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Is Chancellor Merkel’s Support Waning?

On Sunday, Germans in the state election of Lower Saxony (Niedersachsen) narrowly voted down Chancellor Angela Merkel’s party, the Christian Democratic Union (CDU). Below we explore the implications of the defeat and conclude that although this is a meaningful blow to her party, and will tilt the Bundesrat (upper house of parliament) to the opposition, it will not break the Chancellor’s back in terms of her chances of reelection this September. However, it will likely spell a change in the CDU’s coalition partners, and legislative gridlock until then. 

 

The center-left coalition of the Social Democratic party (SPD) and its allies the Greens party (known as the red-green coalition) won a one-seat majority over the center-right coalition of Merkel’s CDU party and the Free Democratic Party (FDP), or a combined 69 seats vs 68, in the state parliament of Lower Saxony on Sunday.  

 

Despite optimism leading up to the vote from the incumbent Lower Saxony CDU state premier David McAllister (a half-Scot) on a “come-from-behind victory”, the CDU garnered only 36% of the votes cast, or a loss of -6.5% versus its past performance of 42.5% in the previous state election of 2008. Notable share gains came at the hands of the Greens +5.7% to 13.7%; SPD +2.3% to 32.6%; and FDP +1.7% to 9.9%.

 

Is Chancellor Merkel’s Support Waning? - Niedersachsen u Bundesrat

 

It’s important to note that there were fears going into the vote that the FDP would not garner at least 5% of the vote, the minimum needed to win seats in the state parliament, many would-be CDU voters tactically voted for the FDP. This in fact changed the complexion of the state vote enough to favor the red-green coalition and with it tipped the balance of the Bundesrat (upper house of parliament) to an absolute majority in favor of Merkel’s opposition. 

 

The shift in the upper house does have teeth. Essentially it means that the opposition in the Bundesrat can block major legislation that Merkel’s coalition, which has a majority in the Bundestag (or lower house of parliament), tries to pass.

 

Practically speaking, we expect Merkel’s policy maneuverability to be limited going into federal elections in September, which could result in a much more cautious tone on such international issues as the ongoing Eurozone debt crisis and atomic energy as well as her domestic agenda. In conclusion, we are expecting legislative gridlock into September which will only be perpetuated if Merkel’s center-right coalition manages to retain power in September – a not so unfamiliar set-up for Americans to envision given the disunity across the U.S. houses of congress. 

 

 

Merkel’s Contender, Steinbrück


The results of the Lower Saxony vote have a few broad implications as we look down the road to September.

 

First, the inaction or gridlock we expect to see on the policy front across the upper and lower houses should keep Merkel tight lipped which could play into the hands of her main contender, Peer Steinbrück.  Steinbrück was nominated to lead the SPD in October and originally proved his worth as Merkel’s finance minister during the 2007-2009 financial crisis.

 

Second, the win in Lower Saxony for the SPD-Greens will remain a psychological tailwind, if nothing else. A quick refresher on the recent German political scene shows that in the span of a few months Steinbrück made repeated political gaffes, which most speculated would cost his party the election in Lower Saxony.

 

In particular, Steinbrück proclaimed that German Chancellors were underpaid, a severe misstep given his highly publicized earnings for speaking engagements over the last three years (estimated at €1MM) and especially given the SPD party platform as one representing the working class. 

 

In fact, Steinbrück’s gaffes directly led to an evaporation of the center-left’s approval in the months leading up to the election in Lower Saxony, so much so that state Premier McAllister even suggested that Steinbrück should continue to visit the state more often.

 

Therefore, it’s the ability of the party to succeed despite him, rather than because of him, that could give him and his party momentum into September. Steinbrück has outlined a campaign platform including a cap on housing rent increases, the introduction of tougher banking rules, a push for a minimum wage, and tracking down wealthy tax evaders. However, his key initiatives have been criticized from members inside and outside of the party as too tax and finance related, which again may also be at odds with the working class ideals of the SPD.  Finally, it’s still a toss-up if his sharp and sometimes combative personality (in contrast to Merkel’s more cautious demeanor) will prove an asset or liability into September.

