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Is this the most underappreciated company in gaming?



“Ameristar had another record-breaking quarterly financial performance, with new high water marks hit for Adjusted EBITDA and Adjusted EPS in a third quarter and the best trailing 12-month Adjusted EBITDA in the Company’s history,”


Gordon Kanofsky, CEO




  • Had river flooding in the quarter at Council Bluff
  • Excluding the buyback, their EPS would still have been up 11 cents or 52% YoY
  • Reduced their promotional expenses significantly which has helped the flow-through at their properties
  • Guided to a 25% tax rate last quarter which they weren't unable to take and it's unclear that they will be able to take them.  Their tax rate this quarter was fairly normal.
  • Retired $63MM of debt in the quarter
  • Used 65% of their Adjusted EBITDA to buyback debt
  • 3.83% interest rate at quarter end based on the leverage grid
  • $10-11MM non-cash interest expenses in 4Q
  • Will only make one mandatory principal repayment at 4Q given their seasonal FCF needs in the quarter



  • Corporate OH - why so high in the quarter and why is next quarter stock comp expense so high?
    • Had some one time refinancing expenses and some personnel changes that occurred. 
    • 4Q stock comp expense is also at a higher than normal run rate.  Board has made a decision to extend options from 7 years to 10 years which adds a $3MM charge in the 4Q. The board has also seen fit to establish a retirement program for options which also added $3MM of one time expense 
  • They have cut $60MM of expenses permanently from their cost structure and believe that is why they are seeing such good flowthrough. Have seen some modest net revenue growth.
  • There are some hold changes that caused the volatility in East Chicago - the fact that the slot floor is fresh helps them. The new casino is 40 miles away.
  • There are some "copycats" out there in regard to their marketing campaigns but it's clearly not impacting them. Having better and fresher product helps. 
  • Kansas City is 25 miles from their property - they haven't made comments on the anticipated impact from that opening



  • "The year-over year improvement in net income is mostly attributable to efficient revenue flow-through driven by operating and marketing initiatives."
  • "Notably, Council Bluffs improved year-over-year Adjusted EBITDA by $1.7 million (11.1%) on net revenue growth of $1.9 million (4.9%) while overcoming some operational inconveniences from flood conditions."
  • "Our East Chicago property achieved a 16.1% year-over-year increase in Adjusted EBITDA despite a new competitor opening in Des Plaines, Illinois during the quarter."
  • Net Leverage was 5.15x
  • 3Q Capex: $19.1MM
  • Stock buyback: Repurchased $0.2MM shares at $2.7MM in the 3rd Q and $0.3MM shares for $5.1MM from 10/1-11/2
  • Guidance for FY11:
    • D&A: $104.2 to $105.2MM
    • Interest expense, net of capitalized interest: $106.4 to $107.4MM (incl. non-cash  expense of approx $6.3MM)
    • Tax rate: 41-43% (also for the 4Q)
    • Capex: $65-70MM (predominately maintenance)
    • Non-cash stock-based compensation expense: $22.3 to $23.3MM

Draghi Acts in Hot Seat

Positions in Europe: Short France (EWQ)

The ECB surprised and cut 25bps in the main interest rate to 1.25% this morning in the first meeting of newly-minted ECB President Mario Draghi. In many ways, his comments on inflation were a continuation of Trichet’s, namely that inflation is likely to stay above 2% for many months, but come down to below 2% in 2012; ongoing tensions in financial markets are likely to dampen the pace of economic growth in 2H11 and in 2012 and make downside revisions to growth forecasts, especially in 2012, "very likely"; and the pace of monetary expansion continues to be moderate.


