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JCP: Game Changers Cost Money

JCP closed up nearly 5% this afternoon following a tweet from the company’s new fashion curator Nina Garcia who said the new prototype is a “game changer.” Game Changers cost money- lots and lots of it.

 

Over the past Week, JCP has provided investors with several updates regarding its transformation from 400 brands to 100 shops which has put the stock back up above $22 from last week’s $19.06 low. Here are some details:

  • Nina Garcia was announced as JCP’s “Resident Style Voice and Fashion Curator” on July 18th; Garcia is currently the Fashion Director of Marie Claire Magazine and Project Runway Judge.
  • On Monday Afternoon, the company released details regarding its first 10 shops that will go into 700 of its 1100 stores by year end and some additional detail around the new format:
    • August is all about Blue Jeans- 6 shops will debut (one in Men’s, one in Women’s per brand) with merchandise from Levi, Buffalo Jeans and Arizona. These will hit 683 of the 1100 doors though merchandise will be available chain wide.
    • The Levi shop will feature 88 washes and 11 cuts ($40 a pair) and will offer shopping help through the denim bar which will be equipped with ipads to provide additional detail on each fit.  
    • September- Izod men’s shop, Liz Claiborne women’s, and one “JCP” branded shop per gender.
    • Checkout Counters will be replaced with seating areas with sofas and long tables boasting built-in ipads and wireless internet.
    • Town Square- Kicking off in August with free haircuts for elementary age students.
    • Eliminating the 96 page monthly book which will be replaced by 2 weekly circulars that will focus on the new merchandise being offered (i.e denim in August).
  • This Morning, the Joe Fresh shop was announced and will hit stores in April 2013 with a 1,000 to 2,500 square foot footprint across 700 stores.

 

As Canada’s largest apparel brand and priced similar to H&M, Zara and Top Shop, we think the Joe Fresh shop is a net positive from a brand perspective given the first 10 shops opening this year are legacy JCP brands with the addition of 2 “JCP” branded shops. Ron Johnson and Team will need to introduce several more new brands to drive the level of traffic and conversion required for the new concept to truly be a “game changer.” Regardless, “Game Changers” cost money- lots and lots of it, and JCP's got none of it (notice the nicely timed REIT sale days enforce end of the q). Sad.  

 

JCP: Game Changers Cost Money - nina garcia COTD

 

JCP: Game Changers Cost Money - Joe fresh shop

 

JCP: Game Changers Cost Money - joe fresh image


LVS 2Q CONF CALL NOTES

At least Bethlehem produced a beat

 

 

"While our quarterly results did not meet my expectations, and were impacted by lower hold on table games play compared to last year's second quarter, higher provisions for accounts receivable at Marina Bay Sands in Singapore, and elevated legal expenses, our financial results reflected solid revenue growth overall and significant cash flow in both Macao and Singapore, as well as the continued steady execution of our Cotai Strip development plan in Macao."

 

Mr. Sheldon G. Adelson, chairman and chief executive officer

 

 

CONF CALL NOTES

  • According to LVS, they would have made $107.5MM more of net revenue if they held normally across the board and EBITDA would have been $932.6MM on a hold-adjusted basis ($88MM of an add back)
    • They only adjusted if the hold fell outside of 2.7%-3% range
    • We obviously got a much lower adjustment when we adjusted to historical hold for each property
  • $29MM impact from larger accounts receiveable charge at MBS
  • SCC has performed well and has been well received by customers. 
  • Investments in Cotai are allowing them to exceed market growth rate
    • Obviously
  • SCC won't truly hit its stride until next year when all the phases are open
  • Given the lack of new supply for at least 3 more years and the new infrastructure coming online, they remain optimistic
  • Hope to start with pilings on Site 3 in November
  • SCC early performance statistics: 
    • Hotel occupancy: 61% in April, 74% in May and 85% in June 
    • Holiday Inn is getting great reviews
    • Win per mass table per day is great
    • Win per slot/ETG is also great
  • LV:  they are renovating 1000 rooms. They are seeing a pick up in bookings for 2013.
  • Macau VIP segment represents about $500MM of their revenue and 25% of their EBITDA.  Feel like that Mass growth is the big opportunity for them.  Has a 45% margin vs. the 12-20% margin of VIP.
  • Singapore's VIP segment didn't grow last quarter but are confident in the future of that property
  • Prepaid $400MM of debt on the US bank facility and pre-paid the Macau ferry financing.  $9.374BN of debt at 6/30 at 3%. Have no sizeable maturities until 2014.
  • Net Debt/EBITDA: 1.5x
  • Cash: $3,529.6MM
  • Expect to spend $500MM at SCC in 2H12 and $500MM thereafter
  • $350MM of maintenance capex in 2012 and $500MM for FY2012. Expect a similar amount for 2013.