 

 

The popular, trusted Chancellor


What is clear is that Merkel still remains a strong favorite to win a third term. A Forsa public opinion survey released last week put the SPD at 23%, its lowest rating since mid-2011, versus 43% for Merkel's conservatives. Further, when asking pollsters who they would vote for if chancellors were elected directly, only 18% of respondents said they would pick Steinbrück, whereas 59% chose Merkel.

 

Merkel’s support has been largely anchored on German approval of the way in which she has handled the Eurozone crisis, but there’s room for concern that Merkel may be resting too much on her laurels and not pushing a directed campaign. From what has been issued, Merkel supports creating equal opportunities for all, including immigrants; delivering job security and fair wages; and ensuring equitable living standards for seniors and those living in the “depressed” east.

 

Yet Merkel must be careful to not further alienate party supporters that charge her with a leftward shift in the party in recent years – one aimed at winning more cosmopolitan voters through policies to better support childcare facilities and monetary assistance to child bearing couples.

 

While Merkel's CDU-FDP has now lost to the SPD and Greens in five states over the past two years, including in the long-time southern stronghold of Baden-Wuerttemberg and in the northern industrial powerhouse of North Rhine-Westphalia, it’s clear Merkel and her CDU party still command a decided rating advantage, which she can likely maintain even without the support of the upper parliament and even if her campaign massaging lacks “teeth”. From today’s vantage point it appears less likely that the CDU can afford to keep its pro-business FDP coalition partners (unless a coalition agreement can be made along with the Greens) and more likely that the CDU returns to a “grand coalition” with the SPD. Although such a coalition arrangement could spell legislative friction, it would be advantageous versus the current gridlock of opposing coalitions across the upper and lower houses of parliament.  

 

Matthew Hedrick

Senior Analyst


LVS: EXPECT A Q4 BEAT

We’re still above the Street, but so is the buy side.

 

 

The Street has come up on their Q4 EBITDA estimates for LVS since we put out our Macau EBITDA estimates (“MACAU MODEL UPDATES”, 1/6/13) and our hold adjusted estimates (MACAU: EXAMINING THE Q4 HOLD IMPACT,  1/7/13).  However, we remain above the Street although buy side expectations are likely more aligned with us.  Thus, we’re not sure a Q1 beat will be much of a catalyst.

 

Here are our projections:

 

OVERALL


Our Q4 revenue and EBITDA projection for LVS is $3.07BN and $989MM which are about 2% above the Street.  We’re solidly above the Street for Macau, slightly below for Singapore, and below the Street for Las Vegas.

 

MACAU

 

Our estimate for Macau property-level EBITDA (ex ferries) and net revenues is $596MM and $1.92BN, 12% and 10% above the street, respectively.  Sands and Sands Cotai played lucky this quarter, while FS played unlucky.  Venetian’s hold was just a little above its historical norm.  On a portfolio basis, we estimate that hold benefited EBITDA by $12MM or 2% in the quarter.  We estimate that hold across Sands China’s portfolio was 2.98%.  

 

Venetian


Venetian is projected to report net revenue of $821MM and EBITDA of $310MM, -7% and -18% compared to the Street, respectively.

