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WYNN Q4 PREVIEW

We’re in-line, for a change, but a little below on 2012.  Estimates have appropriately come down over the past month closer to ours.

 

 

WYNN should report EBITDA close to consensus, although Las Vegas remains the wildcard.  While positive catalysts remain elusive, 2012 estimates have come down to the point where we are only 3% below consensus and the stock has appropriately underperformed.  Undoubtedly, WYNN will continue to lose share in Macau in 2012 but that is well-known.  We’re positive on Vegas but MGM is the better play on that thesis.  So without a positive (new Asian market) or negative (further erosion of Macau share, emergence of a commission war, or slower growth in Macau) catalyst, this stock looks range bound.

 

For Q4, we are projecting $1.37BN of net revenue and $392MM of EBITDA.

 

 

Q4 Detail:

 

We estimate that Wynn Macau will produce $999MM of net revenue and $305MM of EBITDA (5% below consensus)

  • Net casino revenue of $936MM
    • $660MM of net VIP win
      • Assuming 10% direct play, RC volume of $29.4BN (up 7% YoY) and 3.2% hold
      • Rebate rate of 99bps or 30.5% on a rev share basis
      • Assuming theoretical hold of 2.85%, net revenues and EBITDA would be $77MM and $20MM lower, respectively
    • Mass win of $211MM, a 23% YoY increase
    • Slot win of $65MM, up 4% YoY 
  • $63MM of net non-gaming revenue
    • Room revenue: $31MM
    • F&B: $26MM
    • Retail & other: $50MM
    • Promotional allowances: $44MM
  • $562MM of variable expenses
    • $478MM of taxes
    • $72MM of gaming promoter expense assuming a blended commission rate 42.7%
  • Recorded non-gaming expenses of $24MM
  • Fixed expenses of $112MM compared to $110MM in 3Q and up 29% YoY

 

Projecting $373MM of net revenue and $107MM of EBITDA for Wynn Las Vegas (9% above consensus)

  • Net casino revenue of $157MM and operating margin of $83MM
    • Table win of $143MM
      • 10% increase in table drop to $621MM
      • 23% hold rate
    • $45MM of slot win
      • 3% increase in drop to $719MM
      • 6.2% win rate
    • $30MM discounts & rebates or 16% of gross casino win (compared to 17.4% in 3Q)
    • Casino expenses of $74MM, up 3% YoY compared to $71MM in 3Q11
  • $261MM of non-gaming revenue
    • Room revenue of $92MM
      • RevPAR: $209.50 (ADR: $250/ Occ: 84%)
      • CostPAR: $85.60
    • F&B: $108MM revenues at a 40% operating margin
    • Entertainment, retail, & other: $62MM at a 35% operating margin
    • $46MM of promotional spending or 29.5% of casino revenue
  • SG&A: $50MM (compared to $51MM last quarter)

 

Other assumptions:

  • Corporate expense: $20MM
  • D&A: $100MM
  • Stock comp: $6MM
  • Net interest expense: $56MM

Hedgeye 2012 Recommended Reading List

This note was originally published January 24, 2012 at 16:43 in Early Look

“No matter how busy you think you are, you must find time for reading, or surrender yourself to self-chosen ignorance.”

-Confucius

 

Please find attached Hedgeye’s reading list for 2012. There was no science in the construction of this list, we simply surveyed our colleagues at Hedgeye for their favorite reads in the last twelve months. We hope you will enjoy digging into these books as much as our team did.

 

Cheers,

 

Daryl G. Jones

Director of Research

 


“High Financier” by Niall Ferguson

 

Niall Ferguson's biography of Siegmund Warburg is a great read. Warburg was the architect of the post-WWII re-globalization of financial services after a period of profound retrenchment during and immediately following the war.  The context Ferguson provides around banking pre and post WWII seems invaluable given the parallels to the challenges facing Europe today.

