What Keith's Reading


In preparation for IGT's F1Q 2013 earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.






  • Under the terms of the accelerated stock buyback agreement, Goldman, Sachs & Co. will have delivered 30.3 million shares (27.8 million in the fiscal 2012 and 2.5 million in the fiscal first quarter of 2013) to IGT at an average price of $13.22 per share


  • IGT announced today its Board of Directors declared a cash dividend of $0.07 per share on its common stock, a 17% increase compared to the dividend paid in the same quarter last year. The dividend is payable on Dec. 31, 2012 to shareholders of record on Dec. 19, 2012.





  • “Gaming Operations gross margin increased in the 4Q by 400bps basis points to 61%. On a same-store sales basis, Gaming Operations gross margin was up about 100 bps. This is mainly driven by an increased percentage of standalone and fixed-fee games that carry higher gross margins than typical WAP games. It also reflects the success of our strategy to manage the turnover of capital in our MegaJackpot installed base”
  • “In 2013, we expect Gaming Operations revenue and installed base to be about flat with 2012, while gross margin and profit per unit are expected to show modest improvements.”
  • “For 2013, on a same-store sales basis, we expect our pricing to follow historical trends.”
  • “On the strength of our VLT business in Canada, Ohio, and Illinois, where we expect to enjoy leading ship shares, we anticipate our product sales revenue and gross profit to deliver double-digit increases, while gross margin may be slightly softer due to mix.”
  • “We have seen remarkable growth in the number of mobile users and a corresponding growth in revenue from those users. We remain very excited about DoubleDown's potential and still expect the transaction to be GAAP accretive by 2014.”
  • “Moving forward, we expect some additional costs and, in the short term, lower revenues and gross margin in our IGTi business as this restructuring plan is executed. On the positive side, these actions are anticipated to reduce annual operating expenses in our IGTi business.”
  • “For the year, adjusted operating expenses were about flat as a percentage of revenue, and we expect this trend to remain consistent into 2013.”
  • “We are extremely pleased with the rate at which our revenue is being converted into operating cash flow, roughly 21%. Over the past five years, on average we have converted 26% of revenues into cash flow from operations.”
  •  “Looking forward to 2013, we are initiating our adjusted earnings per share guidance at $1.20 to $1.30 per share, representing 15% to 25% growth over fiscal 2012. We feel this guidance reflects the positive momentum in our business as well as the current economic conditions globally and the improving sentiment of our customers toward our products and services. We expect to continue to grow the top line and grow operating income and adjusted earnings per share even faster.”
    • The guidance excludes $40MM of SG&A charges related to amortization of intangibles (DD) and earn-out mark to market.
  • “Historically we earn about 40% to 45% of our full-year earnings in the first half of the fiscal year and that the fiscal first quarter is usually less than half of that”
  • “We expect to stabilize our MegaJackpot revenues, improve our return on invested capital, and increase our product sales gross margin, especially in our international business.”
  • “At DoubleDown, the world's largest social casino, we expect to launch a more complete mobile product. We expect to add localized content for the international markets and to leverage even more of our proven IGT brands and game content.”
  • “At our IGTi group, we expect to see continued growth in our mobile real-money wagering business consistent with our past trends.”
  • “The vast majority of the growth in SG&A this year has been related to our Interactive businesses. That's the IGTi business and then, obviously, the acquisition of Double Down. In fact, the base SG&A has grown less than double-digit dollars. So we would expect to continue to invest in the Interactive business, but at a rate that's less than the revenue growth expectations going forward. And then in the base business, we'd expect again, low single-digit SG&A growth.”
    • Q: So if I think about that just empirically, maybe $30 million in incremental SG&A?
    • A: I think that's about right on the growth next year, recognizing that we have one more quarter of Double Down next year than we had in the prior first quarter.
  • “We are looking now expecting our North American replacement share to come in at around 48% for the quarter, a very strong quarter for us. There wasn't anything that we pulled in. Our guidance 90 days ago was to stay with our guidance range, which is exactly where we came in. So there wasn't an expectation; there was no moving here of shipments from one quarter to the other. We shipped what we had forecasted that we would ship that hit the guidance range that we confirmed last quarter”
  • “I think the margin, the gross margin on Canada is a bit stronger than Illinois, but not markedly so”
  • “The products that we have moved from the IGT game library into the DoubleDown Casino have had a significantly positive impact on that monetization. They're proven products. We were able to move them into the market in about half the time and with about half the cost of the other people we compete with in the social casino space.”
  • “I would say still cautiously optimistic on spending on the customer front. But as you can see this quarter and for the year, we continue to pick up ship share, even in a very restricted capital market, so we felt very good.”
  • “I would think about capital in the Gaming Operations business as flat to down slightly.”
  • “I would expect that there will be continued pressure on yield, so we're taking active steps in the quarter and have been for the last quarter.”

