In preparation for ASCA's FQ1 2012 earnings release Wednesday morning, we’ve put together the recent pertinent forward looking company commentary.



 Youtube from FQ4 2011 conference call

  • "Because we almost immediately fell below 5.5 times earlier in the year, once we file our certificate with the banks, we'll be lowering the add-on for our revolver by 25 basis points. So, we're basically staring out this year at an interest rate on the revolver at a lower level than when the facility was put in place last April."
  • "As we've stated in previous earnings releases, the Blanchette Bridge which is the interstate bridge by our St. Charles facility is now starting to receive some preliminary work with minor intermittent lane and highway ramp closures. We had said early in previous call that we thought the actual bridge westbound span would be closed either maybe in March or April. The state now announced it will be around November of 2012 before the bridge is actually completely closed for the construction work – obviously this will create some inconvenience for up to a year with our guests. However, there are several different routes that can be taken by our guests to access Ameristar St. Charles. So, we believe that despite some of the interruption there will be some negative impact to revenues that we'll be able to manage the situation and it is temporary."
  • "Our Q1 2012 estimate for non-cash stock-based compensation expense will be between $4.5 million and $5 million. For the entire year the rate should be somewhere around $14.8 million to $15.8 million. We expect our blended tax rate to get back to normal for the first quarter and for the year with those rates being approximately 43% and 44%."
  • "On the capital spend side, for the first quarter we are looking at $31 million to $36 million number but that number does include the $16 million purchase of land in Springfield. So the run rate will be back to what our normal run rate is which should be somewhere between $15 million and $20 million on the normal maintenance CapEx."
  • "Total capital expenditures for the year should be somewhere between $85 million and $90 million including the land purchase in Massachusetts. Net interest expense in Q1 is expected to be approximately $27 million. Non-cash interest expense is expected to be approximately $1.4 million. For the year, we anticipate interest expense to be between $103.5 million and $108.5 million, flat year-over-year due to expected debt repayments and the add-on reduction offset by what we believe will probably be some slight increase in LIBOR throughout the year."
  • "Q1 corporate expenses are increasing slightly. We expect the range to be $12.5 million to $13 million for the quarter and $52 million to $53 million for the year. This excludes the corporate portion of stock-based comp. We expect to generate significant cash flows that will allow us the flexibility to pay down debt again this year and the first quarter range to be between $20 million to $25 million and for the year somewhere between $155 million and $165 million."
  • "Obviously the number of outstanding shares bounced around this year with the stock buyback and we had multiple numbers during the year. Going forward, the number should range between $34 million and approximately $35 million and diluted weighted average shares starting now at about $34 million for the first quarter."
  • [Promotional spending] "And all I could say is – if I were you, I wouldn't expect any surprises."
  • "I think we're seeing a decent degree of stabilization. There are some very short-term trend lines that give us some hope for optimism, but they're too short to give us confidence in them getting there.  The farm economies are doing pretty well."
  • "Watch the savings rate, that's an indicator that we think is pretty important to have and understand how the economy is going to be moving for the next few months."
  • [Margin flowthrough] "It will continue to be strong.  We anticipate margin flow through, obviously when you take into the component taxes and our promotional spend, of around 50% or a little bit greater than 50% in most markets depending on the tax rate."
  • "As we start to see some lift out of the economy, I think you will see extraordinarily tight control on the variable cost increases that will drive a very high flow through rate."
  • [Bridge closure impact] "There are two other major bridges across the Missouri River within a couple of miles of the property, one to the North and one to the South. So, as Tom said, orange cones were going to create some impact to us. But there is a very sizeable population that lives on the St. Charles County side of the river as well as a substantial portion that lives on the St. Louis County side of the river.So, for some of those people that are going to our competitor in Maryland Heights that live in the St. Charles side of the river, they are going to have a more a difficult time getting over there and may well shift some of their allegiance to Ameristar. So, I think it's going to be a short-term situation, it's going to be a manageable situation, but it's not going to have the zero impact."
  • [Market share growth in East Chicago] "I think it's sustainable."

Nice: SP500 Levels, Refreshed

POSITIONS: Short Industrials (XLI), Basic Materials (XLB), and Energy (XLE)


I just sold my long Utilities (XLU) position which has effectively gone straight up in the last month, so that makes me short 3 Sectors in the SP500. Fortunately, we covered our SPY position yesterday on red.