 

Q&A

  • Will have 1,000 Mass tables when SCC is fully open and 9,000 rooms.  Visitation may be slowing but the better customers keep on coming. They do believe that VIP will continue to grow.  Have an ability to go to ETG's and slots, especially with higher table minimums at competitors' properteis. Have 7,000 slot and ETG positions.
  • Use of cash: they are considering all of the possibilities
  • Receivables overview:  Think that they are in good shape in MBS.  Since inception, they've had $10.4BN of credit extended.  Collected 91% of credit extended.  Have another 1.9% of the total credit drop in reserve and 29% of receivables reserved.  From a Macau perspective, the growth in receivables is more from junket accounts.  $680MM of receivable over $510MM is related to junkets. They continue to collect from junkets without issue.
  • Expect that they will get 400 new tables from the government by the time they open the last 2,000 rooms in January. There will be some table movement though at September 20th when they open Ph2 since they won't have all of the additional 400 tables. 
  • Their margin is impacted by the mix of VIP play, since Mass takes a while to build at SCC.  The properties are also less efficient when a property opens. Once the property is fully opened, it should have the best margins in the group. 
  • They are not seeing any heightened competition on the VIP side in Macau.  Wouldn't be surprised if people get more aggressive on the slot/ETG side.
  • What is the credit appetite in Macau?  They haven't seen a big change in credit pull back but rather a pullback in customer demand.
  • Any seasonality issues in Singapore?  It's a very chunky market and the play is less seasonable. Its just driven by a few very large players and highly concentrated.
  • There is no indication that the gaming habits of Asian players is going to change
  • Connecting SCC and Venetian through a walkway will be very impactful when its opened by year end
  • There is no reason why SCC won't have great margins.  The real upside is on the Mass side for this property.
  • Only half of the non-gaming amenities at SCC are open at this point. On September 20th, they will open a lot more of the amenities.
  • If they can earn the type of mass win per table at SCC that they have at Venetian and FS that's another $1.4BN and at a 45% margin that would solve their own problems.
  • They have another piece of land called "The Tropical Garden" where they want to develop into 500-800k of shopping mall there which they plan to connect with a covered walkway. They also have more space to add more hotel towers at Venetian.
  • They still don't have a handle on seasonality in Singapore. On the VIP side, they don't have a sense for seasonality.
  • Market share for MBS - Sheldon thinks that share has been moving up. They just have a better property.
  • At these prices, Sheldon would like to buy back more stock.  All the other shareholders want dividends so they will likely do more of that in the future.
  • Comment on the process of Singaporeans to further restrict local visitation to casinos. The government wants to protect the vulnerable people in society against getting into gambling debt.  LVS doesn't think it's an issue if the government restricts visitation from people who can't afford to gamble in the first place. Think that the mass market can continue to grow even with more restrictions.  25% of their visitors are Singaporeans. 
  • They had the extra $29MM charge in MBS because they thought that some of the receivables won't be collected. It's not reflective of a change in their reserve policy.   
  • Unfortunately, Singapore is much more dependent on a small number of high rollers and their visitation is not that predictable. They will try to host more events for their VIPs to come more often. 