 

“Sam Walton, Made in America: My Story” by Sam Walton and John Huey

 

This is the story of Sam Walton, who parlayed a single dime store in Newport, Arksas into Wal-Mart, now the largest retailer in the world. Part of the magic of Walton was that he never lost the common touch and developed one of the most loyal, and thrifty, employee bases in the history of commerce.

 

“Greater Than Yourself” by Steve Farber

 

In Greater Than Yourself Steve Farber proves them wrong: in this powerful and inspiring story, Farber shows that the goal of a genuine leader is to help others—teammates, employees, and colleagues—become more capable, confident, and accomplished than they are themselves. Through the actions of a forward-thinking and extraordinarily successful CEO, Farber reveals the three keys to achieving this: Expand Yourself, Give Yourself, and Replicate Yourself.

 

“Lean Thinking” by James P.  Womack and Daniel T. Jones

 

Expanded, updated, and more relevant than ever, this bestselling business classic by two internationally renowned management analysts describes a business system for the twenty-first century that supersedes the mass production system of Ford, the financial control system of Sloan, and the strategic system of Welch and GE. It is based on the Toyota (lean) model, which combines operational excellence with value-based strategies to produce steady growth through a wide range of economic conditions.

 

“The Information: A History, A Theory, A Flood" by James Gleick

 

Gleick starts off thinking about information as a concept, and how human society shifted as it developed the idea of information. He walks through fascinating history and anecdotes from the talking drums of Africa (for a while, the most sophisticated long-range communications system in existence) to the microprocessor, with a very approachable background on the study of Information Theory along the way.

 

“The Talent Code: Greatness Isn't Born. It's Grown. Here's How." by Daniel Coyle

 

What is the secret of talent? How do we unlock it? In this groundbreaking work, journalist and New York Times bestselling author Daniel Coyle provides parents, teachers, coaches, businesspeople, and everyone else with tools they can use to maximize potential in themselves and others.

 

"How to Stay Alive in the Woods: A Complete Guide to Food, Shelter, and Self-Preservation That Makes Starvation in the Wilderness Next to Impossible " by Bradford Angier

 

It was originally published in the mid 1950s when wilderness was really The Wilderness in much of the United States. The book describes practical solutions to survival in the woods. Not that I plan to be lost in the woods (although that happened recently on a hike in Vermont with my wife and kids) and driven to some of the techniques described by Angier, but it was fascinating to see the vast possibilities he presents for food, shelter, and navigation. It took a landscape which I thought I was intimately familiar with, and showed me how to look at things in a completely new way. This is a good exercise in any endeavor.

 

“Moby Dick” by Herman Melville

 

It's a classic for a reason.  It was my first read of Moby Dick which I chose to read in preparation for the lauded The Art of Fielding by Chad Harbach, which is based on Mellville's classic. Moby Dick offers a detailed account, often times cinematic, of a time and place of transition of the American Narrative.  Melville's personal crisis of faith comes through the layered tapestry he has woven here.  It has been particularly interesting and fun to analyze the text and many subtexts while also sifting through the ample literary criticism and essays available. 

 

“The Art of Fielding” by Chad Harbach

 

First, it's a novel, not a non-fiction book. That said, it uses sports - in this case, baseball - as a vehicle to talk about ambition, teammates, friends, and loyalty.  It's eminently readable if you like baseball.

 

“The Medici Effect” by Frans Johansson

 

Why do so many world-changing insights come from people with little or no related experience? Charles Darwin was a geologist when he proposed the theory of evolution. And it was an astronomer who finally explained what happened to the dinosaurs. Frans Johansson’s The Medici Effect shows how breakthrough ideas most often occur when we bring concepts from one field into a new, unfamiliar territory, and offers examples how we can turn the ideas we discover into path-breaking innovations.

