Surprisingly solid results and guidance



“While second quarter regional gaming market revenues generally softened from the pace of the first quarter, six of the sixteen properties that Penn National Gaming operated for both periods recorded year-over-year revenue increases. More significantly, eight of these sixteen properties generated adjusted EBITDA gains in the second quarter relative to the comparable year-ago period.  Reflecting these results, our second quarter revenue and adjusted EBITDA both exceeded guidance."


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




  • Believe that they had a good quarter. View this year as a transitional year and that's what is turning out to be given all the openings and competitive pressures. Therefore, they are pleased with the quarter's results.
  • Relative cannibalization in the quarter was what they thought it would be at the company level. 
  • Relative to guidance, Columbus was already factored into 4Q.  They did increase the guidance for CZR St Louis (2.5MM of pre-opening but haven't included the EBITDA contribution or related interest impact given the uncertainty of timing).  D&A guidance did increase - which includes $4MM of accelerated D&A for the Ohio tracks. 
  • Compared to last year, in 3Q, there was $20MM of EBITDA associated with the sale of Maryland Jockey Club
  • There are also $5MM of pre-opening expenses in 2012 vs. 2011
  • 11 of their properties grew EBITDA margins. They are doing a really good job on keeping a handle on costs and reacting to the local environments
  • They do not assume any improvement in the business environment for the balance of 2012



  • Toledo:  slightly surprised with good June. Seeing good trends in developing their database. F&B is really exceeding their expectations.  Dealers are becoming more efficient, so there should be ongoing improvements to their table performance. They grew the market in Toledo (i.e. Detroit area) which is really positive.
  • Columbus: What they have seen in Toledo, doesn't necessarily translate to Columbus.  Toledo is a more "gaming experienced" market than Columbus. Most of the Toledo surprise is because the market has been exposed to Detriot gaming for a while which could have resulted in quicker penetration.
  • MD Live impact on Charlestown: Still very early. They are still expected to add more product over the next few months. The impact has been a little less than they expected, but it's still really too early to say. MD Live also has an impact on Perryville and Penn National to a lesser extent, so overall, it's been somewhat in-line with what they expected. Again, the first month impact is usually not the full impact of the takes another few months for things to settle out. 
  • Governor has until Aug 20th to expand legislation in order to get on the ballot in MD.  They view the whole process there as sleazy. They have argued that slots at the racetracks is really the only solution and yet the government has not been receptive to them and prefers a "backroom" deal with National Harbor. High level of disgust with the process. Even if they come out with a "competitive" bid process, it likely won't be "competitive."  Clear that the "fix" is in.
  • Was the HET transaction one off or are there more one off deals at sub 8x to be done? They are always interested in building their roots in key markets in the US at the right price. Have their "hands full" but are always looking for opportunities. They are also looking at international opportunities. PENN's strategy is simply growing FCF/share. That underlies all they do, not just growth for growth's sake.
  • Returning cash flow to shareholders? They will do what they can to increase FCF/share which could include share buyback...they do have the preferred maturing in 2015.  Redeeming that instrument is an attractive option that will have a dramatic impact on increasing FCF. That said, its not the only option they look at.
  • They have not changed the impact of MD Live on the 3 properties they thought it would impact. 
  • Riverside is the closest casino to Kansas Speedway and they expect it to have the largest impact there. They have tried to gain share from their competitors though who have been very aggressive at maintaining their slot business. Generally the margins there have held up at Riverside, despite the double digit revenue declines. Speedway is still continuing to ramp, especially on the slot side.
  • Cash: $204.1MM 
  • Debt: bank debt $1775BN, 2.1MM of cap leases; bonds 325MM
  • Capex 184.5MM (154.2MM project capex and 30.2MM maintenance capex) 
  • $3MM of capitalized interest; Guidance of $2.2MM in 3Q and $800k in 4Q
  • Project capex guidance: 160MM (3Q), 88.9MM (4Q)
  • Maintenance capex guidance: 23.7MM (3Q), 21.2MM (4Q)
  • $10MM application fees on Ohio VLT's in the 3Q but not a lot of project capex related to the Ohio tracks in 4Q. 
  • Consumer trends: Things haven't gotten any worse, they've been stable. Things are "ok".
  • Impact on Lawrenceburg from Scotia? They are seeing an impact. The property generates almost all of their impact from Ohio. They were a little surprised about the severity of the impact given the limited facilities there. However, they believe that Columbus may have less of an impact then they expected... they also expect an additional impact from Columbus opening.  So they overall estimated impact hasn't changed.
  • Sioux negotiations: Remain mystified by some of the parties in Iowa. State has decided that they prefer land-side properties.  Can't allow the state to proceed with the precedent that they are setting for other operators. The idea that you can pull a successful license from a high performing operating is "madness". They had been in discussion with their partners and the state to move the site. Then the commission announced that they would do an RFP. Then they came to an agreement with their partner to move their site, but the commission rejected that and decided to move forward with an RFP. However, the events underway have not impacted the performance of the facility.  They hope that the commission realizes that PENN has done a great job operating that site and that no one will really do a better job there. PENN has no intention to cease operations there but they can't control the other side. This will be a big fight. 
  • St Louis: how much capital do they need to invest to convert the property to a Hollywood? They are pleased with how the property is doing in the interim period. Still developing internal budgets for what they want to do. Timing is still 4Q, including getting through the regulatory process. It's also complicated getting in a place to being able to operate the property since CZR's has a much more centralized operating model. Mgmt team is changing out, which is not their norm. Most of the guys there now are leaving for other positions at CZRs.
  • Canada: they will be meeting with representitives in Ontario to explore opportunities in that province. They are very early in the discussion process.
  • Hoping to break ground before end of 2012 on the Ohio tracks. They will be very disciplined on spending capital to make sure that they get a good return: $250-275MM/per facility capex.
  • Thinks that i-gaming is more likely to be a state by state route. They are in talks with a number of parties but haven't committed to anything. They are also fighting against States giving the lotteries the i-gaming opportunity vs their casino operators.
  • Scotia Downs: more challenging location and not up to the same standard as their Columbus facility. Not a big read-through to their Columbus property. They are doing well there. 
  • Impact of Baton Rouge? Have been open about it being a disaster in terms of impact on PNK and PENN. Expect a pronounced impact since that market has been shrinking.  Would love to be wrong on this one. They just don't believe that PNK will be able to turn Baton Rouge into a destination market.
  • LV locals:  Still a very sluggish market. Promotional activity is a little more rational than it was. They continue to pair back their promotional activity as well.
  • Don't anticipate any impact of VLT's in IL since many facilities already had illegal devices. Didn't have an impact in West Virginia.
  • Their revenue guidance implies big declines in 4Q: expect cannibalization impact, Baton Rouge kicks off in September, Aurora and Joilet should continue to see some declines. Saw very little impact when Rivers opened up. Riverside impact of Speedway.
  • All of the Ontario licenses are going to be up for bid to be privatized. Not sure about CZR's Windsor.