For the full press statement, see:



Some key points of the Q&A included:

  • the 25bps cut decision was unanimous.
  • the Bank is monitoring the Greek situation, but maintains that a “Sovereign Signature” is the pillar for financial stability, meaning each member state is responsible for enacting fiscal policy to minimize budget imbalances, grow GDP, and reduce unemployment.   
  • the SMP remains a temporary and limited facility that is justified by monetary policy considerations. It will continue to buy secondary issuance alongside a continued assessment of conditions.
  • On Greece leaving the Eurozone, Draghi maintains that it’s not in the treaty for a country to leave, therefore it cannot be envisaged by the Bank.
  • He expects a mild recession in Europe over the medium term with a weakening business cycle that should dampen wages and prices, and therein lower overall inflation; however he does not see the threat of deflation.
  • On Italian spreads breaking out, Draghi noted that for many years leading up to the last three, spreads across European countries were very thin, but were not reflecting true differences across growth, employment, competitiveness. Now, since the global recession, there’s been a heightened risk aversion trade as more analysis has revealed the greater risk (imbalances) across countries.   Yet he believes whereas risk spreads may have undershot in earlier years, over recent years they may be overshooting. That said, individual states, and not the ECB, are responsible for alleviating these imbalances through prudent fiscal policy.
  • On China bailing out the Eurozone?  -No Comment.
  • On his policy positioning versus the Bundesbank? - Draghi stated he has great admiration for the Bundesbank, but only time will tell how closely he follows that model.

Overall Draghi had very direct and contained answered to many of the questions asked, but like Trichet simply ignored questions surround the state of Greece – from bailout needs to Greece leaving the Eurozone. Stubbornly, like Trichet, he views the ECB with the sole mandate of price stability through monetary policy. What’s clear is that fiscal assistance is needed for many member countries –meaning they can’t do it “alone” through fiscal tightening—yet the one institution with the credibility and balance sheet (including through printing money), the ECB, remains with its back turned.


We view the structure of joining uneven countries under one currency and monetary policy as highly compromised. Given the existing environment in Europe, we'd expect the ECB to bend off its mandate and help alleviate the run-away risk confronting the region over the last months.  


Matthew Hedrick

Senior Analyst


In-line wasn't good enough for Q3 but Q4 off to strong start


"Our forward booking trends remain strong both for our consumer retail segments and corporate events.”


Jim Murren, MGM Resorts International Chairman and CEO




  • Continue to see consistency in this recovery
  • 13% RevPAR growth beat their forecast for 10% RevPAR growth - outperformance due to better results in FIT and Leisure segments
  • Convention business is particularly strong.  September was one of their best booking months ever. 
  • October was the most profitable month that they have ever had in Las Vegas and a record month in Macau
  • Cotai: Resort would have 1600 rooms and suites, 2500 slot machines and 500 tables.  No specific date when they expect to receive their land grant issuance. 
  • US Congress is considering efforts to legalize online gaming.  They announced a joint agreement with Bwin.Party and Boyd gaming.  The poker business will be about scale and this opportunity will be the best one to capitalize on any legalization of online poker.
  • M Life continues to gain traction.  Active customers in their database increased 12% YoY this quarter.  Have also seen tier advancement - specifically a 13% increase in their platinum players and a 7% increase in their NOIR players (highest tier). 
  • Have 17 projects at MGM Hospitality at various stages of development.  First one is opening in a few months.  Just announced a development in Mumbai. 
  • Low hold impacted their CF by $16MM- Aria held high, helping them by $5MM.  Net net their EBITDA would have been $255MM if they held at the mid-point of 'normal'.
  • Table game volume ex Strip was up 1-2%
  • Net RevPOR grew a little more than 3% in the Q.  Retail room rates experienced the best increase - up double digits. 
  • Late November/early Dec opening of their VIP in-house gaming area in Macau
  • Spent $78MM of capex (excluding $14MM in MGM China)
  • Expect to spend $275MM in capex in 2011 - completion of room remodel in Bellagio
  • Luxor and Excalibur are in the process of opening 8 new F&B - 3rd party operated partners
  • City Center:
    • Aria: Hotel revenues were up 20%, F+B revs increased 11%, table game volume ex bacc were up 6% and slot was up 24% YoY
    • 2012 and beyond booking pace continues to strengthen
    • Vdara: $131 RevPAR
    • Crystals: SS sales up 27% YoY - 2nd highest sales per SQFT. 86% is under lease. DG is scheduled to open early next year
    • 374 units are leased for residential inventory
    • Feb 4, 2013 trial date vs. Perini
    • $100MM of pre-payments to the credit facility in September and October
  • Have a lot of events in the 4Q which should help them - have 2 new nightclubs openings.  Feel comfortable that RevPAR will increase 10% in the 4Q.  With best gains in FIT.
  • Expect to see an acceleration of CF growth in 2012. 



