Pretty much what were expecting with the exception of better slot play in vegas and lucky table play.




  • The day after CNY, WYNN Cotai can begin the main construction (drviing of piles, building the foundation, etc). Process will take 36 months.
  • Not focused on revenue share in Macau


  • Wynn Cotai
    • Started construction on Wynn Cotai this week.  They are creating the foundation now.
    • In 2014 and 2015, they will get the structures and the interiors installed
    • No labor issues
  • Like to look at 'Urban Wynn' integrated resort opportunities as opposed to 'slots in a box'
  • Vegas:  feel good about 2013; tracking ahead in room nights and rates. Similar trends in 2014.  Hopeful for a great 1Q given Super Bowl and CNY
  • Not interested in racinos; don't trust slots in box.
  • 75% of $2 billion cash was held at the Macau sub
  • New junkets on 1st floor have been performing very well--they reshuffled 14 tables from elsewhere to increase yield
  • Having a very healthy January in Macau--a $100 million month (balanced throughout all segments)
  • Better margins:  enhancements of service quality and maintenance of the facility; good technological improvements in gaming systems
  • WYNN recently designed a high limit slot room in 3 phases
    • Phase 1 is complete. Phase 2 will begin after CNY and finishing in April.  Phase 3, which includes the addition of private slot suites, will finish in August
    • Will open next week 
  • Sees opportunity in Philadelphia and Boston
  • Spoke with MGM and LVS and the consensus is that China is healthy.
  • 'Murder tough' competition in Macau but healthy
  • WYNN COTAI:  1st spot on Cotai (from ferry and airport); building a Bellagio-like hotel
  • Not too concerned about the smoking ban; all junket rooms have exterior smoking terraces.
  • Continue to grow mass business
  • Confident they will get tables for their Cotai hotel.



  • Adjusted net income: $118.2MM ($1.17 per diluted share)
    • Net income was negatively impacted by a $47.9 million increase in tax expenses due to the timing of the payment of dividends from Macau, stock option exercises and capital expenditures.
    • Declared cash dividend of $1.00 to shareholders as of Feb 28
  • Macau
    • VIP turnover:  down 6.6% to $27.7 billion
    • VIP hold:  2.96%
    • Mass drop:  up 1% to $699.3 billion
    • Mass hold:  31.1%
    • Slot handle:  down 16.4% to $1.1 billion
      • WPD: $635, 15.3% lower
    • REVPAR: $303, compared with $304 last year
    • 504 tables (289 VIP tables, 205 mass market tables and 10 poker tables) and 840 slot machines.
    • Cotai budget: $3.5-4.0 billion
  • Vegas
    • Table turnover:  up 14.3% to $679.4 million
    • Table hold:  26.8%
    • Slot handle:  $758.4 million, up 14.9%
    • Non-casino revenues: $258 million, up 4.6%
    • REVPAR:  $201, up 1.8%
  • Cash: $2.0 billion 
  • Total debt outstanding at the end of the year was $5.8 billion, including $3.1 billion of Wynn Las Vegas debt, $749 million of Wynn Macau debt and $1.9 billion at the parent company.


Takeaway: Continue to like BYI's ramp, positioning, and valuation.

A solid quarter that beat us and consensus due to strong gross margins. We'll have more anlysis in an upcoming post.


“Our second quarter fiscal 2013 demonstrated continued momentum in all major business areas. I am happy with Bally’s trajectory and the steadily increasing visibility we have into our near- and long-term future growth"


