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OBAMA: Bad For Yield?

If Obama is releected, we think he’ll throw down the gauntlet on taxes from a dividends, capital gains and high earners standpoint. This puts high-yield stocks at risk. We went back and look at the original Bush Tax Cuts Round 2, which were signed into law on May 28, 2003. Utilities had the best performance then and outperformed the market by about 9% in the three week period leading up to the cuts. After that, it gave those gains back; buy the rumor, sell the news.

 

Utilities were the market's go-to sector to trade the news of lower dividend tax rates. The question for financials is did the market differentiate between high and low yielding stocks within the sector in anticipation of the news? The answer appears to be yes.

 

OBAMA: Bad For Yield?  - taxlaw1

 

OBAMA: Bad For Yield?  - taxlaw2

 

Essentially, the market does care about taxes. Banks with less than $750m in market cap offering any decent yield are at risk if Obama is reelected. NYB, VLY, PBCT, BOH, NWBI are names we think are vulnerable.

 

 

OBAMA: Bad For Yield?  - taxlaw3


WYN YOUTUBE

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



Wyndham Vacation Ownership Acquires Shell Vacations LLC (9/14)

  • Purchase price:  $102 million cash 
  • Acquisition includes $153 million of debt, which is primarily related to consumer loan receivables.  
  • “This tuck-in acquisition is immediately accretive to earnings and generates meaningful cash flow as well as a healthy rate of return.  With strong fee-for-service revenues, this acquisition is consistent with our capital-light strategy.”

WYN YOUTUBE - WYN55

YOUTUBE FROM 2Q CONFERENCE CALL

  • “We've made significant progress over the past two years with one of our key Apollo initiatives, brand.com. Revenue in room nights across the brand portfolio are up approximately 20% from this channel year-to-date in part due to improved content and Web functionality.”
  • “Over the next five years, we expect annual system size growth of 8% in EMEA, 15% in Latin America and our highest growth market will be A-Pac where we expect our system size to almost double by 2016. This is from an exceptionally strong base in the region, particularly in China where we have close to 60,000 rooms.”
  • “We completed another successful release of rci.com, which included an upgrade to an innovative click-to-chat functionality with multiple language support. From when we started the project in the first quarter of 2008, through the end of 2012, we expect our migration to online transactions to improve our exchange in rentals margin by over 225 basis points.”
  • “We expect that our available cash for the year, which includes net proceeds from ABS Financings, and assumes we'll calibrate leverage to our increased EBITDA, will be approximately $1 billion."
  • “We expect 3,022 rooms from the HPT transaction that Steve mentioned earlier, to enter the system on August 1.  And that overall pipeline activity is up 3% YoY and 5% sequentially.”
  • “We are committed to EBITDA growth of 6% to 8% with high single to low double-digit growth in the Hotel Group and mid single-digit growth in the Exchange & Rentals Group and Wyndham Vacation Ownership.”
  • “We expect sustainable annual free cash flow of $600 million to $700 million. We remain committed to an investment grade profile, which will enable us to increase debt by $300 million for every $100 million that we add in EBITDA. The result is $1 billion of available cash to deploy each year to increase shareholder value.”
  • “For the third quarter, we expect earnings per share to be $1.07 to $1.10. This is below the consensus, reflecting differences in both share repurchase assumptions and seasonality between the third and fourth quarters, however our guidance for the second half of the year is consistent with street expectations”
  • “We've probably seen a little more activity recently, more deals seem to be coming to market, but it's not a dramatic change in the volume of our activity, and really kind of what has to change is the expectation of the other side because we're very disciplined. We're not going chase anything, so if deals don't make sense, they're not going to fit into our plan… I would probably characterize it as the pipeline is a little bit stronger than it was last year at this time.
  • "The HPT deal was ”basically was built into our rooms guidance, and it's part of the reason that we're comfortable that we're going to get the growth that we've been talking about during the year to deliver in the second half”
  • “We have pretty good booking visibility into the summer for the rental business, and we feel it's pretty consistent with what we've seen so far, that we're not going to see a huge uptick, but we're not seeing any decline that we think is meaningful. I think we'll be stable in that business just as we've been calling for all year long.”
  • “We have seen a compression in the booking window.”
  • “There's been a higher level of self-inflicted attrition where we're making the decision to kick people out over the last several years, frankly not just the last couple of quarters, the last several years, as the economy has been so difficult for the hotel owners and they've not been investing in their properties.”

PNK YOUTUBE

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

 

 

YOUTUBE FROM 2Q CONFERENCE CALL

  • "Universal card deployment will continue through the fall with Lake Charles and we anticipate completing this one card system at all our properties by the first quarter of next year. We're 15 months into our revamp loyalty program and mychoice is doing exactly what we designed it to do: increasing loyalty from our best guests with proprietary and aspirational benefits. And we've done this without increasing our overall marketing reinvestment."
  • "Vietnam is expected to follow a gaming tax model that is similar to that of Singapore. The gaming tax rate is 30% in Vietnam on a mass market play; however, it is our expectation that junket commissions will be deductible for gaming tax purposes. Therefore, the VIP effective tax rate will be materially lower."
  • [River Downs] "We expect to have the first phase of development open and to the public in 2013. We're looking forward to having access to the garage later on this year, the multipurpose room will come online next before the end of next summer, and the hotel will be opened in the second half of 2013."
  • "In New Orleans, we will be building hotels to add to severely lacking amenities to this facility. The $20 million project should be completed by the end of 2013, at which point all of our current gaming properties will have a hotel. There will be very limited disruption throughout the construction and we expect the return on invested capital for this project to exceed 15%."
  • "In Lake Charles, as we mentioned previously, we plan to refresh the room product. The first phase of this project will touch close to 530 rooms in hotel corridors, most of which are about seven years old now. This phase will cost approximately $17 million and will be done over the next 18 months."
  • "We expect that transaction to close by the end of this year."
  • [Heartland Poker acquisition] "The asset is EBITDA positive. We're not yet developed the full budget for next year on that. We will do so and you'll start seeing results in our earnings at this coming quarter since the transaction closed right at the beginning of July. So, and obviously we paid it with all cash; so... almost on any metric you look at, it'll be accretive."
  • [Corp expense of ~$5MM sustainable?] "Yes, we can maintain that level."

