FQ1 was likely another weak quarter but can management convince investors they can turn it around?



We don’t think anyone has great expectations going into WMS’s print on Monday after close, despite the stock's nice recovery from $16ish lows in early October.  Buy-side whispers of a big earnings miss made their way to the sell-side after G2E and analysts took down numbers for the quarter and year.   


We’re still a penny below consensus for the quarter, although it’s not really about the quarter for WMS.  The performance of this stock will be determined on the Company’s ability to convince investors that the story isn’t broken and that they are on the road to recovery.  While there may be some short covering, management will likely be unsuccessful on this earnings conference call.  WMS is probably a show me stock at this point.


While replacements have been improving since 2008, the lack of new casinos and expansion have put overall slot market demand at all-time lows.  However, calendar 2012 should display a sharp uptick in new casinos/expansions. 


For FQ1, WMS likely incurred more impairment charges and needs at least another quarter to turn around the declines that they’ve been experiencing in their gaming operations install base.  As we wrote about in “G2E KEY TAKEAWAYS” on 10/06/11, we did walk away from G2E more bullish on the company over the long term.  They seem to be addressing their issues and getting back to what they do best – designing and developing good games.  However, it will likely take a couple of quarters to materialize.




We estimate that WMS will report revenue of $180MM and adjusted EPS of $0.28.

  • We estimate product sales of $106.5MM at a 48% gross margin – impacted by some write-downs and promotional environment
    • 5,400 machine sales at $16.5k
      • 3,250 machine sales into NA – almost all replacement
    • $17MM of conversion and used game & other revenue – likely at lower than normal margins due to promotional activity
  • $73MM of gaming operations revenue at a 79% gross margin
    • We expected a sequential decline in WMS install base as well as yield pressure as WMS brings on new products at a slower pace than what’s been rolling off.  This trend should reverse towards the end of their fiscal year.
  • Other stuff:
    • R&D: $29.4MM
    • SG&A: $36.5MM
    • D&A: $21MM

Bearish TAIL: SP500 Levels, Refreshed

POSITION: no positions in SPY or Sector ETFs


Since I have no idea what the next central plan is other than its to “go big” (Obama at the G20 today), I’m just going to get out of the way. While the US stock market’s intermediate-term TREND level of 1213 held this week, its longer-term TAIL level of 1267 did not. This market is in no man’s land now.


Across my risk management durations here are the lines that matter most: 

  1. TAIL resistance = 1267
  2. TRADE resistance = 1251
  3. TREND support = 1213 

The way I’ve managed risk around this is from a net exposure perspective (overall my call is to take gross exposure down). On Tuesday’s TREND line test of 1213, I moved the Hedgeye Portfolio to 9 LONGS, 5 SHORTS. As of today, I’ve tightened that back up to 7 LONGS, 7 SHORTS.


The EUR/USD is going to decide which way the SP500 trades from here. I’m watching how the Euro’s $1.36 TRADE line support holds up very closely.



Keith R. McCullough
Chief Executive Officer


Bearish TAIL: SP500 Levels, Refreshed - SPX

TGT: Selling

Keith just sold Target in the Virtual Portfolio; oil is too high and TGT has broken its immediate-term TRADE line of support.


TGT: Selling - TGT levels 11 4 11

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From a quantitative perspective, Starbucks is overbought at current levels from a TRADE perspective.  From a fundamental perspective, it remains one of our favorite names in the space.


Keith signaled to us this morning that Starbucks is overbought from a TRADE perspective at current levels, trading up as it is more than 6% today following yesterday’s earnings.  Clearly, the strength of the price action Starbucks in the face of an ugly tape shows that investors are confidence that the back-end loading of FY12 EPS growth is not a cause for concern.  We've liked this name for a long time and remain positive on the stock.





Howard Penney

Managing Director


Rory Green





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




There is a great article by Jonathan Maze on Private Equity's Mixed Track Record in the Restaurant Finance Monitor - “The buyout boom years of 2005 to 2007 haven't been good to private equity buyers of restaurant chains. In that period, those investors, buoyed by cheap debt, bought up numerous chains around the country. Yet of the 35 restaurants they bought in those years, 11 have gone bankrupt, and two others are in distress”.




The employment situation in October was largely unchanged with the unemployment rate dropping slightly to 9.0% from 9.1% prior and the Labor Force Participation Rate was unchanged at 64.2%.  Private Payrolls came in below expectations at 104k versus 125k expectations.  September’s number was revised from 137k to 191k.


We will be following up with a post this morning on important employment trends that pertain to the restaurant space in particular.





THE HBM: SBUX, WEN - subsector fbr





SBUX: As we wrote this morning, Starbucks posted strong 4QFY11 earnings last night and mentioned that business has been strong in Canada.  Tim Horton’s must be feeling the heat.  Tim Horton’s has announced the launch of its new specialty coffees, which will soon be available at more than 2,500 locations across Canada. The company said it's the biggest specialty coffee roll out ever in the country. Starting at $2, the lineup includes lattes, mocha lattes and cappuccinos made with premium espresso.


