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Here is our quarterly update on slot ship share.



IGT appears to be gaining traction even if the September pull forward is normalized.  Konami was also a big winner in 2H 2012.  It comes as no big surprise that WMS was a big share donor in the second half of 2012, while the other top 5 manufacturers gained share at its expense. 


WMS’s share fell 5% in 2H11 to 19% which represented an acceleration of the 4% share loss WMS experience in 1H11.  Most of the hit that occurred in 3Q11 when their estimated ship-share fell to just 15%, down 8% YoY.  WMS’s 4Q recovered to an estimated 22% (down 2% YoY) if we include the 957 deferred units that were shipped but not recognized in the December quarter.  Excluding the 957 deferred units, WMS’s ship share in 4Q would have been 17%, down 7% YoY and 16% for 2H11.  WMS ended the year with 21% ship-share and we believe that WMS’s ship-share in 2012 will also be around 20%.  1H12 will likely be a period of share loss for the company.  As we wrote on WMS: NOT OUT OF THE WOODS YET on 01/27/12, we continue to be concerned by WMS’s pattern of pulling forward demand.  Despite the recognition of the sale of 800 Maryland units in 1Q12, we estimate that WMS’s share will drop to 17% - largely due to the deferred units counted in 4Q11.


IGT picked up the most share in 2H11.  We estimate that IGT’s ship share increased 2% YoY to 30%.  All of its ship share gains were driven in Q3, when estimated ship-share reached 40% - their best market share since 2Q08.  IGT’s 4Q ship share plummeted to only 21%, driven by the pulling forward of demand into their year-end September quarter.  However, combined, those quarters showed an increase.  For the year, IGT’s ship share also increased 2% to 30%.  With all of the new openings in 2012, IGT should generate an increase in ship share since they usually get higher market share of new openings and they are the only game in town when it comes to video poker.  We estimate that 1Q12 ship-share will be 34% for IGT.


Konami, BYI, and ALL gained between 80-110bps of market share in 2H11.  Konami gained 110bps of market share due to a very strong December quarter where its share spiked to 18%.  Part of the spike in 4Q share was because Konami didn’t recognize any Kansas units in the 3rd quarter, which is also why their ship share decreased YoY in 3Q.  For the year, Konami’s ship share increased to 15%, up 2% YoY.  We believe that further ship share gains will be a challenge for Konami.  The company could experience a ship share decrease in 1Q12 since 1Q11 ship share was a record 20% for the company.


BYI gained 90bps of market share in 2H11 to 15% with all of the gains skewed to the December quarter.  We believe that December share gains of 2% YoY were driven by strong video content and a greatly improved Alpha 2 box.  For the year, BYI’s ship share was flat YoY at 15%.  BYI should continue to be a share gainer in 2012, with high-teens ship share.


For the first time in a long time, ALL gained market share in NA.  2H11 ship share increased 80bps to 13%.  While ALL does not break out the quarterly detail, they did say that shipments were back-end loaded towards 4Q.  Of the 4.4k units shipped in 2H11, we assume that about 2.5k where shipped in 4Q11, implying 4Q share of 15% vs. 13% in 4Q10.  Like all the other manufacturers, ALL’s strongest ship-share quarter coincided with their fiscal year end. We assume that ALL should be able to maintain their ship-share of 12% in 2012. 




As expected, Jack in the Box provided a comprehensive update on the business model and the direction the company is heading over the next three years. 


We still believe that there is upside in JACK’s cash flow multiple (EV/EBITDA) from the current 7.4x EV/EBITDA level to a range of 8-9x which implies, at its midpoint, 28% of upside from current levels.  Yesterday’s Investor Conference was the coming out party for the new Jack in the Box, Inc.  As the company nears the end of its refranchising program at Jack in the Box, investments in menu, service and the store base have driven sales and traffic growth.  We are confident that the company is heading in the right direction over the next three years with stabilization of cash flow and a strong growth vehicle in Qdoba.


