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ASCA 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:  A pretty big miss and back half numbers look like they are coming down.  Margin improvement stopped this quarter as ASCA has pretty much gotten its costs as low as they can go.  Consumer is under pressure to some extent and July faces a difficult calendar comp. 

 

ASCA 2Q REPORT CARD - asca1

 

LAKE CHARLES CASINO (BUDGET/TIMING)

    • LITTLE WORSE:  Capex estimate increased to $560-580 million (includes $32.5MM purchase price to Creative) from at least $500 million previously.  The new estimate included additional F&B amenities and higher % of new gaming machines vs old.  Target opening of 3Q 2014 remains on track.
    • PREVIOUSLY:  Completion: 3Q 2014/ Capex: >$500MM (minimum investment requirement)

SPRINGFIELD SITE CONTROL

    • SAME:  ASCA took control of the property in May.  Demoltion and site grading was also completed in May.
    • PREVIOUSLY: "In Springfield the demolition and site grading are almost complete. We expect to take control of the property by the end of May." 

KANSAS CITY COMPETITION:

    • WORSE:  Increased competition drove ASCA Kansas City 2Q EBITDA down 13% YoY
    • PREVIOUSLY:  "I think another quarter or two and we'll start to get a more stabilized trend line of what things are going to look like, but we're very encouraged by the strength of our Kansas City property. We've always said it's the best quality property in the market, it's the furthest away from the competition and I think we're going to do just great."

CONSUMER BEHAVIOR

    • Worse:  While management was cautious during their Q1 call they definitely noticed a downtick in Q2
    • PREVIOUSLY:"I don't think consumer confidence has seen a huge boost... They've had lower utility bills this year versus last year where they've had a little bit higher gasoline prices. Employment is changing in some respects in some of the markets. But I think ... people are still being a little guarded with how they're spending. I don't see long-term trend lines developing yet."

CRR: Feeling The Pressure

We’ve been bearish on CARBO Ceramics (CRR) for a few weeks now and last week’s earnings confirmed our concerns over demand for ceramic fracking proppant in the energy space. The stock sunk from $83 a share to $68 a share and has continued to sell off since then.

 

Hedgeye Energy Analyst Kevin Kaiser sees further contraction in CRR as ceramic proppant becomes more commoditized. We doubt that CARBO Ceramics can continue to trade at a 12x multiple on forward P/E as the downfall continues. Like other players in the energy space, CRR needs to lower guidance for the back half of 2012 and into 2013 as margins decrease and proppant costs come down. Looking at the chart below, you can see what the future holds for CRR.

 

 

CRR: Feeling The Pressure - CRR peforward


ASCA 2Q CONF CALL NOTES

Volatility in Q2 regional performance continues. ASCA margins stopped going up, finally.

 

 

"The combination of new competition, construction disruption and a pull-back in consumer discretionary spending impacted the quarter."

 

- Gordon Kanofsky, Ameristar's Chief Executive Officer

 

CONF CALL NOTES

  • In St. Charles, they had some floor disruption from a systems upgrade underway.  
  • Just lapped the opening of Des Plaines in July so comps should get easier going forward
  • Jackpot hotel rooms were completed in July and should really complete the competitiveness of the property.  Highway repavement should be completed by September 20th.
  • Kansas City and Jackpot basically accounted for the entire downside in the Q
  • Through Q3, they will be able to fund capex through FCF without drawing the R/C
  • Lake Charles funding:  50/50 between FCF and revolver
  • Springfield:  demolition and site grading completed in May 2012