  • 2012: 1Q is a tough convention comp. They expect FY 12' to be at or slightly above where they are in 2011. Pricing is up but volume is down in 1Q.
  • Bellagio is having a tremendous 4Q for RevPAR
  • Aria - up 40% for 2012 Convention Bookings
  • MGM Macau - Since the completion of their construction of the new lounge, they have seen 12-13% improvements per square foot yields.  Still seeing very strong growth in VIP revenues which should continue as they bring on new direct VIP area. 
  • EBITDA impact for rooms out of service at the Bellagio? 
    • At least $1MM of CF impact from 300 rooms out of service
    • Selling rate for the renovated rooms are $30/night higher
    • Renovations for 2,570 rooms
    • $70MM Capex project
  • MGM Grand remodel program is starting now: $160MM remodel program - 4,300 rooms.  700 rooms out of service at any point in time.  Expect to get a $10-20 increase in ADR.
  • MGM Grand benefits during the summer because of their pool.  Also had a lot of events at the property.
  • FIT numbers are still materially lower than peak and a little below last year.  60% flowthrough is pretty good. If they held better, the flowthrough would have been better.
  • M Life should also help them going forward
  • 2012 will be even better from an event standpoint than 2011
  • Highest priority is for MGM to improve the balance sheet. The refinance gives them maximum flexibility - to issue $300MM more of secured paper (removed a cumbersome covenant).  High priority on lowering their cost of capital. Refinancing Macau's credit facility is also a top priority.
    • At a high level - every point of interest savings is $100MM of FCF to them 
    • Will save a lot when they redo their credit facility next Q
    • Will retire the NY notes which are at 13%
    • Expect to see a dramatic reduction on their interest
  • Last year's hold % for Aria was 23% and this year it was 27%
  • MGM China dividend?
    • Will be debt free in that operation this quarter.  Clearly an objective of the board to balance growth and shareholder returns at MGM China.  Will have numerous opportunities to dividend back money to shareholders and to investment in Macau.
  • Flow through on mid-single digit range revenue growth.  Objective is to keep their costs flatish in 2012. 
  • Decrease in baccarat volumes in the quarter?
    • Just a matter of when their players come in. The tone of that travel is strong. Think it was just a timing issue
    • Expect strong baccarat play in 4Q and 1Q12'
  • October strong Vegas performance was broadly based: strong casino play, Bellagio had strong revenue growth
  • No comment on Cotai costs.  Given the size of the property, just look at the recent comps like Galaxy.
  • Shovel ready in Cotai?
    • Ready to do site work right away as long as they get permission
  • Convention mix in 3Q was 12% and will be about 14% in 4Q; YE at 14.5%; 15% in 2012; while Aria's convention mix will be about 16.5%.
  • Bellagio is up double digits even on unrenovated rooms at Bellagio
  • Leisure mix was around 40% and expect it to stay around there in 2012.  Trying to squeeze the gap between FIT and Leisure.  Commissions on leisure still the same.
  • Just completed planning the Luxor, Excalibur, and NY - but mostly in the public areas for those properties
  • Post MGM Grand, they will do the spa Tower at Bellagio (built in 04') Luxor/Excalibor, and the Hotel at Mandalay Bay.  Expect that rooms will be out of service for a while. 