 

"Don't Make Me Think: A Common Sense Approach to Web Usability, 2nd Edition" by Steve Krug

 

Five years and more than 100,000 copies after it was first published, it's hard to imagine anyone working in Web design who hasn't read Steve Krug's "instant classic" on Web usability, but people are still discovering it every day.  In this second edition, Steve adds three new chapters in the same style as the original: wry and entertaining, yet loaded with insights and practical advice for novice and veteran alike.  Don't be surprised if it completely changes the way you think about Web design.

 

"The Man in the Rockefeller Suit: The Astonishing Rise and Spectacular Fall of a Serial Imposter" by Mark Seal

 

The story of Clark Rockefeller is a stranger-than-fiction twist on the classic American success story of the self-made man because Clark Rockefeller was totally made up. The career con man who convincingly passed himself off as Rockefeller was born in a small village in Germany. At seventeen, obsessed with getting to America, he flew into the country on dubious student visa documents and his journey of deception began.

 

"December 1941: 31 Days That Changed America and Saved the World" by Craig Shirley

               

This book examines the critical days leading up to Pearl Harbor. Analyzes the Japan relationship, Japan's decision to attack and the warning signs we missed but also paints a picture of what it was like to live in the United States at that time.

 

"Winner-Take-All Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class " by Jacob Hacker and Paul Pierson

 

There's a reason this book is not on the Wall Street Journal's Christmas reading list. Hacker and Pierson reconstruct with chilling and profound detail the intertwining sequence of legislative and presidential actions and targeted neglect, starting in the 1970's and continuing to this day, that have actively redistributed the risk-reward in America's economic system. The book argues quite convincingly, backed by scholarship and meticulous documentation, that the widening inequality gap in our economy is the result of decades of deliberate policy decisions. If you didn't get why the folks in Guy Fawkes masks camped out at Zuccotti Park, you should read this book.


“Debt: The First 5,000 Years” by David Graeber

 

An internationally recognized academic who is also an avowed anarchist and card carrying member of the IWW, Graeber is the intellectual father of Occupy Wall Street and was instrumental in creating the first general assembly in August of this year. Debt traces the link between war, slavery, enforced prostitution, coinage and credit, and positively shreds the accepted basis of Smithian market theory that money and markets "evolved" to replace barter. The book is a fundamental challenge to all the mainstream pablum in favor of today's brand of free market capitalism, and is a real argument for the power of the written word to change society. If you read no other book this year, read this one.

 

"Unbroken: A World War II Story of Survival, Resilience, and Redemption" by Laura Hillenbrand

 

On a May afternoon in 1943, an Army Air Force bomber crashed into the Pacific Ocean and disappeared, leaving only a spray of debris and a slick of oil, gasoline, and blood. Then, on the ocean surface, a face appeared. It was that of a young lieutenant, the plane’s bombardier, who was struggling to a life raft and pulling himself aboard. So began one of the most extraordinary odysseys of the Second World War.

 

“The Gap in the Curtain” by John Buchan

 

In an experiment that allows for a glimpse into the future, a group of friends get a look at a newspaper one year from the current date. Two of the men read their own obituaries. The story chronicles how each spends his next year, trying to take advantage of, or change what they know of the future; such foresight turns out to be more of a curse than a blessing.

 

“Thinking, Fast and Slow” by Daniel Kahneman

 

This book gives a practitioner’s view of how both intuitive and deliberate thought impacts our daily lives as well as exploring and challenging the assumption of rationality in economics. Among the book's many pursuits is an intriguing look into loss aversion and the role it plays in our industry. This a terrific book that sheds new light on the way people think. It has dramatic implications not just for everyday decision making, but also how investors approach decisions about the markets.

 

“Inside the House of Money” by Steven Drobny

 

It's an interesting read for any of the young analyst-types who want to learn more about what actually happens on the buy-side. While admittedly macro-oriented, it does offer some perspective on how various buy-siders develop and execute on their own investment processes.