Q&A

  • Promotional environment:  pretty choppy economic conditions; will move along with customer spending habits
  • Massachusetts timetable:  legislation is not being rushed.  Pre-qualification stage will be later in 2012.  Late 2013/1H 2014 is estimated license selection time.
  • Springfield referendum will take place some time in 2013.  City is currently getting some guidance from the gaming commission.
  • Lake Charles project:  hurdle rate of 15%; after Lake Charles ramps up, confident they will exceed that.
  • Consumer trends:  a little deceleration at end of 1Q/beginning part of 2Q but has stabilized somewhat; consumer will continue to be cautious in the short-term.
  • Lakes Charles capex:  $560-580MM vs +$500MM previously is apples to oranges.  The $500MM is the minimum investment requirement; the $560-580MM includes the $32.5MM purchase price to Creative.  The updated capex guidance involved the addition of some F&B amenities and opening up with more new gaming equipment than used, and some maintenance changes.
  • July:  worst comparable month of the year from a calendar perspective (e.g. July 4 unfavorable timing, extra Sat/Sun last year)

 

HIGHLIGHTS FROM THE RELEASE

  • "Our Black Hawk property was a notable contributor to the consolidated margin as it produced the best quarterly financial performance in its history"
  • "We are pleased with the progress made on our casino hotel spa development in Lake Charles, La. Within the last two months, we received the necessary regulatory approvals, completed the acquisition and commenced construction." 
  • "We believe the slower growth in consumer discretionary spending adversely impacted our top-line results."
  • "New competition continued to adversely impact our Kansas City and East Chicago properties"
  • "Net revenues at our Jackpot properties decreased... due mostly to the combined effect of road repaving on Highway 93 between Twin Falls, Idaho and Jackpot and a hotel renovation that was completed in late July 2012." 
  • Ameristar Lake Charles: 
    • "The cost of the project (including the purchase price) is expected to be between $560 million to $580 million, excluding capitalized interest and pre-opening expenses. We anticipate funding the project through a combination of cash from operations and borrowings under our revolving credit facility. We expect to open the resort in the third quarter of 2014"
  • Cash & equivalents: $135.5MM; Debt: $1.9BN
  • Total Net Leverage ratio: 4.99x vs. 6.5x covenant
  • Capex: $20.3MM
  • Outlook for 3Q12:
    • D&A: $26.5-27.5MM
    • Interest expense (net of capitalized interest): $29-30MM (includes non-cash interest of $1.4MM)
    • Tax rate: 40.5-41.5%
    • Capex: $75-80MM (including $31.5MM due for the purchase of Creative and $30MM on design and construction of the Lake Charles casino)
    • Non-cash comp: $3.5-4MM
    • Corporate expense: $13-14MM

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JCP: Not Ready For Primetime

JCP: Not Ready For Primetime - JCP concept5

 

Despite the hype surrounding the new JCPenney (JCP) stores due to rollout this year into 2013, we remain bearish on the stock, a call that we’ve stuck with for about a year now. Ron Johnson and executive management continue to fail to execute on their turnaround plan which has helped the stock fall from $40 a share to $20 a share in under a year.

 

JCP proudly announced the unveiling of its new store concepts yesterday in a release, showcasing the mini-stores for the Levi’s and Arizona brands. While the video they produced was entertaining, showing off their concept of a “denim bar,” the Hedgeye Retail team begs to differ noting that there are noticeable hiccups in the rollout.

 

The team checked out a JCP store yesterday and instead of a hip, modern concept, found a half-completed store that resembled a warehouse more than anything. The Arizona stores were not ready due to a late shipment of wallpaper and the entire store had construction going on for other mini-stores that gave the store an unsightly appearance.

 

Here are the takeaways from our team, along with some choice photos below:

 

• 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.

 

  

JCP: Not Ready For Primetime - JCP concept2

 

JCP: Not Ready For Primetime - JCP concept3

 

JCP: Not Ready For Primetime - JCP concept4


Waiting For Ben

 

 

CLIENT TALKING POINTS

 

THE BERNANK

ADP numbers aside, everyone will truly be focused on the Federal Open Market Committee (FOMC) minutes and the language the Fed uses. Expect low volumes until the details are out; people want to know if we’re getting another dose of QE or not. If we do, gold and oil will rip to the upside. If not, expect King (US) Dollar to make an appearance. We’re of the belief that QE slows growth and simply hasn’t been working. Swallowing a bitter pill is difficult but necessary sometimes. Let’s see what Bernanke has on his mind later.

