. 




Las Vegas revenues came in 10% above our estimate while EBITDA was 24% better

  • Net casino revenue was $20MM above our estimate 
    • Table win was $27MM better than our estimate due to strong growth in table drop and better hold
      • Higher than ‘normal hold’ on tables helped revenues by about $14MM and EBITDA by approx $11MM
        • 6 quarter trailing average hold was 18% and 17.5% over of the trailing 12 months
    • Slot win was $7MM better than we estimated due to 5% better handle
    • Better gross gaming revenue was somewhat offset by higher rebates that equaled 5.2% of GGR vs. our estimate of 3.3%
  • Net non-gaming revenues were $9MM above our estimate driven by better RevPAR
  • Property level expenses, excluding taxes increased 9% YoY to $243MM compared to $232MM last quarter 

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