 

HIGHLIGHTS FROM THE RELEASE

  • Macau EBITDA: $429MM vs. consensus of $492MM
    • Region wide stats:
      • RC volume: +36.3%  YoY
      • Non-rolling drop: +20.9% YoY
      • Slot handle: +72.5% YoY
    • Our overall market share of gross gaming revenue in Macao also increased to 17.7% frpm 16.0% in 2Q11
    • Venetian net revenue and EBITDA of $649MM and $229MM, respectively
      • RC hold of 2.68%
    • FS net revenue of $266MM and EBITDA of $76.6MM
      • RC hold of 3.05%
    • SCC EBITDA of $52MM on net revenue of $266MM
      • RC hold of 3.12%
    • Sands net revenue of $272MM and EBITDA of $71MM
      • RC hold of 2.58%
  • MBS EBITDA: $330MM vs. consensus of $419MM
    • "Marina Bay Sands in Singapore delivered a steady financial performance, including good growth in its hotel and retail segments, although lower rolling volume, low hold on rolling table games play and higher provisions for accounts receivable negatively impacted our results this quarter"
    • RC drop:  -5.9%
    • Mass drop: +8.2%
    • Slot handle: +15.1%
  • LV EBITDA: $64MM vs. consensus of $95MM
    • Hold was lower this quarter compared to the quarter last year, which negatively impacted our results. Baccarat play was up, but other table games play was down, reflecting overall market conditions in Las Vegas. Slot handle was up 8.2%.
  • Bethlehem EBITDA: $27MM vs. consensus of $26MM

 


LVS 2Q REPORT CARD

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

  • WORSE:  Even on a hold adjusted basis EBITDA fell short of our expectations and the Street.  Moreover, we already had factored in low hold in Macau and Las Vegas. 

 

MACAU

 

MARKET OUTLOOK

  • WORSE:  visitation has slowed.  There will be more aggressive promotional activity in Mass/ETGs segments.  VIP customer demand continues to soften.
  • PREVIOUSLY:  The infrastructure of Macau continues to build, continues to get better and of course, we're dependent on the Chinese economic condition, which we feel is we'll have some level of softness from time to time, but overall is very well positioned for the future. I think over the next five years, you should be talking somewhere between 10% and 15% growth a year.”

MASS GROWTH

  • SAME:  premium mass continues to ramp up
  • PREVIOUSLY:  I don't think on a mass market basis we've seen anything negative whatsoever. 

TABLE ADDITIONS AT SCC

  • SAME:  management still believes they will add 200 mass tables and 1,200 slots in Phase IIA.  LVS is confident that by mid-January, SCC will have 400 additional tables.
  • PREVIOUSLY:  "“We're still getting requests for more VIP rooms in site 6, which we've allocated capital for to build and if we're not under construction now, we're all designed and ready to go to add an additional 60 to 70 tables in VIP on site 6.  The government is committed to lenders to provide 400 tables. They gave us 200 tables for the opening the first of the two mass casinos. And they're going to give us, presumably, the second 200 tables when we go to open our second casino.”

SHERATON RAMP

  • SAME:  will have up to 2,500 Sheraton rooms by Sept 20 (Phase IIA).  Phase IIB will start in Oct 2012 and will feature ~1,500 Sheraton rooms
  • PREVIOUSLY:  "The Sheraton, 4,000 room-Sheraton, which is two phases, will be open fully complete by the end of January and will pen 1,850 rooms, by the end of this September.”

COST MANAGEMENT

  • WORSE:   margins fell from 32.1% in Q1 2012 to 29.5% in Q2 2012.  Q2 2011 margins was 33%.
  • PREVIOUSLY:  “We're already managing our costs. I was looking at the numbers just a couple of weeks ago and our costs are way down right away. I mean, first of all a lot of our costs at the operating level are in the gaming area itself. They automatically reduce if you don't have the volumes, and from a cost management standpoint we run the highest margins in Macau by far, and our company is built now as a high-margin company.”

 

SINGAPORE

 

GROWTH AT MBS

  • WORSE:  we estimate MBS GGR fell 20% QoQ and 8% YoY.   On the bright side, hotel occupancy rose to 99.1% and REVPAR gained 30%.
  • PREVIOUSLY:  
    • “We've gotten to maturity in less than two years. So from now on you're going to see gradual increases in the Singapore market mostly from the VIP scenario because our hotel is running at capacity now and has been for a year.”
    •  “We also have mass market help from the new MRT station, the cruise terminal that will open and...  the Botanical Gardens that will open I think this November."
    • “Marina Bay Sands has become a really a significant retail destination. We have over 300 stores there driving traffic as well. So I think you'll see moderate... but consistent growth."
    • “Our hotel's running in the high 90%s, it's sold out most of the time on 2,500 keys at a very high rate.  The room [to grow] is really in the casino.  I would expect a high single-digit growth there over the next number of years.”