 

 

SOMEBODY GET ME A DOCTOR

Doctor Copper is back in play this morning. The #GrowthSlowing case in China does not bode particularly well for this commodity but ultimately, the fate of price lies in the hands of Ben Bernanke. The Federal Reserve Chairman has proven that he is willing to do anything to buoy commodity and equity markets, even if the rapid inflation includes feeling the heat at the pump and your local grocer.

 

 

GEITHNER THE GREAT

Tim Geithner has been making the rounds around the world, meeting with central planners cut from the same kind of cloth has he is. By that, we mean people who aren’t afraid of a bailout or five. He seems to forget that inflation is NOT growth. Per Keith in this morning’s Early Look:

 

US Consumption represents the 71% that I don’t hear the Democrats talking about inasmuch as I didn’t hear the Republicans talking about it under Bush. That’s the 71% of the US Economy (GDP). And it’s been getting jammed by the likes of Bernanke and Geithner since at least 2006. Policies to debauch the Dollar and inflate oil prices at the pump are a colossal failure of Keynesian sense.”

 

Isn’t the global economy just peachy?

 

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash                Flat                        U.S. Equities:   DOWN

 

Int'l Equities:  Flat                        Commodities:   Flat

                                  

Fixed Income: UP                         Int'l Currencies: Flat

 

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

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.

  • TRADE: LONG
  • TREND: LONG
  • TAIL:     LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE: LONG
  • TREND: LONG
  • TAIL:     LONG

 

LIFEPOINT HOSPITALS (LPNT)

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.

  • TRADE: NEUTRAL
  • TREND: LONG
  • TAIL:     LONG

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“BREAKING: US mortgage demand (MBA weekly mortgage applications) falls for the 3rd consecutive wk (-2.3% wk-over-wk) $XLF” -@KeithMcCullough

 

 

QUOTE OF THE DAY

“It is nobler to declare oneself wrong than to insist on being right - especially when one is right.” - Friedrich Nietzsche

 

 

STAT OF THE DAY

Chinese PMI fell to 50.1 in July from 50.2 in June, falling below economists’ consensus estimate of 50.5.


Stealing Horses

This note was originally published at 8am on July 18, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“In West Texas in 1871, stealing someone’s horse was often equivalent to a death sentence.”

-S.C. Gwynne

 

The only thing I don’t like about working on America’s West Coast is that room service doesn’t start until 8AM EST. I’m in San Francisco, California this morning. And, away from no oatmeal in my belly, I am loving it.

 

What I don’t love is when Chuck Schumer speaks. I get especially irritated when he speaks at people like he did with my good pal Ben Bernanke yesterday, telling him to “get to work” on some more money printing.

 

As S.C. Gwynne explains in an excellent new book I started reading on the flight down here, “Empire of The Summer Moon: Quanah Parker and the rise and fall of the Comanches, the most powerful tribe in American History”, stealing someone’s most valuable asset (in my case US Dollars) is not cool.

 

Back to the Global Macro Grind

 

Admittedly, when it comes to explaining the basic concept of the Purchasing Power of your hard earned currency and how conflicted and compromised politicians are attempting to debauch it for the sake of their short-term career risk, I can’t walk a horse to water.

 

I can, however, steal away into the night and watch the only thing that matters in scoring the efficacy of what Chucky Schumer wants more of (Qe drugs) – Mr. Global Macro Market.