Jack in the Box is at the tail end of a six-year restructuring that has defined Linda Lang’s stint as CEO thus far.   The stock has traded sideways for much of Lang’s tenure as management has endured a long six years of transforming the company into a more franchised business model.  A more franchised business model is now set to reward JACK with less exposure to volatility in commodity prices.  The question is now whether or not the investment community will revalue the earnings and cash flow stream in line with valuations of other largely franchised restaurant companies. 


The fact that yesterday’s Investor Conference was the company’s first since 2008 was a positive in itself.  Our expectations were for management to provide investors with a clear vision for the company’s future growth prospects now that the cash flow generation is set to pick up significantly.  The 1,000 foot view that the company provided for investors included:

  • Operating EPS of at least $2.00 by 2015, or roughly double the expected operating EPS for FY12.
  • Free cash flow of ~$75 million beginning in FY15
  • Shifting from maintenance to growth in capital spending focus
  • 15-20% growth in Qdoba stores through FY15. Long-term target of 2,000 domestic units versus ~600 restaurants today.

This general outlook is strong, in our view, as it offers investors clarity on the source and diversity of future earnings growth and stability of cash flows.  The EPS guidance is conservative, given that it assumes no stock repurchases with the free cash flow generation that the company is set to achieve over the next few years with the target being $75 million on an annual basis by FY15. 





Doubling the company unit base of Qdoba is set to aid an increased diversification of earnings for JACK over the next three years.  As management illustrated yesterday, the pathway to at least $2.00 in operating EPS by 2015 is anticipated to come from a broad range of growth vehicles.  The chart, below, illustrates this 100% growth in operating EPS.


JACK: SOLID OUTLOOK - jack eps growth





The company’s sources of cash flow are Jack in the Box company-owned restaurants, Jack in the Box franchise restaurants, and Qdoba.  The company JIB locations have higher AUV’s and higher restaurant operating margins.  The concept is not highly penetrated on a national level so we do see opportunity for expansion of the company-operated base.  The JIB Franchise business was described by management as an “annuity-like” source of cash flow for the company.  The company collects both royalty fees and, in 90% of cases, rental fees from franchisees.  Again, given the lack of penetration of the brand on a national level, there is potential for expansion and the company bears no exposure to cost inflation.  The profit flow-through on incremental sales is “near 100%”.  Qdoba is a growing focus of JACK’s management team, which expects the concept to account for 25% of FY15 EBITDA versus 14% in FY11.





After a six year cash drought of cash burn, JACK is set to ring in a new era of Free Cash Flow generation.  In terms of shareholder returns, this is an important point.  Having negative cash flow was, in our view, a key factor in keeping investors on the sidelines over the last three years.


JACK: SOLID OUTLOOK - jack vs xly





Qdoba leverages the company to a fast-growth segment of the QSR space and, as such, will account for a larger share of capital expenditure going forward.   As the table below shows, as Qdoba stores mature, they tend to perform at higher restaurant operating margins.  Further, with AUV’s north of $1mm, margins approach 25%. 


JACK: SOLID OUTLOOK - qdoba unit economics



The strong cash-on-cash returns (21.3% versus 16.2% at JIB) generated by Qdoba are spurring management to focus its capital spending on Qdoba over the next four years.  The chart below shows clearly that the company’s spending is set to shift from remodels and maintenance of Jack in the Box to growth of the Qdoba business.


JACK: SOLID OUTLOOK - jack capex





1QFY12 comparable restaurant sales at JIB grew 5.3%, representing the sixth consecutive quarter of positive comp growth for the concept.  The increase in 1QFY12 was driven by traffic growth of 2.8% and a 2.5% increase in average check.  The strength was, according to management, broad-based with each of the major markets posting increases in sales, traffic, and average check.  For 2QFY12, management guided to 4-5% same-store sales at JIB versus +0.8% last year.  System-wide sales are expected to increase 6% in 2QFY12 versus the same quarter a year ago.





