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PNK YOUTUBE

In preparation for PNK's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

Pinnacle Entertainment Completes Acquisition of Retama Park Racetrack in Texas (1/30/2013)

  • Paid cash consideration of $15 million to acquire a 75.5% equity interest in Pinnacle Retama Partners, LLC (PRP).  PRP will use the  proceeds of the transaction primarily to refinance the existing indebtedness of Retama Development Corporation ("RDC").  In addition, the Company entered into a management contract with RDC to manage the day-to-day operations of Retama Park. In conjunction with the closing, RDC repaid approximately $3.3 million of loans owned by the Company that were used to maintain continuity in the operations of Retama Park Racetrack."

PNK acquires ASCA (12/21/2012)

  • Please see our "PNK-ASCA ACQUISITION CONF CALL NOTES."

 

YOUTUBE FROM 3Q CONFERENCE CALL 

  • “L'Auberge Baton Rouge... we have seen strong visitation as evidenced by over 48,000 new mychoice sign-ups during the first month of operations. VIP business has opened up ahead of pace and we're optimistic about our ability to drive continued pace in this segment given the high quality amenities at this property.”
  • “These results are being delivered with more efficient and effective marketing spend. For the quarter, marketing expense as a percent of gaming revenue was down 60 basis points. This marks the third consecutive quarter where marketing reinvestment has been reduced versus prior year.”
  • “Table game growth continues to be a great story at Lumière, up 21% year-over-year in table field for the quarter. River City's growth was driven by increased play on day of trips and overall increased frequency of visitation. Our continued focus on driving profitable revenue is again evident in the results coming out of St. Louis, with marketing expense as a percentage of gaming revenue down 180 basis points versus prior year.”
  • [Belterra] "We continue to grow admissions in a declining market, and we remain focused on leveraging our unique assets while maintaining marketing spend discipline.”
  • “In New Orleans, the property and the market are clearly struggling, but underlying trends at Boomtown got progressively better throughout the quarter, notwithstanding the impact of Hurricane Isaac.”
  • “We have tremendous conviction in the value of our company and are very pleased to be purchasing shares in what we view as very compelling levels.”
  • [River Downs] The project's expected to cost $209 million, excluding license fees, land and capitalized interest. We expect to begin construction this year with the entire facility scheduled to open in the first half of 2014. We have master planned this facility for future expansion should demand conditions warrant the additional investment.”
  • “At River City in St. Louis, the $82 million expansion is progressing rapidly with the parking garage expected to open in about a month. The multipurpose event center is expected to come online before the end of next summer, and the hotel will open in the second half of 2013.”
  • “To date, we have contributed about $14 million of the $15.6 million, and we expect the remaining funds to close in the fourth quarter. ACDL continues to make meaningful progress on the development. And while there is work to do on the regulatory front, the project remains on track to open the first quarter of next year.”
  • “We continue to improve our margins, not only in this property, but all of our properties.  We believe margins this quarter are sustainable going forward.”
  •  [L’Auberge Baton Rouge]  “We're pleased with September and initial results. October has a bit different calendar and – but we're pleased with what we see in October and most important, we really feel like we nailed this facility. It's a terrific facility with a wonderful management team that we're very optimistic over time. We're going to build profitable revenues and have really good financial outcomes here.”
  • [L’Auberge du Lac] “Houston is a very underpenetrated market where we think that there is a lot of unmet demand, and we've been able to yield that facility – meaningfully better over the last couple of years mostly by having more profitable guests that come through our place but given the depth of that market. So we think that there is certainly room to go there and we've made enhancements to our facilities to make sure that we can take advantage of that demand. And on the non-gaming revenue side, we've continued to make enhancement that drive non-gaming cash revenue which is part of the story.”
  • “In terms of the spend per visit increase, it is coming largely from our top three tiers, the quality of the guests that are visiting our properties and the incentives that we're providing to them are yielding higher spend per visit.”

AXP: SPENDTREND - IS U.S. CREDIT GROWTH RE-ACCELERATING?

Takeaway: $AXP growth is likely to be stronger sequentially in 1Q based on January SpendTrend numbers from FirstData. Multiple expansion seems likely.

Growth Accelerates Notably in January

First Data released its January SpendTrend data this morning, which tracks aggregate same-store sales activity in the United States. January showed notable acceleration in credit card volume growth to +9.2% YoY vs. +4.3% YoY growth in December and +6.8% YoY growth in November. 

