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PENN 4Q11 CONF CALL NOTES

Soft quarter and guidance.  Management probably a little conservative but cannibalization is a wildcard

 

 

PENN 4Q11 CONF CALL NOTES

“Although widespread economic concerns and volatility in the capital markets prevailed throughout the quarter and full year, consumer spending at our facilities remained relatively stable and we continued to make progress across the organization in enhancing operating efficiencies and maintaining a disciplined approach to marketing. Our current outlook and guidance for 2012 contemplates a continuation of the trends experienced in 2011, reasonable expectations for our newest facilities and the rate at which they will ramp to their potential and a realistic view of the impact of new competition on current operations."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming

 

CONF CALL NOTES

  • October was soft, November was stable and December was great. Started slow and finished strong. Weather helped and is continuing to help in January
  • Guidance: Taking a realistic view given the uncertainty in the economy
  • Saw slight increase in YoY SS sales growth - with strength at the VIP segment ($400+)
  • Promotional environment remains rational which helped them achieve their margin improvement in the quarter

 

Q&A 

  • They expect some minor EBITDA improvement in markets not impacted by cannabilization but in markets with cannabalizations they will take a margin hit. Expect good margins from new facilities
  • They will complete construction on Toledo on March 15th.  Hope that they can open before May but they know that it won't be mid-March. They will have more clarity on the opening date in the next week hopefully. They hope for a opening sometime in April.
  • Will be opportunistic with their buybacks. However, they are still looking forward to a number of projects down the line so they want to leave dry powder. Middle of 2015 when the Fortress warrants expire they will have a material reduction in share count
  • Cash: $238MM; Bank debt: $1.7BN; 4.2MM capital leases; $325MM of bonds.
  • Capex: Maintenance of $24.8MM in the Q and 64.7MM of project capex. Kansas investments: $23.6MM in the Q
  • Given all the moving pieces in 2012 (opening timing and impact from competitive openings) they prefer to be conservative in their estimates. Given all the variables this year - they can easily come in +/- $30MM of EBITDA vis a vis their projections. That being said they gave a number that they thought was achievable
  • They are clearly concerned about Charlestown with the opening of Anurdel but that will also impact Perryville to some extent.  Very difficult to predict what the impact will be of all the new openings this year.
  • Impact of Scotia Downs opening?
    • They think that the impact of their early opening will be inconsequential
    • Thinks that many other steps will need to be taken and overcome before they will be able to open
    • They are proceeding very carefully on Ohio VLTs. There is a hearing to dismiss the lawsuit in a [month]
    • If they are able to open a few months before PENN they have no concerns that MNTR will have a first mover advantage over them given the superior quality of their facility
  • Ramp in Ohio?  Good proxy would be Penn National from a revenue and margin ramp
  • SS revenues excluding properties impacted by openings are basically flat.  Biloxi is struggling, other markets are better
  • $5.9MM impairment charge in NJ?
    • 50/50 JV with their Freehold partner in Kansas
    • Their partner did a valuation of the goodwill in their JV which needed to be written - no more goodwill left in the JV
  • Tax rate bounces around due to the deductibility of various expenses. They had an accrual issue vs. estimates getting trued up in the last quarter
  • Corporate expense in 4Q - included in other. Nothing extraordinary in that number which is in line with past few quarters
  • Latest on VLTs in IL:
    • Government remains opposed to slots at tracks
    • Online gaming could change some things
    • Slots at bars? no impact from that - West Virginia is a very good comp of why they don;t think anything will happen
  • Senator Kyl and Reed are keeping things very close to the vest. Expect some movement on the Senate side but expect some delays and issues on the House side.  They continue to have reservations about online gaming. They are monitoring the situations and there are a lot of unanswered questions on the topic
  • Sioux City: Have had some advice discussions about relocating their operations to a location that would benefit all parties involved. They have had discussions about changing partners which PENN is opposed to.  They are hopeful that they can come to an agreement by mid-year
  • Looking at land in Massachussetts.  Worried about local politics.  Cautiously optimistic but need community support.  They have a plan.
  • Casino Rama - mgmt contract extended for another 6 months to 12/31/12 under current terms. Can't predict what will happen after that.
  • Kentucky - Slots at tracks potential bill.  Need 3/5ths majority.  Senate will be a challenge.