Where would I consider re-shorting SPY on green? 

  1. Immediate-term TRADE overbought = 1412
  2. Immediate-term TRADE support = 1391
  3. Intermediate-term TREND support = 1359 

In other words, shorting the SPY at a lower YTD high is definitely interesting on the way up here, but its more interesting to be short the aforementioned pro-cyclical Sectors provided that Growth Slowing remains our call.


Today’s ISM number (54.8 vs 53.4 last mth) was the only legitimate beat we’ve seen in our model in a month, so don’t expect me to change everything based on 1 data point. That would just look as emotional as the tape does right now on short covering.


Up next is jobs, jobs, jobs (ADP, Jobless Claims, and Unemployment). So we will have to see about that.



Keith R. McCullough
Chief Executive Officer


Nice: SP500 Levels, Refreshed - SPX


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

OVERALL:  BETTER - Results this quarter where better than expected driven by profitable marketing initiatives, mild winter weather, a favorable calendar, and tight cost controls 


Here is the report card evaluating actual results against management's previous assertions.  

    • SAME:  Growth in spend per visit among their top customers continued to grow
    • WORSE:  The property performance was disappointing but the PNK remained optimistic. Boomtown "continues to experience difficult comparisons due to last year's elevated local economic activity created by the Deep Horizon oil spill cleanup and recovery efforts.  We have made select facility improvements to increase the property's competitiveness, and continue to refine the property's marketing programs to drive profitable revenue."  
    • LITTLE BETTER:  Market pressures continued as expected. However, PNK was able to implement some cost reductions that allowed it to grow Adj EBITDA despite of challenging market conditions 
    • BETTER:  Garage disruptions have been minimal at River City.  The garage completion date has been moved up to end of 2012, from early 2013.  In addition, the second phase (200-room hotel and multi-purpose event center) is ahead of schedule.
    • SAME: remain committed to open in late August with $368MM budget
    • SAME:  project remains on track to open by end of 2013
    • SAME:  sale on track to close by mid-2012
    • SAME:  restarting the sale process as expected. Too early to gauge interest
    • SAME:  corporate expense was stable this quarter and is a good run rate going forward

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Very good quarter from PNK but weather and calendar certainly helped. Sustainability is the question.




"We are very pleased to report strong first quarter financial results that demonstrate the positive operating momentum we built in 2011 has carried into 2012.  The Company continues to make significant progress improving its operations and executing on its strategic objectives." - Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment



  • Expect to open Baton Rouge in Late August
  • Mychoice is having a meaningful impact - recognizing and rewarding their best guests and increasing customer loyalty. 
    • Formed a partnership with Atlantis Bahamas - available for their top 3 tiers of guests
    • Owners club guests were also given 3 Mercedes options
    • Options for their top customers to go to Wynn LV
    • # of guests in top tier (Owner's Club) grew 40%
    • 2nd and 3rd tier members also grew double digits
    • New member enrollment was up 10% in the Q in MyChoice
  • Revenue per admission continues to grow across their portfolio
  • Feel like there is material margin upside in 2012
  • Net leverage: 4.5x
  • Expect some decisions about slots at Ohio tracks in 2Q
  • River City garage construction so far had minimal disruption on the property
  • Total investment at Retama Park will be $23MM, $10MM of which was already paid.  The property lost $1.5MM in 2011, but they believe that they can operate the facility more profitably.


