Growth's Roadblock

Client Talking Points

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Since 2013 started, stocks have ripped to the upside nearly every day and the S&P 500 is a few handles away from touching 1500, an impressive feat considering that the financial crisis was only five years ago. And while the move in stocks is actually justified this time, we begin to worry about inflation slowing global growth. If commodity prices (oil in particular) keep heading higher, that can stop growth right in its tracks. When consumption slows because of $8 a gallon gas and $5 boxes of Gushers at the supermarket, so does global growth. There is no way that $100/barrel WTI crude is going be OK with the American consumer; Jamie Dimon can kiss his 4% GDP growth rate goodbye if that happens. 

The Big Miss

Apple’s (AAPL) earnings release after the close is the big catalyst for the market. If they miss, people are likely to freak out. People freak out when bad things happen to Apple because it makes up 17% of the tech sector ETF (XLK) and is king of the NASDAQ. “In the meantime, the SP500 is immediate-term TRADE overbought at 1496 inasmuch as the VIX is oversold at 12.19,” says Keith this morning. And if we want to enjoy a market above 1500, we’re probably going to need to see a beat from Apple after the close.

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


“Economists lowered 2013 economic growth expectations for Asia for the fourth time in a row. However expectations are 2013 will beat 2012.” -@Bain_Energy


“Philosophy is a battle against the bewitchment of our intelligence by means of language.” -Ludwig Wittgenstein



U.S. chains store sales were up 3.2% in January over where they were a year ago.


It wasn’t as good as the headline $0.04 beat but it was solid and long thesis remains intact.



Following the solid FQ1, our full fiscal 2013 estimate goes from $1.26 to $1.30.  We think IGT’s unchanged fiscal 2013 guidance was conservative – the company has learned.  Our thesis remains intact:  strong EPS growth, stabilized market share, better capital deployment (read:  higher ROI), and a still cheap valuation.  Hard to argue that 65% EPS growth in FQ1, reduced capex (no new acquisitions – Yeah!), and likely stable and possibly higher market share refutes our thesis in any way.  We will be doing some more work on the capex situation in a follow-up note because that seemed to be an interesting development in the quarter.  For now, please enjoy the additional details/thoughts from the quarter.


Product sales

  • North America:
    • Replacements excluding Canada were 3,500 compared to a comparable replacement of 2,800 units in the same period next year
    • Gross margins would have been up an estimated 500bps even without the royalty settlement payment in the quarter.  However, that should be no surprise given the 72% YoY increase in sales.
    • There were 900 units shipped to IL this quarter, 1100 recognized
    • IGT expected to ship about 2k units to Canada this quarter – some of that slipped into next quarter
  • International:
    • 2,500 International shipments in the quarter:
      • Asia:  200 (vs 300 last year)
      • Australia:  1,100 (flat YoY)
      • Europe:  300 (vs 100 last year)
      • S. Africa:  100 (vs 200 last year)
      • Mexico:  700 (vs 200 last year)
      • Latin America:  100 vs (1,100 last year)
    • The thousand deferred units recognized in the quarter were units shipped to Peru and France


  • SG&A was seasonally low and should be higher in the next several quarters.  Moreover, bad debt of $6MM in the quarter actually inflated SG&A.  Management guided to an SG&A number more in line with $110MM/Q.
  • Mgmt was vague on why the bad debt number increased in the quarter – just said that it was several factors and that they increased their reserves related to a few properties
  • Retention and earn out payments should be higher in the next 3 quarters assuming Double Down’s performance remains on the current path
  • Note:  our “normalized EPS” do not exclude the higher amortization related to the acquisition of DD. We never really adjust other company's numbers for higher amortization related to acquisitions so we don’t do it here.  We do exclude the retention and earn out payments.
  • Tax rate was only 33% vs. guidance of 37%
  • Nice decrease in capital expenditures to just $38MM vs $49MM last year.  The majority of the decrease came from a reduction of gaming operations spend.  


The Macau Metro Monitor, January 23, 2013




Visitor arrivals totaled 2,495,851 in December 2012, down by 2.0% YoY.  For the whole year of 2012, visitor arrivals increased slightly by 0.3% YoY to 28,082,292.  In December 2012, the average length of stay of visitors stood at 1.0 day, up by 0.1 day YoY.  Visitors from Mainland China increased slightly by 0.9% YoY to 1,495,316, with those traveling to Macao under the Individual Visit Scheme rising by 5.4% to 603,904.





According to the Oriental Morning Post, the non-performing loan ratio at banks in Wenzhou, the eastern Chinese city hit hardest by the collapse of private lending, dropped for the first time since June 2011.  The ratio fell to 3.43% at the end of November, down 0.01% MoM.  Still, the total amount of soured debt climbed to 24 billion yuan in November, an increase of 87 million yuan from October and up 15.3 billion yuan from the beginning of the year.

