Higher hold contributed over 10% of the 42% YoY growth.  November GGR should fall significantly MoM.



As previously disclosed, October gross gaming revenues (GGR) increased 42% YoY to $3.35BN.  With the detail in hand, we can confirm that while growth was strong, the month got a boost from good hold and an easy hold comparison from last October.  Total direct play this month was 6.3% of the market, compared to 7.5% last year.  The total market held at 3.05% vs. 2.70% in October 2010.  Normalizing for hold, October would have increased 30% YoY.  High margin Mass business increased 36%, just slightly lower than the 40-41% growth we’ve seen during the last 4 months.


As we approach the next 3 months of the year we expect YoY growth rates to decelerate, partly due to difficult hold comparisons and trends we are seeing in our sequential monthly projections (see “MACAU: EYE ON NOVEMBER” published on 11/2/11).  Hold rates for November 2010 through January 2011 ranged between 3.05% and 3.13%.  Normal hold levels would alone shave roughly 10% off YoY growth.



Y-o-Y Table Revenue Observations

Total table revenues grew 43% YoY this month, on top of 50% growth las­t October.  October Mass revs rose 36%; VIP revs grew 45%; and Junket RC rose 30%. 



Table revenues grew 5% only YoY – exhibiting the slowest concessionaire growth in the market, in-line with recent trends.  We’ll be keenly watching for a turnaround in November since we’ve heard that LVS has been extending additional junket credit and 2 new junkets are coming online at the Four Seasons this month.  Over the last 5 months LVS’s table revenues have grown at 14% while the market has grown 48% - roughly 30% of the market’s pace.

  • Sands was down 6% YoY, driven by low hold. The YoY decline was driven by a 15% drop in VIP which was somewhat offset by 12% increase in Mass.
    • Junket RC was up 21%
    • Sands held poorly in October and had a difficult YoY comp.  Adjusted for 14% direct play (15% in 3Q11), hold was about 2.05%, compared with 3.00% hold in October 2010 assuming 15% direct play (in-line with 4Q10). 
  • Venetian was up 8% YoY, driven by a Mass increase of 28% offset by a 4% drop VIP
    • Junket VIP RC fell slightly, down 1%
    • Assuming 23% direct play in the quarter (just slightly below the 24% we saw in 3Q11), hold was 2.99% compared to 3.12% hold in October 2010 assuming 19% direct play (in-line with 4Q10)
  • Four Seasons grew 17%YoY, driven by an 89% increase in Mass VIP revenues and a small 3% increase in VIP revenue. 
    • Junket VIP RC increased 10% YoY
    • While we believe that the property held low, the comparison was also very easy.  Assuming 36% direct play (which is close to the 38% in 3Q11 and implies a 19% sequential increase in average monthly direct play levels), hold was 2.65% in October, compared with a hold rate of 1.82% if we assume 54% direct play in October 2010 (in-line with 4Q10)


Wynn table revenues were up 36%, which benefited from an easy hold comparison

  • Mass was up 23% and VIP increased 40%
  • Junket RC increased 11%
  • Assuming 10% of total VIP play was direct (in-line with 3Q11), we estimate that hold was 2.9% compared to 2.3% last year (assuming 11% direct play – in-line with 4Q10)


Table revenues grew 49% - equally driven by Mass and VIP

  • Altira revenues rose 28% with Mass growth at 18% while VIP grew 29%, helped by an easy hold comparison
    • VIP RC increased 14%
    • We estimate that hold was 2.9% vs. 2.7% last year (direct play is not material at Altira)
  • CoD table revenue was up 62%, driven by 57% growth in Mass and 64% growth in VIP – helped by high hold and an easy comparison
    • Junket VIP RC grew 37%
    • Assuming a 13% direct play level, hold was 3.4% in October compared to 2.6% last year


Revs grew 15%

  • Mass was up 17% and VIP was up 14%
  • Junket RC was up 10%


Table revenues continued its streak of triple-digit gains, +201%; mass soared 340%, while VIP gained 186%

  • StarWorld table revenues grew 64% - exhibiting the best growth of any mature property
    • Mass grew 56% and VIP grew 65%, helped by high hold and an easy comp
    • Junket RC grew 28%
    • Hold was high at 3.1% compared to just 2.5% hold last October
  • Galaxy Macau's total table revenues were $339MM, 41% higher than September’s
    • Mass table revenues rose 29% MoM to $59MM
    • VIP table revenue of $280MM, a 43% MoM increase, helped by luck. Hold was 3.4% this month vs. 2.8% in September.
    • RC volume of $8.3BN, up 19% MoM


