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CHART DU JOUR: INVESTORS PUNISHING EARNINGS

In-line quarters are not good enough

 

  • For the stocks we monitor in gaming, lodging, and leisure, it’s been a rough and volatile earnings season where stocks were punished even though sentiment was low and stock prices down into the earnings releases
  • So far, the 8 companies that missed and/or lowered guidance were down an average of 6.4% more than the S&P on the first day of trading subsequent to the announcement
  • The five companies that beat were only up 3.7% more than the S&P and even the in-liners fell 3.4%

 

CHART DU JOUR: INVESTORS PUNISHING EARNINGS - GGA


BYI F4Q12 PREVIEW

Now that IGT’s and MGAM’s disappointing quarters have taken a chunk out of BYI’s stock, perhaps we can dip a toe into the water? 

 

 

In less than two weeks, BYI has sold off 9%.  The stock was already down about 5% and then tumbled another 4% post IGT’s print.  We have BYI eking out a beat of $0.79 for F4Q and issuing FY2013 guidance that is in-line with consensus estimates, albeit with a large range.  There are many deltas for next year and we outline them in the Guidance section below.  Canada and Illinois look like they are moving ahead faster than many may be anticipating and that could be a focus on the conference call.

 

 

FQ4 DETAIL


We expect BYI to report $253MM of revenue and $0.79 of earnings next Thursday after close.  We’re projecting $99MM of gaming equipment revenue at a 45.4% gross margin.

  • 5,400 units
    • 1,200 international unit sales
    • 4,200 NA unit sales
      • 1500 new unit sales, the majority of which were shipped to Ohio.  Major shipments this quarter should include:
        • 21% share in Toledo and Cleveland (850-900 units)
        • Scotia Downs
        • PNK Baton Rouge
      • 2,700 replacement units flat YoY
  • ASP of $16.7k down QoQ and flat YoY.  We expect pricing to be negatively impacted by discounts on large shipments to new openings (Ohio/ PNK Baton Rouge)
  • Margins on new game sales should decrease slightly sequentially as the June quarter will include a lot of Ohio units which are discounted.
  • $8MM of parts and other revenue

We’re projecting $60MM of systems revenue at a 74% margin

  • BYI guided to margins at the high end of their 70-75% range due to mix in the 4Q
  • Larger new openings include:
    • Sands Cotai Central
    • CZR’s Cleveland Casino
    • There should be some recognition of Canada in the Q

We expect gaming operations revenue of $94MM at a 72.5% margin

  • Should see growth in the WAP footprint with the release of Michael Jackson game late in the quarter and additional Grease placements.
  • June has always been a better quarter seasonally for BYI, vs. the March quarter, for gaming operations revenue

Other stuff:

  • SG&A:  $67MM
  • R&D:  $26MM
  • D&A:  $6MM
  • Net interest expense:  $3MM
  • Tax rate:  36.5%

 

GUIDANCE 


We think that BYI will offer a wide range of guidance for next year but recent developments in Canada and IL have made us more confident about the outlook for next year.  We still maintain that the biggest risk to owning BYI into the print is what they will guide to.  Based on some of the numbers that we’ve run we can come up with numbers ranging from $3.05-3.25 for FY2013.

 

What are the big delta points for next year?

  • We understand that the provinces of Manitoba and Saskatchewan have recently awarded the RFP for 10,000-11,000 new units.  We are fairly confident that BYI got an allocation of those units.  There will be some uncertainty in terms of how fast those units start shipping and it’s likely that some of the units will fall into BYI’s FY14.
  • IL:  So far only 88 locations have been approved but we know that BYI already has some orders and believe that there should be an acceleration in license approvals over the next few months since IL will start enforcing the ban on grey machines.  Violators will be charged with a felony offense.  We assume that BYI should be able to ship at least 800 units to IL in FY13; there could be upside to that number.
  • Atlantic Lottery units should start shipping in September
  • Some of the Ohio tracks opening in 2H13 could have shipments in BYI’s F4Q13
  • Timing of systems revenue recognition
  • ASPs may be lower since IL VLT’s are going to be priced in the mid $12k range and Canadian units are also priced at a discount
  • Uncertainty around the US replacement cycle and international shipments

COH: No Manpurse For Us

On July 18, Brian McGough had the idea to short Coach (COH) and we did so in the Hedgeye Virtual Portfolio. Our levels sent us the indication to sell, regardless of the fundamentals of the company. There are several other factors that make the bearish case for COH. Slowdown in China will affect the company’s push into the country as it looks for $300 million in sales and store growth. That just won’t last.

 

The other issue at hand is the rollout of Coach Men’s stores. They are working to get the store count up to 100 from 42 by the next quarter. Sales at US department stores have slowed and other premium brands like Kate Spade, Tory Burch and Michael Kors will put the pressure on Coach as they take sales away. High inventory levels will also plague the retailer as they continue to grow.

 

Here’s what Managing Director of Retail Brian McGough had to say about Coach this week:

 

“In listening to Lew Frankfort talk about Coach’s global business, he sounded remarkably like Howard Schultz in talking about Global Economic headwinds. When asked about why, he reverted to everything Macro…employment, jittery confidence around an election year, gas prices, and several other factors that seemed to not matter when they were working in COH’s favor (and factors that we already know). Now COH is sitting here looking at FY13 (which just began) as ‘an investment year’, with reliance on men’s and China. But they’re both so small that on a consolidated basis, they will account for 5% growth at best if successful. In the grand scheme of things, Coach is a very good company. But the time still is not right to own the stock. Our bias remains on the short side.”

