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UAL: Margins Under Pressure

United Continental (UAL) faces margin pressure going forward into 2013 if it doesn’t do something about the pricing of airfares. The airline has seen fuel costs increase +8% year-over-year to $3.44/gallon for September of 2012 as well as a +6.5% increase in salary plus related costs year-over-year for Q2 2012. UAL has yet to pass many of these costs on to the consumer via ticket prices, which will ultimately put pressure on 2013 EPS estimates. With UAL facing a more competitive American Airlines, you can see why our Industrials coverage remains bearish on UAL.

 

UAL: Margins Under Pressure  - fares normal


Fun: SP500 Levels, Refreshed

Takeaway: Less than 3 trading days ago (after 6 consecutive down days), no one wanted to buyem. Now +2.3% higher, no one wants to sellem.

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Less than 3 trading days ago (after 6 consecutive down days), no one wanted to buyem. Now +2.3% higher, no one wants to sellem.

 

#Fun

 

Across my core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1466 (lower-high vs Bernanke Top SEP14)
  2. Intermediate-term TREND support = 1419

 

In other words, the risk range is widening – and that’s not a good thing, particularly if the VIX holds 14 for the umpteenth time in the last 5 years. If you ask anyone who is long Tech how the market feels (-3% for OCT), they see the risk more clearly.

 

Risk tends to be more clear in the rear-view,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fun: SP500 Levels, Refreshed - SPX


PENN Q3 PREVIEW

On an apples-to-apples basis, we think we are below the Street.

 


Our Q3 EBITDA and EPS projection is $187 million (excluding pre-opening and Maryland lobbying expenditures) and $0.57, respectively.  PENN management had previously guided to $0.55 which included pre-opening expense (estimated at $0.08) but excluded Maryland.  On an apples-to-apples basis to management’s guidance, our estimate is $0.49.  We believe consensus is somewhere below the guidance but above our estimate – again, on an apples-to-apples basis.

 

The whisper number is probably a slight miss.  We’re not sure how much of a catalyst a slight miss would be so guidance may be the focus.  We’re generally negative on domestic gaming.  Recent results adjusted for seasonality have been on a sequential downturn.  In other words, gaming revenue for the last three months have fallen below what the sequential trend, adjusted for seasonality, would’ve suggested.  Even if PENN maintains Q4 guidance, that guidance would be at risk, in our opinion.

 

Of course, PENN management has done a fantastic job with margins so that cost side will be the wild card.  We think most of the heavy lifting on cost cutting has been completed and it should be all about demand going forward.


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Brent Versus ANS

As of this morning, the spot price of Brent Crude oil is trading at a near $7 premium to Alaska North Slope spot. This is a bullish signal on the immediate-term TRADE duration for refining margins based on the West Coast, which process ANS and sell products based largely off of Brent. Energy Analyst Kevin Kaiser likes Tesoro (TSO) as a long play here, as it’s the most heavily levered to West Coast refining margins. 

 

Brent Versus ANS  - brent ans normal


Check 'Em

CHECK 'EM

 

 

CLIENT TALKING POINTS

 

CHECK ‘EM

In the days leading up to last night’s presidential debate, there was much a stir about the choice of Candy Crowley as moderator of the debate. She said she would defy rules and rephrase questions as she saw fit. That’s like a replacement ref in the NFL making up stuff as they go along - it’s not right. She was clearly going out of her way last night to drum up a brouhaha over her work and she got it. She interpreted the debate as she saw fit and that’s not what the American people deserve. What happened to truth and fairness?

 

 

BETTER GET IT RIGHT

We bought gold into the close yesterday because when the dollar is down, gold goes up. When Obama does well in a debate, the dollar goes down and vice versa when Mitt is killing it. Gold is still in a long-term bubble but the point is that on the immediate-term side of things, if you get that US dollar right, you’re going to get a lot of other things right. Keith pointed out a factoid on the USD that’s worth sharing this morning because it has huge implications:

 

A)  IF the US Dollar snaps its TAIL line of support ($78.11)

B)  AND the Euro (vs USD) breaks out above its TAIL risk line of resistance ($1.31)

C)  THEN the market is probably telling you that Obama is going to win the Election

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: DOWN  

 

 

_______________________________________________________

 

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

 

HCA HOLDINGS (HCA)

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

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

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“The media simply don't hold Obama to a high standard. I call it the soft bigotry of low expectations.” -@TPCarney

 

 

QUOTE OF THE DAY

“Nothing is so admirable in politics as a short memory.” -John Kenneth Galbraith

                       

 

STAT OF THE DAY

Pepsi’s Q3 earnings fells 4.9% amid a decline in food and beverage sales. Higher commodity prices at work, folks.