  • Net gaming revenue of $710MM
    • $270MM of net VIP revenue     
      • RC volume of $13.4BN, down 1% YoY
        • Junket RC volume dropped 4% YoY to $9.4BN.  We assume that direct play of $4BN was up a bit from $3.4BN in 3Q, but in-line with a direct play rate of 30% (same as 3Q)
        • Hold rate of 3.00%, which is 7bps above the property's historical hold rate.  We estimate that high hold benefited net revenues by $6MM and EBITDA by $4MM.
      • Rebate rate of 98bps or 33% of hold
    • Mass table revenue of $369MM, up 19% YoY
    • Slot win of $71MM
  • $111MM of net non-gaming revenue
    • $58MM of room revenue ($235 ADR/94% Occ/$221 RevPAR)
    • $23MMof F&B revenue
    • $64MM of retail, entertainment and other revenue
    • $34MM of promotional expenses
  • Variable expenses of $380MM
    • $328MM of taxes
    • $32MM of junket expenses assuming a commission rate of 1.22% (rebate + promoter expense )
    • $28MM of recorded non-gaming expense
  • $103MM of fixed costs, up 8% YoY

Sands Macau


We expect Sands to report net revenue of $309MM and EBITDA of $90MM, +3% and +15% compared to the Street, respectively.

  • Net gaming revenue of $301MM
    • $122MM of net VIP revenue    
      • RC volume of $5.7BN (down 25% YoY) assuming 9% direct play and a hold rate of 3.37%
      • Rebate rate of 125bps or 37% of hold
      • Assuming historical hold of 2.94%, net revenues and EBITDA would have been $15MM and $7MM lower, respectively
    • Mass table revenue of $152MM, up 2% YoY
    • Slot win of $28MM
  • $8MM of net non-gaming revenue
  • $164MM of variable expenses
    • $145MM of taxes
    • $10MM of junket expenses assuming a commission rate of 1.42% (rebate + promoter expense ) or 42%
    • $4MM of recorded non-gaming expense
  • $51MM of fixed costs, up 4% YoY

 Four Seasons

 

We estimate $284MM of net revenue and $75MM of EBITDA, +10% and +7% compared to the Street, respectively.

  • Net gaming revenue of $253MM
    • $184MM of net VIP revenue    
      • RC volume of $11BN, up 46% YoY
        • Junket RC volume is up 69% YoY to $9.2BN. We assume that direct play is close to the $1.7BN or 16% of total RC.
      • Hold of 2.54%, 25bps below the historical hold at FS.
      • Rebate rate of 86bps or 34% of hold
      • Using historical hold rate, we estimate that net revenue and EBITDA would be $18MM and $6MM higher, respectively.
    • Mass table revenue of $57MM, up 28% YoY
    • Slot win of $12MM
  • $44MM of net non-gaming revenue
    • $11MM of room revenue
    • $6MM of F&B
    • $27MM of retail, entertainment and other
    • Promotional expenses of $12MM
  • $170MM of variable expenses
    • $136MM of taxes
    • $26MM of junket expenses assuming a commission rate of 1.10% (rebate + promoter expense )
    • $9MM of recorded non-gaming expense
  • $30MM of fixed costs, up $4MM QoQ

Sands Cotai Central


We estimate $507MM of net revenue and $122MM of EBITDA, +20% and +28% compared to the Street, respectively.

  • Net gaming revenue of $454MM
    • $210MM of net VIP revenue    
      • RC volume of $9.9BN
        • Junket RC volume of $8.3BN.
        • We assume direct play of 9%, which implies a hold rate of just 3.22%. Direct play in 3Q was approximately 9%.
      • Rebate rate of 109bps or 34%
      • Assuming theoretical hold of 2.85%, net revenue and EBITDA would be $22MM and $8MM lower, respectively.
    • Mass table revenue of $190MM
    • Slot win of $54MM
  • $53MM of net non-gaming revenue
    • $50MM of room revenue
    • $19MM of F&B
    • $12MM of retail, entertainment and other
    • Promotional expenses of $28MM
  • $253MM of variable expenses
    • $219MM of taxes
    • $25MM of junket expenses assuming a commission rate of 1.35% (rebate + promoter expense )
    • $22MM of recorded non-gaming expense
  • $110MM of fixed costs

SINGAPORE


We project $703MM of net revenue and EBITDA of $366MM, -4% and -1% compared with the Street, respectively.