  • Guidance: 
    • Net Revenues: 3Q: $699.3MM (below consensus of $729MM);  FY12: $2,872.5MM (below consensus of $2,921.5)
    • Adjusted EBITDA: 3Q: $184MM (below consensus of $188MM);  FY12: $769MM (above consensus of $765)
    • EPS: 3Q: $0.55 (below consensus of $0.59); FY12: $2.46 (below consensus of $2.51)
    • FY12 Share count: 105.9MM 
    • Pre-opening of $24.3MM in 2012 and $8.5MM in 3Q
    • D&A of $243MM in 2012 and $61.2MM in 3Q
    • Non-cash stock comp of $29.7MM and $7.2MM in 3Q
    • 39% tax rate
  • "Reported adjusted EBITDA was impacted by $0.8 million of costs not anticipated in the guidance related to our agreement during the second quarter to acquire Harrah’s St. Louis, which we anticipate will close in the fourth quarter. The Company’s second quarter 2012 adjusted EBITDA margins declined compared to the prior year due to a $6.6 million increase in preopening and acquisition related transaction costs. However, adjusted EBITDA margins are consistent for both periods once these costs are excluded."
  • "Second quarter results benefited from a full quarter’s contribution from M Resort which we owned for just one month during last year’s second quarter, as well as a full quarter’s contribution from our joint venture at Hollywood Casino at Kansas Speedway which opened February 3. In addition, we benefited from approximately one month of results from Hollywood Casino Toledo which, to date, has performed very well."
  • "We have seen continued positive results across the organization in terms of enhancing operating efficiencies and maintaining a disciplined approach to marketing and promotional activities."    
  • "Harrah’s St. Louis.... acquisition will be funded through an add-on to our existing Senior Secured Credit Facility, which will result in a short-term increase in our total debt to adjusted EBITDA leverage ratio to 3.32 times from 2.79 times at June 30, 2012.  We currently expect the... transaction to close in the fourth quarter of 2012, at which time we will re-brand Harrah’s St. Louis with the Company’s Hollywood-themed brand, which is now successfully deployed at twelve of our properties across the country. We are currently establishing the budget for re-branding the facility, refreshing areas of the gaming floor and aligning our IT and reporting functions"
  • “With the late June filing of our Video Lottery Terminal (VLT) license applications, as well as our formal request to relocate our Beulah Park racetrack in Columbus to the Mahoning Valley and Raceway Park in Toledo to Dayton, we are making measurable progress towards our planned construction of two new $150 million integrated racing and VLT facilities... The state will receive $125 million per facility in licensing and relocation fees, as well as a new recurring tax base, while the Company believes the facilities will deliver attractive returns on invested capital."
  • "We are pursuing new gaming opportunities in Western Massachusetts; for our jointly owned racetracks in Texas; and in Maryland where we are advocating for legislative approval for slots at our Rosecroft Racetrack in Prince George’s County to help provide a long term solution for the state’s struggling horse racing industry. Whether Governor O’Malley will call a Special Session of the Legislature to consider gaming expansion remains to be seen, but Penn National will continue to aggressively push for the inclusion of Rosecroft as a potential sixth gaming location in the state at the current gaming tax levels."
  • “We are disappointed with the Iowa Racing and Gaming Commission’s recent decision to not approve an extension of our operating agreement with our qualified sponsorship organization through March 2015 as well as their decision to request applications for a new land based facility in Sioux City. We have filed a lawsuit to protect our interests and continue to explore our options related to this matter."
  • Our revised 2012 guidance assumes, among other things, a continuation of recent consumer trends, the current expected opening date for our Columbus facility, and the impact to operating results in several markets related to new competition as outlined in the assumptions which precede the guidance later in this release