 

"A Whole New Mind: Why Right-Brainers Will Rule the Future" by Daniel H. Pink

 

Pink discusses the importance of right-brain thinking in society, providing thought-provoking examples of how left-brain thinking is becoming highly automated (outsourced) and how right-brain thinkers at least in highly developed countries like the U.S. will excel and be coveted by employers. Pink ties in examples of ways to better activate right-brain thinking in this fast pace, dynamic book. 

 

“Willpower, Rediscovering the Greatest Human Strength” by Roy F. Baumeister and John Tierney

 

Willpower, manifested in both the individual and the collective, has been credited with and blamed for some of the most important global events in history. Such a distinctive human trait deserves thorough investigation and, in my view, this book does it justice. Baumeister and Tierney explain the phenomenon of willpower through a scientific lens while also contextualizing shifting attitudes towards willpower between different eras and cultures. More narrowly, the authors offer a digestible and engaging tool for understanding a key facet of human behavior offering, at the same time, a compelling case for self-control over self-esteem as an avenue to success in all areas of life.

 

“Ghost Rider: Travels on the Healing Road” by Neil Peart

 

This is a story of a physical and philosophical journey - and ultimate rehabilitation -- after a tremendous personal tragedy. In less than a year, Neil Peart lost both his 19-year-old daughter, Selena, and his wife, Jackie. Faced with overwhelming sadness and isolated from the world in his home on the lake, Peart was left without direction. This memoir tells of the sense of loss and bewilderment that led him on a 55,000-mile journey by motorcycle across much of North America, down through Mexico to Belize, and back again.

 

“Death of Salesman” by Arthur Miller

 

Arthur Miller's 1949 Death of a Salesman has sold 11 million copies, and Willy Loman didn't make all those sales on a smile and a shoeshine. This play is the genuine article--it's got the goods on the human condition, all packed into a day in the life of one self-deluded, self-promoting, self-defeating soul. It's a sturdy bridge between kitchen-sink realism and spectral abstraction, the facts of particular hard times and universal themes.


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Hedgeye 2012 Recommended Reading List

“No matter how busy you think you are, you must find time for reading, or surrender yourself to self-chosen ignorance.”

-Confucius

 

Please find attached Hedgeye’s reading list for 2012. There was no science in the construction of this list, we simply surveyed our colleagues at Hedgeye for their favorite reads in the last twelve months. We hope you will enjoy digging into these books as much as our team did.

 

Cheers,

 

Daryl G. Jones

Director of Research

 


“High Financier” by Niall Ferguson

 

Niall Ferguson's biography of Siegmund Warburg is a great read. Warburg was the architect of the post-WWII re-globalization of financial services after a period of profound retrenchment during and immediately following the war.  The context Ferguson provides around banking pre and post WWII seems invaluable given the parallels to the challenges facing Europe today.

 

“Sam Walton, Made in America: My Story” by Sam Walton and John Huey

 

This is the story of Sam Walton, who parlayed a single dime store in Newport, Arksas into Wal-Mart, now the largest retailer in the world. Part of the magic of Walton was that he never lost the common touch and developed one of the most loyal, and thrifty, employee bases in the history of commerce.

 

“Greater Than Yourself” by Steve Farber

 

In Greater Than Yourself Steve Farber proves them wrong: in this powerful and inspiring story, Farber shows that the goal of a genuine leader is to help others—teammates, employees, and colleagues—become more capable, confident, and accomplished than they are themselves. Through the actions of a forward-thinking and extraordinarily successful CEO, Farber reveals the three keys to achieving this: Expand Yourself, Give Yourself, and Replicate Yourself.

 

“Lean Thinking” by James P.  Womack and Daniel T. Jones

 

Expanded, updated, and more relevant than ever, this bestselling business classic by two internationally renowned management analysts describes a business system for the twenty-first century that supersedes the mass production system of Ford, the financial control system of Sloan, and the strategic system of Welch and GE. It is based on the Toyota (lean) model, which combines operational excellence with value-based strategies to produce steady growth through a wide range of economic conditions.