  • $2.2BN of consolidated net revenue and $444MM adjusted EBITDA
  • Las Vegas Strip resorts saw a 13% RevPAR increase
  • "The overall table games hold percentage in the third quarter of 2011 was near the low end of the Company’s normal range of 19% to 23%. The overall table games hold percentage in the prior year was near the mid-point of the Company’s normal range.  Slots revenue increased 4% compared to the prior year quarter, with an increase of 6% at the Company’s Las Vegas Strip resorts."
  • "In the current quarter, the Company recorded an impairment charge of $80 million (or $0.11 per share, net of tax) related to Circus Circus Reno... related to the carrying value of its long-lived assets"
  • MGM China: Adjusted Property EBITDA $139MM
    • "We are extremely pleased with our Cotai development plans while at the same time have some exciting expansion opportunities within our existing MGM Macau property.”
  • CC Adjusted Property EBITDA: $50MM
    • Net revenue: $255MM
    • Aria Adjusted Property EBITDA: $40MM
      • "Hold percentage was above the high end of its normal range in the current quarter, but lower than the prior year hold percentage by approximately 400 basis points"
      • RevPAR: $173 (ADR: $200/ Occ: 87%)
    • Vdara: $5MM of adjusted property EBITDA
    • Crystals: $6MM of adjusted property EBITDA
  • "In September 2011, the Company borrowed an additional $879 million under its senior credit facility to increase its capacity for issuing additional secured indebtedness; these borrowings were repaid immediately after quarter end. As a result, the Company had a higher than normal cash balance at September 30, 2011 of $1.8 billion, which also included approximately $494 million of cash and cash equivalents related to MGM China."
    • At 9/30: $551MM outstanding on MGM Macau's R/C 

Early Look

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Retail: Q4 Vortex


This morning’s sales reports reinforce our standing view that Q3 is setting up to be the worst in two-years. Following a choppy August BTS season, September sales came in better than expected setting the stage for what turned out to be a very disappointing October to cap off Q3. Perhaps the biggest callout out of October numbers is the swing in top-line trends. This is stating the obvious – we realize; however, recall that sales came in stronger than expected, but weren’t translating to commensurate bottom-line growth last month. Now both top-line AND bottom-line trends are rolling heading into Q4. The result is widespread revisions for both Q3 as well as for the full-year. In addition to continued weakness in low-to-mid tier markets, the spread between high-end outperformance relative to the low-end narrowed in October reflecting incremental weakness at the high-end. Despite the chink in high-end demand, the low-to-mid-tier retailers (e.g. BONT, SSI, JCP, etc.) are slowing at a faster rate. We still firmly think there will be an increased bifurcation between upward and downward revisions in retail over the next quarter and into 2012.


A few additional callouts in October:

  • The High/Low-end performance spread has narrowed. Within department stores,  Neimans +8% and JWN +5.4%continue to post solid results while SKS +1.8% and M +2.2% came in weaker than expected and more in-line with KSS, +3.9%, TJX +3%, and SSI +0.8%. The clear underperformers were JCP -2.6% and BONT -10.2%.
  • Consistent with recent months, Discounters continue to be among the strongest performing segment of retail. This is likely due to greater grocery exposure, which continues to be a key category. Retailers with exposure there (TGT up low-teen and COST up DD) fared better than most with COST betting expectations and TGT coming in light, though still up +3.3%.
  • JCP was again a clear negative callout. While the company didn’t revise its guidance, it should have and we expect it to when they report next week with Q3 comps coming in down -1.6%. The Street’s at $1.19 for Q4, we’re shaking out under a buck. A consistent disappointment of late is the company’s e-commerce, which posted its third straight decline down -4.5% with comps ahead only getting tougher. This continues to defy explanation as e-commerce is one of the few positive channels for any retailer not named JCP.
  • Lastly, we have to callout HBI admitting that it got its forecasting wrong on last night’s call. Compounding the error, they also highlighted that after a tough August, strong sales in September and October should reaccelerate order demand. Perhaps they should have held the call until after retailers reported October sales as that certainly doesn’t appear to be the case. 