-  Ramesh Srinivasan, the Company’s President and Chief Executive Officer




  • Game sales:  3,778 units in NA including replacements of 2,956 units
  • Continue to see an uptick in the NA replacement market
  • 399 IL VGT units.  Factoring out IL & CA units, ASPs would have been comparable to last Q
  • Margins benefited by 200bps from a customer's election to reduce costs but did not impact revenue. Now expect that product sales margins will be 50% for the balance of the year.
  • Cash connection: 1,360 units (up 144 units from last Q)
  • Systems:  As they continue to grow the average units connected to their systems and maintenance per unit their recurring revenues should grow.  Also benefited from conversion of Class II systems to Class III.
  • Reinstatement of the US R&D tax credit will lower their FY tax rate 
  • Higher game sale margins were offset by some one time legal and G2E expenses
  • Seasonality in certain variable fee games and reclassification of some game ops revenue to systems caused a slight QoQ decrease in gaming operations
  • Launching: Hot Shot Progressive and NASCAR on their Cash Connection link over the next few months. Pawn Stars also just launched. Tiki Torch is also launching later this year. So far they only released one game of MJ and Grease but more games will follow
  • Expect that the first set of output from their 3rd party game studios to be available for sale later this year. 
  • International game sales continue to dissappoint.  Sold 787 units. Have some local games that just launched and expect international sales to improve in the quarters ahead
  • Gaining good momentum with iVIEW DM and their Bonusing Suit of products.  Hosting their systems user conference later this year at Mohegan Sun.
  • Cloud-based Mobile platform offering a non-wagering portfolio of content and services continues its strong momentum and has now grown to more 6 million users
  • Making good progress with their online game distribution program.  Expect a dozen companies to feature their content.



  • Deal announced today acknowledges the undervalued nature of their sector. The potential for business disruption resulting from the deal could present an opportunity for BYI to gain further market share.
  • Still have a ways to go on gaming equipment sales - more conversion kits and more international sales
  • Canada and S. Africa implementations are going very well. No delays there. It's fair to say that over the next few years you should see some hardware and software revenue from these 2 markets in every quarter. 
  • Think that they had 20%ish market share in NA this quarter
  • Any change in operators' appetite for new purchases and replacements due to the weak regional numbers? No, they have continued optimism on their prospects
  • Slow down in the Game Ops growth was due to the timing of game releases and they were also impacted seasonality 
  • YTD game ops capex was right around $45MM
  • ASP's on a go forward basis: Stable.  Not seeing any pressure on their core business. 
  • Expect a continued pick up in steam on the VGT side.  With respect to Canadian VLTs they are into 1200 of a 1600 unit contract. 
  • Customer contract election benefit to game sale margins:  Benefited costs by 200bps and had no revenue impact. Had $2.9MM of unusual SG&A charges.
  • Guidance improvement:  ship share improvement, better game sale margins, and better Canadian sales. Only offset is that international game sales have been weaker
  • Assume $15-20MM/per Q of buybacks is included in their guidance.
  • Italy update: no change in status. Still working feverishly to improve game performance there.
  • Have not seen any major changes in the discounting aspect of the game sales. Good games continue to garner good prices.
  • Had some good collections this quarter on receivables which benefited their cash balance.  They will continue to paydown debt and buyback $15-20MM of stock. 
  • More conversions from Class II to SDS, should that continue? Assume that systems will continue to grow because of more links to the systems but nothing unusual in terms of systems conversions. 
  • Western lottery shipments starting in the March Q? Correct - think that the vast majority of those will ship into this fiscal year
  • PNK & ASCA: Think that with the consolidation, they will have a greater opportunity to sell systems to ASCA since they are already in PNK.  Don't know when and if that will happen though.



  • BYI beat the Street, reporting $0.80 and record revenues of $238MM
  • Raised guidance by $0.05-$0.15 to $3.20 to $3.40
    • Assumes a tax rate of 36-37%
  • "This quarter represents the 21st quarter in a row that we have repurchased stock. During the second quarter, we purchased 530,000 shares of common stock for $24 million at $45.43 per share. As of today, the Company has approximately $126 million available under its Board-authorized share repurchase plan"
  • Leverage remains beneath 2.0x
  • Gaming equipment: Revenue of $83MM with 53% gross margins
    • New devices: 4,565
      • Growth was "driven by higher domestic replacement sales, the shipment of 568 Canadian VLTs, and the shipments of units into the Illinois VGT market"
      • International was 17% of total
    • ASP: 16,553
      • ASP's were lower YoY "primarily as a result of a higher mix of lower-ASP VLT and VGT units sold in the quarter"
    • Gross margins jumped "due to continued cost reductions on the Pro Series line of cabinets and sales mix, a reduction in cost due to a customer contract election, and an increase in conversion kit revenue".
  • Gaming operations: $99MM of revenue at a 70% margin
    • YoY growth driven by growth in the WAP install base
    • Gross margin was down YoY due to higher Jackpot expense
  • Systems: $57MM of revenue at a 76% margin
    • $23MM of maintenance revenue vs. $18MM last year
    • Increase in margins was "primarily as a result of the change in mix of products. Specifically, hardware sales were 27% of systems revenues, and software and service sales were 32%, as compared to 33% for hardware and 33% for software and services in the same period last year."