PENN YOUTUBE

In preparation for PENN's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

Penn National Gaming Proposes $807 Million Springfield, Massachusetts Development Including Hollywood-Branded Destination Casino Resort (10/11/2012)

  • +300k ft casino
    • 3,000-3,500 slots
    • 80-100 tables
  • Hotel:  300-500 rooms
  • Nightclub/ultra lounge; structured parking with 4,000-5,000 spaces; and 30,000-45,000 square-feet of meeting and convention space

Hollywood Columbus opens (10/8/2012)

 

PENN YOUTUBE - penn

 

DB LEVERAGED FINANCE CONFERENCE (10/11/2012)

  • "We've got the Harrah's St. Louis acquisition, which we expect to close right around the end of this month, maybe November 1, November 2."
  • "We have two VLTs for tracks that we're relocating to one to Dayton, Ohio, which will open in 2014 and another track which we're going to relocate to Youngstown, Ohio, which will open in 2014 as well."
  • "The amount that we've spent to date is deminimis, really for land cost, $4.9 million and $3.6 million, population – that will start ramping here in probably late fourth quarter, early first quarter of next year and population there is roughly 0.8 million or 800,000 people and 600,000 people in Dayton."
  • "Baton Rouge, L'Auberge opened in Baton Rouge. Clearly to date that's having an impact on our property. It's fairly substantial."
  • "We've clearly seen an impact from Scioto Downs opening in Columbus... on our Lawrenceburg facility. We have roughly 10% of our business comes out of the Columbus market for Lawrenceburg, and we have clearly felt the impact of that."
  • "Table games play has been very strong. Similar to what we're seeing in Dayton, we saw a little bit of that in Columbus. For whatever reason, and I think maybe it's simply a function that it's a less mature market and it hasn't had a lot of exposure to gaming, but we're clearly seeing that the slot business is a little bit slower building than what we might have expected to happen. I would say at Toledo, we're basically on track, but we're well ahead of track on poker and tables. So, clearly both of those markets are a little stronger in Ohio. The slot business – for whatever reason, I think it's going to just develop over time."
  • "We think the cannibalization in St. Louis market is over for the foreseeable future."
  • [Maryland Heights acquisition]  "Our new CapEx is going to include new slot machines, not completely new slot machines, probably about 500 new slot machines, all new systems and a Hollywood rebranding."
  • "First there's the process of getting selected by Springfield. Then it goes to the state. It's not completely established yet whether the city's going to approve one or two sites or three sites or four sites or whatever and let the state decide. So that's all to come. I don't think there's a final selection in Springfield until 2014 and even after that selection process, I would guess it's a 2016 event before you see any kind of actual opening of a facility in Western Mass." 

1Q CONFERENCE CALL YOUTUBE (7/24/2012)

  • "Generally not having any expectation that we're seeing any improvement in consumer confidence or unemployment levels as we think about the balance of 2012."
  • "I would remind everybody that we have the preferred equity sitting out there with the maturity in 2015, which currently has a dilution impact of roughly 27 to 28 million shares. It currently costs us 0% to leave that out there, so there's certainly no incentive for us to go out and accelerate the redemption of that instrument. But that's a mechanism that sits out there." 
  • "Riverside is the closest casino to the speedway. We fully expected that it would take the largest hit from the Kansas Speedway opening. But with all that, we have continued to look at our fight zones in and around that market and try to capture share from Ameristar and Harrah's and, to a lesser extent, Isle. And they have been very aggressive in preserving their slot business especially. And that's been our challenge, but we're not going to be undisciplined in how we go after that. So we've continued to look at geographically where we think we have opportunities to continue to grow the business at a very profitable level but not overspend in our marketing dollars. Our margins there have held up very well, even though the revenue impact has been a double-digit decline. We'll continue to do that as well at Riverside and...continue to grow both of those businesses as Kansas Speedway evolves."
  • "Project CapEx is expected to be roughly $160 million for the third quarter and roughly $88.9 million for the fourth quarter. Maintenance CapEx in the third quarter was roughly $23.7 million and maintenance CapEx for the fourth quarter were projected to be around $21.2 million."
  • [Toronto] "We have a broad interest in any opportunity in that province. So Toronto is certainly of interest if we have a better understanding of what they're looking to do there, plus there's other regional markets in that province that also we view as very attractive."
  • "We're hopeful to have a groundbreaking before the end of 2012, and right now we're thinking first half of '14. But it's still a very fluid process and a lot of things have not been resolved yet."
  • [Promotional environment in Vegas]  "Generally more of the same. The locals market continues to be sluggish out there. Promotional activity is slightly more rational than what we saw a couple quarters ago. And we've certainly at the M continued to pare back our marketing expenses where we believe we can improve the profitability of our revenue streams."
  • [Illinois VLT impact] "We don't anticipate any impact from these bars and taverns opening up."
  • [Cap interest guidance] "We have roughly $2.2 million in the third and roughly $800,000 in the fourth."

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