  • Missouri Credit passage:  not sure about the likelihood of passage.  If it does, it will greatly increase their ability to cross market their properties.  Allows them an additional way to take care of their guests.  Haven't modeled the benefit of it passing. 
  • Construction disruption at River City: 
    • The Winter was mild and that helped.  As the temperature climbs over the summer they may see an impact of a potentially hot walk.  Do expect some impact during the hot summer months or days when there is rain/slow/bad weather.
    • To mitigate disruption, they will not commence hotel construction until the garage is complete
  • Is it possible to make Retama Park break even? 
    • Unsure - they are confident in minimizing the loss but have not crunched the numbers yet to see exactly how much improvement they can implement
  • L'Auberge strength: 
    • The Houston market continues to be under-penetrated
    • Top-line is mostly driven by marketing improvements - MyChoice is helping
  • St Louis: It's possible for them to get to a 30% margin but that isn't their focus.  Rather they are focused on profitable revenue growth.
  • New Orleans:  Focusing on improving operations through a variety of programs. 
  • Have put together a marketing plan that will launch in the summer time for their Baton Rouge Casino
  • There was nothing unusual in their corporate expense line.  If anything there may be rooms for improvement.
  • Loss from equity method investment: Vietnam - will likely incur operating losses until it opens.  Will likely ramp up (losswise) until the property opens in 2013.  Will likely turn positive by the end of 2013.
  • Taxes would have been $1.8MM different if not for the 1x charges
  • Baton Rouge - there will be a ramp up period in the first couple of quarters.  Given the shared services effort and the fact that they have already hired a good team, they should ramp better than some other new openings.
  • They are hopeful that the roadways continue to improve near the development in Vietman. Think that that is a very vibrant part of the world. 
  • River Downs - Scotia Downs is scheduled to open in early June; that will be a test in and of itself
    • Possible that they can start Ph1 construction as early as this summer.  Haven't finalized the budget on PH1 yet.  High probability that they will be able to open by end of 2013. 
    • PNK's participation in future cash raises in Vietnam depends on the terms and other investment opportunities for PNK at that time
  • If gaming comes to Texas they want to be a part of it. Don't know when and if that happens
  • They are beginning to remarket their AC property.  They are optimistic that there will be some good alternatives for that asset. 


  • "First quarter performance was driven principally by Adjusted EBITDA growth at... St. Louis, L'Auberge Lake Charles, and Belterra operating segments, as well as a decline in corporate overhead expenses." 
  • "The St. Louis segment continued its strong performance during the first quarter, with further ramp up of gaming revenues at River City and expense discipline across both properties."
  • "Investments made in the casino floor of L'Auberge Lake Charles began to bear fruit in the first quarter with the property achieving record overall gaming revenue, slot win, table drop, poker rake and win per admission"
  • "Boomtown New Orleans continues to experience difficult comparisons due to last year's elevated local economic activity created by the Deep Horizon oil spill cleanup and recovery efforts.  We have made select facility improvements to increase the property's competitiveness, and continue to refine the property's marketing programs to drive profitable revenue.  While disappointed with the performance over the past two quarters, we are optimistic these initiatives will improve the performance of Boomtown New Orleans going forward"
  • "Boomtown Bossier City continues to face a very competitive operating environment, but cost discipline has permitted the property to drive Adjusted EBITDA growth despite revenue challenges."
  • "The reduction in corporate overhead expense was driven principally by a decrease in severance expense during the 2012 first quarter.  Efforts to eliminate non-value added expenses at the Company's Las Vegas headquarters, as well as a ramp up of cost savings related to the Company's shared service center supporting our properties in the Midwest and Louisiana, also contributed to the decline."
  • "We broke ground on the construction of a 1,600 space parking structure at River City in late-March.  We continue to anticipate completion of this element of the expansion by the end of 2012.  The second phase of this expansion, a 200-room hotel and multi-purpose event center is expected to commence by the end of 2012 and be completed in late-2013."
  • "Construction in Baton Rouge is progressing rapidly, with the project remaining on track to open by Labor Day 2012 and within its $368.0 million budget.  At River Downs in Cincinnati, Ohio, we have made significant progress in concept and design work for the project.  Finally, Asian Coast Development's project inVietnam continues to make meaningful progress.  We look forward to MGM Grand Ho Tram's opening by the end of the first quarter of 2013."
  • "On April 26, 2012, the Company announced the potential acquisition of a 75.5% equity stake in the owner of Retama Park Racetrack's racing license for total consideration of $22.8 million, comprising a purchase of debt securities and other interests related to Retama Park for $7.8 million and $15.0 million in cash consideration which will be used primarily to refinance Retama Development Corporation's current indebtedness and to provide working capital.  The initial purchase of debt securities and other interests related to Retama Park closed in April.  The subsequent transactions are subject to the receipt of all applicable regulatory approvals, with closing expected by the end of 2012."
  • "On track to close the previously announced sale of its Boomtown Reno casino-resort operations by mid-2012.  The casino-resort buyers also have a one year option to purchase 100% of the Company's membership interest in the current gaming licensee, PNK (Reno), LLC, and additional land adjacent to Boomtown Reno."
  • "In the first quarter of 2012, the use of medical pooling had a $1.0 million favorable impact on Adjusted EBITDA for Belterra and a $0.9 million negative impact on Adjusted EBITDA for St. Louis.  The impact was negligible to the Company's other operating segments."
  • "Capital expenditures totaled approximately $66.0 million during the first quarter of 2012, including $54.5 million related to construction of L'Auberge Baton Rouge.  Through March 31, 2012, the Company has incurred approximately $220.5 million of the $368.0 million budget for L'Auberge Baton Rouge, excluding land cost and capitalized interest, and $2.9 million of the $82.0 million River City expansion project."
  • "Capitalized interest in the 2012 first quarter was $5.4 million" 