Food cost inflation increased 8% for JACK in 1QFY12 and is expected to be roughly 3% for 2QFY12 and between 3% and 4% during 2HFY12.





The immediate-term TRADE range for JACK is $22.99 to $24.43, according to Hedgeye's quantitative models.  The intermediate term TREND line is $21.02.


JACK: SOLID OUTLOOK - jack levels


Howard Penney

Managing Director


Rory Green




Month-End: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Consumer Discretionary (XLY)


This is what I call down-shifting my beta at the top of my intermediate-term range. I’m no longer long the Financials or Energy Sectors. After double digit YTD ramps, those Sectors have the most mean reversion risk to any downside correction in early March.


Will we ever have a correction? That, of course, is a silly question – and the only time you tend to start asking yourself that question is when the VIX is testing 15-16. It’s human nature. We have yet to have a -1% down day in the SP500 YTD. That will change.


Across my risk management durations, here are the lines that matter to me most: 

  1. Immediate-term TRADE overbought = 1376
  2. Immediate-term TRADE support = 1364
  3. Intermediate-term TREND support = 1280 

In other words, there’s little upside left on my immediate-term TRADE duration and if we break through and close below 1364, you’ll see an open window of beta risk to be managed towards 1280 (-7% from here). Don’t believe the risk of the range can change in 90 minutes of trading? Look at Gold today.


There is short-term career risk in saying something is going to happen before it actually happens. We get that. That’s why we talk about the probabilities of risks and what would ramp or reduce those probabilities.


Into Month-End Markups, risk of a correction rises as stocks do.



Keith R. McCullough
Chief Executive Officer


Month-End: SP500 Levels, Refreshed - spx.02.29

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"The continued growth in Las Vegas was driven by robust international play and higher room and occupancy rates at our properties. The outlook for continued strong group bookings and increased visitation to that market bodes well for the success of our Caesars Palace projects, including the Nobu hotel tower and restaurant additions and the Octavius Tower completion, which opened to the public in January this year. Work is progressing on the Linq retail, dining and entertainment experience that will open on the Strip in phases in mid to late 2013. Our regional performance continued to be impacted by reduced visitation, increased competition and, in the Illinois/Indiana region, the closure of a key access route to our Southern Indiana property, which has since reopened."


- Gary Loveman, CEO of CZR



  • 'Bullish' on Las Vegas market due to international customers- strength in group business, occupancy at all-time high
  • Will expand Total Rewards program
  • Still improvement in margins in several regions despite lower trips
  • Development pipeline: 'most robust' in Loveman's tenure'
  • Baltimore bid: feel good about the opportunity
  • Linq will open mid-late March 2012
  • Hainan project: expected to open 2014
  • 25 resorts planned for Asia-Pacific region
  • CZR Interactive: 3MM daily users (Playtika)
  • Online poker: encouraged by positive dialogue
    • Expect approval at federal level
  • Quiet period until March 5
  • $21.75BN net debt; $900MM in cash ex restricted cash.
  • Total Capex: $590-625MM: OpCo $540-580MM ($200-240MM (Octavius/Linq)); CMBS properties: $50MM
  • 2012 LV group bookings strong
  • Rivers casino continue to adversely affect Hammond property