Table revenue increased 50% YoY, helped by high hold in the quarter

  • Mass revenue growth was 9%, while VIP grew 60%
  • Junket RC increased 24%
  • Assuming a direct play level of 8%, we estimate that hold was 3.6% this month vs. 3.0% in October 2010, also assuming direct play of 8% 


Sequential Market Share (property specific details are for table share while company-wide statistics are calculated on total GGR, including slots)



Share increased 40bps sequentially to 14.1%. This compares to 6 month trailing market share of 15.1% and 2010 average share of 19.5%

  • Sands' share ticked up 10bps to 3.5% off of all time lows in September
    • Mass rev share fell 30 bps offset by a 50bps improvement in VIP share
  • Venetian’s share fell 40bps sequentially to 8.1% share
    • VIP share fell 1% to 5.9%, below the prior TTM average of 6.8%
    • Mass share gained 1.5% sequentially to 15.5% - above the 14% average for the trailing 6 months
    • Junket RC fell 20bps to 4.7%
  • FS share improved 80bps to 2.0%
    • VIP share increased 1% to 1.9%
    • Mass share ticked down 10bps to 2.3%
    • Junket RC improved 20bps to 1.5%


After hitting an all-time low in September market share, WYNN was the largest share gainer in October – gaining back 1.6% to 13.1% share - although still below their 6 month trailing average share of 14.2% and 2010 average share of 15%. Wynn’s share should continue to struggle with the opening of Sands Cotai Central in March and with the introduction of new junkets at the Four Seasons this month.

  • Mass market share fell 20bps at 10.3%
  • VIP market share increased 2.2% to 13.6%
  • Junket RC share was flat MoM at 13.5%, below its 6 month trailing average of 14.7% and 2010 average of 15.2%


Market share fell 1.5% points to 14.7%, below than its average 6 month trailing share of 15.2% but above its 2010 share of 14.6%.

  • Altira share fell 50bps to 4.7%, compared to a 5.6% average share in 2010; Mass share fell 10bps while VIP share dropped 1%. 
  • CoD’s share dropped 80bps to 9.9% driven by share losses in VIP that were partly offset by strength in Mass
    • Mass market share increased 1.1% points to 9.1% 
    • VIP share fell 1.5% points bps to 10.1%


In a reversal from last month SJM lost the most share in October, down 3.0% to 26.0%, their lowest share since August 2009 and below its 6-month trailing average of 29.2% and 2010 average of 31.3%.

  • Mass market share dropped 2.8% to 33.9% - an all-time low
  • VIP share fell 2.8% to 24.5%
  • Junket RC share ticked down 10bps to 28.3% - their lowest share since Sept 2009


Gained 1.3% share to 20.9%. October share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 16.0%.

  • Galaxy Macau share gained 1% to 10.5%
    • Mass and VIP market share gained 90bps to 8.2% and 11.2%, respectively
    • RC share ticked down 20bps to 10.8%
  • Starworld lost 40bps of market share to 9.2%, 10bps above its TTM share of 9.1% pre-Galaxy Macau level.


Gained 1.1% to 11.2% due to an improvement in VIP share. October share compares with an average share of 10.3% in 2010 and a 6 month trailing average of 10.4%.

  • Mass share lost 120bps to 6.9% but was more than offset by a 160bps decrease in VIP share to 12.2%
  • Junket RC gained 60bps to 10.3%, above the property’s 2010 average of 8.4% and in-line with its 6 month trailing average of 10.4%


Slot Revenue


Slot revenue grew 18% YoY and increased $2MM sequentially.

  • As expected, Galaxy slot revenues grew the most with 309% YoY to a record of $16MM
  • MGM slot revenues had the second best growth at 24% YoY to $20MM – an all-time high for the property
  • Wynn slot revenues grew 11% YoY to $25MM
  • MPEL slot revenues grew 3% YoY to $22MM
  • SJM slot revenues grew 7% YoY to $14MM – down from $17MM in September
  • LVS slot revenues fell 3% YoY to $33MM






The Week Ahead

The Economic Data calendar for the week of the 7th of November through the 11th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 1. cal

The Week Ahead - 2. cal



I have been a SBUX bull since early 2009 and remain one today.  Yet, unfortunately, I am still not allowed to ask a question on the earnings calls.  I know there are 28 analysts that follow SBUX and there is a limited time on the call to get every question in but I was disappointed when calling in 20 minutes in advance did not yield an opportunity to ask a question.


