prev

BYI: F2Q13 SHOULD BE A BEAT

Finally a catalyst?

 


BYI has underperformed IGT lately and really has traded in a fairly tight range for the better part of a year.  We’d say this stock is in need of a catalyst and Thursday night’s earnings could be that catalyst.  We project BYI to beat F2Q consensus by roughly 5% - revenue of $249MM and Adjusted EPS of $0.79.  We expect BYI to exceed consensus in both gaming ops and gaming equipment sales.

 

FQ2 DETAIL

 

We’re projecting $89MM of gaming equipment revenue ($11MM ahead of consensus) at a 47.7% gross margin ($6MM ahead of consensus).

  • The Street is projecting a $5MM QoQ decrease, while we are projecting a $6MM QoQ increase.  We believe the Street is wrong because:
    • In the last 7 years, there has only been 1 year where December revenues have not been materially higher than September’s.  Since BYI’s fiscal year end is in June, F1Q tends to be the weakest quarter of the year for them for gaming equipment sales.  The average uptick from F1Q to F2Q over the last 7 years has been $11MM.
    • Replacements are usually weaker in September than December, since the September quarter is a seasonally strong quarter and casinos typically avoid disrupting their floor during that time.
  • 5,050 units recognized in FQ2
    • 900 international unit sales
    • 4,150 NA unit sales
      • A QoQ increase in replacements excluding Canada
      • ~600 units shipped to Atlantic lottery corporation
  • ASP of $16.5k, down QoQ and YoY, reflecting mix shift towards Canada and IL VLTs
  • $5MM of parts and other revenue

 

We’re projecting $57MM of systems revenue ($2MM below the Street) at a 72.5% margin ($3MM below the Street). 

  • BYI guided to a QoQ increase due to commencement of installations to Canada and/or South Africa

 

We expect gaming operations revenue of $103MM ($5MM above the Street) at a 70.7% margin ($2MM above the Street).

  • Should see growth in the WAP foot print and benefits of a full quarter of revenues from Michael Jackson and Grease units installed in September
  • Gaming operations revenues have increased for the last 7 quarters.  While it’s true that September is a seasonally stronger period for gaming operations revenues, we would point out that:
    • BYI’s footprint has less seasonality than WMS or IGT since a lower % of its install base is on true revenue share vs a fixed fee
    • Since FY2005, the average decline from the September to the December Q has been $1MM - the Street is projecting a $3MM sequential decline
    • Growth in BYI’s install base is a large mitigating factor to seasonality.  In the September Q, the WAP install base grew 26% QoQ and there was low single digit growth in all other categories outside of centrally determined games.  Even if there were no incremental placements in the December quarter, and assuming that all those WAP units weren’t placed in the beginning of July, there should be a nice increase in the number of average installed units in the December Q compared to the September Q, which should lead to QoQ growth.
    • The reclassification of the centrally determined units from gaming operations to systems already occurred last quarter had a $1.5MM impact on gaming operations (no impact to total revenues or bottom line)

 

Other stuff:

  • SG&A: $68MM
  • R&D: $25MM
  • D&A: $6MM
  • Net interest expense: $4MM
  • Tax rate: 38%

M: Leadership Chg Net Negative

Takeaway: Bulls will gloss over the mgmt chg, but Cole was the 2nd highest paid person at M, and was there for 40 years. He matters.

Macy’s announced after the close that Thomas Cole, Chief Administrative Officer, will be leaving the company in May 2013. Our sense is that Mr. Cole is leaving on his own accord and under good terms after 40 years at the company. That said, make no bones about it… Cole is important to the organization. Formerly a Vice Chair, he is responsible for orchestrating everything from internal audit, human resources, external affairs, systems, technology, logistics, credit, non-merchandise purchasing, sustainability, and store planning, design and construction. There’s a couple of other functions as well – all of which have been spread out to three existing and one new individual in the Macy’s organization.

 

The bulls – if they acknowledge this announcement at all -- will tout that this is a company with a deep bench, and that they are not concerned to see such an important executive leave the company.  The reality is that if there is any positive it is that there will be $2-3mm in EBIT freed up with the departure of his compensation (only half a penny per share). Keep in mind that Cole was the second highest paid person in the company – making 20% more than CFO Karen Hoguet, the primary interface of the company to the Street.

 

Our sense is that whenever we see someone leave who has so many responsibilities and has greater tenure than anyone else on the org chart – it simply cannot be glossed over.

