Industrial Indicator: PCAR vs. NAV: Navistar Doesn’t Look Cheap

PCAR vs. NAV: Navistar Doesn’t Look Cheap


  • Adjusted EV:  Below, we update our table comparing Navistar and Paccar on an adjusted EV/EBITDA basis (2013 Consensus) and again find that Navistar is actually more expensive than Paccar.  While we generally do not rely on multiples for valuation, the comparison is telling.
  • Operational Risks:  Navistar has numerous operating and management challenges ahead that will bring tremendous operating risks.  Why pay more for Navistar than Paccar? 
  • Downside Risk Significant:  If Navistar cannot pull off a rapid and challenging switch in engine emissions technology, the shares could easily end up in the single digits.  That still doesn’t seem like a risk worth taking to us, even with the shares down 43.4% YTD.



Industrial Indicator: PCAR vs. NAV: Navistar Doesn’t Look Cheap - pcar vs nav



UPCOMING EVENT:  We will be hosting a call on our Truck OEM Industry Black Book on August 16th at 11am. Details to follow.



Industrial Indicator: PCAR vs. NAV: Navistar Doesn’t Look Cheap - perf 8212


Canada and IL moving faster than expected



Maybe the only positive takeaways from IGT’s earnings call were that replacements were a lot better than we expected and Illinois units should start shipping in the September quarter.  Canada was the big boost to IGT’s replacement tally and the news there looks even better.  We’ve done some research and it looks like both markets may be moving faster and generating greater sales over the next 1 to 2 years than expected by the Street.



Driving IGT’s strong replacements was the beginning of the once-in-a-decade tailwind where Canadian provinces overhaul their systems and undergo a massive replacement cycle.  IGT shipped 900 units to Loto-Quebec in the June quarter.  Next quarter, IGT may ship 3,000 units to Loto-Quebec and Atlantic Lottery Corporation.  IGT isn’t the only manufacturer gearing up their plants for Canadian shipments; BYI and WMS may ship in the September quarter to the Atlantic Lottery and Alberta, respectively.    


A further boost could come from the Western Canadian Lottery Corporation (representing the provinces of Saskatchewan and Manitoba) who may be awarding between 10-11k replacement units soon after finalizing some details.  We estimate that over the next 2 years, an additional 28k replacement units should be shipped to Canadian provinces.  This may be more than the Street is expecting.



In IL, there are currently 88 locations that are approved for VLTs, with a maximum of 5 machines per location.  The Illinois Gaming Board meets each month to approve additional locations.  Starting in September, the authorities will actively pursue enforcement against locations operating “grey” machines, charging them with Felony action.  We therefore expect an acceleration of approvals for legal machines in the coming months.  Our understanding is that ASPs will be in the mid $12k range and that many suppliers will offer financing to route operators. 


Into Illinois, IGT will distribute its units exclusively through ABS; WMS will use Betsson as their distributor; while BYI is planning on selling directly to route operators.   We understand that IGT has a slug of units on order while BYI also has “some” units on order.  We believe WMS do not have any orders yet.


We expect about 1,000 units to be shipped to IL in the September quarter, with IGT recognizing the majority of those units.  In total, we think that there should be about 3,000 units shipped to IL in 2H2012 and over 10,000 units in 2013.  In terms of backlog, we think that distributors have already put in orders for 5,000 slots, of which 1,500 went to IGT.  BYI and ALL garnered about 10% share, while WMS was left behind given their high product pricing.  While there are still a few obstacles for the route market to begin operations, it looks like we could be seeing at about 10,000 units go to IL over the next 12 months and potentially much more than that over the next 2 years.  Again, we think those numbers may exceed Street expectations.


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%



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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.




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%



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

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