The IR team did reach out to me and I look forward the conversation, but I must say I was hoping to ask my question in a public forum.  That is not to say that I doubt they would have expertly danced around the issue I planned on bringing up but I was eagerly anticipating the dialogue nonetheless.


Ever the optimist, I was hoping that management might look kindly upon the only sell-side analyst that has been covering the company from day one.  Then working at Morgan Stanley, I titled my initial report “Expensive and Built to Stay That Way”.  Nine months later I got cute and put a sell on the stock due to a rich valuation.  Soon after, I received a call from Howard Schultz and he told me that I did not understand the room the company had to grow.  He invited me out to Seattle to show me what he meant.  After taking him up on his offer and spending a day driving around with him, I walked away having learned a lot.  One week later I changed my rating.  So, my relationship with Starbucks has had its ups and down, but surely longevity counts for something!


As Schultz reminded us on the call yesterday, SBUX has come a long way since its beginnings in 1987. He said, “this week approximately 60 million customers will visit us, and that's just an unbelievable number when you consider where we have come from 1987, 11 stores, 100 employees, and today, 17,000 stores in 55 countries.”


I learned a very important lesson that day early in my career and it still applies today.  Howard Schultz embraced my sell rating as a challenge and, telling me “you don’t get it and let me show you why”, set about changing my mind rather than cutting me off.  I don’t think that Starbucks would cut me off for asking the question I was going to ask yesterday, but I do think that the topic it addresses will be a real concern in the coming 12 or 18 months.   


So, here is the thought process behind my question:


Starbucks has identified the single serve category as being very important to the company future growth.   While I understand the rational for going with Keurig and Green Mountain, I was surprised the company did not want to control the “last mile” into the home.  A number of people from the SEC to forensic accountants and well-known hedge fund managers have expressed serious reservations about the integrity of the company and the viability of the business model. 


Does Starbucks have a contingency plan in case Green Mountain cannot access the financial markets for the needed capital to execute its growth plan and deliver an adequate supply of k-cups?


The lack of the company ability to generate cash has been well documented and screens “UNSUSTAINABLE” in the Hedgeye Sustainability model.  The biggest red flags in the Hedgeye Sustainability model are Asset Turns and CFFO or, more importantly, the proportion of earnings yielding cash. 


Why would Starbucks rely on a supplier where we need to ask the question:  Is the company generating enough cash from its operating activities to continue without accessing new external sources of cash?  What if the capital markets dry up for GMCR?


We define CFFO as cash from operating activities less capital expenditures, less the benefits from the exercise of Employee Stock Options and adjustment for one-time gains/losses or restructuring items.  


Most of the companies we follow generate free-cash flow after significant investment in the growth of the core business, while other smaller, faster growing companies do not generate free-cash flow.  This is not necessarily a negative if the cash burn rate is within the limits of available resources.  To-date, the capital markets have been very generous to GMCR, but what happens when the music stops?    


Importantly, we are looking at the proportion of earnings yielding cash.  If GMCR reports strong revenue growth, good margins, healthy profits but those profits are accompanied by negative cash earnings yield, SBUX must be suspicious, or at least I hope they are. 



Howard Penney

Managing Director


Rory Green





Call Him Good or Lucky, Obama Is At 50/50 On InTrade

Conclusion:  Romney looks poised to win the Republican nomination, but Obama is looking increasingly difficult to beat.

Our Macro Team was on the road this week meeting with clients on the West Coast and inevitably politics came up as part of the macro discussion.  As most macro traders know, policy and policy makers are key factors in determining the future price direction of various asset classes.  Specifically, both monetary and fiscal policy shape interest rate policy and, eventually, the price of key currencies.


In theUnited States, this coming year is obviously a Presidential Election year.  Barring an unforeseen development, the showdown over the Presidency will be between President Obama and former Massachusetts Governor, Mitt Romney.  Despite the media trying to make the Republican nominating process seem competitive, it is anything but competitive. 


According to InTrade, Romney is currently at 70.1% probability of gaining the nomination.  The rest of the field is very distant, with Perry at 11%, Gingrich at 8%, and Cain at 5%.  Interestingly, the most recent national poll of the Republican front runners suggests a slightly closer race with Romney at 25%, Cain at 23%, Perry at 14%, and Gingrich at 12%.  From our perspective, while polls can be instructive, predictive markets tend to be more accurate.  Further, the primary calendar plays very well into Romney’s strategy.