ASPs move the opposite way of IGT/BYI.  Too bad because there were some bright spots in the Q. 



As we summed up in our teaser from our conference call notes and Report Card, low ASPs and weak international sales spoiled what could have been a good quarter from WMS.  While international sales can be volatile, the drop in ASPs is disconcerting.  We know Konami was very aggressive in pricing during the quarter but both IGT and BYI reported almost 10% ASP increases.  Clearly, WMS is feeling the competitive heat more so than the competitors.


In any event, WMS clearly missed the mark this quarter vis-a-vis investor expectations on both revenues and EPS by a considerable margin.  If not for the low tax rate in the quarter, WMS would have reported $0.38 vs. consensus of $0.44.  Coupled with the recent run-up in the stock, investors are probably taking little solace that there were actually several bright spots in the quarter. 


Since WMS led with their left foot this quarter, we’ll start with what went wrong.



  • ASPs:  It’s true that large shipments to new openings typically get a decent discount but IGT and BYI reported strong ASPs.  It’s also true that it’s a very competitive market and therein lies the worry for WMS.  There was no signal from the company since December that pricing could be an issue.  The issue may be that WMS started from a higher point than its competitors and since their competitors have stepped up their product quality, WMS has had to simply get more competitive on price.
  • On the VLT front, WMS was the only supplier to sell rather than lease units to Maryland Live.  Since their contract fell under Spielo, the purchase price was not disclosed.  However, our understanding behind WMS’s rationale to sell vs. lease the units at $25-28/day to the facility was based on a lucrative sales price.  So we’re left scratching our heads here a bit.
  • International units:  While international units are notoriously difficult to predict since they are mostly replacements, WMS’s low number of shipments definitely surprised us.  Based on our conversations with management, we expected a 2,000/Q run rate.  Instead, it looks like WMS’s units are slipping below FY2007 levels.  No doubt various jurisdictions are reviewing their regulatory standards but it does seem a bit odd to us that this is not impacting any of the suppliers.


  • Declining unit revenues in gaming operations:  Both IGT and WMS attribute declining win per day to mix shift which makes sense from the anecdotal evidence.  WMS specifically mentioned that they have an increasing number of games out on a fixed fee or daily lease.  Just a few years ago, BYI was the only supplier to consider this pricing model outside of markets where true participation was not possible.  We also know that casinos have been targeting WAP games to increase margins.


  • North American shipments:  Shipments (not recognized units) to North America came in 500 units above our estimate.  While we are still waiting to speak to several suppliers, we believe that WMS could be in second place for market share this quarter.  Lower ASPs helped.
  • Healthy margins:  Despite the disappointing ASP’s, margins were strong.  Of course, the large number of conversion kits sold in the quarter didn’t hurt.
  • Install base no longer stalled?  After 6 quarters of declines in their install base, dare we say that WMS has turned a corner?  It certainly appears so.  Unfortunately, all the new great content they have coming out still faces competition and that’s the new market norm. 

Damned Lies

This note was originally published at 8am on April 17, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them.”

-George Soros


Just as Keith has his pile of reading, I also have mine.  The quote above from George Soros was in a speech he gave to the Institute for New Economic Thinking Annual Plenary Conference.  The quote itself was buried somewhat deep in Soros’ comments, but it jumped off the page at me.  To me it is somewhat akin, and I hate to use another hockey analogy, to Wayne Gretzky being told he couldn’t score 90+ goals in a NHL season (which is more than one goal per game) after he did it.


Soros, of course, is in a similar situation in the realm of investing.   He has absolutely crushed it in terms of outperforming the market over long periods of time.  His performance has been so staggering, in fact, that his net worth today is estimated north of $22 billion.  Now I haven’t always admired Soros’ political positions, but it is very difficult not to admire his investment track record. 


