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PENN 1Q CONF CALL NOTES

Terrific quarter.  Margin improvement continues.

 


“Our first quarter revenue, adjusted EBITDA (inclusive of $6.4 million of pre-opening expenses), net income and diluted EPS significantly exceeded guidance primarily due to the robust growth of the East/West segment relative to our projections, which we believe was attributable to a combination of the mild East Coast winter, healthier consumer spending, and excellent operating performance by our property teams. In addition our consolidated first quarter revenue and reported adjusted EBITDA growth ... benefited from the February 3 opening of Hollywood Casino at Kansas Speedway and a lower than forecasted impact to Argosy Casino Riverside following the opening, a healthy contribution from M Resort, and ongoing progress across the organization in enhancing operating efficiencies and maintaining a disciplined approach to marketing." 

 

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

 

 

Q&A

  • Clearly, good weather had an impact but feeling pretty good about the consumer.
  • Strength in VIP customers (+$400); continue to improve margins in lower rated customers.
  • Saw improvement in spend per visit
  • Marketing activities continue to move away from being rated to unrated. So that has an overall effect of improving the quality of rated play on a per trip basis. 
  • Rational promotional environment
  • Recovery will continue to be slow, which is reflected in 2012 guidance
  • Changes in FY 2012 guidance: Picked up an extra Q of mgmt fees from Casino Rama; moved up Columbus opening by a month; delayed Toledo opening by a month; Maryland Live opening earlier than anticipated.
  • Cannibalization proceeding better than originally thought.
  • KC property performing exactly to formula: New property starts strong for 2 months, then a slowdown for a couple of months, and then 4-6 months to climb back up to opening months performance.
  • FY 2012 guidance still has room to move up 
  • There may be a special session for MD's 6th casino license.  PENN still hopeful on Rosecroft bid.
  • Better Margins in Midwest:
    • Lawrenceburg: Downsized marine operation staff
    • Reducing marketing expenses to lower rated players
  • Increase in pre-opening expense guidance mostly due to Toledo delay
  • M Resorts: have been reducing FTEs; off to decent start but more to come
  • Baton Rouge: the market is saturated; will have significant cannibalization; prepared for lower business volumes at their property
  • Toledo will fight with the Detroit casinos and sees NE Indiana market as an opportunity. 
  • Ohio Roundtable litigation decision should happen by Memorial Day; if approved, Ohio VLTs could happen in 2014
  • Total Ohio fees: $125MM (license + relocation)
  • Debt: $2.03 billion
  • Cash: $214MM
  • Capex: $119.7MM (21.5MM maintenance capex)--doesn't includes KS JV ($19.5MM share)
  • Did not make any share purchases in 1Q
  • Certain slot manufacturers were aggressive in machine pricing i.e. Konami; given them some ship share and win/slot have done well