The early caucuses or primaries in January and February are outlined in the table below:


Call Him Good or Lucky, Obama Is At 50/50 On InTrade - 1. DJ


In aggregate, of the first ten primaries or caucuses, Romney appears poised to win six handily and in the remaining four, he is in a tight race with Herman Cain. (Incidentally, most of these polls were taken before the recent Cain sexual harassment scandal).  The key surprise could well be that Romney does better than expected in Iowa and then goes for close to a clean sweep in January and February, which would effectively end the race early.  This appears to be the scenario that is priced into the InTrade contract.


So, assuming this race very quickly becomes Obama versus Romney, does President Obama stand a chance?  According to a preponderance of political strategists, many pertinent economic indicators, and relevant approval polls, President Obama will be a one term President.  A few key points to consider (hat tip to Karl Rove for collecting this data):

  • No President has ever been re-elected with 74% of American saying the country is on the wrong track a year before the election;
  • No President has ever been re-elected with so few Americans, 13% according toGallup, saying they are satisfied with the way things are going;
  • No President has been re-elected with unemployment at 9% a year prior to the election; and   
  • No President has been re-elected with a job approval as low as Obama currently has.

Sounds dismal for Obama, right?  Well, not so fast.


According to InTrade, Obama is now at 50.5% on the contract as to whether he gets re-elected, which suggest a more than 50% probability.  As outlined in the chart below, this is off the lows of early October.  Now, clearly there is some correlation to the massive positive move in the U.S. stock market we’ve seen in October.  Nonetheless, Obama is a long ways from a sure thing as a one term President.


Call Him Good or Lucky, Obama Is At 50/50 On InTrade - 2. DJ


According the to the Real Clear Politics aggregate, Obama trails the generic Republican challenger by about +3 points.  This spread is within the margin of error and overtime has consistently indicated a slight lead for the generic Republican.  Conversely, when polled against the actual Republicans, Obama does well.  For instance, Obama has consistently outpolled Romney for the last month by either tying or beating him in every poll, and currently leads by +1.9 points.  As for the rest of the field, it isn’t even close as Obama demolishes them head-to-head.


So far, at least, voters seem to be siding with the devil they know, versus the devil they don’t.  In addition, there is a clear and definitive incumbency advantage for in Presidential elections as, according to a paper by David Mayhew, the incumbent has been re-elected 2/3s of the time versus 50% of the time when the there was no incumbent running.  The real risk for the Republican candidate is that the economy and stock market improve in 2012, even if only marginally.  This scenario could take a marginal Obama lead to a solid re-election.


Daryl G. Jones

Director of Research




Employment data was positive for quick service and mixed for casual dining.


The overall jobs picture this morning was mixed this morning as the unemployment rate ticked down 10 basis points with a sequentially flat labor force participation rate but Private Payrolls for October came in at 104k versus 125k consensus and 191k prior (revised from 137k).  The revision was good news but, at the end of the day, this news still indicates – at best – that the economy is making very slow progress.


Employment by age shows a large uptick in employment in the 20-24 YOA bracket in October, indicating a sequential acceleration from September’s level.  This is a positive for the QSR industry which sources a lot of its customers from younger age cohorts.





The second chart, below, is on a one month lag versus the chart above and shows employment growth in the full service and limited service industries.  Hiring continues to be strong on a year-over-year basis but, on the margin, employment growth in limited service restaurants showed improvement during September while full-service restaurants hiring slowed sequentially in terms of year-over-year growth.  We would need to see a continuation of this trend in October to gain more conviction of concern among restaurant operators.





Howard Penney

Managing Director


Rory Green




We like lodging but buying HOT because you think it is going private is not a sound investment strategy. recently reported that there was go private chatter related to Starwood Hotels.  No offense to HOT shareholders – lodging stocks look interesting to us too – but the chances of a large company going private in our space over the near term are very slim.  Here is why:

  • Debt markets are not available for deal leverage
    • Max leverage for super high quality stuff is 5.5x and for meat and potato, it's 4.5x
    • All the peak deals were done in the CMBS markets, which aren’t really back
  • HOT does not own enough real estate for LBO.  Blackstone was able to take Hilton private given the frothy financing environment for real estate.
    • It’s not that cheap
    • Fritz likes being public and likes his job, so we don’t think the interest is there.  There is no one on the board likely to encourage them to do it
  • CEOs are not interested in M&A.  They are chasing new Greenfield opportunities.
  • M&A deals over the last 5 quarters or shall I say lack thereof:
    • ProLogis/AMB
    • Ventas/NHP
    • Corporate properties associates ($916MM)
  • There was the Sonesta deal yesterday.  However, it's a micro cap transaction and is more of an asset sale rather than M&A since their main asset sold - Royal Sonesta Hotel Boston - accounted for 86% of the purchase price.

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