More importantly, I’ve always admired his desire and interest in attempting to explain his investment process.  Much of what Soros has written about his investment process revolves around reflexivity.  He loosely based this way of interpreting the markets on a theory by philosopher Karl Popper that suggests that the individual’s interpretation of reality never quite correspond with reality itself.  


According to Soros, in financial markets this is taken one step further in that individuals with a flawed sense of reality actually take action based on this flawed interpretation of the future.  In turn, these collective actions often influence future events, or more likely, as Soros said, create a “divergence between the participants’ view of reality and the actual state of affairs and a divergence between the participants’ expectations and the actual outcome.”


From my seat, the pin action in Europe over the past 18-months highlights Soros’ idea that collectively market participants really have no idea what the ultimate outcome in Europe will be to resolve the intrinsic issues associate with the Maastricht Treaty. Specifically, I’m referring to the issue that a European monetary union cannot exist sustainably without a strong political union or fiscal solidarity.


This morning the first of two key Spanish debt auctions occurred for the week.  The reflexive response from the equity markets is that the auction was a success, as European equities are up across the board with beleaguered French banks leading the way.  According to reports we are receiving from some of our contacts on the ground in Europe, the Spaniards sold 3.2 billion euros of 12 – 18 month bills versus a maximum target of 3.0 billion euros at a total bid-to-cover of 3.19.  On the negative side, the bills sold yielded 2.6% on the 12-year versus 1.4% prior and 3.1% on the 18-year versus 1.7% prior.  So, yes the auction was “successful”, albeit at usury type rates.


It’s quite possible that the Spanish debt auction this Thursday is just as “successful”.  Although as always, I would recommend watching not necessarily what the government officials say, but what they actually do.  In that vein, this week European officials are headed to Washington, DC with hat in hand to ask for more money from the International Monetary Fund.  The IMF meetings occur from April 20 – 22nd.  Interestingly, the Europeans may meet at least one surprising fiscal hawk in the way of U.S. Treasury Secretary who has already ruled out additional contributions to the IMF based on the belief that the IMF already has “substantial financial resources.”


Meanwhile as the loose monetary policies in Europe appear likely to be extended in perpetuity, inflation readings came in stickier, even if marginally, across the board this morning.  Eurozone March CPI came in at +1.3% month-over-month and +2.7% on year-over-year basis, both ahead of expectations.  The acceleration in U.K. inflation was even more noteworthy coming in at +3.5% versus estimates of +3.4%.


The scary thing with inflation is that, just like George Soros’ returns, it also compounds.  So, at this rate of inflation, in 10 years someone in the U.K. who makes $50,000 now will have to make $70,000 to have the same purchasing power.  Thus we have the hidden tax of inflation. 


Switching gears briefly, I wanted to touch on U.S. politics.  Yesterday the Senate blocked the so-called Buffett Tax, which would have implemented a mandatory tax of 30% on anyone earning over $1 million in income.  The legislation was blocked basically on party lines.  In terms of true tax reform, the Buffett tax is basically meaningless and is clearly not much more than a political stunt, although perhaps an adroit one by the Obama camp as according to a recent Gallup poll 6 in 10 eligible voters supported passage of the bill. 


The Democrats are only going to continue to focus on this class warfare type issue heading into the Presidential elections this fall.  In fact, yesterday I received a blast email from Stephanie Cutter, the Deputy Campaign Manager for Obama which invited me to compare my tax rate to Romney’s.  Ultimately, this “war on the rich” is and will continue to backfire on Obama in one key way: political donations.  So far, corporate executives across almost every industry have been giving less money to Obama and the Democrats this election cycle.  (We will have a note on this up today.)


For those looking for some interesting and enlightening reading this morning, the IMF releases the world economic outlook and fiscal monitor at 9am and ECB President Draghi is delivering an intro speech at the 6thECB Statistics conference.   Thinking about an annual ECB statistics conference reminds of Mark Twain’s famous quote (who he purportedly borrowed from former U.K. Prime Minister Benjamin Disraeli):


"There are three kinds of lies: lies, damned lies, and statistics."




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 $1617-1662, $117.67-121.61, $79.27-79.67, $80.03-82.34, $1.30-1.32, and 1349-1383, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Damned Lies - Chart of the Day


Damned Lies - Virtual Portfolio

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