 

“The Information: A History, A Theory, A Flood" by James Gleick

 

Gleick starts off thinking about information as a concept, and how human society shifted as it developed the idea of information. He walks through fascinating history and anecdotes from the talking drums of Africa (for a while, the most sophisticated long-range communications system in existence) to the microprocessor, with a very approachable background on the study of Information Theory along the way.

 

“The Talent Code: Greatness Isn't Born. It's Grown. Here's How." by Daniel Coyle

 

What is the secret of talent? How do we unlock it? In this groundbreaking work, journalist and New York Times bestselling author Daniel Coyle provides parents, teachers, coaches, businesspeople, and everyone else with tools they can use to maximize potential in themselves and others.

 

"How to Stay Alive in the Woods: A Complete Guide to Food, Shelter, and Self-Preservation That Makes Starvation in the Wilderness Next to Impossible " by Bradford Angier

 

It was originally published in the mid 1950s when wilderness was really The Wilderness in much of the United States. The book describes practical solutions to survival in the woods. Not that I plan to be lost in the woods (although that happened recently on a hike in Vermont with my wife and kids) and driven to some of the techniques described by Angier, but it was fascinating to see the vast possibilities he presents for food, shelter, and navigation. It took a landscape which I thought I was intimately familiar with, and showed me how to look at things in a completely new way. This is a good exercise in any endeavor.

 

“Moby Dick” by Herman Melville

 

It's a classic for a reason.  It was my first read of Moby Dick which I chose to read in preparation for the lauded The Art of Fielding by Chad Harbach, which is based on Mellville's classic. Moby Dick offers a detailed account, often times cinematic, of a time and place of transition of the American Narrative.  Melville's personal crisis of faith comes through the layered tapestry he has woven here.  It has been particularly interesting and fun to analyze the text and many subtexts while also sifting through the ample literary criticism and essays available. 

 

“The Art of Fielding” by Chad Harbach

 

First, it's a novel, not a non-fiction book. That said, it uses sports - in this case, baseball - as a vehicle to talk about ambition, teammates, friends, and loyalty.  It's eminently readable if you like baseball.

 

“The Medici Effect” by Frans Johansson

 

Why do so many world-changing insights come from people with little or no related experience? Charles Darwin was a geologist when he proposed the theory of evolution. And it was an astronomer who finally explained what happened to the dinosaurs. Frans Johansson’s The Medici Effect shows how breakthrough ideas most often occur when we bring concepts from one field into a new, unfamiliar territory, and offers examples how we can turn the ideas we discover into path-breaking innovations.

 

"Don't Make Me Think: A Common Sense Approach to Web Usability, 2nd Edition" by Steve Krug

 

Five years and more than 100,000 copies after it was first published, it's hard to imagine anyone working in Web design who hasn't read Steve Krug's "instant classic" on Web usability, but people are still discovering it every day.  In this second edition, Steve adds three new chapters in the same style as the original: wry and entertaining, yet loaded with insights and practical advice for novice and veteran alike.  Don't be surprised if it completely changes the way you think about Web design.

 

"The Man in the Rockefeller Suit: The Astonishing Rise and Spectacular Fall of a Serial Imposter" by Mark Seal

 

The story of Clark Rockefeller is a stranger-than-fiction twist on the classic American success story of the self-made man because Clark Rockefeller was totally made up. The career con man who convincingly passed himself off as Rockefeller was born in a small village in Germany. At seventeen, obsessed with getting to America, he flew into the country on dubious student visa documents and his journey of deception began.

 

"December 1941: 31 Days That Changed America and Saved the World" by Craig Shirley

               

This book examines the critical days leading up to Pearl Harbor. Analyzes the Japan relationship, Japan's decision to attack and the warning signs we missed but also paints a picture of what it was like to live in the United States at that time.