 

 

COH: No Manpurse For Us - COH levels


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No “Whatever”, No Bazooka at August ECB Presser!

Positions in Europe: Long German Bunds (BUNL)

 

As we’ve noted in recent research notes, Draghi primed the market for great expectations leading into today’s ECB decision with his statement last Thursday (7/26) that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” adding , “believe me, it will be enough.”

 

Well, Draghi certainly under-delivered today and the market is selling off hard since the ECB’s 8:30am EST conference call.  And we aren’t surprised. As recently as 7/27 in response to Draghi’s “whatever” comment we wrote:

 

“The issue here, though, is that Draghi hints at possessing some bazooka that he’s been concealing for all this time.  We frankly don’t think there is one, particularly because we can’t envision what one grand bazooka would look like. “

 

In today’s conference call Draghi left rates unchanged (main refinancing operations at 0.75%, marginal lending facility at 1.50% and deposit facility at 0.00%) and signaled no further plans of a LTRO.  Unlike previous calls, he directly addressed yields across the periphery, saying:

 

“Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.”

 

To address these rising yields (Spain and Italy, without being named) Draghi announced that the ECB “may undertake” non-standard  measures, hinting at a reactivation of the SMP to namely buy bonds on the secondary market and areengagement of the EFSF to buy bonds on the primary market, with focus on the short end of the yield curve. No target size of buying was mentioned beyond “size adequate to reach its objective”.

 

Questions about the seniority of these bond purchases were not addressed by Draghi. He deflected them saying that the details will be worked out in the coming months.

 

Also note that Germany and the Bundesbank under Jens Weidmann remain firmly against ECB bond buying. This rub will continue to contribute to European market volatility.

 

What this spells is further artificial hand holding in the Italian and Spanish bond markets. Ultimately, the ECB must buy time until 1.) the 12th of September when the German Constitutional court votes on the constitutionality of the ESM and fiscal compact and 2.) more clarity on a banking license for the ESM, assuming that the Germans sign off on it. And remember, numerous Eurocrats are on vacation in August.

 

You can find Mario Draghi’s full Introductory Statements to the press conference here.  

 

No “Whatever”, No Bazooka at August ECB Presser! - 1111. eur

 

Matthew Hedrick

Senior Analyst


JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS

Rolling NSA Claims Continue to Reveal Signs of Weakness

Last week initial jobless claims rose 12k WoW to 365k (rising 8k after the 4k upward revision to the prior week's data). Rolling claims fell 2.75k to 365.5k and non-seasonally adjusted claims fell roughly 30k to 310k.

 

We like to cut through all the noise by looking at the NSA series on a YoY basis. Currently claims are improving at ~5.7% YoY. This rate is down from 6.5% in the prior week and 11.9% at the beginning of this year. While claims are still improving, they are improving at a slower rate. This suggest to us that the fundamentals are weakening in the employment environment. We expect the seasonal adjustment distortions to remain a headwind to claims throughout the month of August. Thereafter, we would expect the seasonality distortion to become less of a headwind, eventually becoming a tailwind that peaks in Feburary/March of 2013. 

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - Raw

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - Rolling

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - NSA

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - NSA rolling

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - S P

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - Fed

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - NSA YoY

 

The 2-10 Spread

The 2-10 spread widened 10 bps WoW to 129 bps. The ten-year treasury yield rose 13 bps to 153 bps.

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - 2 10

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - Subsector performance

 

JOBLESS CLAIMS TREND WEAKENING ON A YOY BASIS - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

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No Reaction

NO REACTION

 

 

CLIENT TALKING POINTS

 

MARIO’S TURN

So the Fed basically extended low rates until 2014 yesterday and the market didn’t think much of it. Perhaps they were dealing with the market making debacle over at Knight Capital OR perhaps they were waiting for the real catalyst, which is Mario Draghi amd the ECB. It really matters what happens today at his meeting because if you’ll recall, Draghi is ready to do “whatever” it takes. Too bad they didn't cut rates and said they "may" do open market operations. That doesn't inspired confidence; European stocks hopped into  a freefall afterward.

 

 

NOT AGAIN

The Keynesian central planners love to get their tightie whities in a bunch. Perhaps they are finally wising up to the fact that they are the ones perpetuating slowing growth and have gotten exactly where we didn’t want to be. They are realizing that the family on welfare is not so keen on high fuel prices and higher food prices, despite the government assistance. It’s like one of those movies about the Civil War where someone gets shot: we’re going to have to bite down hard and pull through the pain before we’re back to normal.

 

 

GEITHNER THE GREAT

China’s stock market has basically been going down since April. It tried to go up yesterday but people decided they didn’t really like that. They’re down -14% since May, which doesn’t exactly inspire confidence. The country might have

 

 

_______________________________________________________

 

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

“KCG owns substantial minority stake in Direct Edge, which has been exploring capital-market opportunities for some time...” -@JustinRBLT

 

 

QUOTE OF THE DAY

“An economist is a man who states the obvious in terms of the incomprehensible.” – Alfred A. Knopf

 

 

STAT OF THE DAY

$440 million. The loss Knight Capital (KCG) will take from yesterday’s market structure breakdown.

 


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