For the first time in five quarters, MPEL could miss the Street, but at 7x current year EBITDA, should we really care? 



MPEL could come in just a tad below consensus EBITDA estimates this quarter.  Pretty good performance considering the LVS and WYNN punts.  The stock is down 57% since its 52 week high on April 26th so expectations cannot be too high.  Based on our below consensus estimates, MPEL is trading at just 7x 2012 and 6x 2013 EBITDA – and that’s before we give the company any credit for Macau Studio City or the pending deal partly owned and managed by Belle Grande Manila Bay.  Investors must really be afraid of the Macau VIP outlook.


We estimate hold played a small role in the quarter of around a $4MM EBITDA benefit.  CoD held a little high, while Altira held a little low.  We are projecting $212MM of EBITDA for Q2, which is 3% below consensus of $219MM.  Consensus estimates have factored in hold of 2.94% for CoD (we’re at 2.98%) and 2.8% for Altira (vs. HE at 2.75%).


While most investors are worried about the slowdown that’s been occurring in the VIP market, we would point out that MPEL’s mass/slot business should grow about 28% YoY in 2Q12 and has averaged 49% YoY in the last 3 quarters.  MPEL remains the cheapest concessionaire with operations on Cotai Strip with two large projects in the pipeline and a multiple of just 6x 2013.



2Q Detail


We estimate that City of Dreams will report $704MM of net revenues and $185MM in EBITDA (2% below consensus)

  • Our net casino win projection is $682MM
    • VIP net win of $400MM
      • Assuming 15.5% direct play, we estimate $19.3BN of RC volume (flat YoY) and a hold rate of 2.98%
      • Using CoD’s historical hold rate of 2.87%, EBITDA would be $7MM lower and net revenues would be $18MM lower
    • $243MM of mass win, up 37% YoY
    • $38MM of slot win
  • $23MM of net non gaming revenue
    • $22MM of room revenue
    • $14MM of F&B revenue
    • $23MM of retail, entertainment and other revenue
    • $37MMM of promotional allowances or 63% of gross non-gaming revenue or 5.4% of net gaming revenue
  • $407MM of variable operating expenses
    • $334MM of taxes
    • $61MM of gaming promoter commissions in addition to the rebate rate of 90bps (we assume an all-in commission rate of 1.21% or 40.8% on a rev share basis)
  • $25MM of non-gaming expenses
  • $87MM of fixed operating expenses flat QoQ

We project $216MM of net revenues and $38MM in EBITDA for Altira (5% above consensus)

  • We estimate net casino win $209MM
    • VIP net win of $281MM
      • $10.2BN of RC volume (23% YoY decrease) and a hold rate of 2.75%
      • Using Altira’s historical hold rate of 2.81%, we estimate that EBITDA would be $3MM higher and that net revenues would be $6MM better
    • $26MM of mass win, up 12% YoY
  • $7MM of net non gaming revenue
  • $146MM of variable operating expenses
    • $120MM of taxes
    • $24MM of gaming promoter commissions in addition to the rebate rate of 96bps (we assume an all-in commission rate of 1.19% or 43.3% on a rev share basis)
  • $3MM of non-gaming expenses
  • $29MM of fixed operating expenses in-line with 1Q

Other stuff:

  • Mocha slots revenue and EBITDA of $36MM and $9MM, respectively
  • D&A:  $96MM (guidance of $90-95MM)
  • Interest expense:  $25MM (guidance of $23-25MM)
  • Corporate expense:  $20MM (guidance of $18-20MM)

HBI: Needs a Good Dose of ‘04

Conclusion: This company smells so much like it did at the time it was spun out of Sara Lee. We think that the market is giving the company too much credit in blowing through historical profitability, and out-earning the  best brands in the business. The consumer is unlikely to be that forgiving.



We think that a whole lot of historical context is needed in looking at this HBI quarter. The reason is that in reconciling the company’s guidance for earnings and cash flow for 2H and 2013, you need to go back in time to 2006 and imagine that you’re the analyst at a buldge bracket brokerage firm that just got the call from your banker regarding the mandate to lead the spin-off from Sarah Lee (hint hint).


Think of the following.

