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HALF IN THE BAG

I continue to hold a very sober view of 1H CY2009 slot sales. Analysts are forecasting 10% revenue growth for BYI and WMS and positive slot unit sales for the sector over this period. As we wrote about in our 11/02/2008 post, “CAPEX, COVENANTS, AND CORPORATE CONTROL”, slot Capex is likely to drop off dramatically in the first half of next year as CFO’s strive to avoid liquidity crises. In addition to a replacement push back, demand for slots at new casinos will be way down in 1H CY2009. We estimate unit sales to new casinos will be cut in half over that time.

Estimates probably need to be reigned in for all of the suppliers. However, BYI looks to be more protected with almost 50% of its revenue derived from what we would consider “in the bag” sources. WMS is expected to generate only 35% from such sources. No company would be in good shape if slot sales fall to zero in 1H 2009, nor are we predicting they will. There are new casinos opening next year but it is conceivable that replacement demand could get cut in half or even by 75%.

“In the bag” revenue sources include lease and participation revenue (which we’ve discounted given the environment) and deferred revenue. Due to accounting regulations, BYI has deferred a significant amount of revenue. We estimate a little under 20% of projected revenue is derived from deferred revenue versus virtually zero WMS. This provides a nice cushion in a temporary slot slowdown. Both companies should source 30-35% of revenue from participation and lease revenue.

Considering relative valuations and expectations and BYI’s earnings cushion, BYI’s stock may be in better shape to weather a temporary slot drought.


SP500 Levels Into the Close: Buy'em!

As of the 3PM refresh, my models are signaling 1-2% downside and 6-7% upside from the 833 line we issued in our Early look.

BUY "Trade" line = 818.11
SELL "Trade" line = 885.67

The SP500 is setting up here to close at a lower low. On the margin, that's bearish. In conjunction with this event, Volatility and Volume are not confirming higher highs vs. those seen during the thralls of October 2008. On the margin, that’s bullish.

Hank “The Market Tank” is done. The CPI report tomorrow will be bullish. Buy’em!
KM

Spain: The Terror Mullet

A very frightening man with a very funny hair style…

News that the ETA military leader Mikel Garikoitz Aspiazu Rubina , known as “Txeroki” had been apprehended in France was headline news across the continent with Spanish Prime Minister Zapatero heralding the arrest a “severe blow” to the separatists.

The ETA has waged a smoldering terrorist campaign in Spain since the Franco regime ended with frequent violent outbursts. Since July the ETA is suspected of 3 car bombings, including one at a military academy in Santona that killed a Spanish Army officer on September 21st and one in a university parking lot in Pamplona on Oct 30th that injured 15 students. Despite the capture the IBEX continued to decline throughout the day session closing lower by 330 points or 3.77% pulled down by concerns over the gloomy prospects for a recovery anytime soon. Banco Santander, Spain’s largest financial institution fell by more than 6%.

We have followed the Spanish market closely this year and were short EWP, the Spanish ETF, during the spring as the housing market crisis there began to accelerate. We continue to keep an eye on the Spanish market, looking for signs that matter on the margin. This one certainly didn’t.

Andrew Barber
Director

Early Look

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US PPI: The Most Bullish Chart Of The Day

When a tree falls in a forest, does anybody hear? This inflation charts is starting to sing bullishly (albeit softly) to our macro model.

Suffice to say, the top in reported US inflation is in the rear view mirror (see chart). This is going to pave the way for "Heli-Ben" to justify cutting US interest rates to zero. Altogether, this is going to be bullish for equities and commodity prices in the months to come. Re-flating may very well be the only policy path left.

KM

Eye On Liquidity: Flatlining

LIBOR and spreads between short term and long term rates came in flat yesterday as the markets waited for PPI and CPI for cues. This morning’s PPI was deflationary, so US short rates continue to come in nominally, but three month LIBOR is holding at 2.22% On the margin, this is a bearish signal for equities and a negative sign for liquidity in general as the cost of lending in the interbank and capital markets increases slightly on concerns over counterparty risk (the low was closer to 2.10%, so we are moving up from the lows, not down from them).

The decline of 3 month LIBOR from near 5% in early October to less than half of that in the first week of this month was one of the most positive signals in our macro model, but don’t mistake lower reference rates with increased liquidity. Figures released last week by the Fed for Interbank loans by commercial banks during the first week of November showed the second sequential week over week decline (see chart) suggesting that commercial lenders are still reluctant to extend credit despite government intervention. They fear the market’s proverbial pirates. They are sitting on their cash.

Meanwhile the swap spread market still reflects the high cost of financing positions in the capital markets. Although shorter maturity swap rates decreased overnight the levels still remain over 100 basis points – well above historic averages. The drought appears to be impacting the listed futures markets as well - an informal survey of brokers suggests that FCMs on average are quoting rates above the Exchange minimum levels and that this premium has been creeping up steadily in recent weeks.

We will continue to watch reference rates for signals, but will weigh those signals against the real cost of liquidity when factoring them into our model.

Andrew Barber
Director

Another Negative for Casual Dining

A consumer survey, conducted by BIGresearch, indicated that overall gift card sales are expected to decline more than 5% this year to $24.9 billion. In 2007, restaurants and retailers enjoyed a 6% increase in gift card sales.
Not only is the number of gift cards purchased expected to fall from 2007 levels but the average gift card purchaser is also expected to spend less this year - $147.33 per person compared with $156.24 last year. 2008 marks the first year that average gift card spending has decreased since this Holiday Consumer Intentions and Actions Survey began in 2003.

National Retail Federation President Tracy Mullin stated, “Since gift cards never go on sale, some price-conscious shoppers will be passing up gift cards in favor of holiday bargains.”

As a true sign of the times, the survey found that 3.1% of shoppers attributed their cutting back on gift cards to fear that the issuing restaurant/retailer might go out of business, and their fears, in some cases, are warranted. Just two weeks ago, RUTH commented that it is relying on strong gift card sales in the fourth quarter to help the company to remain below its year end maximum debt to EBITDA covenant level of 3.5x, which management said “will be tight.” In 2007, gift card sales added about $12-$13 million of revenues in RUTH’s fourth quarter, and management is expecting the same level of gift card sales this year, which may also be tight, as a result of this survey's findings.

RUTH, however, is not alone. A lot of casual dining restaurants count on gift card sales to boost revenues in the fourth quarter. This year these gift card sales are even more crucial as a means to offset the overall fall off in casual dining traffic trends. For reference, in addition to its typical holiday season gift card promotion, Red Robin also rolled out a third party gift program, primarily in Safeway and Kroger grocery store chains, to drive incremental traffic. California Pizza Kitchen increased the number of distribution points for its gift card program by three times relative to last year, and is also offering the gift buyer a $20 reward card for every $100 gift card purchase. McCormick & Schmick’s is also focused on making its gift cards more readily available in additional points of distribution, including grocery stores, Costco and the internet. The company sold $8.5 million worth of gift cards last year at Costco alone and is expecting an ever greater contribution this year.



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