PCAR: Don't Drive with the Rearview Mirror

Takeaway: In our view of capital equipment, orders matter and sales don't. Trading on historical sales is like driving with a rear view mirror.

Wait for Forward-Looking Data in the 10-K


  • Mostly ‘Takes’ on Quarter:  PCAR reported a quarter that initially reads quite well.  However, the EPS beat was mostly due to a lower than expected tax rate (29.2% vs. the ~32.2% imbedded in consensus estimates).
  • Capitalization Item:  Another negative is a footnote below the income statement reading :  “The fourth quarter 2012 includes the benefit of a $12.7 million reduction in cost of sales related to the capitalization of new product tooling that had been expensed in the first nine months of 2012. The positive effect on net income for the fourth quarter was $9.0 million ($0.03 per share)."  It is difficult to know how to interpret this item and management should have expanded on it on the conference call, in our view.  It could be viewed as PCAR slightly understating its profitability in the first nine-months.  Or it could be viewed as 'goosing' the quarter.  Regardless, the benefit was not in expectations and adds to the quarter's miss.
  • A Miss, Adjusted:  PCAR missed by a penny or two when the lower tax rate and capitalization items are backed out.  The street 'hates' it when these items are not clearly presented, leaving the shares to get hit harder, in our view.
  • Ignore the Quarter:  PCAR has a lot of things going well for it in 2013-2014 and 4Q 2012 was already well known to have been weak for the truck OEMs globally.  In the near-term, we estimate that Navistar has lost significant market share in orders through late 4Q.  That should benefit PCAR, among others, in early 2013.  Further, we see the end of tail pipe emissions regulations and a rebound in construction activity as significant potential benefits.  In addition to a record-old Class 8 fleet, there are a number of reasons to expect PCAR to perform extremely well over the next couple of years, in our view.  (See here for additional information on PCAR or ping us for more background).

PCAR: Don't Drive with the Rearview Mirror - navshare



  • Industry Improving:  The Class 8 market appears to have bottomed in late summer.  With recent and anticipated production curtailments amid a rebound in orders, industry dynamics look to have improved heading into 2013.

PCAR: Don't Drive with the Rearview Mirror - btob



  • Ahead of Itself:  We believe PCAR shares have room to run, but have been cautious on the rapid move in valuation ahead of fundamentals (see here for our recent note on PCAR valuation).  For mature companies, increasing share prices usually mean increasing risk, in our view.  A decline in PCAR shares to the mid-low 40s could provide an attractive entry opportunity for investors.
  • Look Forward:  In addition to the Volvo (2/6/13) and Daimler (2/7/13) earnings reports, we are interested to see the backlog data in the PCAR 10-K at the end of next month.  Backlog data should give us a better sense of order trends and market share with respect to NAV, which we expect to be an important upside driver for PCAR.  In our view of capital equipment, orders matter and sales usually don't.  Trading on sales is like driving with a review mirror, while anticipating order trends is key.


Jay Van Sciver, CFA

Managing Director

111 Whitney Avenue

New Haven, CT 06510


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DOJ Complaint (ABI/Modelo) - We Read it So You Don't Have To

What the DOJ did…

After reading through the complaint filed by the DOJ, it seems clear to us that the DOJ was more interested in appearing to do SOMETHING rather than examine the facts of the case.  The DOJ has a long history of wanting to appear sympathetic to the little guy that buys beer and baby food.


The DOJ gave ABI/Modelo/STZ virtually no credit for the indirect nature of the control that ABI would have had subseqent to the transaction closing.  Instead, the focus was placed on the supply agreement, and how that might allow ABI to influence Corona pricing.