The bottom-line is that sales are now getting weaker across the board – including at the high-end. However, the domestic mid-tier market continues to experience a more aggressive roll in both  top and bottom line results setting up for increased volatility heading into year-end. We would still avoid most names that touch the domestic mid-tier market. 


Shorts: JCP, HBI, UA, GIL

Longs: LIZ, WMT, NKE


Retail: Q4 Vortex  - SSS BeatMiss 11 11


Retail: Q4 Vortex  - SSS Mo Seasonality 11 11


Retail: Q4 Vortex  - total SSS 11 3 11


Retail: Q4 Vortex  - SSS one year comps 11 3 11


Retail: Q4 Vortex  - SSS two year comps 11 3 11


Retail: Q4 Vortex  - Equal Weighted SSS 11 3 11


Casey Flavin







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





Initial jobless claims came in at 397K versus 400k expectations and a revised 406k in the week prior.  The drop below the 400,000 threshold in the latest week was better than expected improvement and puts initial jobless claims at their lowest level since late September; the downtick in claims points to slowly improving economic data. Continuing claims dropped in the prior week.


Bloomberg Consumer Comfort Index fell to -53.2 in the latest week the second-lowest reading in almost 26 years of data.  The index has held below -50 for six of the past seven weeks; a period unmatched even during the 2008-2009 recession.








WEN:  Wendy’s top-line has strengthened thanks to advertising and the new burger.  We now like Wendy’s on the long side from a TRADE (3wks or less) and TAIL (3yrs or less) perspective.  We have no stance on the TREND (3mos or more). 


EAT: We like Brinker on the long side from a TRADE (3 weeks or less) TREND (3 months or more) and TAIL ( 3 years or less).  Today's new from DIN and CHUX suggest that Chili's is gaining share in the Bar & Grill space


THE HBM: WEN (TRADE UPDATE), DIN, CHUX, DRI, CAKE - applebees chilis




STEAK CATEGORY: Outback Steakhouse launched a new holiday promotion Wednesday that includes steak combinations with grilled shrimp, ribs and lobster tail.  Officials with Outback’s Tampa, Florida-based parent OSI Restaurant Partners LLC, said the combination plates start at $11.99 and will be available through January 17. Options include herb-roasted prime rib paired with a lobster tail and served with a side salad; Outback’s signature sirloin paired with a skewer of grilled shrimp; or a six-ounce sirloin served with a half-rack of wood-fired grilled ribs. All are served with a dressed baked potato


DIN:  Dine Equity reported Q3 EPS of $1.04 versus expectations of $0.99.  The company reduced guidance for Applebee’s domestic system-wide same-restaurant sales performance to a range of 1.5% to 2% versus 2% to 4% prior.  Consensus is 1.7%.  Consolidated free cash flow guidance was lowered to between $104 and $114M which reflects a reduction from previous expectations of $112 to $122M.  We believe that Chili’s is part of the problem and continue to like EAT.


CHUX: O’Charley’s reported a loss of -$0.18 versus expectations of -$0.17 for the third quarter.  Comps came in at -0.9% versus consensus of +0.7%.  The overcrowded Bar & Grill category is suffering.  Ninety Nine’s 3Q comps  were +4.1% versus expectations of +1.7% and Stoney River printed a +6.8% versus expectations of +3.8%.


DRI: Darden was downgraded to Neutral by Janney Montgomery on concern that comps are decelerating.  We agree that comps are decelerating but there are better shorts in the group.


CAKE: Cheesecake Factory was downgraded to Neutral by Janney Montgomery.





Howard Penney

Managing Director



Rory Green



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