Solid quarter but “disappointing” guidance.



“Management is sandbagging”.  “Guidance is conservative”.  We’ve all heard it many times from the sell side – always when a buy rated stock provides disappointing guidance.  We, however, really mean it!  Look, we don’t have an axe to grind either way with IGT.  We’re not trying to justify a Buy rating.  Our call the last few months has been on BYI, not IGT.  However, we’ll call a spade a spade and say that IGT is sandbagging.  Guidance should’ve been 10 cents higher in our opinion.  We lay it out below.


The quarter can be summed up as having very strong top line results for both product sales and gaming operations (solidly ahead of consensus) somewhat offset by disappointing gaming operations margins and higher operating expenses.  We think management may be managing earnings a bit here.  We’ve seen it from them before.  With that level of revenues, EPS should’ve been a lot better.





Product revenues came in 19% ahead of our estimate due to better unit sales while gross margins were in-line with our estimate.

  • We estimate that IGT’s share rose to 40% in September – their best market share quarter since June 2008 (IGT would like to send out a special thanks to WMS)
  • Domestic units shipped exceeded our estimate by almost 3,000 units
    • Replacements were 1,200 units better than we estimated due to higher share (we estimate 39% share vs. high 20's share average over the last 6 quarters)
    • New units were 1,750 better than we estimated due primarily to the earlier than expected recognition of shipments to the 2 Kansas casinos opening in 1Q12 which we estimated accounted for 1,500 shipments
    • Replacement units for the quarter look like they were in-line with our original estimate of 13k for the entire market – marking an 11% YoY improvement.  We estimate that the YTD improvement in replacements is 13% with replacements tracking at 41.6k through September 30th vs. 37.7k shipped in the first 9 months of 2010.
    • International product revenues were $8MM above our estimate but gross profit was $1MM below our estimate. We suspect that this is due to the lower margins from the Entraction acquisition – which contributed to revenue but delivered no profits in the quarter.



Gaming operations revenue was $8MM above our estimate while gross profit was $6MM below our estimate, after adjusting for the $4.8MM IP settlement charge.

  • Better revenues were driven by improvements in WAP yields per day due to better game performance on fresh product.  However, WAPs do have lower margins since the games are largely licensed titles with royalty payments and jackpot funding expenses.
  • The quarter also got a boost from better than expected shipments to international markets –including shipments to CAGE
  • Adjusted for the negative impact from rates and the IP charge, ‘normalized gross profit’ margin would have been 59% - below the 62% rate where IGT had been tracking for the first 9 months of the year.  We suspect that next year’s guidance has a similarly conservative margin.

Other stuff:

  • SG&A was $13MM above our estimate – largely due to higher commissions from better product sales



IGT’s guidance for 2012 is pretty conservative in our opinion:

  • Excludes their signed contract to ship 7,200 units into Canada. If half those units ship in F2012 than that will add 5 cents to IGT's results
  • Flattish to slight uptick in the replacement environment. Unless current trends massively reverse, this is unlikely. For the TTM ended 9/30/2011 we estimate that 54k replacement units shipped in NA, a 12% YoY increase. Assuming just a 10% increase would add over 5,000 units to the market in IGT's fiscal 2012 and assuming that IGT can garner a 35% share that's another 2 cents a share.
  • Flatish new and expansion opportunities in IGT's fiscal 2012 vs. 2011.  We're not sure how that's possible, there were less then 12k new and expansion units shipped into NA for the TTM ended 9/30/11 and we estimate over 18k excluding any new units to Canada, Ohio VLTs, IL and counting 2 of 4 Ohio casino shipments. Assuming IGT get's 35-40% share of these openings we get another 3 cents
  • These 3 items account for roughly 10 cents of EPS. 

IGT’s install base and yields should show improvement YoY, however, we did take down our gross margins to 59%.  We also assumed a 30% variable component to SG&A.  All in, we get to $1.10/share for 2012. 






According to the National Bureau of Statistics, the annual inflation rate in China decelerated to 5.5% in October from 6.1% in September. 


Hedgeye Financials posted this on today's MBA Mortgage Purchase Applications print - "The MBA Purchase Index rose 4.8% last week, bringing the series to an index level of 173. In spite of this improvement, purchase application levels remain roughly 5% below their rates from the summer. At the current rate, applications will finish the year roughly 10% lower than 2010. We reiterate that this has a direct read through to prices."






THE HBM: CBOU, CAKE - subsector fbr





CBOU: Caribou Coffee reported 3Q EPS after the close yesterday of $0.07 versus expectations of $0.06.  Comps increased 4.1% and FY11 and FY12 guidance of $0.39-$0.41 and $0.48-$0.51, respectively.  Consensus is at the high end of both ranges.