So, the deal has become contentious, with the potential to drag out beyond Q1.  If this moves to trial, we won't likely see a start for 2-4 months.  However, both sides can and likely will continue to talk.  We fall back on our initial assessment based on the following factors:


  1. Modelo is an asset that ABI has long coveted (multi-year owner/partner)
  2. If not now, when does ABI act? Waiting for changes in the regulatory winds doesn't seem like a sound business strategy on the part of ABI
  3. Modelo is a multi-billion global opportunity for ABI

Walking away seems unlikely, if you accept our fact pattern.  Therefore, what has to be done.  First off, the call option on the business has to go -- the DOJ mentioned it about a half dozen times in the complaint.  The DOJ was focused on premium and premium plus pricing, so ABI might have to give up a brand in that segment - we have suggested Michelob.  Finally, we fall back to our analysis of the InBev/Budweiser deal where InBev sold and then brewed Labatt's for a period of three years for North American Breweries.  In short, the DOJ's concerns regarding supply have to be met in some fashion (selling a brewery or searching for an alternate supply for Crown).


What the DOJ said...

We read the complaint so you don’t have to, and we have selected some comments that we believe highlight how the DOJ has attempted to shoehorn a conclusion into a fact pattern that is several sizes too small.  To begin:

“As the two largest brewers, ABI and MillerCoors often find it more profitable to follow each other’s prices than to compete aggressively for market share by cutting price. Among other things, ABI typically initiates annual price increases in various markets with the expectation that MillerCoors’ prices will follow. And they frequently do.  In contrast, Modelo has resisted ABI-led price hikes.”

The DOJ has embraced a temporary market share vs. price strategy as a structural imperative of the US beer industry.  It is just as likely that Modelo, satisfied with recent share gains, seeks to improve profitability through pricing for a period of time.

“The loss of this head-to-head competition would enhance the ability of ABI to unilaterally raise the prices of the brands that it would own post-acquisition, and diminish ABI’s incentive to innovate with respect to new brands, products, and packaging.”

ABI competes in a global market place with shifting demographics and consumer taste preferences.  Further, consumers across all staples categories are demanding different varieties and taste profiles.  Finally, the growth of the craft brewing segment has been a driver of innovation across the industry, not the competition between ABI and MillerCoors.  In this case, the DOJ has mistakenly viewed a structural imperative of virtually all staples sectors (innovation), as a temporary market condition.

“For no substantial business reason other than to avoid liability under the antitrust laws, ABI has entered into an additional transaction contingent on the approval of its acquisition of the remainder of Modelo. Specifically, ABI has agreed to sell Modelo’s existing 50% interest in Crown Imports LLC (“Crown”)”

This one is a real head-scratcher – of course there was no business reason.  Any incremental concessions won’t have any substantial business reason either.

“Constellation has already shown through its participation in the Crown joint venture that it does not share Modelo’s incentive to thwart ABI’s price leadership. In fact, Constellation consistently has urged following ABI’s price leadership.”

This is simply a difference of opinion between JV partners, neither position is permanent (see earlier point) nor is one necessarily the correct or incorrect course of action at any point in time.

“The acquisition gives complete control of Modelo to ABI, and gives ABI full access to competitively sensitive information about the sale of the Modelo brands in the United States – access that ABI does not currently enjoy.”

Really?  I have access to pricing information on Modelo brands.  Not real time, nor in advance, but does the DOJ believe that the largest brewer in the U.S., with a network of distributors across the country, is unaware of the actions of its competitors, whether it owns a portion of them or not?

“Beer is a relevant product market and line of commerce under Section 7 of the Clayton Act. Other alcoholic beverages, such as wine and distilled spirits, are not sufficiently substitutable (emphasis added) to discipline at least a small but significant and nontransitory increase in the price of beer, and relatively few consumers would substantially reduce their beer purchases in the event of such a price increase.”

Again, really?  I have to assume that the DOJ just missed the spirits companies talking about targeting beer occasions.  Someone needs to tell Brown-Forman that no one who drinks beer is a potential consumer of any of their products.  It would save the company a lot of time, money and effort.  Someone should also point out the consistent and multi-year loss of share of liver on the part of beer to wines and spirits.

“Brewers are able to price differently in different locations, in part, because arbitrage across local markets is unlikely to occur.”

I’m confused – is beer pricing local, or is it uniform across the country?

“Crown executives have recognized the differing incentives, as it relates to pricing, of their two owners. As one Crown executive observed in a March 2011 email, “Modelo has a higher interest in building volume so that they can cover manufacturing costs, gain manufacturing profits and build share as the brand owners.” Constellation, however, “is interested primarily in the financial return on a short-term or at the most on a mid-term basis.”