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



  • SAME:  There wasn't much change in guidance (it was just a little better) and the quarter was generally in-line.  Given the pessimism, however, PENN performed quite well.  




  • SAME:  has not gotten better but not getting worse on consumer spending behavior


  • MIXED:  In the Kansas City market, ASCA, CZR, and to a lesser extent, ISLE have been very aggressive in preserving their slot business but PENN is not going to be undisciplined in its reaction.  LV locals promotional market has been slightly more rational than a few months ago.  
  • PREVIOUSLY:  "There's rational promo environment out there."


  • SAME:  Cannibalization, overall, was in-line with management projections.  Maryland Live! has adversely impacted Charles Town and Penn National properties.
    • "It's clear that the cannibalization immediately is not as strong as what we've been indicating in our previous thought process. So that doesn't mean that the cannibalization doesn't happen. It just seems to be a little bit more delayed than we had in our original numbers."
    • "Maryland Live! versus Charles Town, I mean, certainly we are incorporating a bit of that. We think that the cannibalization, original cannibalization thoughts may have been a little bit accelerated in terms of the immediate impact. So we have pulled that back just a little bit."


  • WORSE:  LV locals market remains sluggish 
  • PREVIOUSLY:  "We started to see a little bit of improvement in the Boulder Station numbers for the Las Vegas locals....continue to show improvement to the overall performance in the M. But again, we're still early on in this, and it's going to take a couple more quarters going forward into this year and into next year for this to completely take hold. So we're off to a decent start this year, but there is more to come."


  • SAME:  L'Auberge Baton Rouge will be a 'disaster' for the Baton Rouge market
  • PREVIOUSLY:  "I think there is going to be very, very modest growth in this market, and I do think there is going to be significant cannibalization of the two existing casinos that are in that market. So we don't anticipate that there is going to be a good story in Baton Rouge once Pinnacle does open there. So we think the market is fairly well saturated and there will be modest overall growth. Probably not too different than what you're going to see in Atlantic City with the Revel opening that just occurred, given how saturated that market is, we see similar kind of effect in Baton Rouge. So we're preparing for lower business volumes and therefore ready to adjust our cost structure to accept a new paradigm of business levels."

UA: Full Speed Ahead

Under Armour (UA) reported better-than-expected Q2 earnings this morning. That’s good for them because we expressed concern over a full blown sell off like Chipotle (CMG) or Nike (NKE) experienced when they reported. Instead, as of writing, the stock is up over 11%.


The company has solid growth and beat the Street consensus on multiple metrics including revenue, operating margin and an overall improved balance sheet. But the real story here is footwear. 



