Since October 23, when HOT gave its outlook for 4th Quarter and preliminary 2009 guidance, RevPAR has continued to plummet from negative mid to high single digits to a run-rate of -20% during the first 17 days of January, with Upper Upscale tracking down almost 23%. The rest of the world isn’t doing that much better with worldwide RevPAR tracking at negative double digits in most regions across Europe and Asia Pacific.

Bottom line is that the street is still way too high and HOT management way too optimistic in its guidance. The only bright spot may be for credit investors as cash flow should remain positive in 2009.

The Street is currently projecting $905 million and $1.26 in mean EBITDA and EPS for 2009. Before we cheer the Street for being conservative vis-à-vis management guidance of $1 billion and $1.55, respectively, consider this. The Street is probably too high on EBITDA by about 15% and EPS probably needs to fall by 50%.

Below are some of our key assumptions:

Owned Business:

- US Owned RevPAR (ex Canada & Mexico) of -12.5%, NA RevPAR of -16% in 4Q08 with no great improvement in 2009. Canada & Mexico represent about 22.5% of HOT’s North American owned EBITDA and on a blended basis those currencies have depreciated 17.5% y-o-y in the 4Q08 and would have about an 18% drag on 2009 comparisons if FX rates stay at current levels
- Local currency international RevPAR of -12% in 4Q08 and -10% in 2009. However on a constant dollar basis the dollar appreciation vs HOT’s currency exposure should produce an incremental drag of ~10% in 4Q08 and 2009 (at current FX rates). So we’re talking about RevPAR down about 20% in each of the next four quarters.
- Taking into account recent cost cutting measures, decreases CPI and global commodity deflation we believe that EBITDA margins will be down 550 bps and 410 bps for HOT’s owned portfolio for 4Q08 and 2009, respectively (not same store).

Management & Franchise Business:

- Managed and franchised net room growth of 4.7% for 4Q08 and 5.5% in 2009. However, we wonder whether attrition rates will accelerate amongst franchisees as they attempt to cut back on capital expenditures in the face of deteriorating income, and are unable to maintain brand standards.
- Despite the room growth, we believe that fee income will be down about 10% in 4Q08 and almost 15% in 2009. Incentive fees are sure to take a hit.

From a valuation standpoint, almost 9.5x 2009 a reasonable EV/EBITDA and 24x earnings is nothing to get excited about. Starwood does look “ok” on a FCF yield basis, trading at an almost 8% yield, and probably isn’t the best short for credit investors. However, it will be interesting to see how the stock trades when estimates get cut in half.

Eye On The UK: One Reason Why We Remain Short

That giant sucking sound you hear is UK house prices sinking further…

January data released yesterday by Hometrack registered a decline of -9.4% year-over-year for the average cost of a home in England and Wales. Hometrack also reported that the average time a property spends on the market rose to 12.3 weeks, a 45% increase from a year earlier, while sellers are achieving less than 90% of their asking price. The group forecasts prices to decline -10% this year.

Supporting Hometrack’s negative view, the British bankers Association released December mortgage a data yesterday showing net mortgage lending down for the 4th month in a row (although, looking at the delta, the number of mortgage approvals were up by nearly 5,000 since November’s decade low reported level). The small silver lining on the margin provided by this uptick in approvals may signify, at last, a response by lenders to the increasingly hostile tone taken by Prime Minister Brown’s government towards banks that have yet to pass on liquidity injected by state funds.

We are short the UK via the EWU ETF, and remain negative on the duration for prospects to change any time soon.

Matthew Hedrick
Andrew Barber

GMCR – Poking holes in the business model

GMCR’s success relies on the razor/razor blade growth model in that the company is currently selling its Keurig At-Home Single Cup Brewers at cost. The company justifies foregoing margin on the sale of this product in an attempt to further penetrate the market and increase sales of its K-cups, which it recognizes as the driver of future margin growth. This strategy is taking its toll on the company’s profitability as GMCR’s sales mix has been shifting more toward this zero gross margin At-Home product, which has resulted in significantly lower YOY gross margins. Thus far, the company has been able to generate improved profitability by offsetting these huge gross margin declines with significant cuts to its SG&A line, which is not a sustainable business strategy.

Although I have questioned GMCR’s razor/razor blade growth model, may further complicate the company’s strategy with its promotion of a product that allows customers to recycle their K-cups. maintains that its product allows customers to reuse each K-Cup up to 20 times by filling it with any coffee or tea, which if true (full disclosure: I have never bought or used the My-Kap product so I cannot vouch for it), could provide real risk to GMCR’s K-Cup sales projections and margin story. Keurig already sells a reusable K-Cup, which costs about $15, but states that Keurig’s reusable product does not make as good a cup of coffee as the K-Cups due to its different design.

The GMCR story is dependent on significant growth in sales of K-cups. Given there are zero profits generated from selling the brewers, a blip in the sales trends of K-cups could be disastrous for the stock.

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US Dollar: The Line That Matters

I wrote about this in my “Early Look” note this morning, and wanted to hammer on the same point with a picture rather than prose.

Someone needs to send this to Obama’s crackberry with a note attached that says ‘look at what the US stock market did in December when the US$ broke this white dotted line.’ That’s it Mr. President – you don’t need a room full of “economists” to make the call. I don’t think it’s any more complicated than that. Break the buck’s $83.96 line, and assets will start to “re-flate” again.

Note that there is a monumental difference between re-flation and inflation. “Re-flation” builds confidence. Confidence perpetuates momentum. Positive momentum is what the US stock market has lost – that positive momentum line in the SP500 is now 873.