CAKE: Cheesecake Factory says it’s doing nearly anything it can to lower costs without cutting portions during a time of high commodity-price inflation.  “We have to balance the need to protect margins with the even greater desire to grow guest counts”, said CFO Douglas Benn.  WSJ


THE HBM: CBOU, CAKE - stocks 119



Howard Penney

Managing Director


Rory Green


Great Inflations

This note was originally published at 8am on November 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The fear of another great inflation remained with him all his life.”

-Niall Ferguson


Inflation is a centrally planned policy. Period.


History is littered with examples of governments devaluing their fiat currencies for short-term political resolve. Keynesians can call their goals “price stability” and “full employment” all they want. The People are starting to call that a joke. In the long-term, banning both gravitational forces and the truth about long-term prices will be difficult.


The aforementioned quote comes from an excellent book that I am in the middle of studying – Niall Ferguson’s High Financier – The Lives and Times of Siegmund Warburg. In the Post 1913 Federal Reserve Act Period (Chart of The Day), there are very few merchant bankers (not to be confused with central or too-big-to-perform bankers) who rival Warburg’s legacy.


What’s most interesting to me about Warburg (like it is with most revolutionary capitalists), is where he came from. Context and experience are some of the things I personally thank God for every day of my life. For Siegmund Warburg, context and experience are what made him the change that the British and American banking systems needed to see.


“I brought something to England which was a little bit different because I was a damn foreigner, a German Jew.”

-Siegmund Warburg (High Financier, page 233)


You don’t have to take my word for it on any of this. I’m just a Canadian who came to the American Financial Empire in 1995 and studied the source code of Keynesian economic dogma at Yale in my cutoff jean shorts.


Take Harvard’s word for it – Ferguson’s book has 104 pages of footnotes.


You don’t have to take Warburg’s word for it either – few in the Establishment of the British economic elite did after he became a British citizen in 1939. But when a post WWII debt-laden England resorted to debauching the British Pound, Warburg called them out on it, big time.


Great Inflations?


Warburg lived through Germany’s hyperinflation of the 1920s and the politicized central banking that perpetuated it. Today’s good ole boy network money printing is not a new strategy. We don’t have that hyperinflation (yet) either. But the manic financial media seems hell bent on cheering on its catalysts.


WTIC and Brent Crude oil prices are trading at $95 and $112/barrel this morning. Deflation? Pull up any long-term chart that doesn’t use 2008’s $150/barrel oil price as its anchoring point in the analysis (all-time high), and you’ll conclude what every man, woman, and child from Kenya to Vietnam already has – Keynesian monetary policies are exporting generationally high levels of food and energy inflation.


Warburg didn’t believe in trading prop, levering up his client deposits, or front-running client capital. His strategy was to simply keep his bank’s balance sheet liquid and conservatively positioned throughout the British and French currency devaluations of the 1950s and 1960s. He also avoided getting train wrecked by the US Dollar Devaluation that ensued under Nixon and Carter in the 1970s.


Warburg fundamentally believed that “inflation was primarily a political phenomenon caused by governments who do not have the courage to either reduce their expenditure or to cover it by taxation.” (High Financier, page 36). Sound familiar?


The sad and pathetic reality about Western Economic Leadership in the 21stcentury (read case studies of both Bush/Obama US Administrations, the 8 or 9 Japanese PM’s they’ve had in the last decade, or … uh, Europe!), is that this is all very familiar.


“To sin by silence when they should protest makes cowards of men.”

-Abraham Lincoln


The metaphor that Ferguson and I make between the British Empire’s peak (then) and America’s (potentially now) is a very important debate that needs to be had. If we repeat history’s mistakes, our children have no business forgiving the elephantine intellects endowed upon us from our Ivy League institutions.


In the late 1940’s and early 1950’s Warburg was at least as critical of British policy as Hedgeye and many others are of US fiscal and monetary policy today.




“By the September 1949 devaluation, which saw the Pound’s dollar value reduced by 30% from $4.03 to $2.80, his Wartime enthusiasm for Labour had waned significantly… he argued in a highly critical memorandum written in August of that year … The country was spending too much on defence. Profits and pay were on a much too high level… the employers indulge frequently in illusions as to the profits …” (High Financier, page 131)




But, but, but … if you don’t adjust them for inflation, ‘corporate profits are great’… and we continue to beg for The Bernank and/or the Italian Job from Super Mario, to cut, print, cut… beg, cut, print… print, bail, cut…


If you’ve been awake since 2006 and watched Big Government Interventions A) shorten economic cycles and B) amplify market volatilities, you get it. Great expectations for Great Inflations have become the root of the common man’s heartache.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1724-1784, $92.66-94.86, 6105-6413, and 1251-1267, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Great Inflations - Chart of the Day


Great Inflations - Virtual Portfolio

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Clever Confusion

“A clever person solves a problem. A wise person avoids it.”