UA: Full Speed Ahead - UA Footweartime



Under Armour has tried twice before with footwear and has essentially fallen flat. After all, who needs another Reebok/Nike/Puma/etc., right? This time around, with the introduction of their Spine Technology, used in the Spine line of running shoes, revenue is off to a solid start.


Footwear revenue came in +44% vs. +26% though only 12% of sales. This is where they have the biggest opportunity given they’ve fallen short on the execution and design side in the past. Now they’re crushing it and they just released their best product yet which is just starting to drive sales. Consumers are definitely getting excited about UA sneakers.


Keep in mind footwear is at a lower margin than apparel so as market penetration grows, it will pressure margins but at the same time, UA will offset this as they grow out their direct-to-consumer business vs. wholesale which carries an even higher margin.


Another note to keep in mind is that UA will bring the Spine technology over to their professional athletic apparel. Football and basketball shoes will get the Spine treatment soon enough; there’s always room for endorsements from all star athletes, too. 

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 80.46%
  • SHORT SIGNALS 78.35%

Heads or Bails?







Moody’s came out last night and lowered their outlook on Germany and the Netherlands’ credit ratings. While Angela Merkel’s AAA rating remains intact, the curtain is being pulled back, revealing that Germany has the same #GrowthSlowing problem as everyone else. Estimates floating around now guess that German Q3 GDP could even turn negative on a year-over-year basis; the consensus is up +0.5%.



Our idea of a country being “Too Big To Bail” isn’t some pipe dream we came up with – it’s reality. Bailout mechanisms like the IMF and EFSF only have a finite amount of funds and it’s not exactly trillions upon trillions of dollars either. Spain and Greece go and ask for more money every week, like spoiled children going to the shopping mall.


And then there is Italy. Italy has over $1 trillion of debt maturing in the next 12 months. The country will have a tough time with austerity measures, too, we’d imagine. This is a country truly too big to bail.



Seriously, holler at the US dollar. As Keith mentioned on The Kudlow Report last evening: get the dollar right and you’re going to get a lot of other things right. We’re bullish on the USD and thus we’ve had a fairly good time watching things like Brent oil, the EUR/USD and gold move lower as the dollar goes higher. The commodities game is basically winding to a close since the Federal Reserve is out of bullets.




Cash:  Flat    U.S. Equities: Up


Int'l Equities: Up           Commodities: Flat


Fixed Income: Down     Int'l Currencies: Flat





This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.







SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.








Tweet of the Day: “So this is it. A battle three years in the making. The US Housing Market vs Europe. Good luck, gentlemen. $$” -@ReformedBroker


Quote of the Day: “In great affairs men show themselves as they wish to be seen; in small things they show themselves as they are.” –Nicholas Chamfort


Stat of the Day: The Russell 2000 has dropped over -5% since July 4, snapping both our TRADE and TREND lines of support.



In preparation for WYN's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “We've been generating between $600 million or $700 million of free cash flow or $1 billion of available cash flow because we've stated that we are not afraid to lever up if we have additional EBITDA that will allow us to borrow more and still maintain our bottom of investment grade rating.  So, that's been a heavy focus of our business over the last couple of years.  Also, a heavy focus on growth, all of our businesses are growing and they have different attributes that are growing both domestically as well as internationally.”
  • “Europe represents about 15% of our overall EBITDA.  The largest business we have there is Vacation Rental business… largely focused in Northern Europe.  Our three largest markets for product is the UK, Holland and Denmark, and those three countries plus Germany represent the four main source markets for us. It was very resilient during the last downturn. We continue to see a stable environment for our rental businesses over in Europe. We've said that that's what we expected. When we entered the year, we said that's what we saw through the first quarter after the first quarter call, and now with April and May in the books, we'll see the exact same thing." 
  • “We had expected kind of a mid-single digit VPG growth and we ended up with a, I think, 11% VPG growth for the first quarter. We're not suggesting that that's the pace that we're going to remain at going forward.”
  • “We're continuing to see great growth in that Chinese market. I think we're doing an okay job there. I think we could frankly be doing a better job and that's not a knock on anybody who is doing the effort over there. It's just the opportunity is so large and I think we have the opportunity to even be doing better than we're doing right now.  Super 8, eight is a lucky number in China, so we got lucky with that brand. Wyndham is growing very rapidly. Our pipeline on Wyndham is tremendous. Howard Johnson is actually a stronger brand in its product quality and presence in China than it is in the U.S. Last time I was over in Shanghai and stayed at our Howard Johnson in Shanghai it's a beautiful, beautiful product."
  • "I don't see us ever going back to the model we had before where we were building at a pace of $600 million of build a year in order to fuel the kind of growth that that business was on. Right now, we're spending $125 million a year to finish the development of inventory that we already have on our balance sheet. And that's a pace that we'll be at for the next eight to 10 years. And then after that we may go more heavily on this WAAM model and not even have that much development in the future."





