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G2E TAKEAWAYS: MGM, IGT, WMS, BYI, REGIONALS

Takeaway: We like the IGT, WMS, and BYI coming out of G2E. Fundamentals for the US operators look softer.

Suppliers look good, operators, uh, not so much 

 

 

Key Supplier Takeaways from G2E 

  • Overall, we thought G2E was a very good show for the suppliers.
  • WMS surprised on the upside in terms of content this year.  WMS will appeal to investors looking for a turnaround on a beaten down stock and there was certainly a buzz in the investment community out at the show.  The excitement probably means WMS works for a long trade.  However, we would caution that the appearance of good content doesn’t always translate into high revenue generating games.  Even if the content performs, it will be at least a couple of quarters before the revenue impact is meaningful.  WMS’s near-term earnings visibility is cloudy.  Nevertheless, the stock will likely run over the next week or two.
  • BYI displayed very good content and they are outperforming with their existing content.  While Grease has peaked, Michael Jackson is doing extremely well and NASCAR was well received by slot managers at the G2E.  Market share will likely continue to rise and BYI is certainly a better earnings story than WMS.  On the margin, BYI right now is the supplier to beat.
  • IGT had some good content and the earnings outlook is strong.  We still expect 20%+ EPS growth for next year.  Our biggest concern remains “brain drain” and we heard more of that from our private industry contacts.  Having said that, it will take a year before that impacts content, in our opinion, and in the meantime, investors should feel good about earnings visibility.  Management certainly seems bullish.

MGM and Las Vegas

  • As we mentioned last week, MGM management seemed less optimistic that the Q3 RevPAR decline was a one shot deal.  Overall softness has carried over from the Summer into the Fall.  We spoke to folks at other properties and other market participants and we believe the Strip numbers were not good for either August and September.  We already published a negative YoY projection for August Strip revenues and that seemed confirmed with our contacts out in Las Vegas.  Furthermore, October numbers may look ugly with one less Saturday and Sunday compared with October 2011.
  • MGM focused on the positive in their presentation which was convention bookings for 2013.  While certainly a positive, convention rooms generate only 13% of total room nights and those folks don’t gamble as much.  We think slot volume growth is the most important metric and it has turned consistently negative YoY.

Regional Gaming

  • PNK seemed bullish but aside from that Louisiana focused operator, we heard little positive commentary from the regional operators.
  • Despite a favorable calendar, September may look weak.  Indeed, Missouri same-store gaming revenues were likely down 5% (we get these numbers early).  Operators probably needed a decent September to make Street revenue projections.  That likely won’t happen and estimates may be going down ahead of earnings.

OIL: Bring The Bears Out

Takeaway: Get the dollar right and you'll get a lot of other things right. A move to the upside will take oil lower.

A move to the upside on the US dollar is all it would take to take oil even lower and Mitt Romney certainly has the ability to do just that at tonight’s debate. Looking at this chart showing one-month performance of Brent Crude oil and the US dollar, you can easily see why we remain bearish on crude. 

 

OIL: Bring The Bears Out  - image001


CRI: Getting Easier to Short

Takeaway: #1 shareholder selling 40% of their stake is the latest factor on a growing list why CRI is one of our top short ideas headed into year-end.

 

We don't make investment decisions based on the actions of others, but the major push back we’ve had on taking the short-side of CRI is the ‘Berkshire’s buying’ argument – that just got debunked. Berkshire filed last night revealing they just sold 40% of their stake. Oh, and short interest at 5% of the float now stands at 12-months lows at the same time valuations sit at near seven-year peak levels.


These latest factors add to what is becoming a growing list of reasons why CRI is one of our top short ideas headed into year-end.


Here’s are take on CRI coming out of Q2:


“Strength in Carters' wholesale drove the beat this quarter – and we’ll give them that, but that alone isn’t enough tosupport a stock with such lofty expectations. Importantly, with little delineation and differentiation of product by channel, stronger wholesale performance is actually competing against CRI’s own retail. In fact, this has been reflected by the decline in new store productivity. With Carter’s retail accounting for nearly 2/3 of 2H revenue growth and ~50% of CRI’s top-line in F13, the company is increasingly reliant on increasing the volume of less productive stores. It should come as no surprise then that store growth has continued to increase over each of the past two years at +14% and +17% in F11 and F12 respectively up from +10% in F10. This is simply not sustainable. Assuming CRI maintains this rate of growth, it would hit its ~600 store opportunity threshold by F14 – then what? We think it will have blown up its wholesale business long before then -- there's your risk.


Lastly, the timing of management choosing to go dark on AUR disclosure for “competitive reasons” headed into 2H just smells bad. With product cost pressures now turning to a tailwind down -10% in 2H, the company will have to continue to post solid gross margin results for EPS to meet or exceed current guidance. The opacity in AUR disclosure does little to increase confidence in that regard.