-Albert Einstein


Yesterday was not a good day for me. Today will be. This is the game. And I love playing it.


Yesterday, I couldn’t have been more confused between the intraday and end of day signals I was getting in my risk management model. In general, when that happens (and I’ve had to learn this lesson the hard way by getting whipped around), the best decision is to take down exposure and get out of the way.


So this, fortunately, is what I did:

  1. Sold my US Equities in the Hedgeye Asset Allocation Model back down to 0% (from 6% on the open and 12% the week prior)
  2. Sold my LONGS in the Hedgeye Portfolio (different product) down from 9 LONGS on the open to 7 LONGS by the close
  3. Stayed with my best Global Macro long ideas – US Dollar (UUP), Long-term Treasuries (TLT), long UST Flattener (FLAT)

Unfortunately, staying with these long positions (UUP, TLT, and FLAT) made me feel shame yesterday. That’s what you should feel when you lose. Losing means you didn’t have it right. Winners need to lose before they can really learn how to win.


Intermediate-term to long-term investors have not been losing being long these positions for the last 6-9 months as it’s become clear that Global Growth Slowing will dominate Global Macro investing in 2011.


Most of the losers out there who focus on whining and finger pointing will obviously disagree with that statement – blame Europe or blame Canada for US GDP growth being 0.36% in Q1 or China slowing sequentially throughout the year – that’s easier, I guess.


There is nothing that’s been easy about investing in a globally interconnected macro marketplace in 2011. That will not change with French, Italian, and US Equities collapsing early this morning.


Ironically enough, Madame Lagarde seems to be geeking out on Le Chaos Theory this morning, prefacing her great depression fear-mongering speech to the last bastion of money printing – the IMF:


“In our increasingly interconnected world, no country or region can go it alone… there are dark clouds gathering in the global economy.”




On what part? The Lord Voldemort darkness of it all that is required to scare the hell out of people, or the socializing of losses part where only the young can dare “go it alone” in this world and bet on themselves?


If you thought all of this begging, banning, and printing was going to end well, you certainly didn’t get that call from me. In the last 4 years of ranting to you, I have to say that some days it really sucks to have to write about reality.


I’m on the same team as you. I am responsible for both my family and firm’s well being. I am looking to make this world a better place for my kids. But piling-more-policy-upon-policy is not the way out of this confidence spiral. It’s sucking the life out of capitalism.


Let us fail.


That’s the only way anyone on any team I have ever played on was really able to learn. Let me give-away the puck in front of 10,000 crazy fans wearing Badger red in Wisconsin (when my Mom is in the stands wearing blue) and let me hear that building light me up with insults like a Christmas tree in December for giving away a Yale goal.


Mucker, high and off the glass next time, eh?


Avoiding risk is important. It’s a process, not an emotional beta chasing point. Here are some of the most important lines in all of Global Macro to avoid “buying the dip” on:

  1. EUR/USD $1.37 – do not buy Euros on that breakdown if/when it occurs (buy US Dollars)
  2. SP500 – do not buy the SP500 if it cannot sustain itself above 1268 TAIL line resistance
  3. CAC40 (France) – do not buy French stocks if the intermediate-term TREND line of 3403 isn’t recovered

With everyone talking about Italy this morning, focus on France. We’ve been shorting Italy for 2-years and as of this morning it’s still crashing (down -34.5% from its YTD peak). Berlusconi is going away, but European Stagflation isn’t.


Focus on where the puck is going, not where it’s been. If I had to learn that risk management lesson from The Great One, so be it. I’ll take that over losing money today, all day long.

My immediate-term support and resistance ranges for Gold, Oil, German DAX and the SP500 are now $1, $94.01-97.07, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Clever Confusion - 1. EL EUR


Clever Confusion - Virtual Portfolio


The Macau Metro Monitor, November 9, 2011




China’s October housing transactions fell for the first time in three months, declining 25% from September.  The value of homes sold last month dropped to 372.3 BN yuan (US$58.7BN) from 493.9 BN yuan in September, based on data from the statistics bureau.



According to the National Bureau of Statistics (NBS), China CPI rose 5.5% YoY in October, weakening from September's 6.1% rise.  The October CPI growth marked the slowest surge since May this year.  On a monthly basis, the cost of living added 0.1% in October.

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