Now with RevPAR underperforming, Baccarat looks like the only reliable Vegas metric


  • The chart below shows monthly RevPAR change as reported by the Las Vegas Convention and Visitors Authority for all of Las Vegas.  We’ve also added our trend-based projections adjusted for seasonality out to June of 2013.
  • Although not shown on the chart, Q3 Strip RevPAR is likely to decline YoY and could fall Vegas-wide as well.
  • MGM management previously had indicated that Q3 was a blip but we think Q4 could be flattish and even negative.  Management seemed less constructive on the outlook last week.  RevPAR and Baccarat were the last important metrics that were reliably positive.  Looks like Baccarat will hold down the fort solo.



Building Homes and Momentum

Homebuilder stocks have been on a tear over the last year, with Toll Brothers (TOL) and D.R. Horton (DHI) up +130.9% and +128.9%, respectively. It's been our contention that the group is way over its ski tips, but now there's a growing body of evidence, in the form of builder CEOs dumping stock, that seems to concur. Multiple insider sales of stock are definitely worth keeping an eye on going forward.



Building Homes and Momentum  - Bob Toll normal


Building Homes and Momentum  - Donald Tomnitz normal


Takeaway: IGT could be a 20%+ EPS CAGR the next few years yet it trades at only 11x

We were out in Las Vegas last week and back for some more at G2E



Like BYI, IGT looks good heading into G2E but not necessarily for the same reasons.  We’re not sure IGT is going to deliver the same content wow factor as BYI will.  It’s not that IGT management wasn’t positive on its content for the show but who isn’t?  Our takeaways deal more with earnings visibility and growth, capital allocation, and a few upcoming catalysts.

  • Earnings – Obviously, management is not going to provide their earnings expectations but a line by line review of their business yielded good commentary about unit shipments, margins, and improving yields.  With Italy, Canada, and Ohio, unit shipments should be strong in FY2013.  Operating margin will be better sequentially in the September Q.  For 2013, there are some tailwinds.  Higher volumes will help product margins.  For gaming operations, margins will be aided by the depreciation schedule and conversions.  Obviously, the significantly lower share count will be very accretive.  The leveraging of the built out international infrastructure should benefit the margins of both segments.  Finally, gaming ops yields remain a concern.  However, management thinks they will cease to decline YoY in FQ3 of 2013 and while the September and December Q’s will likely be slightly negative YoY, they should look better than the YoY in the June Q.  We remain cautious on yields and are not sold on the content yet.  Obviously, management cannot control the economy or any caps put on the WAPs, but the fact is IGT’s content has lagged.  However, investor expectations for yields are pretty low and the other business levers are leaning positive.   
  • Capital Allocation – It’s very simple.  Current leverage of around 2.5x is the minimum that they will accept.  IGT generates strong free cash flow and there really isn’t anywhere else for them to put their cash (we hope!) other than buy back shares.  I suspect that they find the current price attractive for repurchase.
  • Catalysts – We are expecting a 10k unit order from Western Canada that has been awarded but not announced for political reasons.  IGT should get a good share of this and it will impact fiscal 2013 earnings.  Potentially more near-term, we think Goldman may be done with the accelerated share repurchase program soon.  Following completion, IGT will announce the results and, as we’ve been writing about, the number of shares repurchased will be more than expected.  IGT may also announce additional shares repurchased.  Overall, we would expect that announcement to be received positively.


Here are some details from our notes of the meeting:

  • No ASP issue but investors still concerned about that.  ASPs should be up in FQ4.
  • Game performance has been a yield issue for IGT – economy and competition as well
  • Product margins:  sequential improvement in September Q.  Same with Gaming Ops
  • 5 out of 6 yield buckets are up YoY
  • WAPs is the one category that is down
  • Pricing competition is fierce – cap on WAP is the most common
    • IGT is doing some of that but only in defense
  • Will be a positive announcement when Goldman finishes up the repurchase
  • International performance has been “good”.  Claim international share is growing and growing faster than the US.  Europe has been a drag.  
  • Projected low double digit growth for international in fiscal 2012 and it will be high single digits
  • Pretty much done with international infrastructure so should be able to leverage that
  • Should see flow from Atlantic Lottery Corp in September Q
  • Western Canada impact mostly in June and September 2013
  • IL: probably 50/50 for sale.  30k in shipments and IGT should get 45-55% share.
  • No boxes in Italy; games on Lottomatica boxes in early calendar 2013
  • Columbus – don’t know when it will be recognized
  • Canadian orders should help margins in 2013
  • FQ2 should be the first Q to have higher yields. There is a chance it happens in FQ1
  • 2.5x leverage right now.  This is probably the minimum and “wouldn’t go below that."
  • D&A and conversions are working in favor of IGT’s game ops margins for F2013.  Play levels will be a big driver.
  • F2013 should be a very good volume year
  • December NY Analyst meeting – we view this as management’s outlook is improving 
  • Will get 2013 guidance on November 8th

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Financials And The S&P 500

Year-to-date, the Financials SPDR (XLF) is outperforming the S&P 500 (SPY) quite a bit with the XLF up 21.7% compared with SPY, which is only up 15.9% during the same time period. The XLF’s success can be attributed to QE3 and Mario Draghi’s “whatever it takes” comments coming out of the ECB in Europe. 


Financials And The S&P 500  - xlfspy

Quiet August On The Strip

Takeaway: The real question is whether or not slot volumes will continue to fall. Five months of consecutive drops does not bode well for the Strip.

The latest Las Vegas Strip data shows August was quiet in terms of growth. Assuming normal slot and table hold, our model is predicting -3% to +1% growth for August Strip gaming revenue year-over-year change. Slot volume could very well fall again in August, which would mark the fifth consecutive month of declines.


Another metric to note is that McCarran Airport passengers grew 0.3% while Nevada taxi trips fell -1.7% in August. If you’ll recall, there’s a 71% correlation to taxi trips and table volume. 



Quiet August On The Strip  - vegas strip normal

The Obama Election

Takeaway: Romney has one chance at a comeback and that is the upcoming debates. Otherwise, consider Obama a winner.

According to the latest data from, President Obama essentially has the election locked up with 97.2% of the wins. Intrade has the President’s odds of being reelected at 76%. Things just aren’t looking good for Romney at this point.


Data for Ohio shows Obama taking a near-six point percentage lead over Romney. If Romney doesn’t win Ohio, he’s basically done for. No Republican has ever won the Presidency without clinching Ohio. Romney has one last chance to win the voting public over and that is with the upcoming debates. If he can lay the smackdown on Obama in a meaningful, engaging way, he may have a shot at a comeback.


The Obama Election - 270towin 100112 normal



The Obama Election - U of Coloaroad Electoral Table normal

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