 

OTHER

 

EQUITY CONTRIBUTION TO NEW DEVELOPMENTS

  • SAME:  25% ‐ 35% of total developmental project costs to be funded with equity
  • PREVIOUSLY:  We'll go up to 30% to 35% equity in any property we do or any resort development we do. We will not go above that and we will go for development financing for the rest of that for the rest of those projects.”

NEW DEVELOPMENTS ROIC

  • SAME:  minimum of 20% return on total invested capital
  • PREVIOUSLY:  “20% is our hurdle. Don't forget, that's 20% cash on cash, it's a higher return on equity obviously."

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HedgeyeRetail Visual: CRI Coincidence?

CRI pulled its disclosure on wholesale pricing trends this quarter for “competitive reasons.” We don’t buy it – It’s no coincidence that they’ve added opacity here just as they comp against last year’s price increases…

 

CRI remains one of our top shorts following this morning’s print where it showed early signs of tail weakness.

 

See our quick take and follow up reports for additional detail:

 

"CRI: First Chink in the Armor"

 

"CRI: 2Q Report Card"

 

HedgeyeRetail Visual: CRI Coincidence? - CRI COTD


CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY

CONCLUSION: We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.

 

THEMES AT PLAY: Growth Slowing’s Slope, Deflating the Inflation [of Bernanke’s Bubbles], and King Dollar via The Last War: Fed Fighting.

 

If you’ve been following our highly-differentiated Global Macro research process over the last four years, you’ll know that we rarely anchor on company forecasts for guidance on economic growth. At best, we use them to vet our internal analysis of said trends. The logic behind applying such a limited weight to corporate executive guidance in our process is primarily three-fold: 

  • Like traditional sell-side economists, corporate executives carry a persistent optimistic bias, which typically leaves them reacting to – rather than preparing for – economic downturns;
  • Like traditional sell-side economists, corporate executives tend to streamline current trends into perpetuity when forecasting, often limiting their ability to appropriately risk manage any increase in the probability of exogenous events; and
  • Ironically, both entities (sell-side economists and corporate executives) rely on each other’s work in true circular reference nature when developing their own “independent” forecasts. 

As previously mentioned, we do occasionally find opportunities to vet our existing conclusions with company results and/or guidance. In this example, we focus on Caterpillar Inc. (CAT), which just reported a positive 11.31% surprise in 2Q EPS ($2.54 vs. $2.28). CEO Doug Oberhelman was particularly pleased with the results (all-time highs in revenues ($17.374B) and profits ($2.54/share)), as indicated in the press release: 

  • Reaction to Quarter: “I am very pleased with Caterpillar's record-breaking performance in the second quarter.”
  • Operating Guidance: “We have narrowed the outlook range for sales and revenues and raised the outlook for profit.  The sales and revenues outlook range for 2012 is now $68 to $70 billion with profit of about $9.60 per share at the middle of the sales and revenues outlook range.  The previous outlook for sales and revenues was a range of $68 to $72 billion with profit of about $9.50 per share at the middle of the sales and revenues outlook range.”
  • Economic Guidance: "While we're expecting a record year in 2012, we understand the world is facing economic challenges, and if it becomes necessary, we are prepared to act quickly as we did in late 2008 and 2009.  While we're prepared, the good news is, this doesn't feel like 2008.  Interest rates are low, central banks are prepared to inject more liquidity if needed, and housing is coming off lows, not a peak, and seems to be improving… While we will not hesitate to act if we need to, we believe that actions needed for better world economic growth for the future have already begun… I am cautiously optimistic about the world economy in 2013, very positive on the long-term prospects for global growth and excited about the role Caterpillar will play in making that growth happen.” 

We on the Hedgeye Macro Team “feel” far less optimistic about their quarter (top line growth slowed; margins compressed) and the slope of global growth over the intermediate-term TREND. As the table below shows (sourced from our 3Q12 Macro Themes slide deck; email us for an updated copy), we remain well below consensus growth estimates for a number of key countries and economic blocs globally.