 

HIGHLIGHTS FROM RELEASE

  • "Repurchased 2,225,889 shares of our Common Stock in the fourth quarter for approximately $78.2MM, or an average price of $35.12 per share."
  • “The anticipated openings of Hollywood Casino Toledo and Hollywood Casino Columbus in the second and fourth quarter of 2012... Both the $320 million Toledo facility and the $400 million Columbus property remain on budget and despite public reports from the Ohio Casino Control Commission that our anticipated opening date for Toledo might be pushed back, we are continuing to work with the Commission and staff with the hope of minimizing any potential delays." 
  • “The State of Ohio has approved the placement of VLTs at the state’s seven racetracks and while we await the final regulatory framework, we are actively pursuing the relocation of our existing racetracks in Toledo and Grove City to Dayton and Youngstown, respectively, subject to the satisfaction of regulatory and other approvals. 
  • 4Q benefited from "strong property performances in our East/West segment attributable to continued strength at Hollywood Casino at Charles Town Races as well as further operating margin improvements.
  • Outlook/assumptions:
    • "Hollywood Casino at Kansas Speedway (joint venture) opens on February 3, 2012 with an expected impact to the Company’s Argosy Casino Riverside property;
    • Hollywood Casino Toledo opens in May 2012
    • Hollywood Casino Columbus opens in November 2012 with a relatively minor impact on Hollywood Casino Lawrenceburg;
    • Margaritaville Biloxi opens in May 2012 with an anticipated impact to our Boomtown Biloxi property;
    • Maryland Live! opens in July 2012 with an expected impact to our Hollywood Casino at Charles Town Races, Hollywood Casino at Penn National Race Course and Hollywood Casino Perryville properties;
    • L’Auberge Baton Rouge opens in August 2012 with an impact to the Company’s Hollywood Casino Baton Rouge property;
    • Horseshoe Cincinnati does not open during 2012 (and thus, no impact is expected to Hollywood Casino Lawrenceburg);
    • The January 2012 signing of the Casino Rama management contract which extends the agreement through September 2012;"
    • Pre-opening expenses: $17.2MM in 2012, $7.3MM 1Q12
    • No gains from insurance proceeds related to the Hollywood Casino Tunica flood
    • D&A: $225.2MM for 2012, with $51.2MM in 1Q12
    • Stock comp: $28.7MM for 2012, with $7.2MM in 1Q12;
    • Tax rate: 39%;
    • Diluted share count:106.5MM

BYI: GOOD STUFF HAPPENING EARLIER THAN EXPECTED

We feel even better about our long-term positive thesis after the Q.

 

 

We will have a more detailed note out when we are done with the model.  As you know, BYI is one of our favorite long-term and intermediate names.  However, had we known the quarter was going to be this good we would have been on the trading side of this call too.  Shame on me.  However, the quarter did provide us with comfort on our longer term thesis.  Certainly, more comfort than we thought. 

 

Here are some comments from our slot expert, Anna Massion:

  • It was a good quarter.  New unit sales were as expected but ASPs were better and margins lower.
  • Their ship share was 17% - including WMS’s deferred units (which were not immaterial – but we look at ship share on a what’s shipped basis).  Even so, that 17% is a 2% QoQ improvement and a 3% YoY improvement.
  • Systems and Game ops were just better than expected and will continue to improve in the coming quarters
  • While Italy continues to disappoint, that will be more than offset by early shipments to Scotia Downs
  • Our projections don’t even include the other 5 Ohio racetracks (8-10k slots) or IL VLTs, so plenty of upside potential.
  • Growth in BYI’s WAP install base was better and that’s before Grease and Michael Jackson.  We’re not really giving them much credit there either, so more upside potential.
  • You can see the impact of gaming ops on the balance sheet with the increase in jackpot liabilities
  • Backlog may have grown - an increase in customer deposits while A/R declined.

BYI: GOOD STUFF HAPPENING EARLIER THAN EXPECTED - BYI


JAPAN’S JUGULAR 2.0: WILL 2012 BE THE BEGINNING OF THE END?

***It has come to our attention that the hyperlink in Tuesday's note did not successfully download the accompanying presentation for everyone. As such, we're re-sending the link to the deck; please email us if the updated link below still fails to work and we'll be happy to get you the PDF file.***


CLICK HERE TO DOWNLOAD THE CORRESPONDING SLIDE DECK: http://docs.hedgeye.com/Japans%20Jugular.pdf


Conclusion: The perception of the Japanese sovereign debt market is at risk of a fundamental inflection point in 2012, as heavy issuance is likely to be accompanied by very public failures in passing much-needed fiscal reform. As such, we will seek to manage immediate-term risk within this long-term bearish thesis by trading Japanese equities and the Japanese yen with a bearish bias.

  

Current Virtual Portfolio Positioning: Short Japanese equities (EWJ).

 

“I skate to where the puck is going to be, not where it has been.”

-Wayne Gretzky

 

For long-time Hedgeye clients, our long-term bearish outlook for Japanese economic growth is not new news; neither is our aggressive stance against their ultra-Keynesian monetary policy and fiscal positioning. That said, however, 2012 shapes up to be a rather interesting year for Japan’s sovereign debt market, as both a heavy auction calendar coincides with debates on key fiscal reforms – both of which possess the potential of dramatically surprising consensus expectations to the downside.

 

Given our own deep understanding of the tailwinds supporting the Japanese yen and the Japanese government bond market, it would be reckless to assign a timeline to a potential Japanese sovereign debt and/or banking crisis. We have, however, done the work and are comfortable in saying that, more so than any year prior, 2012 shapes up to be the year where confidence in the JGB market is lost – putting Japan at risk of being next in line to face the music of ourSovereign Debt Dichotomy theme.