Of course STZ was short-term focused; it wasn’t clear what the status of the Crown JV was much beyond the next couple of years.  The nature of the transaction changes the incentives and durations of the parties involved.


Where does that leave us?


In summary, it appears that the DOJ is focused on pricing (naturally), the fact that there is no brewing facility associated with the transaction (ABI controls supply) and the 10 year call option (mentioned several times, that thing really has to go).   We think that there is a middle ground to be had here that preserves the illusion that the DOJ actually accomplished something and that allows for ABI/Modelo/STZ to realize significant value from the transaction.


Call with questions, please.




Robert  Campagnino

Managing Director





Matthew Hedrick

Senior Analyst

HSY Q4 - Not a Whole Heck of A Lot Wrong

HSY’s 4Q2012 adjusted EPS of $0.74 missed Bloomberg consensus by a penny with the main drag coming from a +19% increase in SG&A (excluding marketing), which was above initial estimates.


For its important Halloween and Christmas quarter, organic sales grew +9.3% (price +2.3%, volume +7.0%), and net sales rose +11.7% inclusive of the Brookside acquisition (+2.1%) and +0.3% of FX).  Gross margin improved +140bps to 43.1%.


We came into the print saying that HSY, at 21.4x ’13 EPS, was expensive but had very good business momentum, and the quarter largely proved this out across its Chocolate, Non-Chocolate, Mint, and Gum segments.


The company’s outlook for 2013:

  • Net sales growth of 5 to 7%, including FX, unchanged versus previous estimates
  • Adjusted Gross Margin expansion of 180 to 200 bps, driven by “productivity, cost savings initiatives and overall input cost deflation.”
  • Advertising expected to increase 20% with a larger share going to Brookside and China
  • Adjusted EPS growth of 10 to 12% versus previous guidance of 8 to 10%, or EPS of  $3.47-$3.56 versus consensus at $3.60

We think the name finds buyers on any pullback (HSY is up +1.6% intraday).  We don’t find its 2013 sales growth target particular challenging which could lend to upside surprises. In 2013 we could expect the USA to grow around +4%, to get +1 point from innovation, and +2% from international, which very quickly takes you to the top end of its guidance range. The company last took a major price increase in 2011. We suspect HSY, like many of its peers, will see larger volume gains as pricing comes in. We are bullish on HSY getting more shelf space internationally, especially in China, and expect continued sticky consumption from its convenient store channel despite such headwinds as an increase to the payroll tax.


Call with questions.




Robert  Campagnino

Managing Director






Matthew Hedrick

Senior Analyst


Wave has a decent start but are expectations for RCL’s 2013 guidance too high? 



With CCL offering disappointing 2013 net yield guidance of +1-2% yield for 2013, RCL has a chance to reassure cruise investors of a strong 2013 outlook.  However, we think the commentary will be mixed, which may not be good enough given the 8% run up in the stock since they last reported.  Thus, the Q1 earnings next week may actually be a negative catalyst.  As we mentioned in 2013 EARLY WAVE SEASON PRICING (01/31), RCL's Alaska and Europe pricing (mass brand) are underperforming. 


We understand there is an expectation that pricing should pick up in February and March, thanks to easy Concordia comps.  Travel agent surveys have been quite optimistic regarding the start of Wave Season.  The Street is looking for close to 3% yield growth in 2013.  It is an achievable target but European pricing will likely need to stabilize.  Unfortunately, we see European pricing trends continue to deteriorate relative to October.  


An interesting trend we’re noticing is the relative pricing outperformance of the premium brands (Celebrity/Azamara) versus the mass brand (RC) in Europe and the Caribbean.  The 2013 payroll tax hike is probably playing a role in the mass weakness especially in the Caribbean.  The RC brand accounts for 64% of RCL’s total capacity in 2013.


We believe RCL would need to guide 3%+ in net yields to beat Street expectations and continue the momentum.  We think yields closer to 2% is more reasonable.  The continued Oasisizing and Solsticizing in the 1st half of 2013 will pressure costs and higher airfares to Europe may continue to crimp demand and lead to shorter booking windows.  The stock is not overly cheap at 13x which is in-line with its historical average.



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