HIGHLIGHTS FROM THE RELEASE

  • "While the most significant year-over-year growth was driven by the Company’s East/West segment, adjusted EBITDA improvements were achieved at eleven of the sixteen gaming properties we operated during the first quarter of both 2012 and 2011 and twelve of these properties improved their adjusted EBITDA margins year over year. Notably, despite new competition from the operations of the tenth license in Illinois, adjusted EBITDA margins in the Midwest segment rose on a year-over-year basis after excluding the impact of pre-opening costs."
  • Guidance:
    • Net revenue: 2Q12: $711MM (vs Street at $732MM) and FY2012: $2,873MM (vs. Street at $2,906MM) up from prior guidance of $2,786MM
    • Adjust EBITDA: 2Q12: $188MM ($195.5MM excluding pre-opening expenses) (vs Street at $195MM) and FY2012: $762MM (vs. Street at $731MM) up from prior guidance of $721MM
    • EPS:  2Q12: $0.64 (vs Street at $0.62) and FY2012: $2.48 (vs. Street at $2.27) up from prior guidance of $2.22
    • Key assumptions:
      • Pre-opening: 2012: $22MM;  2Q12: $7.6MM
      • Depreciation and amortization: 2012: $235.8MM; 2Q12: $55.6MM
      • Non-cash stock compensation: 2012: $29.4MM; 2Q12: $7.2MM
      • 2012 tax rate: 38.5%;
      • Diluted share count: 105.3 million shares for the full year
  • Hollywood Casino at Kansas Speedway: "Results during the first two months of operations exceeded our expectations and we now anticipate that our share of the construction costs will be $10 million less than the initial $155 million budget." 
  • Ohio updates: 
    • “Based on the determination of the Ohio Casino Control Commission, the $320 million Toledo facility is scheduled to open on May 29, about a month later than anticipated in our initial financial guidance for 2012. Conversely, and subject to regulatory approval, given construction progress, the $400 million Columbus property will likely open slightly earlier in the fourth quarter than initially anticipated"
    • “We recently entered into a non-binding memorandum of understanding with the State of Ohio that establishes a framework for relocating our existing racetracks in Toledo and Grove City to Dayton and Austintown (located in the Mahoning Valley), respectively, where we intend to develop new integrated racing and gaming facilities, each budgeted at approximately $275 million inclusive of license and relocation fees. Pursuant to this arrangement we would pay the state a $75 million relocation fee per facility and The Ohio Lottery Commission would retain 33.5% of VLT revenues. We remain in negotiations with the thoroughbred and harness horsemen’s organizations to determine the level of their participation in the revenue streams from our significant investments in these two new first-class racing and gaming facilities and are optimistic we will reach a resolution equitable to both parties. In addition, the memorandum of understanding restricts any other gaming facility from being located within 50 miles of our Columbus and Toledo casinos, as well as our relocated tracks, with certain exceptions"
  • "We are pursuing new gaming opportunities in Western Massachusetts, for our jointly owned racetracks in Texas, and in Maryland where we’re seeking legislative approval for slots at our Rosecroft Racetrack in Prince George’s County. The Maryland Legislature recently adjourned without taking action on a proposed gaming expansion bill, the latest version of which excluded Rosecroft as an eligible slots location. We anticipate there will be a Special Session called by Governor Martin O’Malley, during which we’ll continue to highlight the benefits to the racing industry, employment, and new tax revenue to be derived from the inclusion of Rosecroft as a potential sixth gaming location in the state." 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED

Two Weeks of Spring Break?

Last week we highlighted the uptick in claims being at least partially driven by Spring Break week, in which school bus drivers and cafeteria workers are eligible to collect unemployment benefits. Normally the seasonal adjustment factors appropriately capture this, but last week the adjustment seemed to be off by a week. You can see this in the NSA claims chart below. As such, we had expected this week to be down by roughly 10k, all else being equal. Instead, we got a 6k increase (before the +8k revision). Interesting. Again, looking at the NSA chart below, it seems that somehow those same workers collected benefits for two weeks this year. The bottom line is that even net of these adjustments, claims are rising quickly. In fact, they're rising faster than we would have expected even based on our observation of the faulty seasonal adjustment models the government is using. This suggests that underlying claims may be backing off their intrinsic rate of improvement, i.e. a bona fide deterioration in the jobs market. We'll need to see a few more weeks of data to confirm, i.e. move beyond this Spring Break dynamic, but let's keep a close eye on claims as a leading indicator for domestic employment health.

 

The headline number for initial claims this week was 386k, this is a 6k increase over the prior week's print of 380k (though a 2k decrease if you factor in the 8k upward revision to the prior week's number: 388k). Larger-than-average upward revisions to the prior week is also a recent trend. Rolling claims rose 5.5k WoW to 375k. On a non-seasonally adjusted basis, claims fell 23k to 368k. 

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - Raw

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - Rolling

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - NSA

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - NSA rolling

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - S P

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - Fed and CLaims

 

2-10 Spread

The 2-10 spread tightened 3 bps versus last week to 171 bps as of yesterday.  The ten-year bond yield decreased 6 bps to 197 bps.

