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We believe there is a high likelihood that PNK's 26.50 bid for ASCA will be topped.  As evidenced by the huge increase in PNK's stock, ASCA left a lot on the table.  MGM Resorts International or Penn Resorts could offer a higher bid for ASCA.  ASCA would be hugely accretive for MGM, given MGM's large balance of tax loss carry-forwards. They could pay 8.5x ASCA's trailing 12-month EBITDA, which would equate to a $35 bid and still make it de-leveraging and very accretive from an EPS and cash flow perspective.  PENN could offer even higher since ASCA's integration with its planned REIT structure would instantly create value.  We believe ASCA could be worth up to $40 to PENN.



INTERMEDIATE TERM (the next 3 months or more)

The stock may trade in a tight range for the next month or so. Investors are waiting to see if a higher bid from MGM, PENN, or another operator surfaces. Fundamentally, ASCA remains relatively protected from new competition and, with the top in class assets in virtually all of its jurisdictions, is a defensive play in the space. LONG-TERM (the next 3 years or less) PNK's acquisition of ASCA is expected to close by 3Q 2013. However, we believe ASCA will receive a higher bid before that deadline. A bid of at least $35 (28% premium to current price) seems reasonable and doable given the relatively small breakup fee.


LONG-TERM (the next 3 years or less)

PNK's acquisition of ASCA is expected to close by 3Q 2013. However, we believe ASCA will receive a higher bid before that deadline. A bid of at least $35 (28% premium to current price) seems reasonable and doable given the relatively small breakup fee.



We Want Your Feedback - he bi ASCA chart



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Out With The Old

Client Talking Points

In With The New

2013 is an exciting year for us at Hedgeye. We’re all about following a process that works for us, owning up to our mistakes and taking on new challenges every day. The #OldWall still doesn’t get it to a degree. They are still attending conferences where everyone plays by the rules and makes sure to discuss year-old topics with a certain vagueness as to not offend anyone. Our analysts are the best of the best and don’t have things like brokerage to get in the way of their decision-making process. When we trade stocks, we use a combination of quantitative and fundamental, bottom-up research that helps us determine a risk and a range for each name. If you stay within that range, you’ll do a lot better than throwing darts blindly into the wind. 

Hammer Time

One of the themes from our Q1 2013 Global Macro Themes call was #HousingHammer and boy, is it Hammer Time. This week has been quite a boon to the housing market with some truly significant data coming out on the mortgage application and housing starts front. Throw in a superb Jobless Claims print of 335,000 and you’ve got something to get excited about. The Street consensus isn’t as bullish as they should be on housing; we suggest they take a closer look at the market.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Phrase "deeply regret" has really lost its way. I'm pretty sure you can't regret something someone else did (or another country)” -@ianrosen


“If a man does his best, what else is there?” -General George S. Patton


China Q4 GDP rises 7.9% vs estimates of 7.8%

Politicians and Energy Drinks - Making Sure No Windmill goes Untilted

Yesterday, shares of MNST were weak for what seems like the umpteenth time on the same news - concerns over the FDA's involvement in energy drinks.  This time, it was a letter sent from the offices of Sens. Durbin and Blumenthal and Rep. Markey to Living Essentials, the manufacturer of 5 Hour Energy Drink.  The letter is linked below:


The latest flurry of activity is in response to data published by the Drug Abuse Early Warning Network regarding emergency room visits and energy drinks.  The report is linked below:


The gist of the report is that emergency room visits involving energy drinks doubled from 2007 to 2011 - the data prior to 2007 is squirrelley, at best.  Of course, over the same period MNST's volume has grown over 60% and energy shots have seen a substantial increase in popularity.


We are encouraged by the fact that our elected officials have fixed everything else in the country to the point where looking at caffeinated drinks has become an issue.  However, we haven't changed our view that there isn't a role for the FDA here.


Part of us thinks KO should simply buy MNST and use KO's more substantial resources to fight this battle because, and make no mistake about it, they will come for KO's products next (KO's recent efforts to get out in front of the obesity issue tells us there is concern there).  Mayor Bloomberg isn't the only part-time nanny that holds a political office.


Hedgeye is an outstanding resource for historical perspective, and part of that is some very quotable quotes.  I prefer to rely more on pop culture for my quotes, and look to Captain Jean-Luc Picard in his fight against the Borg in Star Trek: First Contact - "The line must be drawn here! This far and no further!"