  • Net gaming revenue of $547MM
    • $167MM of net VIP revenue     
      • RC volume of $10.8BN, flat YoY
      • Hold rate of 2.80%
      • Rebate rate of 1.25%
    • Mass table revenue of $245MM
      • Drop of $1.1BN, down 5% YoY and 22.5% hold
    • $136MM of slot & EGT win
  • $156MM of net non-gaming revenue
    • $85MM of room revenue ($366 ADR/99% Occ/$363 RevPAR)
  • $68MM of gaming taxes and $36MM of GST
  • $227MM of fixed costs, compared to an estimated $227MM in 3Q and $228MM in 2Q

LAS VEGAS


We estimate that Venetian and Palazzo’s net revenues will be $334MM with EBITDA of $74MM, -7% and -18% compared to the Street, respectively.

  • Net casino revenue of $129MM
    • Table revenue of $106MM
      • Drop of $559MM, up 5% YoY
      • 19% hold
  • $46MM of slot win
    • $536MM of slot handle, up 3% YoY
    • 8.6% hold
  • Rebates of $24MM or 4.2% of GGR
  • $110MM of room revenue - $168 RevPAR (-3% YoY)
  • $120MM of F&B, retail & other revenue
  • $23MM of promotional allowances or 16% of GGR
  • Flat YoY operating expenses of $249MM

BETHLEHEM

 

We expect Sands Bethlehem to report $120MM of revenue and $33MM of EBITDA, +5% and +21% compared with the Street, respectively.

  • $109MM of gaming revenues
    • Table revenue of $39MM
    • $70MM of slot win
  • $11MM of net non-gaming revenue
  • $45MM of taxes
  • $43MM of operating expenses

OTHER

  • D&A: $232MM
  • Rental expense: $10MM
  • Corp and stock comp expense: $64MM
  • Net interest expense: $61MM

Jobless Claims: Keep Hope Alive

This morning’s jobless claims number showed a week-over-week decrease of 5000 to 330,000 from 335,000, beating expectations from economists. While the recent data points for the labor market and US economy have been nothing short of spectacular, we question whether the labor market itself is beginning to weaken. 

 

Jobless Claims: Keep Hope Alive - 1

 

On a rolling, year-over-year basis, the improvement in the latest week slipped to -4.3% from -7.0% the week prior and -9.7% the week prior to that. We've long argued that looking at the rolling NSA data is a better barometer of the underlying health of the labor market because there are so many errors currently plaguing the seasonally-adjusted data. 

 

Jobless Claims: Keep Hope Alive - 2

 

Jobless Claims: Keep Hope Alive - 4


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JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS?

Is Labor Improving?


The headline number certainly suggests the labor market is roaring ahead, and this is consistent with our view that the seasonality tailwinds will run full force through the end of February. That said, the non-seasonally adjusted data appears to be deteriorating. On a rolling, year-over-year basis, the improvement in the latest week slipped to -4.3% from -7.0% the week prior and -9.7% the week prior to that. We've long argued that looking at the rolling NSA data is a better barometer of the underlying health of the labor market because there are so many errors currently plaguing the seasonally-adjusted data. As such, we think it's a fair question to ask whether the labor market's underlying health is starting to weaken. We'll want to see more data before drawing any firm conclusions. 

 

There was no revision to the prior week's data, so the 5k WoW decrease to 330k from 335k is apples to apples. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -8k WoW to 351k.

 

As mentioned above, the 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.0% 

 

JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 1

 

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JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 5

 

JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 6

 

JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 7

 

JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 8

 

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Yield Spreads Continue to Widen

The 2-10 spread rose +1 basis point WoW to 159 bps. 1Q13TD, the 2-10 spread is averaging 161 bps, which is higher by 18 bps relative to 4Q12.

 

JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 12

 

JOSHUA STEINER: JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - JS 13

 

 

Joshua Steiner, CFA

 

 

 


UA: The Most Bearish News Imaginable

Takeaway: We need to peel layers off the onion to find out why good managers fail in delivering results. With $UA, we think it comes down to capital.