PG and KMB into Earnings

Kimberly-Clark (KMB) is set to report earnings on January 25th, and while it isn’t our thing to preview earnings, we think the timing of the KMB and PG earnings releases (also scheduled for the 25th) makes for an interesting short duration pair – long PG/short KMB.

KMB on the short side

KMB will report Q4 2012 EPS and provide an initial look at 2013 EPS – consensus for Q4 is $1.36 (we are modeling $1.34), bringing the full year 2012 EPS result to $5.23 versus company guidance of $5.15 to $5.25.  We see more risk to the $1.36 than upside.  The company will likely provide 2013 guidance consistent with its longer-term goal of EPS growth in the mid-to-high single digit range.  For reference, 2011 vs. 2010 was 6.3% EPS growth at the mid-point, while 2012 vs. 2011 was 5.7% growth.  Consensus for 2013 ($5.59) already contemplates 6.9% growth, so we don’t think a short position gets hurt with guidance.

Further, at 15.5x ’13 consensus, we don’t see much upside to the multiple, given our view of the company as a 3-4% top line grower.

We believe that the quality of KMB’s earnings have declined through 2012.  In Q1, $77 million of year over year EBIT gains were driven by cost saves ($60 million) and hurt by $10 million of input cost inflation, so operations accounted for $27 million of the year over year EBIT gains.  KMB reinvested $45 million in strategic marketing.  In Q2 and Q3, year over year EBIT gains slowed while cost savings increased and raw materials moved from a headwind to a tailwind and strategic marketing investments slowed.  As we move into 2013, raw materials appear to be set to move from a tailwind to a headwind once again.

PG and KMB into Earnings - KMB EBIT

Finally, the key commodities of crude and pulp have moved against the company over the last quarter of 2012.  Now, the company does have some flexibility year over year as we have seen increases in the strategic marketing spend through the first three quarters of 2012 (+$45 million in Q1, +$35 million in Q2 and +$25 million in Q3).  However, we are of the opinion that the company has seen its multiple expand precisely because it has increased investment and any reversal of that trend is unlikely to be greeted kindly by the market.

PG and KMB into Earnings - crude oil

PG and KMB into Earnings - pulp prices


PG on the long side


PG will report Q2 EPS on Friday, with consensus looking for $1.11 versus a guidance range of $1.07 to $1.13 - the growth versus 2012 is not heroic at all, with core EPS in the year ago quarter at $1.09.  Our estimate is $1.13 and we can model an increase to the full-year guide as well.  Our experience is that names that beat and raise go higher, particularly in the case of mult-year laggards such as PG.


While top-line trends at PG have been lackluster, the company has significant income statement flexibility from its restructuring program.  EPS stability sans top line momentum isn't likely to garner multiple expansion, but we at least have some comfort that the earnings base can be sustained while we wait to see what materializes on the top line for PG.  We may be waiting for Godot, but we don't think we are paying a substantial premium for the show.


PG's valuation isn't particularly compelling to us (16.9x calendar '13), but we think the name can be defended lower if our math happens to be wrong (just as we think investors can stick with the KMB short if Friday doesn't emerge as a catalyst).


Have a good week.




Robert  Campagnino

Managing Director





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Average daily table revenues declined to HK$775 million last week from HK$899 million the prior week.  We expect the current week to be slow as well, ahead of the February Chinese New Year celebration.  Remember that CNY is on Sunday February 10th this year versus Monday January 23rd in 2012.  Our full month January forecast is down slightly from our previous projection.  We’re now expecting YoY growth of 7-11%.




For market share, MPEL is having another very good month, well above trend, as is Galaxy.  LVS gained some share back but remains below trend for January.  Following a strong, hold-aided December, MGM has fallen well below trend.  Wynn remains at its 3 month average of 10.7%, but far below its 2012 share of 11.8%.  We expect Wynn and MGM to continue to be market share losers.