- Rob


Robert  Campagnino

Managing Director








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ICR: A Whole Lot of Complacency

Takeaway: The lack of a major theme out of ICR is itself a theme. We think this is the year where you're paid for the stock call, not the group call.

We think that this is the first ICR conference in at least 5-years where there is the absence of a major theme to carry the group – up or down – for the year. Management teams seemed complacent in their lot of ‘slightly better than average’ business trends, with few companies (FNP and URBN are two) who stand out with an exceptional process to drive their business to the next level.


Our top longs remain FNP, NKE, RH, URBN, and believe it or not – JCP is even gravitating to our bench of ideas.

On the short side, we like department stores – M, KSS, as well as GPS, and GES.



The tone of this week’s ICR conference seemed positive overall to us, with a far more favorable preannouncement cadence than last year, and notable commentary on good inventory positions despite mixed sales results. You could drive a truck through the range in quality of the management teams there, and we were specifically impressed with discussions with both FNP and URBN as it relates to their respective views as to what it will take to more than double the size of their businesses, and the categories and selling methods it will take to get there.


But there was one big trend that hit us hard – and that was the absence of a recognizable trend at all. That might seem like a ridiculous statement, but let’s look at past ICRs and add some context.


  • 2008 and 2009: We were in the depths of the Great Recession. Positive datapoints were few and far between. The sentiment was almost uniformly negative, and the stocks behaved accordingly. Into the 2009 ICR conference alone, the group (as measured by the RTH – cap weighted S&P Retail Index) was off by almost 15%. The MVR (equal-weighted index of 30 retail stocks) was off by over 30% into and around the conference.
  • 2010: This was a big recovery year. Sales accelerated and inventories fell. That sent gross margins up high and earnings revisions higher. This is clear as day in Exhibit 2 below. The stocks started to work in earnest two quarters before the conference, but were still up 5-10% on the event as the recovery continued.
  • 2011: The Raw Material Scare. This is when people thought that cotton, which had just doubled in price over the shortest time period in history, would stay at $2 in perpetuity. The ‘recession earnings recovery’ slowed, at the same time the outlook for Average Unit Costs (AUC) went grossly out of favor. Translation = negative tone at ICR, and decelerating stock price performance.  
  • 2012: This was an interesting one. There were more severe preannouncements than any year yet, but more often than not companies chalked this up to the lingering impact of higher costs – which was the ultimate excuse because the fact of the matter is that it was valid. But at the same time the companies gave positive unofficial outlooks on getting pricing power in 2012 and the gap between AUR and AUC turning positive. The bottom line is that it gave people reason to believe, the tone of the event was upbeat, and the stocks traded up.
  • 2013: This year, as shown in Exhibit 2, Inventory/Sales trends are back to zero-barrier after a strong four-quarter trajectory upward. Gross margins are still down, but are within 100bp of peak and unlike last year, clean inventories won’t likely provide a tailwind. We’re not looking to paint a big negative call here, but just can’t come up with something positive, either. We’re pretty much ‘retail-agnostic’. The market seems to agree, as the stocks are only up 3% on the event – which is less than usual. We may get more GM improvement in 2013, but by and large, we need a strong consumer for the group to work en masse from here. The lack of strong proactive plans by many companies seems to support this.


Exhibit 1: S&P Retail Index vs. Past ICR Conferences

ICR: A Whole Lot of Complacency - icr1


Exhibit 2: Sales/Inventory Spread vs. Gross Margins (60 Company Average) vs. Past ICR Conferences

ICR: A Whole Lot of Complacency - icr2

Stand On Your Hands

 “When torrential water tosses boulders, it is because of its momentum”

-Sun Tzu


To invert is to change from one position, direction, or course to the opposite position, direction, or course.   Within the context of yoga, the art of inversion includes using breathing and your core mussels to control the mind and the body; inversion allows for efficient brain stimulation.


Blockages of blood flow to the brain can sometimes result in cognitive difficulties or, in extreme cases, serious health issues.  Performing daily inversions combats this by forcibly flushing old blood out of the brain and replacing it with freshly oxygenated, nutrient rich blood coming directly from the heart.  Performing the ritual of Adho Mukha Vrksasana has been empowering and beneficial for me.  The state of relaxation that follows can lead to gratifying periods of reflection. 