WEN: Wendy’s continues to trade well.  We believe that sales at the concept are strengthening.


THE HBM: SBUX, WEN - stocks 114



Howard Penney

Managing Director



Rory Green






TODAY’S S&P 500 SET-UP - November 4, 2011


Get the US Dollar right, you’ll get a lot of other things (beta) right!   As we look at today’s set up for the S&P 500, the range is 16 points or -0.80% downside to 1251 and 0.46% upside to 1267. 




THE HEDGEYE DAILY OUTLOOK - levels and trends 114


THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: +1303 (-695) 
  • VOLUME: NYSE 1002.25 (+4.69%)
  • VIX:  30.50 -6.84% YTD PERFORMANCE: +71.83%
  • SPX PUT/CALL RATIO: 1.55 from 2.29 (-32.07%)




TREASURIES: long end of the US treasury yield curve has been yelling that this unemployment report is going to be bad again; stay tuned

  • TED SPREAD: 43.50
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.09 from 2.03    
  • YIELD CURVE: 1.85 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Change in non-farm payrolls, est. 95k, prior 103k
  • 8:30 a.m.: Unemployment rate, est. 9.1%, prior 9.1%
  • 1 p.m.: Fed’s Tarullo speaks in Washington on regulation
  • 1 p.m.: Baker Hughes rig count
  • 4:05 p.m.: Fed’s Williams speaks in Santa Clara, Calif.


  • Greek PM George Papandreou’s government faces confidence vote in parliament; referendum canceled
  • G-20 chiefs meeting in Cannes, France, are pushing European authorities to flesh out, enact a week-old rescue plan that has already shown signs of unraveling
  • Basel Committee on Banking Supervision scheduled to release list of so-called global systemically important institutions following G-20 meeting
  • MF Global’s Asian units may be sold as soon as this weekend after liquidators received between 30 and 40 “credible” purchase offers: WSJ




THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Ex-Credit Suisse Oil Head McKenna Starts Mastic Hedge Fund
  • Gartman Sees Euro Slump Pushing Gold to Record: Chart of the Day
  • RBA Cuts Growth, CPI Forecasts as Europe’s Turmoil Deepens
  • Yingluck Banks on $26 Billion Plan After Flood ‘Stumble’
  • Wheat Plunging as Stockpiles Climb to 10-Year High: Commodities
  • India Economy Faces ‘Critical’ Coal Shortage: Chart of the Day
  • Oil Trades Near Three-Month High as Greece Cancels Referendum
  • Gold Traders More Bullish as Hedge Funds Increase Bets on Gains
  • Stocks, Oil Rise, Treasuries Drop as Greece Moves Toward Bailout
  • Heating Fuel at Record as European Diesel Surges: Energy Markets
  • Chinese Iron Ore Miners Losing Money at Current Prices, UBS Says
  • Copper Gains for Third Day as Greece Near Bailout, ECB Cuts Rate
  • Malaysia’s Export Growth Quickens on Higher Sales of Commodities
  • Thai Rice Exports Seen Plunging on State Buying, Flooding
  • Gold Pares Second Weekly Increase as Investors Lock in Gains
  • Credit Suisse Brazil Unit Said to Shut Agriculture Trading Desk
  • Starbucks Fourth-Quarter Profit Rises 29% as U.S. Sales Gain
  • Abramovich Says He Feared Russia’s Murderous Aluminum Trade
  • Vale Marketing Head Gutemberg Leaves Amid China Price Talks




EURO – we covered at TRADE line support (and sold the USD) on Tuesday at Euro 1.36. Now we can re-short it on the mini-squeeze back up to 1.39-1.40 (and buy the USD back). Just managing risk around a proactively predictable FX range.

Eurozone Producer Prices +5.8% y/y in SEP and set to rip higher again in OCT/NOV as policies to inflate continue


THE HEDGEYE DAILY OUTLOOK - daily currency view




FRANCE – there’s nothing stealth about what either the French stock or bond market continues to tell us – its explicit - France is entering a period of intermediate-term stagflation; this morning’s failure to capture TREND line resistance (3403) combined with a nasty Services PMI print of 44.6 for OCT (vs 46 in SEP) tells us all we need to know to be shorting French stocks on green.


THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – stealth move higher in Chinese stocks continued overnight as the Shanghai Comp closed up for the 9th day out of the last 10. Heard from large constituencies in the hedge fund community that China (as in the country) was going off a cliff in early October. Hearing crickets now. Our predictive tracking algorithms have Chinese GDP growth bottoming (sequential slowdown) in Q1 of 2012.



THE HEDGEYE DAILY OUTLOOK - asia performance






The Hedgeye Macro Team

Howard Penney

Managing Director