All in, we’re reducing our 2H EPS numbers by $0.05 to $1.45 primarily reflecting higher SG&A spend (e-commerce and marketing) offsetting stronger trends at wholesale. At the time of writing this note, consensus was at $1.84 for 2H and $2.67 in F12 and $3.38 in F13. We’re at $2.40 and $2.95 respectively. If our estimates prove correct, this name has another 25-40% downside from these levels.”

 

Berkshire reduces holding by ~40% after realizing nearly 120% return since becoming CRI’s top shareholder in October 2010:


CRI: Getting Easier to Short - CRI Berk Stake



 


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Fight Night

FIGHT NIGHT

 

 

CLIENT TALKING POINTS

 

FIGHT NIGHT

The latest data according to our proprietary Hedgeye Election Indicator shows President Obama’s odds of being reelected at 62.4%. Most polls you’ll hear about also put Obama several points ahead of Romney both nationally and on a state-by-state basis. Clearly, Romney needs to execute a major comeback in order to win this election and tonight’s his first chance to do so. The upcoming debates are Mitt’s chance to show he’s got what it takes to turn America around and can visibly improve the economy. Jobs will likely be discussed, but it’ll be interesting to see if they touch on the US dollar and the role of the Federal Reserve at all.

 

 

RISK AND RANGE

The US stock market continues to amaze and wonder heading into November as the S&P 500 holds above our 1430 TRADE level of support with resistance at 1448. Trading the risk and the range is what we do here at Hedgeye. With the CBOE Volatility Index (VIX) above 15, things could heat up soon without anyone taking immediate notice of the situation. Obama needs to keep the market propped up for about one more month and after that, who knows what’ll happen, especially with Europe acting as the wildcard in all this.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                DOWN

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

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

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

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

 

UNDER ARMOUR (UA)

This company’s on track to post $3Bn in revenues by ’14 – impressive given a $1.5Bn print in 2011. Perhaps more impressive is the breadth of growth drivers that will get it there – women’s, accessories, new underwear platform etc. in addition to footwear. UA is gaining share in both apparel and footwear quarter-to-date. While some may be concerned over the loss of UA’s SVP/Sourcing we’re 8% ahead of the Street in the upcoming quarter and buyers on weakness.

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

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Do you ever get tired of carrying so many evil secrets around or is it just me?” -@Dasan

 

 

QUOTE OF THE DAY

“Human Dignity has gleamed only now and then and here and there, in lonely splendor, throughout the ages, a hope of the better men, never an achievement of the majority.” -James Thurber

                       

 

STAT OF THE DAY

ADP private sector labor report shows U.S. private sector created 162,000 jobs in September, besting forecasts from economists for 143,000.


THE M3: OKADA; PARISIAN LOAN; SMOKING BAN RULES

The Macau Metro Monitor, October 3, 2012

 

 

OKADA LOSES BID TO VOTE WYNN RESORTS SHARES AT MEETING Bloomberg

Nevada state court Judge Elizabeth Gonzalez has rejected Kazuo Okada's request to let him vote on the 25 million shares that were forcibly redeemed in February, at WYNN's annual shareholders' meeting on November 2.  She said Okada didn’t convince her that he was likely to overcome Wynn’s argument that the Board’s business judgment validated the redemption.  Gonzalez’s ruling allows Okada to file a new request.  

 

Kim Sinatra, Wynn’s general counsel, said one reason stockholders won’t be asked to remove Okada next month is that there are still “lots of investigations.” 

 

THE PARISIAN LOAN TO BE INKED BY EARLY 2013 Macau Business

According to Kenneth Kay, LVS's CFO, LVS expects to get the bank loans for it’s The Parisian project in Cotai in place in 1Q 2013.  The company is planning to invest at least US$2.5 billion (MOP20 billion) in the construction of The Parisian, to be located beside Four Seasons, in Cotai.  Sands executives said last month that US$1 billion of the financing would come from the company’s equity base with the remainder coming from international banks.  They expect construction to begin before the end of next month, subject to government approval.