The sell side is hot and heavy this morning in previewing UA’s quarter, which is to be released next Thursday. That officially does not matter one iota. The announcement that Gene McCarthy, head of Footwear, has resigned is one of the most bearish datapoints imaginable for UA.

 

As background, Gene is no joke. He was one of the people responsible for taking Brand Jordan at Nike from a $100mm shoe line to a $1bn+ brand. He was hired to revive the ailing ‘yellow boot’ business at Timberland, where he was met with early success – to the extent that CEO Jeff Schwartz invoked the Peter Principle and made him the co-President of the company instead of leaving him in charge of the urban lifestyle division where he was making serious inroads. Then Kevin Plank made what we though at the time was one of UA’s best hires yet when he hired McCarthy to run footwear.

 

That said, three years after the hire, despite all the hype around new products such as ‘Spine’, UA is still struggling to break above 1% market share of the US footwear market. Far less powerful sports brands are sitting at 5-7% share, and yet UA can’t pierce the 1% veil? Clearly, either McCarthy was not what we expected, or there is something structurally impaired with UA’s approach to the footwear business.

 

How could someone who is so good produce such weak results?

 

We think that the answer does not boil down to leadership, but rather capital deployment. Kevin Plank could have Phil Knight in charge of footwear and it would still not be growing at the rate necessary to win. The reason is that for UA to print outsized growth in footwear, we need a more significant working capital and SG&A commitment that would take aggregate operating margins down to the 8% range (and would take returns along with it). (Think Reebok when it was struggling to grow against Nike)

 

As a frame of reference, to add another $400mm in sales, the impact would be EBIT-neutral with an incremental $44mm in SG&A spending associated with growing the business. In all reality, $40-$50mm is not a lot of capital when it comes to hiring the additional staff and aligning all the design, development and marketing resources to grow into a space with such high barriers to entry. If spending steps up, which we think needs to happen, we could see the top line pick up, but EBIT stay steady.

 

We don’t think it’s too relevant if McCarthy left on his own accord or was pushed out. If UA’s visibility was clear he would have stayed and Plank would never let him leave. Now we’re stuck with the COO of the company running a business that perennially disappoints relative to high expectations. McCarthy was influential with his staff, and we would not be surprised to see more departures. This kind of risk profile is not what a company with UA’s multiple can afford to exhibit. We think the 4% sell-off we're seeing today is mild given the new disclosure. 


JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS?

Takeaway: Consistent with the last few years, the labor market is saying one thing but doing another: early signs of deterioration.

Is Labor Improving?

The headline number certainly suggests the labor market is roaring ahead, and this is consistent with our view that the seasonality tailwinds will run full force through the end of February. That said, the non-seasonally adjusted data appears to be deteriorating. On a rolling, year-over-year basis, the improvement in the latest week slipped to -4.3% from -7.0% the week prior and -9.7% the week prior to that. We've long argued that looking at the rolling NSA data is a better barometer of the underlying health of the labor market because there are so many errors currently plaguing the seasonally-adjusted data. As such, we think it's a fair question to ask whether the labor market's underlying health is starting to weaken. We'll want to see more data before drawing any firm conclusions. 

 

There was no revision to the prior week's data, so the 5k WoW decrease to 330k from 335k is apples to apples. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -8k WoW to 351k.

 

As mentioned above, the 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.0% 

 

JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - 1

 

JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - 2

 

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JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - 11

 

Yield Spreads Continue to Widen

The 2-10 spread rose +1 basis point WoW to 159 bps. 1Q13TD, the 2-10 spread is averaging 161 bps, which is higher by 18 bps relative to 4Q12.

 

JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - 12

 

JOBLESS CLAIMS: IS THE LABOR MARKET REALLY AS STRONG AS IT SEEMS? - 13

 

Joshua Steiner, CFA



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