 

"Winner-Take-All Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class " by Jacob Hacker and Paul Pierson

 

There's a reason this book is not on the Wall Street Journal's Christmas reading list. Hacker and Pierson reconstruct with chilling and profound detail the intertwining sequence of legislative and presidential actions and targeted neglect, starting in the 1970's and continuing to this day, that have actively redistributed the risk-reward in America's economic system. The book argues quite convincingly, backed by scholarship and meticulous documentation, that the widening inequality gap in our economy is the result of decades of deliberate policy decisions. If you didn't get why the folks in Guy Fawkes masks camped out at Zuccotti Park, you should read this book.


“Debt: The First 5,000 Years” by David Graeber

 

An internationally recognized academic who is also an avowed anarchist and card carrying member of the IWW, Graeber is the intellectual father of Occupy Wall Street and was instrumental in creating the first general assembly in August of this year. Debt traces the link between war, slavery, enforced prostitution, coinage and credit, and positively shreds the accepted basis of Smithian market theory that money and markets "evolved" to replace barter. The book is a fundamental challenge to all the mainstream pablum in favor of today's brand of free market capitalism, and is a real argument for the power of the written word to change society. If you read no other book this year, read this one.

 

"Unbroken: A World War II Story of Survival, Resilience, and Redemption" by Laura Hillenbrand

 

On a May afternoon in 1943, an Army Air Force bomber crashed into the Pacific Ocean and disappeared, leaving only a spray of debris and a slick of oil, gasoline, and blood. Then, on the ocean surface, a face appeared. It was that of a young lieutenant, the plane’s bombardier, who was struggling to a life raft and pulling himself aboard. So began one of the most extraordinary odysseys of the Second World War.

 

“The Gap in the Curtain” by John Buchan

 

In an experiment that allows for a glimpse into the future, a group of friends get a look at a newspaper one year from the current date. Two of the men read their own obituaries. The story chronicles how each spends his next year, trying to take advantage of, or change what they know of the future; such foresight turns out to be more of a curse than a blessing.

 

“Thinking, Fast and Slow” by Daniel Kahneman

 

This book gives a practitioner’s view of how both intuitive and deliberate thought impacts our daily lives as well as exploring and challenging the assumption of rationality in economics. Among the book's many pursuits is an intriguing look into loss aversion and the role it plays in our industry. This a terrific book that sheds new light on the way people think. It has dramatic implications not just for everyday decision making, but also how investors approach decisions about the markets.

 

“Inside the House of Money” by Steven Drobny

 

It's an interesting read for any of the young analyst-types who want to learn more about what actually happens on the buy-side. While admittedly macro-oriented, it does offer some perspective on how various buy-siders develop and execute on their own investment processes.

 

"A Whole New Mind: Why Right-Brainers Will Rule the Future" by Daniel H. Pink

 

Pink discusses the importance of right-brain thinking in society, providing thought-provoking examples of how left-brain thinking is becoming highly automated (outsourced) and how right-brain thinkers at least in highly developed countries like the U.S. will excel and be coveted by employers. Pink ties in examples of ways to better activate right-brain thinking in this fast pace, dynamic book. 

 

“Willpower, Rediscovering the Greatest Human Strength” by Roy F. Baumeister and John Tierney

 

Willpower, manifested in both the individual and the collective, has been credited with and blamed for some of the most important global events in history. Such a distinctive human trait deserves thorough investigation and, in my view, this book does it justice. Baumeister and Tierney explain the phenomenon of willpower through a scientific lens while also contextualizing shifting attitudes towards willpower between different eras and cultures. More narrowly, the authors offer a digestible and engaging tool for understanding a key facet of human behavior offering, at the same time, a compelling case for self-control over self-esteem as an avenue to success in all areas of life.

 

“Ghost Rider: Travels on the Healing Road” by Neil Peart

 

This is a story of a physical and philosophical journey - and ultimate rehabilitation -- after a tremendous personal tragedy. In less than a year, Neil Peart lost both his 19-year-old daughter, Selena, and his wife, Jackie. Faced with overwhelming sadness and isolated from the world in his home on the lake, Peart was left without direction. This memoir tells of the sense of loss and bewilderment that led him on a 55,000-mile journey by motorcycle across much of North America, down through Mexico to Belize, and back again.