Finish The Job

This note was originally published at 8am on January 07, 2013 for Hedgeye subscribers.

“Give us the news and we will finish the job.”

-Winston Churchill


That’s what Churchill said to President Roosevelt in the spring of 1941 as the British were still pleading for America’s hand in taking down one of Germany’s most important ships - The Bismarck (The Last Lion, page 359).


With the US Dollar on the cusp of another long-term breakout from its bombed out base, that’s what I am still begging for. President Obama, get the Fed and Congress out of our way and we will let free-market pricing Finish The Job.


Strong Dollar, Strong America.


Back to the Global Macro Grind


The US Dollar was up smartly last week. Closing +1.1% to $80.50, that was the 11th week out of the last 15 that the US Dollar Index closed flat to up. And the global economy liked it.


For the US stock market to have its best up week in a year on an up week for the US Dollar is not only progressive, but very new. If you want any chance at sustained US and Global Economic Growth, you need to see this Dollar strength confirmed.


For what feels like forever, we have warned of the Fed/Congress (monetarily and fiscally) perpetuating what we call The Correlation Risk (Debauched Dollar = Inflated Asset Prices, not real-inflation adjusted economic growth).


To be clear, this opportunity for the US Government to get out of the way is fleeting – but we just saw, on a very immediate-term basis, what that could look like if Obama gives us that news.


Look at these positive 15-day immediate-term TRADE correlations:

  1. US Dollar vs. SP500 = +0.48
  2. US Dollar vs. MSCI Emerging Markets Index = +0.79
  3. US Dollar vs. US Treasury 10yr Yield = +0.62

Again, these are very immediate-term changes in the Global Macro Risk Factoring of the market – but they are not new to US and Global Economic history. During both the Reagan (1983-1988) and Clinton (1993-1999) sustained US Economic Growth periods, we had A) Strong Dollar and B) Deflated Commodity prices.


*Class Warfare fans: that would be good for lower-income populations and bad for the only class I’ll call a “class” - the #PoliticalClass.


Importantly, if I push the duration of these US Dollar correlations out to 120-days (i.e. when we were of the view that Global Growth was still slowing), here’s what the negative Correlation Risk looks like:

  1. USD vs SP500 = -0.75
  2. USD vs MSCI EM = -0.73
  3. USD vs UST 10yr Yield = -0.57

In other words, the Weak Dollar, Slow Growth world can come back in a hurry if policy makers think more policy that hasn’t worked is the answer. That said, for now (as in what someone needs to forward to Axelrod to read right now), as global economic growth goes from SLOWING to STABILIZING:


A)     The US Dollar has stopped going down

B)      Commodities have stopped inflating

C)      Both Bonds and Gold have started to go down (relative to stocks), big time


That last point is driving Gold/Bond bulls nuts, because it too is very new. But it makes sense. That’s precisely the reason why most growth investors who own Gold now didn’t buy it in the 1990s. Absolute returns were a lot higher in productive assets (Tech).


Last week’s signals from the US Treasury market were both explicit and fundamentally driven:

  1. Global Growth Data (across Europe and Asia in particular) continued to stabilize/accelerate
  2. US Employment Data continued to stabilize
  3. Tim Geithner said he’s leaving

All of this was good news for both global growth and the US Dollar. They have both causal and correlated relationships. They are also reflexive. And they are screaming at us from a quantitative risk signaling perspective:

  1. US Treasury 10yr Yield long-term TAIL risk breakout line = 1.84% (TREND support under that at 1.70%)
  2. Yield Spread (10yr minus 2yr, a good proxy for marginal slope of growth) = +19 basis pts wider wk-over-wk
  3. US Dollar Index moved back into a Bullish Formation (bullish on all 3 of our core durations: TRADE/TREND/TAIL)

There’s a very unique opportunity for the President of the United States to provide both American savers and those starving from food/energy inflation globally to Finish The Job here. Yes We Can buy into him just getting US government out of the market’s way.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1636-1664, $110.01-113.06, $3.63-3.75, $80.24-80.58, $1.30-1.32, 1.84-1.96%, and 1434-1477, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Finish The Job - Chart of the Day


Finish The Job - Virtual Portfolio


The Economic Data calendar for the week of the 21st of January through the 25th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



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