 

CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY - 2

 

CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY - 3

 

CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY - 1

 

Jumping back to CAT specifically, we offer the following analysis from our new Industrials ace, Jay Van Sciver, who recently launched coverage of that sector for Hedgeye with his hyper-contrarian bearish thesis on the airlines industry. To the extent you’d like to see more of his work and/or connect with Jay live, please email

  • “Despite the move up in CAT today, which we view as short covering driven, weak backlog trends support recent underperformance in the shares.
  • Backlogs declined for first time since 3Q 2009, as the company drew down backlogs in today’s “beat.” 
  • As shown below, months of backlog are highly correlated with CAT’s relative performance.
  • Implied orders (estimated as change in backlogs plus revenue) declined 3.0% y-o-y after posting 12.2% growth y-o-y in 1Q2012.  That is a significant deceleration.
  • Something has to give: orders will need to rebound, production will have to be cut, or backlogs will be drawn down.  The current macro data does not suggest a near-term order rebound to us.
  • CAT has been one of the primary beneficiaries of what we view as unsustainably high levels of resource capital investment.  Slowing activity in China is a risk to mining capital spending.
  • Though CAT has an excellent competitive position and a strong franchise, we believe that the shares are overvalued from a cyclically adjusted perspective. 
  • While the months of backlog is still relatively high, historically that has presented an exit opportunity.
  • Implied orders rates now trail revenue, as indicated by backlog declines.” 

CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY - 4

 

BAD CHINA

In looking at their results from my coverage purview (Asia and Latin America), we highlight a couple key negative comments on China that may be flying under the radar to some extent: 

  • “Construction sales declined in the Asia/Pacific region, where a large decrease in China more than offset increases in other Asia/Pacific countries.
  • “The Chinese government has accelerated policy easing, with its second consecutive interest rate cut in July 2012.  Infrastructure spending is running behind the government's target, and we expect the government will introduce supplemental investment programs.
  • Sales in China were also weak during the second quarter of 2012 and were well below the second quarter of 2011, which was a strong quarter for sales in China.” 
  • “As we began 2012, our expectations for sales in China were higher, and we built substantial new machine inventory in the first quarter to support what is usually a seasonally strong quarter.  First-quarter sales were lower than expected, and we ended the first quarter with higher inventory in China.  We developed and are executing a plan for an orderly reduction of China inventory that includes lower production, merchandising programs to improve sales and the export of machines from China to other parts of the world.”
  • We remain very positive on long-term industry growth in China and our strategy to grow our business there.  Our plans for the remainder of 2012 reflect an orderly ramp down of production that considers our entire supply chain in China.  Given the current low rate of sales and the production ramp down, it will likely take the rest of 2012 to reduce inventory to appropriate levels. 

We highlight the following red flags: 

  1. The large YoY decrease in sales to China “more than offset increases in other Asia/Pacific countries”, suggesting to us that A) demand for industrial machinery in China is outright contracting and B) China, being the economic behemoth that it has become is large enough to offset sales growth from the broader region;
  2. They, like many sell-side prognosticators (that may or may not service CAT from a banking/advisory perspective), expect China to “introduce supplemental investment programs” (i.e. fiscal stimulus and/or a state-directed lending program). We remain on the other side of this view with respect to the TRADE and TREND durations (see compendium on China below);
  3. Despite “remain[ing] very positive on long-term industry growth in China” they plan an “orderly ramp down of production” with respect to their “entire supply chain in China” though year-end in hopes of repackaging that product and delivering it to other parts of the world. It remains to be seen if the region can accelerate their demand for industrial equipment with Chinese growth continuing to slow. Given China’s growing role in the industrial supply chain as an end-consumer of raw materials, we’ll take the other side of that bet… 

All told, CAT’s results and guidance on China rhymes directly with what we’ve been saying for months now. Moreover, CAT is not the first major industrial company to come out and talk down their Chinese growth expectations in recent weeks:

 

Sany Heavy Industry Co., China’s biggest maker of excavators, lowered its sales forecast for the equipment as slowing economic growth and government curbs on property market sap demand. Excavator sales may increase 10 percent this year, slower than a previous target of 40 percent, Vice Chairman Xiang Wenbo said in a July 11 interview in Changsha, Hunan province, where the company is based. Sany will still outperform the industry, which may see a fall in demand, he said. 