 

“Death of Salesman” by Arthur Miller

 

Arthur Miller's 1949 Death of a Salesman has sold 11 million copies, and Willy Loman didn't make all those sales on a smile and a shoeshine. This play is the genuine article--it's got the goods on the human condition, all packed into a day in the life of one self-deluded, self-promoting, self-defeating soul. It's a sturdy bridge between kitchen-sink realism and spectral abstraction, the facts of particular hard times and universal themes.


SP500 Levels, Refreshed: Bite the Bullet


The Thunder Bay Bull, our CEO Keith McCullough, is on the road in New York meeting with subscribers and walking them through our Q1 2012 investment themes.  Accompanying him is our Asia Analyst, Darius Dale, more of a bear, at least in body type, given that he is a former Yale offensive lineman.  (Unfortunately for him, he is also a Seahawks fan.)  As it relates the stock markets, we are neither bearish nor bullish, but merely trying to play the game in front of us. 

 

So, what has lead to this bullish shift.

 

1. Employment is improving on the margin – The most recent data point supporting improving employment is the regional and state employment survey from the BLS, which was released earlier today.  In aggregate versus the September data, 37 states saw their unemployment rates decline and 10 states saw their unemployment rates stay flat.  The national rate is 8.5% and 0.9% less than December 2010.

 

2. Europe is stabilizing – The key risk to global markets and global economic growth in 2012 was Europe’s deteriorating sovereign debt situation.  Clearly, Europe is not out of the woods, but the credit and intra-bank markets are much less stressed in Europe than they were a month ago.  The data point we highlighted this morning on our morning call (ping if you don’t have dial in information) was that the most recent Spanish 3 to 6 month bill auction was completed at an average yield of 1.847%.  This was a dramatic improvement from the last auction on December 20th that was completed at a yield of 2.435%.

 

 3. Growth is bottoming – A key data point for us in this regard is the price of copper, which we consider a leading indicator for global growth.  The price of copper is up 10.90% YTD and now bullish TRADE and TREND in our models.  The most critical factor driving copper pricing has been the acceleration of copper imports to China, which hit a new monthly high in December (up more than 70% year-over-year).

 

Clearly, many risks remain, but as the other eponymous Ontario native titled one his songs, sometimes you just have to “bite the bullet” and play the game in front of you.

 

Our updated SP500 levels are in the chart below.

 

 

Daryl G. Jones

 

Director of Research

 

 

  SP500 Levels, Refreshed: Bite the Bullet - sp.01.24


 


IGT: THANKFULLY FQ4 IS REAR VIEW

The Street should've known about the ugly slot sales and share loss. After today, we'll get more positive as the Sell Side gets more negative.

 

 

As we telegraphed in our 12/02/11 post, “Replacement Reversal” and reiterated in our IGT earnings preview, industry replacement demand was likely down in CYQ4, compounded by IGT losing share.  That was certainly confirmed by IGT’s earnings release this morning. 

 

IGT’s quarter was pretty terrible and to be honest, we thought the stock would be down in the AM consistent with the 8% pre-market drop.  However, given the bright outlook for the rest of the year, investors seem to be taking the bad news as ‘old news’ and in stride.  In retrospect, IGT’s stock has massively underperformed the gaming sector since we put that post out – the worst performing stock in our universe – and experienced almost a 5% reversal late in the day yesterday.  Bad news leak out early.