  • "Vacation Ownership had an outstanding quarter, supported by strong consumer travel in the U.S. and continuing progress in optimizing marketing efficiencies. And Exchange and Rental was highly effective in managing a difficult operating environment in Europe, as well as limited growth in the broader timeshare industry."
  • "Our board has approved an additional $750 million to be added to our share repurchase authorization.  We continue to believe that share repurchase offers a compelling return, and with the $750 million increase as of market close yesterday, we have $940 million available in our share repurchase program."
  • "We expect our European vacation rental business to remain stable overall due to the strength and resiliency of our portfolio of established brands and customer bases as well as our strong experienced management teams."
  • "Since our last conference in September of 2010, there's been an obvious improvement in the mood and outlook of our franchisees and partners. Many of our suppliers saw increased order and lead activity, and almost without exception, the owners and managers I spoke with strongly felt that things were improving. And hotel owners are looking to invest in their hotels as well. So in addition to the numbers we are seeing, this is great confirmation that for us, the lodging and recovery is firmly established."
  • "Wyndham Hotel Group continues to make progress in executing its Apollo initiatives, which is a series of technology projects focused on improving our value proposition to franchisees. Our franchisees will be able to measure our results by the number of direct room nights we deliver to overall bookings, primarily through online strategy. Our goal is to capture the maximum amount of online traffic and then convert these online visitors to stay-in guest. Remember that the launch of our new hotel brand websites and improved content were the first step in our Apollo plan to drive more room nights through our online direct distribution channels. Preliminary results have exceeded our expectations with brand booking increases averaging over 10%."
  • "In 2011, we piloted TripAdvisor ratings and reviews on Industry research indicates that up to 50% of consumers will not book a hotel without reading a review. Making ratings and reviews readily available on our own brand sites ensures consumers don't have to leave our site to get that information and ultimately book us. We saw an approximate 30% increase in bookings during the pilot period.  This past quarter, we rolled out TripAdvisor to the majority of our websites and will be fully implemented by the end of May. In conjunction with the rollout, we launched WynReview, a suite of tools and services designed to help our franchisees manage their online ratings and reviews. We expect our affiliation with TripAdvisor, one of the first in the industry, to drive conversions as well as support brand quality."
  • "We are also excited about our new mobile websites. By the end of next year it is expected that more people will access the Internet using a mobile device than a computer. Research indicates that nearly 65% of mobile bookings are made on the day of arrival, many within five miles of the hotel. Based on the narrow booking window of our consumers as well as the distribution of our hotels, we feel this represents a significant opportunity for us to capture the on-road connected traveler." 
  • "In the second quarter, we expect to launch two significant initiatives. First, in North America, we will consolidate 23 Rental websites into a single improved site. Second, in Europe, we will integrate the inventory and reservation platform of our UK cottages, parts and lodges brands into a common property management system, a change the will enable further yield management and operational efficiencies." 
  • "The strength of RCI's technology continues to pay off with online transaction penetration growing to over 40%, up more than 400 basis points from last year."
  • "We recently signed our first WAAM agreement for our WorldMark by Wyndham product. Located in the South Mountain region of Arizona near Scottsdale, our fifth WAAM deal is a purpose-filled timeshare project that will nicely complement our three existing Arizona locations within in the WorldMark portfolio. We expect to start sales on this product in the fourth quarter."
  • "We expect VPG growth to moderate somewhat throughout the year as we lap the rollout of the credit prescreening program. Consistent with last year, we expect to add 27,000 new owners in 2012."
  • "We believe that our Hotel business will have good margin progress by the end of the year – but at least on – at this quarter basis, we had higher marketing spend than we had last year."
  • VOI mix: “It's about 65%-ish upgrades and 35% new owners”

President Obama's Reelection Chances

The polls have been heating up and we have ourselves an official reversal. If you’ll recall, over the last four weeks, President Obama’s chances of being reelected climbed for three weeks straight until holding flat last week according to the Hedgeye Election Indicator (HEI). This week, the President’s odds of being reelected dropped 70 basis points (-0.7%) to 57.1% chance.


Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.


President Obama's Reelection Chances - HEI

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