 

CASINO SMOKING BAN RULES ALMOST READY: GOV'T Macau Business

Secretary for Social Affairs and Culture Cheong U. said the drafting of criteria for smoking areas in casinos was “at the final stage”.  The Health Bureau, under Mr Cheong, is drafting the technical regulations.  He said the ban on smoking in casinos would still be enacted on January 1 next year, in less than three months.  Despite the short notice, Mr Cheong said he expected all smoking areas inside casinos to be ready before that.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 3, 2012


As we look at today’s set up for the S&P 500, the range is 18 points or -1.09% downside to 1430 and 0.16% upside to 1448. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 10/02 NYSE 196
    • Decrease versus the prior day’s trading of 718
  • VOLUME: on 10/02 NYSE 596.29
    • Decrease versus prior day’s trading of -11.31%
  • VIX:  as of 10/02 was at 15.71
    • Decrease versus most recent day’s trading of -3.74%
    • Year-to-date decrease of -32.86%
  • SPX PUT/CALL RATIO: as of 10/02 closed at 2.56
    • Up from the day prior at 1.68

CREDIT/ECONOMIC MARKET LOOK:


TREASURIES – the bond market agrees with me more and more by the day that both Growth and #EarningsSlowing matter a lot more than the latest Spanish conquistador whisper; 10yr yield falls again this morning, down to 1.61%; no support to 1.57% and the Yield Spread is compressing to its lowest level (138bps wide) since Bernanke’s Sep14 top.

  • TED SPREAD: as of this morning 26.78
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.61%
    • Decrease from prior day’s trading of 1.62%
  • YIELD CURVE: as of this morning 1.38
    • Down from prior day’s trading at 1.39

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:00am: MBA Mortgage, Sept. 28 (prior 2.8%)
  • 8:15am: ADP Employment, Sept. est. 140k (prior 201k)
  • 10am: ISM Non-Manufacturing, Sept. est. 53.4 (prior 53.7)
  • 10:30am: DoE inventories
  • 11:00am: Fed to purchase $4.25b-$5.25b debt

GOVERNMENT:

    • Obama, Romney debate jobs and taxes at University of Denver. Moderated by Jim Lehrer of PBS’s NewsHour. 9pm
    • U.S. ITC holds hearing on final investigation of antidumping duties for solar-energy imports from China. 9:30am
    • Senate Homeland Security panel issues findings of two-year bipartisan investigation into fusion centers, which serve as focal points in gathering, sharing information on threats. 9am

WHAT TO WATCH:

  • Services industries in U.S. probably little changed in Sept.
  • Obama, Romney face off in first of three presidential debates
  • China non-manufacturing index falls as economic growth cools
  • Bristol-Meyers returns Plavix, Avapro rights to Sanofi
  • JPMorgan rivals face billions in damages after NY fraud case
  • Boeing lowers growth forecast for global air-cargo market
  • Amerigroup delays investor vote to end Wellpoint deal lawsuits
  • EBA to release figures today on how lenders met a $149b capital target
  • Carlyle Group buys Vermillion to expand beyond private equity
  • Hewlett-Packard hosts analyst day; forecasts may be updated

EARNINGS:

    • Family Dollar Stores (FDO) 7am, $0.75
    • RPM International (RPM) 7:30am, $0.64
    • Monsanto (MON) 8am, $(0.43)
    • Marriott International (MAR) 4:30pm, $0.40

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

OIL – bearish is as bearish does; our TAIL risk line for Brent remains just inside of $113 and continues to pressure that popping sound of commodity bubbles; fully loaded, rumors not getting EUR/USD anywhere close to its TAIL risk line of $1.31; from here, Dollar up can easily take commodities lower – we’ll see if Romney can land a punch tonight for USD.

  • Oil Falls to Four-Day Low as U.S. Supply Increases, China Slows
  • Iron Ore Heads for Longest Bear Market in 20 Years: Commodities
  • Corn Crop in China Curbed by August Typhoon May Lift Imports
  • Copper Drops on Concern European Debt Crisis Threatens Demand
  • Nickel Surplus May Expand to Five-Year High on New Mine Projects
  • Malaysia’s Dompok Proposes Crude Palm Oil Export Tax to Be Cut
  • Gold Swings Between Gains and Losses Before U.S. Jobs Report
  • Cocoa Falls After Ivory Coast Sets Farmer Price; Coffee Advances
  • Palm Oil Set to Extend Losses as Stockpiles Climb on Weak Demand
  • Norway Port Set to Boom With Iron Ore Shipped to China: Freight
  • Mining Capex to Slow in 2013 With Metals Prices Under Pressure
  • VLCC Shipping Rates from Arabian Gulf Below October 2011 Lows
  • Dry Bulk Rates for Capesize, Panamax Recover From Recent Lows
  • Soybeans Drop to Lowest Since July on U.S. Harvest, Brazil Rains

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – so they lied about their GDP numbers for a few yrs and just dropped one of the biggest Service PMI bombs of 2012 (40 in SEP vs 44 in AUG); what’s another 100-300B for dysfunctional banks, amongst political friends? What’s amazing to me is how bad a lot of this global growth data is (France Service PMI 45 vs 49), despite the market’s rally to the September no-volume highs.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 

 

 

 


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