prev

IGT: Simply The Best

 

Last week, we held our bi-annual Best Ideas call for institutional clients. The call focuses on our best actionable ideas from each sector head and today, we’re pleased to bring you Gaming, Leisure and Lodging Sector Head Todd Jordan’s idea: International Game Technology (IGT). After being negative on IGT for years, Jordan is now bullish on the stock due to improving EPS growth, a low P/E ratio of 11x and the company’s ability to grow market share through quality content. 

 

Another positive for IGT is that it has accelerating cash flow; returning cash to shareholders is now a priority and increases the possibility for stock buybacks. Jordan is long on the immediate-term TRADE (3 days) duration and the intermediate-term TREND duration (3 months).

 

Watch the video we’ve posted for Jordan’s full rundown on IGT. You’ll easily see why it’s one of our best ideas.


Improvements In Housing

One of the most important metrics for the housing market is existing inventory of homes for sale. Existing inventory recently moved lower (a positive for the market) by 7.8% on a month-over-month basis for October and 21.9% on a year-over-year basis. Levels continue to tighten which helps improve price and rid the market of excess housing. The charts below showcase the current state of the housing market over various metrics.

 

Improvements In Housing - image003

 

Improvements In Housing - image002

 

Improvements In Housing - image004


Time To Regroup

Client Talking Points

The No Volume Rally

Despite volume being down -21% yesterday versus the November average, stocks decided it was time to load up on steroids and rip to the upside with the S&P 500 blowing past our TAIL line of support at 1364 and closing at 1386. A reminder that our risk range  is 1364-1401 with the latter number being a real test of confidence for the market. We’re still down -6% from the Bernanke Top (aka September 14 YTD high) so you could consider yesterday to be a short squeeze or whatever buzzword floats your boat. The truth of the matter is that our three top macro themes remain intact: Earnings are slowing, the commodity bubble is popping and the Keynesian Cliff remains a problem that has yet to be addressed properly.

Major Meltdown

Our #EarningsSlowing theme has really been a focal point for the market over the last month. We’ve seen big boys like FedEx (FDX) and Caterpillar (CAT) guide down and plenty of misses versus Street consensus. #OldWall thinks that things really aren’t all that bad and yet each day, we get bad news or data that you think would make them change their mind. After last week’s selling, you can’t help but wonder what the people who said that stocks were “cheap” were thinking.

Asset Allocation

CASH 52% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 21% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

IGT

There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.

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.

Three for the Road

TWEET OF THE DAY

“I like how Meg Whitman is blaming "fraud" on the disastrous Autonomy acquisition. More like complete $HPQ board & management incompetence” -@Contrahour

QUOTE OF THE DAY

“Skeptical scrutiny is the means, in both science and religion, by which deep insights can be winnowed from deep nonsense.” -Carl Sagan

STAT OF THE DAY

China Foreign Direct Investment (FDI) remains down -3.5% year-over-year through October.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE M3: GAMING ZONES; RUSSIA; BOUTIQUE COTAI CASINO; CHANGI

The Macau Metro Monitor, November 20, 2012

 

 

RELOCATION OF SLOT MACHINES PARLOR OUTSIDE COMMUNITY TO BE LEGALIZED Macau Daily News

The Macau govt will draft laws to regulate the location, features, rules and operations of gaming venues, in an attempt to resolve gaming related problems, such as removing slot machines venues away from the community.  Secretary for Economy and Finance Francis Tam said the government will soon roll out the definition for ‘gaming zones’ and ‘non-gaming zones’ in 2013, in which case, gaming venues within gaming zones will need to be relocated.

 

The government is going to strengthen gaming supervision in 2013 to push ahead the development of gaming business in a moderate and orderly manner. Efforts will be made to cap the commissions for junket promoters to no higher than 1.25% of the total bets.  The database of junket promoters will continue to be improved and the minimum internal control requirements should be carried out on a sustainable basis.

 

FIRST CASINO BEING BUILT IN FAR EAST GAMBLING ZONE RIA Novosti, Las Vegas Review Journal

According to the administration of the Primorye Region, the construction of a first casino and a hotel has begun in the Far Eastern gambling zone.  The first stage of the Primorye gambling zone project, due to be completed by 2015, is supervised by the region’s governor Vladimir Miklushevsky.  Plans call for 12 casinos with the first phase of a three-part rollout to be completed by 2016 and a planned total investment of about $2 billion.  “The gambling zone itself is not the most important thing, but it is like an anchor. In the modern tourism business, income from the gambling zone itself makes from 30 to 40% of all tourism revenues. The rest comes from other sources, such as amusement parks and shopping centers,” Miklushevsky said.