1)      HBI is guiding for 2H EBIT margins to come in between 12.5-13.0%, and that was unprescedented. Its’ historical 2H peak is 11.6%. For the record, Nike and Ralph Lauren will be lucky to land those margin levels in the back half.

2)      Getting long term debt to $1bn by the end of 2013 means that HBI needs to generate well over $600mm in free cash flow next year. That’s about 35% higher than anything HBI ever reported.


Now here’s the interesting part. When did HBI print those margin levels? In 2004-05. And the peak free cash flow numbers? In 2004-05. When did Sara Lee spin-out Hanesbrands? 2006. If there’s anything that the company made no secret about way back then were the contentious ‘discussions’ between SLE and HBI because it was being spun out with such a disproportionately high debt burden. In addition to being saddled with debt, SLE had underinvested in HBI in the 2-years prior (SG&A), knowing full well that it would be monetized over the intermediate-term.  The punchline is that we’re talking about achieving margin and free cash flow rates well above those realized when the company was being dressed up to maximize the amount of capital that ultimately ended up in SLE’s wallet – and leaving HBI in a multi-year hole in the process.


So the question is…can they get to these levels?

Yeh…perhaps. But a lot needs to go right. Was I the only one who was disturbed that Outerwear margins were down 1,200bps, International was down 1.8%, and most notably Direct to Consumer was DOWN 3%? DTC (which is largely should never be down for any company. Period.


The View on Inflation is All Wrong!

The most troubling thing from my perspective is this prevailing view that ‘inflation is good’ and that the recent raw material cycle has ‘broken in’ the retailers like oil to a new baseball glove, conditioning them to pay higher prices in the future. That’s an assumption that we don’t think belongs in any good risk management process.


Ultimately, the consumer will decide if the inflation will sustain itself. Not the retailers. Just because costs change, it does not mean that the consumer’s perceived value proposition will change. In the context of the value proposition, will the consumer be cool with Nike getting a lower margin than HBI? I know that sounds like a ridiculous question, as the consumer is not looking at comparative margin charts. But they are pretty smart with where their dollars go, and beyond the course of several quarters, this is a question that is not only 100% valid, but one that needs to be asked. When the answer is ‘No’ it always leads to violent swings in a given company’s results relative to plan.


It’d be unfair not to mention that there is a pretty positive angle here. Even if EBIT growth is flat this year, we get 300-500bp of EPS growth from delevering. You’ve got to hand it to the company in that they have systematically chipped away at the $2.6bn debt burden they were originally handed, and are now sitting at only $1.65bn. Next year, lower interest expense alone gets HBI 12% earnings growth.


In addition, the working capital change this quarter was nothing short of astounding – with days inventory on hand off by about 36 days. Much of that is due to the yy change in raw materials costs, but the numbers are what they are. And they’re positive. The question, as noted above, is whether the retailer and consumer will allow them to keep it.


Our take on the Stock

In the end, the consensus is right in line with this margin and cash flow guidance for this year, and is at $3.14 next year – in line with management’s continued comment of a ‘potential’ EPS in the ‘low 3s’ in 2013. We're 5-8% lower in each period.


On these numbers, the stock definitely looks cheap at about 10x. But the reality is that it still has debt, and a cash flow outlook that we think is far less stable than the market thinks as the mid-tier landscape is rattled by JCP. At nearly 9x EBITDA, we can think of a dozen other places to invest our capital.


Brian P. McGough

HBI: Needs a Good Dose of ‘04 - 7 31 2012 8 33 20 PM


Cautious on domestic REVPAR


  • REVPAR growth may have peaked in June 2012.  Based on our model, which projects sequential REVPAR growth on a seasonally-adjusted dollar basis, the 2nd half of 2012 will show a sequential slowdown in YoY REVPAR growth.
  • This model does not take into account macroeconomic issues and with the typical lodging lag, our estimates could prove aggressive
  • Obviously, REITs have the most leverage but among the hotel brand companies, the more cyclically-sensitive lodgers (more hotel ownership) like Starwood and Hyatt are more exposed than a Marriott



HedgeyeRetail Visual: JCP Shops Ready to Go?