 

While this quarter’s results were just plain bad, CY2012 is likely to be a strong year for the slot guys.  Unit shipments were pulled forward by IGT and WMS into CYQ3 so the CYQ4 slowdown is not indicative of a trend.  In fact, we think the catalysts are there for significant growth in slot trends in 2012:

  • The Big Four slot operators – BYD, CZR, MGM, and STN – are in much better shape financially
    • They’ve all refinanced recently
    • 2012 trends on the LV Strip and LV locals are looking much better than expectations so cash flows should be better (we still like BYD and MGM on the long side)
    • STN could go public
    • CZR likely to up their $50MM IPO since online poker, given the recent DoJ opinion and CZR’s ownership of the World Series of Poker brand
    • Remember that these are the largest slot operators and each has significantly under spent on slot CapEx for four straight years
  • 17 year current replacement cycle unsustainable from a physical perspective
  • Replacement demand growth has been positive for three quarters until Q4 (we’ve explained it) so the trend even outside the above factors has been positive
  • Significant new openings/expansion should make 2012 the first real growth year in slot sales in a couple of years

BYI’s stock has significantly outperformed IGT recently, and WMS still has a few more ugly quarters so IGT may be the best way to play improving 2012 trends over the near and intermediate term.  We’d like it cheaper – like $15, where it was trading pre-market – and maybe we’ll get a downgrade or two.

 

 

Q1 FY2012 Details:

 

The Bad

  • Product revenues and margins
    • We knew that replacements were going to have a 3’ handle but we hoped for high 3’s. I guess we confirmed what we already knew – IGT lost a lot of share.
    • IGT claims to have gotten 30% replacement share this quarter which would imply a replacement market of just 9.3k units and total NA shipments of 12.4k in the quarter.  That would suggest huge misses for all the manufacturers.  We’ll take the under on 30% and guess that IGT’s replacement share was somewhere between 20-25%.  We’re fairly confident that the NA shipments will be at least 14.5k this December and probably closer to 15.5k.  That said, we agree with IGT’s statement that their ship share will increase for the balance of the year…how can it get any worse?
    • IGT blamed low profit margins on product mix and lower conversion/parts revenue.  There is some operating leverage so fewer units do not help margins.  It’s no secret that IGT had been offering their customers various discount packages that included free upgrades and conversion kits over the last year or so. While some of that shows up as lower pricing/discounts in the quarter, as one of our clients pointed out, some of it shows up as forgone conversion kits/upgrade revenues in future quarters as clients exercise their free options rather than making new purchases.
  • Gaming operations revenues:
    • Gaming operations revenue was a little lower than we estimated due to lower yield per day but IGT also blamed product mix.  We expected a little more 'juice' from the install base growth, organic and acquired growth in interactive, and higher MegaJackpots yields. It appears that the YoY yield growth trends that we've seen over the last 3 quarters 'decelerated' this quarter.
  • SG&A was a lot higher than we expected – especially given the lack of top line production.  Some of that was blamed on the Entraction acquisition (which apparently didn’t bring much revenue).  However, the high SG&A was offset by lower R&D and D&A.  We’re not sure if that’s a good thing though.
  • Since IGT likes to point out cash flow metrics, here are a few of our observations:
    • On a 4% decline in revenues YoY, cash flow from operations declined 37% or $38MM\
    • Inventory build only accounted for $8MM of the decline
    • Cash flow before financing activities/buybacks/dividends declined 64% YoY 

The Better

  • ASPs were much higher both domestically and internationally.  It’s possible that discounting slowed this quarter in NA.  International price lift was attributed to a decrease of lower-priced shipments to Mexico.
  • Gaming operations margins were better than we expected.  Some of this is mix related but who really knows since the disclosure is terrible. 

Other stuff

 

We won’t harp on this point too much since IGT will be providing better disclosure next quarter, however, we must point out that average revenue per unit in gaming operations is becoming an irrelevant disclosure.  According to IGT, the numerator in this calculation includes a small but rapidly growing amount of revenues from the interactive division which have nothing do to with the install base.  The average revenue per unit that IGT provides for product sales is also a completely worthless metric since the numerator includes systems sales, parts, used units sales (including trade-ins) and systems revenue which also have nothing to do with the number of units sold in the quarter.  


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