 

Mr. Macro has been giving plenty a buy-and-hold Keynesian a performance death sentence since the SP500 was +14.9% higher in October of 2007. While the same ‘growth is good, earnings are great, and stocks are cheap’ crowd still needs the SP500 to rise another +5% to get back to their 2012 break-even, here’s what the rest of the world’s country signals are telling me this morning: 

  1. CHINA – the Shanghai Composite Index remains a rock solid leading indicator for the slope of Chinese economic growth, and it remains in what we call a Bearish Formation (bearish on all 3 of our core risk management durations – TRADE/TREND/TAIL)
  2. JAPAN – the Nikkei225 opened up (after the US closed up) then finished on its lows last night. Its -0.32% loss on the session doesn’t matter as much as the context of its failure to recapture its only remaining line of support (8794)
  3. SOUTH KOREA – the KOSPI got blasted for another -1.5% loss last night after Intel said that they are hoping for +3-5% sales growth in 2012 (vs high single digit growth expected prior); KOSPI is a great leading indicator for Tech/Industrial demand
  4. EUROPE – the EuroStoxx50 looks like the SP500 (better than China, Japan, or KOSPI); that doesn’t mean that it looks good for anything more than what’s in the rear-view mirror off the lows (TRADE support = 2213; TREND resistance = 2282)
  5. SPAIN – the Spanish IBEX looks like the Comanches stole their horses again; leading losers this week and falling right back into crash mode (> 20% peak/tough decline) at -26.5% from March; Bearish Formation
  6. ITALY – the MIB Index looks like it’ll be walking barefoot until the German Parliament votes to ratify more #BailoutBull on September 12th; down again this morning and moving back into crash mode, down -21% from March
  7. BRAZIL – the BOVESPA has had zero bid since the Brazilians cut interest rates last week, so the perma 3-4% Global GDP crowd can talk about the 199 global “easings” all they want, but the BOVESPA is still crashing (down -21% since March 14th)
  8. CANADA – the TSX Composite Index looks a lot like the Eurostoxx50 and the SP500; bullish TRADE (barely) and bearish TREND (with TSX TREND resistance overhead at 11,991); Canada is a great place to live if you have a big hat (and cattle).

Then, of course, we have the good ole United States of America. The home of the 112th Congress, Ben Bernanke, and the brave. Across its big 3 leading market indicators, here’s how she looks:

  1. STOCKS (SP500) – bullish immediate-term TRADE (1351 support); bearish intermediate-term TREND (1365 resistance)
  2. BONDS (10yr) – Bullish Formation for bonds; Bearish Formation for yields; immediate-term risk range = 1.46-1.54%
  3. CURRENCY (USD) – Bullish formation (bullish across all 3 durations) with immediate-term TRADE support = $82.31

So, what does it all mean?

  1. GROWTH – slowing, at an accelerating rate, globally in Q2/Q3 versus where all of Washington/Sell-Side consensus was in Q1
  2. INFLATION – slowing through June, but setting up to re-accelerate where it matters to Global Consumption Growth in July (food and energy prices have v-bottomed since late June)
  3. POLICY – who cares? The manic media continues to scramble for whatever remains of their ratings, but The People are putting this entire thing (including fund flows) on mute. This is a No Trust; No Volume Global Equity market; TREND intact.

So what do you do?

  1. Maintain a large Cash position and keep your gross exposure to equity and commodity markets low
  2. Manage your net exposure to all markets, including the bubbliest of them all (bonds) tight
  3. And Fade Beta (buy red, sell green) –just beat the 93% of hedge funds who have become beta and you’re fine

If all of this is frustrating you, join the club. Global Macro’s interconnected risk (countries, currencies, commodities, etc.) has never been more obvious. Stock pickers are meeting their maker inasmuch as Macro gurus are meeting theirs. As Gwynne reminds us, this was no different in 1836 when different worlds were in collision (Whites and Indians):

 

“The meaning of their meeting, and the moment itself, became completely clear only in hindsight.” (page 23)

 

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1559-1583, $100.82-103.68, $82.76-83.98, $1.20-1.23, 6457-6699, and 1351-1365, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Stealing Horses - Chart of the Day

 

Stealing Horses - Virtual Portfolio


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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