-JUL 13 via Bloomberg Professional

 

We continue to see signs of slowing growth in Fixed Investment in China (46.2% of Chinese GDP), which being exposed by the accelerated decline in rebar prices, as indicated in the chart below.

 

CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY - 5

 

Moreover, we can’t stress enough our counter-consensus stance on the outlook for Chinese policy, in that we believe the State Council is no hurry to introduce a meaningful fiscal stimulus package or a large-scale state-directed lending spree over the intermediate term. In fact, we wouldn’t be surprised if they were inclined to tighten the screws on the property market further (pending a potential second-consecutive monthly acceleration in property prices here in JUL). Refer to the following notes for our extended thoughts on the Chinese economy at this critical juncture: 

  • CHINA’S INCREMENTAL GROWTH SLOWDOWN CONFIRMED (MAY 23): While Deflating the Inflation remains a bullish catalyst for the Chinese economy, the lag between this event and the turn in both the reported growth data and growth expectations may have just increased. As such, we are of the view that waiting and watching for clarity is the best strategy in the immediate term for China.
    • As an aside, China’s Shanghai Composite Index remains in a Bearish Formation and is down -9.6% since we put out this initial bearish piece on the Chinese economy in this latest cycle. That is far and away the largest decline throughout the region over that duration and is vastly underperforming the regional median gain of +0.5% (same duration).
  • CHINA’S RATE CUT IS LIKELY A BAD SIGN OF WHAT LIES AHEAD (JUN 7): We don’t see the early innings of this Chinese rate cut cycle as a signal to get bullish on China’s economy or equity market at the current juncture. Moreover, we do not find it prudent for investors to increase their asset allocation exposure to commodities here.
  • CHINESE GROWTH: STICKING TO THE CENTRAL PLAN (JUL 13): We maintain conviction in our view that Chinese economic growth is not poised to meaningfully inflect over the intermediate term. Furthermore, we can’t stress how much the late-year transition in leadership or the growing official realization that the 2008-09 stimulus package and central plan (i.e. state-directed lending) contributed heavily to a rapid and potentially unhealthy expansion in credit (+96.6% since the end of 2008) may slow Chinese policymakers’ fiscal/regulatory response [if any] to an incremental deterioration in economic growth. Remember, Chinese banks have yet to see a material deterioration in credit quality (the industry-wide NPL ratio is at a measly 0.9%), so it’s not unreasonable to believe that Chinese policymakers could be saving their “bullets” for a potentially more worthy cause than a purposefully-engineered slowdown in Real GDP growth to +10bps above their official 2012 “target” of +7.5% (announced in MAR).
  • PONDERING CHINESE GROWTH PART II (JUL 17): Contrary to consensus speculation, we are of the view that Chinese policymakers are likely not readying a stimulus package to be announced and administered over the intermediate term that would be substantial enough to meaningfully inflect the slope of Chinese economic growth. As such, it would be prudent to fade any incremental Chinese stimulus rallies for the time being. 

SLIPPERY SLOPE?

Taking a 30,000 foot view of our active macro themes, a bevy of key economic and financial market data points across the globe have brought forth renewed concerns about the slope of global growth. A few of the more noteworthy recent callouts include: 

  • The US Treasury 10s-2s spread, a historically reliable leading indicator for the slope of US economic growth, has narrowed in recent weeks to 119bps wide – the tightest spread since JAN ’08!
  • Chinese, Japanese, Hong Kong, Thai, and Vietnamese Export growth figures each slowed in JUN (to +11.3% YoY, -2.3% YoY, -4.8% YoY, -2.5% YoY and +15.2% YoY, respectively).
  • In the Eurozone, the composite Manufacturing PMI ticked down in JUN to 44.1 from 45.1 (a 3yr-low) and the composite ZEW Economic Expectations Index dropped to -22.3 (the lowest since JAN). 

CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY - 6

 

We could continue listing data points, but the point isn’t to belabor what has already been reported; rather, we continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations.