Listening to restaurant companies present at the ICR XChange conference is another ritual than can lead to soul searching.  “What am I doing?” “Does this matter?” “Did he really just say that customers love getting a free bucket of peanuts?” 


After many years of attending the ICR XChange conference, I decided not to attend this year.  As part of a new approach in 2013, I am trying to do things differently.  Being a restaurant analyst that is not at the ICR conference is analogous to performing an inversion; in part, it represents the avoidance of group-think that can lead to poor investment ideas.


The truth is, the #OldWall process is broken and, other than secret one-on-one meetings with management, which I have no desire to attend, little-to-no incremental insight is available from listening to restaurant company executives at ICR this week.  The ICR Exchange Conference is as #OldWallSt as it gets.  All 21 sponsors of the 15th Annual ICR XChange are the biggest investment banks on Wall Street.  Before each presentation, an industry analyst takes the podium to say a few kind words about the presenting company and its future prospects.  There are countless intelligent people to learn from at the event but, at its core, it represents the inherent conflict of interest that typifies the traditional sell-side research model from Wall Street. 


Listening from afar, I am realizing that I have made the correct decision.  Listening to endless generic presentations, getting to Chipotle’s “break out” table 30 minutes early just to get a seat, knowing in advance that commentary will be uniformly bullish whatever the underlying reality, becomes a meaningless exercise eventually.  After yesterday’s preannounced EPS miss from Chipotle, anyone could have written the script for today’s conference: “Everything is fine, we are still changing the industry, and our growth opportunity is still as great as ever.  This EPS miss was merely a blip”.  The bar scene in Miami definitely had a Wall Street influence last night.  A lot of conviction can be gathered on an idea while having a few drinks.


The “read through” and “takeaway” from a company meeting at ICR is often meaningless.  We are getting passed a lot of notes from the sell-side stating that “our meeting with management gives us confidence” in our buy rating.  If you ever receive a note from ICR saying that management meetings have bolstered confidence in a short thesis, call me collect.


That’s the problem with the #OldWall, it is very difficult to speak one’s mind about a company.  As an analyst, your incentives should line up with your clients’: produce effective research on the value of the securities in question and assist those paying clients in making their stock selections.   Unfortunately, the incentives of an analyst are too often in conflict with the clients.  Getting paid and retained is what matters; if clients happen to do well, that’s a happy coincidence.  Ask yourself how your sources, and their firms, get paid.


Coming out of events like ICR, the momentum in certain stocks can build and get a lot of people paid in the short run.  If there is one stock in the restaurant space that has embodied momentum over the past few years, it has been Chipotle. Today, management hinted at raising prices in 2H 2013 to absorb food inflation.  Yesterday, the stock reacted very favorably to that news, we think, in error.  The following is a checklist of questions that we think investors need to become comfortable with before getting behind this move in CMG:

  • If they decide to take price, do they have pricing power?
  • How much sensitivity is there?
  • Is new unit volume growth coming back?

On December 12th, we wrote that the CMG bottoming process was likely to take several quarters and that we would be more constructive on the stock at $250.  We know that over the past number of years, new unit AUV growth has led the inflection points in revenue growth, which has sequentially decelerated over the last two reported quarters.  Until new unit AUV growth bottoms, we expect top line growth to remain sluggish. 


The ICR XChange posed an opportunity for management to hint at taking price and, as usual, the congregation was more than willing in their acceptance of the myth.  Chipotle has to operate, like everyone else, in the real world.   CPI for Food Away from Home has rolled over and, with the share-of-stomach battle in casual dining heating up, there could be limited upside from here.  We see significant risk to Chipotle’s traffic, which sequentially decelerated from 3Q to 4Q, even with price coming off the menu, if price is raised meaningfully.


Standing on my hands, over 1,000 miles from Miami, those are the points that I think matter for Chipotle’s shares going forward.   The stock ripping yesterday was predictable but we would caution against chasing it unless you can get comfortable with our checklist above.  


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the S&P500 are now $1, $109.28-110.83, $3.61-3.71, $79.19-79.98, $1.32-1.34, $88.51-90.27 (oversold), 1.84-1.93%, and 1, respectively.


Function in disaster; finish in style,


Howard Penney


Stand On Your Hands - hp1


Stand On Your Hands - hp2

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