ASCA: A SURVIVOR

ASCA announced today that it had negotiated covenant relief. More restrictions were put in place but the main cost was 125bp increase the rate and $9 million dollar amendment fee. In return, the banks raised the senior leverage covenant by 0.50x to 1.25x depending on the quarter. Per our model, this puts ASCA in the clear at a modest price, about $0.20 in annual EPS.

Due to the leverage step down in Q2 and again in Q3, we had ASCA tripping its senior leverage covenant in Q2. Now, ASCA would seem to have ample room as seen in the first chart. Investors must be cognizant, however, of a new covenant that requires ASCA to maintain minimum consolidated trailing twelve month EBITDA of $275 million. We are currently projecting 2009 EBITDA (per the covenant calculation) of $328 million. Other, less important, changes include a smaller basket for dividends and share repurchases.

While Street EPS estimates need to come down to reflect the higher interest cost, Street EBITDA estimates look too low. Yes, I actually stated that a gaming company is likely to exceed EBITDA estimates. Favorable regulatory changes in Missouri and Colorado and stabilizing demand in most of the regional markets. For once, the analysts were conservative enough. ASCA is really starting to capitalize on the $500 loss limit removal. Look for more effecting marketing efforts to drive incremental demand and better margins. The Street may be over $10 million too low on 2009 EBITDA.

With only two more quarters of development Capex, ASCA has got the makings of a cash machine. The second chart details free cash flow and free cash flow yield on a TTM basis. Net free cash flow should turn positive in Q3 2009 and escalate from there to almost $150 million annually. The FCF yield could exceed 20%.

Gaming is a strong cash generative business with high barriers to entry. Demand is less sensitive than most consumer discretionary sectors. Most gamers egregiously exploited the easy money era and many won’t survive the current environment. The survivors will face less competition, higher cash flows as Capex has been scaled back, and consequentially, higher valuations. ASCA looks like it has entered the survivor pool.

ASCA maintains significant cushion under the new leverage covenant
Significant free cash flow potential

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more