We are the first to admit that ‘Research by Anecdotes’ is a low-ROI way to invest, and that visiting a single store is hardly representative of the other 699 locations receiving JCP’s August Denim Shop update. But let’s face facts, this launch is under a microscope. The rumblings we’ve been hearing about initial hiccups were true at least in the store we visited earlier today. There are bound to be delays with such a large-scale initiative. But if 10% of other stores experience a hiccup, our numbers (which have been well below a dollar since the Street was at $2.77 in June of last year) will likely prove too optimistic.  


Although anecdotal, the 1 JCP location we checked out this afternoon in preparation for the expected shop introduction tomorrow will not be ready to debut its Arizona stores on schedule due to wallpaper arriving late.


Here are a few things we noticed this afternoon:

  • The women’s Levi shop is already open although there we no i-pads in sight. This could simply be a store that did not receive the full blown Levi “store” however notable given the “denim bar” innovation.
  • The Arizona shops (both men’s and women’s) will not be opening on time despite having been scheduled to open with the Levi shop due to wallpaper arriving late. The images below show a view into the women’s shop which has no décor as well as the men’s shop which is just to the right of the store’s entrance; neither is complete.
  • The overall atmosphere of the store has a warehouse feel despite the areas under construction being concealed. Interestingly, with 2-4% of the location’s selling square footage remaining under construction over the next 2 years, there were concealed areas with no work complete inside. Our sense is this area is sectioned off for the September shops but we found this interesting nonetheless given the amount of the store already under construction.

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 1

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 1A

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 2

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 3

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 4

HedgeyeRetail Visual: JCP Shops Ready to Go? - JCP 5

Street Showdown: UBS, Nasdaq and Facebook


Hedgeye Director of Research Daryl Jones appeared on CNBC’s Closing Bell this afternoon along with Sadis & Goldberg Partner Ron Gefner to discuss the problems associated with the Facebook (FB) IPO.


Nasdaq’s systems had problems throughout the morning of the IPO and when trading in Facebook finally began, the exchange encountered all sorts of errors. As a result, multiple trading firms such as UBS, Knight and Citadel have brought forth lawsuits as a result of losses stemming from the IPO. UBS alone lost $355 million and is now seeking to recoup the entire amount from Nasdaq.


As Jones noted, Nasdaq has only put aside $62 million in a legal fund related to the botched Facebook IPO. The exchange must find out who is owed money and specifically, how much cash is owed to each firm.


“The stock should have been halted,” said Jones. Nasdaq knew of the issues associated with their IPO system and should have pushed the Facebook debut back a day in order to make sure everything was working correctly. “UBS had to keep putting orders in trying to get confirmation for their clients…it’s their job,” added Jones.

Face Off: The Market’s Battle Against Oil

As the inflation trade prepares to make a big move this week courtesy of the Federal Open Market Committee (FOMC) meeting, the energy sector is at the center of everyone’s attention. The Oil Services Sector Index (OSX) has outperformed the broader market (the S&P 500) more than 8% over the last 30 days. The high beta nature of the sector can be attributed to the performance, but there are three underlying themes that highlight why this is happening:


1. Better-than-expected earnings reports from BHI, HAL, SLB, NOV, CAM and others.  It is worth noting that the “beats” came off very low expectations and numbers that had been significantly revised lower over the prior six months. This is a very important point to keep in mind.

2. Inflation trade – Brent crude is up 8.3% MTD. This is subject to change if the US dollar roars back into action and heads higher; oil in turn will fall significantly should this occur considering we have an abundance of crude currently available.

3. Mean reversion move.  The OSX still trails the S&P500 by 27% over the last 12 months even with the recent gains.


Face Off: The Market’s Battle Against Oil - OFS SPXchart



As the chart above shows, the OSX tends to fluctuate between +15% and -15% versus the S&P 500 with a tendency to auto-correlate.  Hedgeye Energy Analyst Kevin Kaiser expects some profit taking to occur over the next three weeks (our TRADE duration), but the FOMC decision this week and performance of the dollar will weigh heavily on the OSX performance going forward. After all, if oil continues to climb higher, OFS names like the ones listed above will be able to put up better numbers in the third quarter.

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