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RCL: Cruising Ahead

Royal Caribbean Cruises (RCL) is set to report in-line Q3 results this Thursday due to better cost management. It has had six straight quarters of better-than-expected expenses sans fuel; we expect it to continue. Here are some takeaways from our Gaming, Leisure and Lodging Team on RCL:

 

·Despite a 6.5% increase in bunker fuel prices since their guidance on July 20, RCL should report in-line 3Q results Thursday due to better cost management

·RCL has had six straight quarters of better than expected expenses ex fuel, and that streak should continue, 2012  guidance should be intact but F4Q may be lowered slightly due to continued pricing weakness in North America (i.e. Caribbean) and higher fuel prices

·But investors may not care much about this fiscal year as all ears will be on Fiscal 2013 commentary

·Bookings continue to be solid and will likely improve in 2013, F1Q 2013 is a difficult comp as yields were up 7% last year with much of the business booked before the Costa Concordia incident

·We’re seeing slightly higher Caribbean pricing YoY for 1H 2013, though it is losing steam recently,69% and 37% of capacity is in the Caribbean for 1Q 2013 and 2Q 2013, respectively

·The recovery in European pricing has been steady

 

RCL: Cruising Ahead  - image003


TGT: Terms Don't Look Good For Credit Sale

Takeaway: $TGT's credit card sale is finally done. But at a price well below what we think is acceptable at this point in the cycle.

So, Target is finally selling its credit business in a transaction with TD for $5.9bn. All in, it looks like a bad deal for Target. Par value is the low end of the range for what we should be seeing in deals like this, especially at this point in the cycle. A good deal would have been a mid-to-high single digit premium to receivables.

 

Mind you, it's not like this is a poor quality portfolio. TGT's REDcard, which offers 5%discounts and gives cardholders free shipping for online orders accounted for 12.8% of sales in the latest quarter vs 8.7% a year ago. Perhaps the quality of that growth is less than what the Street otherwise thought.

 

In the end, the cash in in, and the distraction is gone. But the price is low. 


COH: Price Changed, Research Hasn’t

Takeaway: No thesis-changers in this $COH print. There’s some for the bulls and some for the bears. But the only thing really to change is price.


The punchline for us is that we’d short more Coach on strength following the quarter. It’s not that we’re trying to find the bad in this event to justify our call – we don’t do that. But very simply that nothing has really changed except the price – and even that is coming back down to earth after giving back most of initial gains.

 

Quantitatively, the stock needs to break $58.81 and hold that level for bulls to have anything meaningful to hold on to from a near-term perspective, but  the fundamentals won’t support that. The stock initially traded like this was a blow out quarter. In reality, revenue was in-line, margins were down -209bps, EPS grew at a whopping 5%, and inventory growth outpaced sales by 5pts. Guidance – whatever little Coach gives – was very much unchanged, and there was not a whole lot of new information on the call. We’d be surprised if consensus operating estimates change meaningfully following this print.

 

There were a few notable call outs from where we sit.

  1. The first is that the new (high cost) Legacy product line is ‘off to a good start’, meaning that the chance of it falling  flat on its face is minimized. This is important because it’s Coach’s biggest product launch in years, and it is spending accordingly. If the product line did not catch on, it would be a disaster for Coach. They can’t declare victory yet. But they can check the box that it was not a failure. Positive
  2. They could have really muddied the water with their new reporting structure, but did not. The door was wide open for them to add an element of opacity to mask the real underlying trend in their business, but that did not materialize. Positive
  3. While they averted a negative development with perception of disclosure, the reality is that guidance remains very slim. The ‘trust me’ factor remains high and it’s not good enough for us that they’re simply buying the stock. Negative
  4. While comps came in at a respectable +5.5% in NA, the company is slowing store growth on the margin from 30 to 25 stores. Negative
  5. Coach’s SIGMA looks ‘putrid’. This is the 10th quarter in a row where inv/sales has been in a bad space, or headed towards one. The margin move looks awful, and the compares over next 3 quarters get tougher. Tough margin compares with higher inventories is never a great set-up.  Bulls will point to the fact that COH bought it its Korea and Malaysia distributor in the quarter which caused the margin erosion and inventory hit. That’s acceptable, but it does not change the fact that more product needs to be sold at the best margin possible to comp last year’s trend. Negative

Apparently, a low quality 2-cent beat on in-line revenues and weak gross margins with elevated SG&A was good enough to get the stock up in this morning’s session. But the reality for us is that revenue is still slowing, and the cost of those sales is going higher. COH looks cheap ‘relative to history’ where it is today. But valuation is not a catalyst.


It’s guiding to 31% operating margins today. As it grows into more spaces outside the traditional core, margins are more likely to come down than go up. Mind you, 31% is exceptional. Even if they came all the way down to 25% that would still be exceptional by any standards in retail. But unfortunately, stocks don’t go up when margins come down.  

 

COH: Price Changed, Research Hasn’t - COH S

 

COH: Price Changed, Research Hasn’t - COH TTT

 

 


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