 

Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently. Catalysts on this front include: 

  • AUG 1: Federal Reserve FOMC Rate Decision;
  • AUG 23-25: The annual central bankers confab in Jackson Hole; and/or
  • SEP 13: Federal Reserve FOMC Rate Decision. 

We conclude this piece with how we started this note – highlighting CAT’s cheery guidance, which anchors heavily on aggressive exceptions that the world’s central planners can and will “save the day” in the near term. Coincidentally, their current outlook in on this topic rhymes a great deal with their mid-2008 outlook – the last time they were forecasting record full-year Revenues and EPS while accelerating CapEx on hopeful expectations of incremental Polices to Inflate

  • 2Q12 Press Release: “Brazil started easing monetary policy with lower interest rates in late 2011, and we are now seeing improvement in our business there.  China has started taking action, and we expect that further monetary easing and investment initiatives in China should help economic growth in late 2012 and 2013… It will likely take some time for the Eurozone to fix its problems, but we expect that monetary easing by the European Central Bank, a commitment to resolve debt issues and more focus on economic growth should help stabilize the situation and lead to better prospects in the future… Eventually, we expect the U.S. Federal Reserve will resume expanding its balance sheet…”
  • 2Q08 Press Release: “Eventually central banks [in developed countries] will return to cutting interest rates… Many developing countries are experiencing increased inflation, and some have tightened economic policies. However, most counties have moved cautiously, and policies remain expansive. We expect strength growth in construction to continue… Strong sales outside North America are being driven by solid economic growth in the developing world, continued investment in infrastructure throughout much of the world and commodity prices for metals, minerals and energy levels that encourage our customers to invest.” 

CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY - 7

 

The moral of this story is rather simple: don’t get caught offsides by buying into corporate hope.

 

Darius Dale

Senior Analyst


IGT FOLLOW UP

Here is some follow up to our earlier IGT note

 

  • Earnings
    • We think the low end of the range is likely, so $0.31-0.32 vs. guidance of $0.31-0.37
    • Management continues to defend the quality of the quarter with no acknowledgement that it was one of their worst in a long time.  They are adamant they will hit their annual guidance.
  • Stock buyback  
    • We still don’t have a good explanation on the terrible timing other than that it took a while for the Board to approve and perhaps the quarter’s results were not obvious at that point
      • The buyback was a Board decision and they only meet 4-6x a year so the timing was a bit disconnected with the quarter.  They still view the stock as an attractive value in the long term. 
      • We still think they needed the accretion.
  • North American product sales
    • Since IGT only has 2 buckets in product sales, used units fall into the box sale bucket and that’s where they have always been.  However, typically there are only 100-200 used unit sales per quarter vs the 1,000 used units recognized this quarter. 
    • The used units were old participation products that IGT had in its inventory so the ASP was low, but since they were already either entirely or mostly depreciated, the margin was high
    • The 500 deferrals in NA were primarily related to IGT’s Baton Rouge shipment.  Only 1/3 of their 400+ units were recognized in the quarter.
  • International product sales
    • The 500 deferral units were related to Peru and Argentina
      • In Peru, IGT has a new distributor that they have starting shipping to last quarter but haven’t been able to recognize the units yet
      • In Argentina, the new import restrictions put in place by the government in February 2012 have caused considerable delays for IGT’s products to clear customs.  There is currently a WTO suit against Argentina’s import-substitution policy and other restrictive measures put in place.
    • IGT still expects double-digit international shipment growth for the year
      • In 2011, they recognized 14,700 units.  YTD, they have recognized 10,300 units.  This implies F4Q recognition of at least 5,870 units.  Needless to say we are very skeptical.
      • Growth to come from APAC and Latin America
      • Expectation of recognizing the 900 units that have been deferred over these last 2 quarters should help
  • IGT expects to ship 3,000 units to Canada next quarter
    • If they do, 2012 shipments will represent 44% of their current awards from Quebec (7,200) and Atlantic Lottery (1,612)
    • There are still 3 other provinces to award replacements
  • North American non-box sales did not include recognition of the Revel system
    • IGT hopes to recognize revenues from Revel in FQ4

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 80.28%
  • SHORT SIGNALS 78.51%
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