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - 2 10

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - 2 10 QoQ

 

Financial Subsector Performance

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

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - subsector 3

 

INITIAL CLAIMS: RISING FASTER THAN WE WOULD HAVE EXPECTED - Companies within subsectors

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky


THE M3: PONTE 16; MSC CONSTRUCTION

The Macau Metro Monitor, April 19, 2012

 

 

700 MILLION TO EXTEND PONTE 16 SHOPPING MALL Macau Daily Times

Success Universe is spending HKD 700 million to extend its shopping mall in Ponte 16, adding around 20 to 30 gaming tables to its casino, and planning an extra gaming room.  Success Universe’s Deputy Chairman Hoffman Ma Ho-Man said the company would apply for a 20% increase in gaming tables which would, if approved by the authority, add around 20 to 30 new tables to the casino-hotel which currently has more than 100 tables, of which 18 are VIP.

 

Chairman Ho-Man believed the economic situation in the mainland, including the Government’s tightening over monetary policies, would not have much influence on their gaming business.  However he expressed worry that debts would increase as credit conditions become tighter on the mainland; however, the casino would enforce stricter screening of mainland gamblers’ credit records and require mortgage from some VIP clients.  In addition, they planned on opening one more

gaming room and recruiting one extra junket operator. 


He expected gaming revenue growth in 2012 to be lower than last year but would maintain the double-digit level.  
As to the extension of the shopping mall in Ponte 16, Ho-Man said, “The works would start later this year and finish in 2014.”

 

CONSTRUCTION WORKS OR NOT?

According to Business Daily, around 200 workers have been hired for the Macau Studio City project.  Despite what is thought to be worker accommodation being built on site, the project construction has not been restarted, said a spokesperson for Melco International Development Ltd.


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YUM PRE-CALL QUESTIONS

Yum reported 1Q12 EPS of $0.76 versus $0.73 consensus.  The negative reaction to the print was, we believe, largely due to the miss in China’s same-store sales.  YUM is priced for perfection and needed to deliver a commensurately perfect quarter.  While the company came close, it didn’t quite deliver.  The quarter was strong; EPS exceeded expectations helped, for the first time in a long time, by the U.S. Division.  Given the weather and calendar-shift benefits that helped the first quarter, the question from here is “how sustainable is the domestic business?”  Here are our initial takeaways ahead of the earnings call this morning:

  • Yum China comps grew 14% year-over-year.  The stock is up 23% YTD.  Can it work from here with China seemingly losing momentum, at least in the first quarter?  As weather helped in the U.S., did cold weather during Chinese New Year negatively impact top-line trends?
  • Yum Restaurants India same-store sales grew 8% in the first quarter.  As China growth moderates – it has to at some point – this division is set to assume a greater role in driving Yum’s global growth.
  • In the U.S., Taco Bell came in at 6% same-store sales growth.  We are concerned that the trend may not be sustainable.  How much of the boost from the new product introduction and breakfast testing will be sustained?  Is Taco Bell one quarter behind Pizza Hut – will it roll over next quarter – or is this concept truly on the mend?
  • Pizza Hut trends rolled over in the U.S.  The 5% print implied two-year trends down 700 basis points sequentially.  What is next to keep trends moving forward?
  • KFC’s U.S. results were clearly a net positive.  Same-store sales grew 2%, with the two-year average trend up 200 basis points.  Was this a weather-and-leap-year head fake?
  • YRI saw same-store sales up 5%, which brought the two year up 150 basis points to 3.5%.  The numbers are impressive for 1Q12, the first quarter that India has been broken out from this division.  Previously, it had been included within YRI.  Margin contraction on 5% comps is one data point we will be trying to understand better from this morning’s call.

 YUM PRE-CALL QUESTIONS - yum china pod1

 

YUM PRE-CALL QUESTIONS - us taco bell pod1

 

YUM PRE-CALL QUESTIONS - us pizza hut pod1

 

YUM PRE-CALL QUESTIONS - us kfc pod1

 

Howard Penney

Managing Director

 

Rory Green

Analyst



Being a Loser

“Show me a good loser, and I’ll show you a loser.”

-Vince Lombardi

 

Losing sucks and there is basically not much to debate beyond that.  In the investment world, losing means you lose both your family and client’s hard earned capital.  It’s almost a double whammy in terms of managing the emotions related to losing in that sense.  If it were just you losing an individual tennis match at the country club, that’s probably cool on some level.  But when you make a bad investment, you actually have to put the accountability pants on and answer to both your clients and your family. 