In Wenzhou, an export hub where almost 90% of families have taken part in underground lending, more than 100 people fled, committed suicide or declared bankruptcy from August 2011 through last May, and at least 800 lending brokers went bankrupt, Xinhua News Agency reported.


The State Council, China's cabinet, announced a trial plan in March aimed at easing funding for small companies and monitoring underground loans.



The president and COO of Las Vegas Sands Corp, Michael Leven, says Macau’s gaming market could grow to MOP800 billion (US$100 billion) in revenue per year.  In 2012, Macau’s casinos reported gross gaming revenue of MOP304.1 billion.

Leven said, “It will continue to grow, because as income grows in the mainland, it’s going to continue to feed people into Macau. There’s no risk that they won’t have considerable growth.”  He also confirmed of the possible sale of Sands Bethlehem.  “If we get our price, we think it may not fit in the long run for our company. It’s a smaller product. We’ll probably look to sell it. However, somebody’s got to pay the price.  We’re just as happy to keep it,” Leven said.

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COH: Coming Clean That Model Is Unsustainable

Takeaway: COH's Sales growth and 30%+ Margin model can no longer coexist. This won’t be the last ‘investment year’, which creates a value trap.

  • Coach is hardly flying in on the wings of glory with its 2Q13 results and a $1.23 print versus consensus of $1.29. No surprises here, as this is in-line with our model, and has been on our short list for a while given our concerns over the levels of spending needed to maintain market share. But the question to ask here is whether this miss is an event to buy into, or one to press. Our sense is that it is the latter.


  • Our rationale is that we’re hearing Coach talk about the promotional cadence and competitive landscape for the first time in – well, ever. Ever is a long time. We get it that China and Men both represent sizable opportunities, but the US Handbag market is one that represents 70% of Coach’s business. If it can’t grow profitably, then nor can Coach.


  • The reality is that when we see a miss like this – for the reasons we’re seeing – it is usually not the last miss. We think that it’s more likely than not that COH is locked in a multi-year period where it grows its top line at the expense of a draw-down in EBIT margin, or it holds margins steady with top line remaining stagnant. We’d bet on the former.


  • Either way, it suggests that FY13 is not the last ‘investment year’ that Coach will see. We think that value investors risk getting stuck in a value trap on this one. This name is cheap, built to stay that way, and lacking earnings growth to move the stock higher.



COH: Coming Clean That Model Is Unsustainable - COH S



    Morning Reads From Our Sector Heads

    Note: Each morning we'll post what stories Hedgeye's various sector heads and analysts are reading. 


    Josh Steiner (Financials):


    -Bank security study highlights vulnerabilities


    -Morgan Stanley’s Pay Later Plan


    Todd Jordan (GLL):


    -Wenzhou Bad Loan Ratio Declines, Ending 17-Month Rising Streak


    Kevin Kaiser (Energy):




    -Baker Hughes Announces Fourth Quarter and Annual Results


    Howard Penney (Restaurants):


    -Taco Bell provides sneak peak of Super Bowl commercial


    New Haven, CT  (January 23, 2013) – Hedgeye Risk Management, a leading independent financial research and media company, just closed a round of financing representing the first time the company has taken on outside capital. Investors in this round include high net worth individuals and 500 Startups, a Silicon Valley based seed fund and startup accelerator. Though Hedgeye did not disclose the amount of money raised, the company did say that it will deploy the capital as part of a broader media-focused strategy for the company.


    “As the media landscape changes dramatically and as alternative types of media like Twitter emerge, Hedgeye is uniquely positioned to capitalize on this trend,” says Hedgeye CEO and Founder Keith McCullough. “Our plans are bold and aggressive when it comes to media, and we wouldn’t have it any other way.”


    “"I've always been a fan of no-BS analysis, and Hedgeye helps even Wall Street idiots like me tell the difference between bulls and bears." says Dave McClure, Founding Partner of 500 Startups.


    Hedgeye sees a generational opportunity in both financial services and media with a focus on proprietary content generated by the more than two dozen research analysts at the firm.  Hedgeye already produces video, audio and text-based products across multiple platforms, and plans to build on that success.




    Hedgeye Risk Management is a leading independent financial research and media company.  Focused on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world’s most regarded research analysts – united around a vision of independent, un-compromised real-time investment research as a service.  Hedgeye Media produces a wide variety of audio, video and written content that is proprietary and essential, and is distributed globally across multiple platforms. Hedgeye also provides content and analysis for major media outlets including Fortune Magazine and CNBC television. Visit<> for more information.

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