 

Vladivostok is one of the four regions allocated by the Russian government to have gaming.  The mountainous region bordering China and Korea is roughly a two-hour flight from Seoul or Tokyo.

 

COTAI BOUTIQUE CASINO HOTEL TO ISSUE SHARES IN HONG KONG Macau Business

The project for a boutique casino hotel in Cotai, just next to One Oasis residential project, is one step closer to becoming a reality.  The investors are eyeing to inject the project into Hong Kong-listed construction and property management company Paul Y. Engineering Group Ltd, PYE for short, and then use the company as a platform to raise capital.

According to a PYE stock filing dated from yesterday, there is already has an agreement to buy the land needed for the casino hotel from the developers of the One Oasis residential project.  The total estimated cost of the project is HK$6 billion (US$774 million), including the cost of the land.  To help fund the project, there are plans to raise up to HK$800 million through a stock placement. An additional HK$2.4 billion will be raised through issuing convertible bonds.

 

Stephen Hung, the vice chairman of Rio Entertainment Group, the holding company that operates Rio Hotel & Casino on the peninsula, has already indicated his intention to subscribe for HK$200 million worth of placing shares and/or placing convertible bonds.  Construction could start early next year in order for the property to be ready by 2016.  In the stock filing, it is not disclosed under which casino operator’s gaming licence the casino would operate.

 

The boutique casino hotel, to be built on a 6,000-square meter plot, is projected to have 66 live gaming tables.

 

MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport Group

Singapore's Changi airport saw passenger traffic rise 10% in October.

 

THE M3: GAMING ZONES; RUSSIA; BOUTIQUE COTAI CASINO; CHANGI - CHANGI

 



JACK THESIS INTACT

Takeaway: We continue to see upside in this stock to $40 over the long-term TAIL.

JACK reported 4QFY12 EPS last night.  The current climate is challenging for all restaurant operators but we remain confident in our tail thesis on Jack in the Box.  We would highlight the gulf between consensus estimates for JACK revenue and the result last night as indicative of the risk there is in consensus estimates for this company.   We think the headlines, which were largely misrepresentative of the reality of Jack in the Box’s 4QFY12 results, caused the sharp sell off after hours.  We continue to see upside in this name to $40 over the next three years.  Here is a quick run-through of what we will be focusing on during the earnings call at 11:30 ET. 

 

Revenue:

  • JIB SRS were a big upside surprise, will be interesting to hear on the call if marketing was ramped up significantly for the September quarter
  • 2-year SRS trends accelerated for to 4.5% and 2.7%, for company and franchised JIB restaurants
  • Qdoba a big downside surprise at 0.8% and two-years trends slowing to 2.3%.  Gary Breisler, President of Qdoba, left intra-quarter
  • We will want to pay attention to growth expectations for Qdoba.  If SRS trends remain at current levels it could lead to some growth being postponed

 

Margins:

  • Cost of sales were higher than expected.  I suspect that we will get a look into FY 2013 commentary on beef outlook on the call
  • Labor costs were lighter than we modeled, due to lower labor trends at JIB.  How sustainable is this and can we see more of this in FY2013.
  • G&A a bit heavy once again.  G&A has been trending higher for all of FY2012.  Why?

 

Guidance issued for FY13:

  • 1QFY13 SRS 1-2% at JIB co-op and Qdoba co-op.
  • FY SRS at JIB co-op 2-3% (we think this is conservative guidance)
  • FY SRS at Qdoba co-op 2-3% (we believe management is being cautious and will seek to prove Qdoba margin story in FY13)
  • 1Q13 SRS seem to be below the current street expectations. 
  • Commodity costs up 2-3% (refranchising a good move but franchisees will feel burden of beef costs)
  • Company will no longer provide guidance for refranchising gains as results will become cleaner

JACK THESIS INTACT - jack recap

 

JACK THESIS INTACT - jack co op sss

 

JACK THESIS INTACT - qdoba system sss

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next