 

As the aforementioned quote by hockey great Wayne Gretzky suggests, we think it’s appropriate for investors to begin hedging their portfolios against Japanese sovereign credit risk. As always, feel free to email us at if you have any follow-up questions and would like to dialogue further.

 

Darius Dale

Senior Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

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JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES

Claims Tailwind Persists 

Weekly initial jobess claims for last week fell 10k WoW to 367k (down 12k after a 2k upward revision to last week’s data). 4-week rolling claims fell 2k to 376k. On a non-seasonally-adjusted basis, reported claims fell 2k WoW to 415k.

 

This obviously represents continued progress. The big question is whether claims have reached self-reinforcing levels yet. We've chirped endlessly about 375-400k being the threshold that, below which, unemployment begins to fall, which allows autocorrelation to take hold. In other words, falling unemployment inspires confidence which begets further declines in unemployment. This is an extremely powerful force and it's important to understand that its different from the move from 650k to 400k that we've seen from early 2009 through year-end 2011. That move was catalyzed on the back of monetary and fiscal stimulus alone. 

 

As we highlighted last week, the Fed's significant easing last week has thrown cold water on what had been a strengthening US dollar. As our Macro team makes clear daily, a strong dollar is good for America as it makes gas, food and lots of other less perceptible things cheaper for the average American. The opposite of this, inflation, is a tax and markets hate new taxes. So it will be interesting to watch the interplay between self-reinforcing claims and this inflationary tax. For now, claims are trending lower, which bodes well for the Financials on two fronts: credit quality and loan growth.

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - Rolling

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - Raw

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - NSA chart

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - S P and claims

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - FED and Claims

 

2-10 Spread

The 2-10 spread tightened 17 bps versus last week to 160 bps as of yesterday.  The ten-year bond yield also decreased 17 bps to 183 bps.

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - 2 10 spread

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below.

 


THE HBM: CMG ,GMCR, YUM, DNKN

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Consumer

 

Initial jobless claims came in at 367k versus 371k consensus and 379k (revised from 377k) the week prior.

 

THE HBM: CMG ,GMCR, YUM, DNKN - initial claims 22

 

 

Comments from CEO Keith McCullough

 

Almost all of the sequential Growth Slowing signals that matter in my model are flashing amber lights now:

  1. CHINA – all of the high-frequency economic data (inflation accel, growth decel) looks primed to slow in FEB as both the Shanghai Comp (+2% last night) and the Hang Seng (+12.5% YTD!) move to immediate-term TRADE overbought signals. Plenty of Johnny come lately pundits, who I didn’t hear a peep from when we bought China in DEC, going bullish.
  2. COPPER – the Doctor finally breaking its most immediate-term price momentum level of support of $3.83/lb this morn at the same time that Singaporean Stocks back off and moved red into the close. Stealth signals, but they’re leading ones that matter in my model. Copper’s long-term TAIL of 3.98/lb resistance intact – lower-highs.
  3. TREASURIES – if you only bet w/ the bond market for the last year on its implied growth slowing/accelerating signals, you’d have not been sucked into any of the lower-highs in US Equities (Feb 2011, Apr 2011, Jan 2012). I bought the long-bond back yesterday as the 10yr yield looks like it wants to make lower-lows for the YTD.

 

I was very bullish until policy infected the growth/inflation signals in my model. I’m data dependent – and the data is now going the wrong way. Jobless claims and the employment report up next.

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: CMG ,GMCR, YUM, DNKN - subsector

 

 

QUICK SERVICE

 

CMG: Chipotle Mexican Grill reported $0.81 EPS for 4Q11 versus $1.83 consensus.  Comps were up +11.1% and January comps were up roughly 10.1%.  The company plans to take price in the Pacific region which should help comps by 1%.

 

CMG: Chipotle Mexican Grill was reiterated Conviction Buy at Goldman Sachs.  The price target was raised from $410 to $425.

 

CMG: The price target for Chipotle was raised from $370 to $450 at Credit Suisse.

 

GMCR: Green Mountain is up ~20% premarket after reporting 1QFY12 EPS of $0.60 versus $0.36 consensus.  FY12 revenue (Sept) was reiterated at +60-65% y/y or $4.24-4.37b versus consensus $4.24b.  K-Cup Packs revenue was $715.7M versus $332.9M year-over-year.

 

YUM: Yum Brands’ Taco Bell is being linked to a salmonella outbreak in Oklahoma, according to media reports.

 

DNKN: Dunkin’ Donuts is adjusting its menu in an effort to make its growth into new markets more successful than previous efforts, according to media reports.  See the article here.

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

COSI: Cosi traded up 14% on accelerating volume as news emerged that Carin Stutz filed a Form 4 on January 31st, buying another 65k shares.

 

 

CASUAL DINING

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

CHUX, RRGB, BOBE, EAT, TXRH, BWLD: All traded higher on accelerating volume.

 

KONA: Traded down -8% on accelerating volume.

 

THE HBM: CMG ,GMCR, YUM, DNKN - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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