 

Losing is also part of the big boy’s game of being a professional stock market operator.   We lose, we analyze the loss, and then we adjust and improve.  Or, at least, that is how it is supposed to work.  In reality, though, most investors, and people generally, tend to overweight and over-emotionalize their losses.  While winning is great, losing is painful.   This occurs in part to our culture where losing, to Lombardi’s point above, is broadly characterized as a bad thing.  I’m here to tell you it’s not.  In fact, losing is a chance to improve.

 

This morning Spain sold €2.54 billion of 2 and 10-year bonds.  On one hand, Spain won.  They sold more than the maximum target of €2.5 billion.  As well, the bid-to-cover was 2.42 versus 2.17 in the last auction in January.  Yields, on the other hand, have ticked up since January from 5.4% on the 10-year to 5.74% in this auction.  (Incidentally, the actual market yield is higher.)  But, still, mostly a win, right?

 

Well, not so much.  The European sovereign debt market is hardly a market anymore.  Government intervention is enabling these auctions to be “successful”, but the stark reality remains that the monetary union has failed.  The key evidence of this is in interest rate differentials.  In the Chart of the Day, we show the spread between Germany and Spain interest rates going back three years.  In a successful monetary union, the rates at which the key players sell sovereign debt would be comparable.  Unfortunately, at least for monetary union enthusiasts, this is not the case in Europe.

 

The more unfortunate fact in Europe is that while the market is attempting to do its job and price sovereign debt according to appropriate sovereign risk, there is no currency mechanism to adjust and aid these beleaguered sovereigns.  In theory, what should be happening is that the Spanish currency should naturally adjust to reflect its weak fiscal and economic situation, which then, over time, would boost Spanish exports and subsequently boost the Spanish economy as Spain’s goods become cheaper. 

 

Unfortunately, Spain, and really all nations in the Eurozone, has a currency that reflects the strongest members, but doesn’t have the commensurate ability to borrow at low rates.  In effect, the weaker economic nations in the Eurozone are all structural losers.  So, then, it should be no surprise that the Socialists are about to take over the government of France.

As an aside, my favorite quote about socialism comes from Winston Churchill, who said:

 

"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries." 

 

It is sad that the structural issues of the Eurozone are forcing the people of the France to choose the equal sharing of misery via socialism versus rolling the proverbial bones on the upside of capitalism.

 

Although Keith is on a much deserved vacation this week, he was kind enough to flag to me the fact that both copper and long term yields in the U.S. continue to signal an ominous outlook for global growth.  Copper has basically been going down in a straight line over the past thirty days.  Meanwhile, the 10-year yield on U.S. Treasuries remains below our key line of resistance at 2.04%.  Call it reflexivity if you will, but typically these two market prices are good leading indicators for the direction of economic activity.  

 

You may not believe Chinese officials when they say they will temper growth, and you may not believe the tempered growth numbers from China when they get reported, but the price of copper does not lie.  I can tell you the shareholders of Freeport McMoran (FCX) are starting to believe it.  FCX, one of the world’s largest copper miners, is down 20% in a straight line since February 1st, despite trading at less than 5x trailing earnings.

 

Speaking of earnings, our retail Sector Head Brian McGough did an excellent job summarizing his views of earnings for retail this quarter.  While the full note can be found at ( www.hedgeye.com ), the key takeaway was as follows:

 

“a)      The current consensus earnings growth forecast for the next 12-months is 23%. We have not seen this kind of growth since we came off of recessionary earnings numbers in 2010.

 

b)      The market is giving this earnings growth a 17x p/e. We’ve only seen that kind of multiple five times in 3-years, but always at times when the group was still clearly under-earning. Who are we to say that it is NOT under-earning today? But to make this case, we need to see a considerable upshift in consumer spending alongside another decline in raw materials costs. We don’t like that call.”

 

To paraphrase Brian, I think he is saying that the asymmetric risk / reward in retail is not tilted towards the upside in retail land this earnings season.

 

But enough about losing, go out there and get wins on the board today!

 

The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1, $116.91-120.45, $79.23-79.64, $81.11-82.31, $1.30-1.32, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Being a Loser - Chart of the Day

 

Being a Loser - Virtual Portfolio


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