  • Massachusetts: process a little slow; Suffolk Downs bid will be submitted in mid-2012; license may be decided in late 2012/early 2013. The winning property may open in late 2013/early 2014.
  • 4Q Las Vegas hold: pretty normal
  • 4Q Louisiana/MS: poor hold; less than $10MM impact
  • Nevada Gaming Commission: has 'one minor fix' to work through on online gaming license
  • 4Q 2010: IL/IN recognized $23.5MM tax benefit in OpCo. A tax accrual benefit since CZR was using a higher rate than needed.
  • LV: driven by hotel revenue growth; expected gaming rev contribution margin: 50-60%
    • Change in mix: from wholesale customers to group customers; about 2% transition
  • Playtika: margins are attractive; CZR has compared Playtika to Zynga/Double Downs.
  • 4Q LV REVPAR: ~$90 (~$80 a year ago); hotel revenues line includes both comp and cash revenues
  • Potential Capex
    • MA opportunity: equity ownership below 10%, so financing is not a concern
    • Baltimore: $300MM project; equity finance would be $50MM (CEOC/ unrestircted sub)
  • OpCo revenue breakout
    • Decided not to break out because of comments from SEC and IPO process
  • Vegas margins will be shown in 10K, in a couple of weeks
  • Revel competition: do not see loss of casino hosts
  • Gas impact: sees no anxiety yet; have seen spend per trip/gas price inverse relationship;
  • Japan: Casino Caucus (pro-casino 170 members); 2 step process (1) presentation of bill, (2) implementation of bill; stability of Japanese political system would help.
  • Use of Credit facility proceeds: could target certain tranches or invest in business
  • Tunica market--continue to be tough in visitation and spend
  • Linq: will see more LV construction in next few weeks; project on track
  • Cash (ex restricted cash): OpCo ($610MM), CMBS ($150MM), Parent ($145MM)
  • Genting New York impact on AC: a little bit but it's smaller than they anticipated
  • May break out Caesars Interactive in reporting in 2012, particularly if online poker gets legalized


  • "On a consolidated basis, trips in the fourth quarter of 2011 declined from 2010 as increased trips in the Las Vegas and Atlantic City regions were offset by trip declines in our other U.S. regions. Trip declines were the result of continued weak economic conditions in the Louisiana/Mississippi region, new competition and reduced access to one of our properties due to a bridge closure in the Illinois/Indiana region beginning in the first week of September 2011 that recently reopened, and the impact of marketing programs on trip frequency of certain customer segments in all U.S. regions."
  • On a consolidated basis, Q4 Cash ADR rose 7.1% YoY to $90 from $84. 2011 Cash ADR rose 6.4% to $91 from $86.  Total occupancy percentages in 2011 increased 1.3% in 4Q and 1.4% for the FY.
  • 4Q 2011 effective tax rate benefit was 56.9%; 2011 effective tax rate: 43.2%
  • Net Interest expense increased 32.2% in 4Q; Q4 2011 Cap interest was $10.6MM - majority related to completion of Octavius Tower.
  • "Caesars anticipates that the Company will have a permanently lower cost structure and will benefit from greater concentration of specified talent and quicker decision making. The Company estimates that Project Renewal and previous cost-savings programs produced $63.3 million and $268.9 million in incremental cost savings for the fourth quarter and full year 2011, respectively, when compared to the same periods of the prior year. Additionally, as of December 31, 2011, the Company estimates that, once fully implemented, these cost-savings programs will produce additional annual cost savings of $198.3 million."
  • "Our two Ohio casino projects with Rock Gaming are moving forward, with Horseshoe Cleveland scheduled to debut in May this year and Horseshoe Cincinnati progressing toward a second-quarter 2013 opening."  
  • "Our Caesars-Rock Gaming group, along with our local partners, is optimistic about getting the go-ahead for a 3,750-slot gaming operation in Baltimore. We're also excited about our alliance with Suffolk Downs that plans to bid for the Zone 1 casino license included in the casino-legalization bill signed late last year in Massachusetts."
  • "We registered and listed a limited amount of Caesars Entertainment shares on NASDAQ, and announced an amend-and-extend debt transaction in combination with a bond sale that reduced our scheduled 2015 Caesars Entertainment Operating Company, Inc. bank maturities to $2.1 billion from $5.0 billion and extends maturity dates on $2.9 billion of debt for an additional three to five years. We anticipate pursuing similar transactions to bolster our balance sheet as market conditions warrant."


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-Your Hedgeye Macro Team


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