If Geithner can break the dotted white line below, the apocalypse cometh bears trekking the grounds in Davos, Switzerland are going to have to deal with me getting bullish like I was in December. If the US$ holds above this line, commodities and US equity markets are going to continue to be clawed on every rally, as they should.

Geithner's Greenback

Geithner's Greenback - haa012709

“There is nothing more deceptive than an obvious fact.”
-Sherlock Holmes
Holmes has always had my vote as having one of the best analytical processes. Since Wall Street is such a fan of storytelling, I have always been surprised that the pundit patrol doesn’t reference this late nineteenth century fictional character more often – maybe it’s because his creator was Scottish!
Scotland is where my wife and I have ancestral roots, so we’re a little biased, but in this case even the British tend to hold Sir Arthur Conan Doyle’s 56 short detective stories in high regard as well. Regardless, whether you’re Scottish, British, or American this morning, we better all hope and pray that the newly appointed head of the US Treasury, Tim Geithner, upholds the principles of deductive reasoning that Holmes did. Lord knows, Geithner’s predecessor didn’t do the required reading.
Rhetorically at least, “no drama” Obama’s intellectual prowess has stated that this US Administration will consider all voices of reasoning. Whether or not he can deliver on his rhetoric remains the bid/ask spread that we have seen narrow from a 69% approval rating in the first week of January to 60% this week (Rasmussen poll). While polls have their biases, all I care about is measuring this delta.
In Obama does America trust? Last time his approval rating tested the 60% line was the week of November the 20th.  From that November 20th bottom of 752 in the SP500, the market climbed that wall of rightly placed socialist doubt right up to a closing price of 934 on January the 6th. Sherlock’s math clocked that 9% approval rating delta at being worth a +24.2% price differential in US market expectations. Does confidence matter to markets? You bet your Madoff it does!
So where do we go from here? As Wall Street execs love to say “Keith, that’s a great question”… and since Obama is calling for all voices of Sherlock style “deductive reasoning”, here’s my advice: Mr. Geithner, you need to walk away from Hank The Market Tank’s “strong US Dollar” mantra, and break the greenback. That’s it – if you want assets likes houses and portfolios to re-flate, that’s all you need to do.
Yesterday, as the US Dollar was taking it on the chin, we were given an appetizer for this re-flation “Trade” – gold was making a 5 month high, oil was ripping higher, and even the Roubini-ites we’re being forced to cover their shorts. At one point, the SP500 took a peak at the 850 line, putting it up a healthy +2.2% on the day. Then reality bit, a few facts about Bank of America hit the tape, the US dollar paired some of her losses, and stocks went right back down, registering a daily peak to trough -2.5% reversal.
Mr. Geithner, let’s put a muzzle on that China is a “manipulator” lingo of your almighty banking forefathers past. Let the Chinese Yuan appreciate and the US Dollar decline. A break in the US Dollar Index of 83.97 combined with a breakdown in Volatility (VIX) below the 45.24 line will get me to invest some of this 69% position my Asset Allocation Model is holding in Cash. If Americans save less cash and invest more of it, you and Larry Summers will need to ask for less of that “G” (government spending). Sustainably break the buck and get the SP500 to close over the 875 line, and the bullish re-flation trade will be a tough one for even the bears not to chase.
Mr. Geithner, as head of the US Treasury, China is now your largest customer. Forget about the good ole days at the New York City Fed – those champagne toasts with Goldman’s ex-CEO turned Destroyer of Capital are not to be forgotten, but to be understood. Investment Banking Inc. is no longer who you need to pander to – you need to patrol them, and all of the moneys that we give them.
Mr. Geithner, Obama’s White House better be all over you on this – you will be both accountable and transparent. Whether or not we trust you is now your game to lose. Some Volcker-like voice of reason is already in motion reminding your boss that one reason that the US Treasury market is shaking right now is because of you. The Chinese took your “manipulator” comment and sold Treasury bonds in your face – after all, don’t forget that that’s what Kenny Lewis and the boys on the bus down at BofA did to them – remember?
We must remember the facts, because the world is watching us real time, and she doesn’t forget. Whether it is Bank of America selling its stake in Chinese banks or the Pandit Bandit thinking he can get away with buying a brand new $50M jet for his cronies at Citigroup and not call it TARP moneys… it’s all one and the same.
Transparency, Accountability, and Trust – these principles take a career to earn and one bad decision to lose. If you don’t want to take this mantra from me, take it from someone else and call it their idea – I am indifferent, because I just want this country to have credibility again. Sherlock Holmes called these “obvious facts” – let’s not be deceived by them any longer.
Best of luck out there today.

Geithner's Greenback - etfs012709


Analysts and the media community consistently reported a 27.3% plunge in December international visitation to Las Vegas through McCarran airport. I will concede that the international data coming out of the airport is very misleading. My junior analyst and crack researcher Rory Green spent time with people at the airport to fully understand the process.

Rather than a 27.3% decline, the number of international passengers through McCarran Airport actually increased 1.2%. Not exactly blistering growth but compared to what was communicated to the investment community, it might as well have been. The following chart details the actually year over year monthly change in international passengers in 2008.

I remain very negative on the near term and intermediate prospects for Las Vegas. The demise of the world economy will put increasing pressure on the overseas consumer’s ability to jump on a plane to visit Las Vegas and the dollar isn’t as cheap as it used to be. However, I do think the Street may be misreading two recent data points, including December’s international visitation number. As we wrote about in “NO NEW GATES NEEDED HERE”, McCarran’s total passenger traffic drop in December, while similar to November, should translate into a lower gaming revenue decline than November’s -16%.

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