 

CEO Lundgren said as much in his quote
“Tom’s influence has been particularly profound over the past seven years as we integrated the acquisition of The May Department Stores Company, migrated to the nationwide Macy’s brand, developed new business and organization structures, aggressively pursued our omnichannel vision and improved our customer shopping experience. Tom played a key role in these subjects and many, many more.”

 

Macy’s remains one of our top short ideas. 


TRADE OF THE DAY: ADM

Today we bought Archer Daniels Midland Company (ADM) at $28.33 a share at 10:15 AM EDT in our Real-Time Alerts. We bought on red when our immediate-term TRADE oversold signal after an #OldWall downgrade. Hedgeye Consumer Staples Sector Head Rob Campagnino says manage the risk of the range into the EPS event (up and down). Still one of our top long ideas.

 

TRADE OF THE DAY: ADM - image001


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

M/JCP: Loud and Getting Louder

Takeaway: We've been vocal on our Macy's short call. The one you're hearing us get louder on is long JCP. No action yet. We're waiting on price.

Keith added M to our #real-time alerts on the short side into the close. That’s the trade you saw, because the stock call matched up with the research call.

 

The corresponding trade you have not yet seen is to long JCP. As we’ve hit on repeatedly over the past several weeks, we think that the improving sales trajectory in 2013 and incremental improvement in store layout and dot.com business will drive the stock higher this year – even if JCP needs to buy the better top line. That might not be the best ROIC decision, but we think that this stock will trade on revenue, not ROIC.

 

We’re not going to make many friends today in saying that given that nearly a third of the float is short. But we’d rather be right than make friends.

 

To be clear, if the stock call matched up to the fundamental call at the current price, Keith would have added it to our real-time alerts. He has not. Translation = he likes it lower. But if you are less price sensitive and want a contrarian idea that we think will gain momentum on the upside in 2013, this is absolutely one to consider. 

 

 

 


Treasuries Take Hold

This morning, the yield on the 10-year Treasury Note hit 2.0%, a level not seen since April of 2012. Despite moving back down to 1.95% shortly after, the 10-year continues to hold above our TAIL risk line of support at 1.84%. We could soon see the 10-year yield flirting with 2.4% over the next three months, particularly if our call on US unemployment stabilizing continues to take hold. #GrowthStabilizing is good for stocks, bad for bonds. Friday's jobs report should play a role in determining if a yield above 2.0% is here for good.

 

Treasuries Take Hold - JAN28


Still Bullish: SP500 Levels, Refreshed

Takeaway: We anticipate that downside will be reasonably contained as the market pulls back from immediate-term TRADE overbought.

The Bloomberg quote of the day form this AM read:

 

“I’ve failed over and over again in my life and that is why I succeed”

-Michael Jordan

 

While not at all comparing ourselves to MJ, his six titles and his decade-plus of unparalleled dominance in the modern era of basketball, we do share a similar experience in that our failures also tend to sow the seeds for eventual success(es).

 

Long-term clients of our Macro research product know that we haven’t traditionally been the bulls’ huckleberry at the top-end of market melt-ups in previous years as various Polices to Inflate have appropriately led us to discounting eventual slowdowns in economic and/or earnings growth. This time, however, we too are cheering on those gains with the backdrop of not much incremental in the way of such policies.

 

As we outlined in our note from Friday titled, “1565?: SP500 Levels, Refreshed”, we think the balance of risks underpinning the US equity market from both a fundamental research and quantitative risk management perspective remains demonstrably in favor of further upside.

 

More importantly, we think there are a number of investors who may not have fully participated in the melt-up; they and “the flows” will likely be buying the dips at/around our immediate-term TRADE and, if necessary, our intermediate-term TREND lines of support:

 

  • Immediate-term TRADE Overbought = 1509
  • Immediate-term TRADE support = 1486
  • Intermediate-term TREND support = 1434

 

If you’re still bearish on this market or do not necessarily believe it has further upside, that’s totally fine; to each his/her own. We just don’t think it's prudent to short this puppy at least until you see a quantitative breakdown through the aforementioned level(s) of support that is also confirmed by a deterioration in the fundamental backdrop.

 

Right now, however, that scenario is about as probable as sustained flows into fixed income funds throughout 2013 (i.e. “not very”).

 

Darius Dale

Senior Analyst

 

Still Bullish: SP500 Levels, Refreshed - SPX


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.

next