 

On an overall basis, including credit, debit and check, consumer spending volume growth in January also accelerated to 6.2% YoY, which was up from 4.0% in December and 5.8% YoY growth in November. January's 6.2% YoY growth was, in fact, in-line with the average rate of growth over the last 8 months of 2012.

 

FirstData flagged the following components as notable contributors to the strength of January's print: 

 

Retail dollar volume growth was the highest growth seen since August 2012. Dollar volume growth in building material & garden equipment & supply dealers and sporting goods, hobby, book & music stores were key contributors to the retail growth.

 

There also seems to be a bit of time-shifting going on, as consumers deferred some consumption in December over fiscal cliff apprehensions into January. Nevertheless, it's notable that the payroll tax increase as well as the tax increase on high earners appeared to have little impact on consumers' appetite for spending. 

 

We like to use SpendTrend data as a proxy for American Express' intra-quarter momentum. Amex didn't provide a January update, as they normally do, on either their 4Q12 earnings call or at their recent investor meeting. Based on the historical relationship between FirstData's credit volume and Amex' U.S. credit volume, we would expect that January's growth in billed business for U.S. card accelerated to 9.5%-13.3%, up from the 4Q12 growth rate of 6.9%. If this is sustainable, this would support multiple expansion. The stock is currently trading at 13x 2013 estimates. This is the low end of the range (13x - 14.5x) over the last twelve months.

 

It's also interesting to consider that Amex' international volume growth accelerated meaningfully in 4Q12 to 8.8%, up from 2.7% in 3Q12. With both U.S. and International now accelerating, and the benefits of cost cutting materializing, the company is in position to generate upside surprise to estimates (if they choose to let it flow through).

 

Our primary concern on Amex had been that the combination of tax hikes on its top tier clients coupled with higher payroll taxes on all its clients would suppress spending meaningfully. That, however counterintuitively, appears not to be happening. 

 

AXP: SPENDTREND - IS U.S. CREDIT GROWTH RE-ACCELERATING? - spendtrend qtrly

 

AXP: SPENDTREND - IS U.S. CREDIT GROWTH RE-ACCELERATING? - Spendtrend monthly

 

Joshua Steiner, CFA

 



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Currency Armageddon

“Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold are not clothed.”

-Dwight D. Eisenhower

 

As I was preparing for my week long sojourn over to the United Kingdom, I actually had to think seriously about what type of currency I wanted to bring.  After all, in this day and age of the modern currency war, the movement of currencies can be dramatic and shocking.  If you don’t believe me, just ask those good folks that were long of Venezuela’s Bolivar going into Friday.  In a split second, the government unilaterally devalued the Bolivar by 32% and likely put a few currency traders out of business.

 

In terms of global economies, according to the CIA Fact Book Venezuela is just the 34th largest economy in the world at just $400BN in annual economic output.  Despite this, there were a number of multinational companies that were impacted by the devaluation.  Specifically, Colgate-Palmolive and Smurfit Stone have taken charges, with comparable companies like Avon, Proctor and Gamble and Kimberly-Clark certainly at risk of a short term hit to both earnings and assets.

 

Obviously the popular pushback when we stress currency wars with U.S. focused equity managers is that they are a 3rd world type risk and not a concern or issue that will become broadly prevalent. In fact, this consensus view was verified to me as I opened the Irish Times this morning to an article titled, “Fears of an Imminent Currency War Are Wide Of the Mark.”  Of course, many of these money managers have only been managing money for the last 10 – 15 years, so they may have missed this little critter called the Plaza Accord. 

 

Now admittedly, the Plaza Accord was not a unilateral devaluation or war, but rather an agreement by Germany, Japan, France, the United States, and the United Kingdom.  The agreement by these five nations was to intervene in global currency markets with an objective of devaluing the U.S. dollar in relation to the Japanese Yen and German Deutsche Mark.

 

Not surprisingly when the world’s largest central banks gang up to achieve a goal, they succeed, and the U.S. dollar depreciated dramatically over the next two years.  In fact, the dollar depreciated versus the yen by almost 50% from 1985 to 1987.   By some economists, this devaluation was heralded as a glorious success as the devaluation was controlled and did not lead to a financial panic.

 

While the last point is true, the strengthening of the Japanese yen was likely a key catalyst for one of the most significant bubbles of the last three decades, if not hundred years – the Japanese real estate bubble.  Naturally, given that the U.S. dollar was set to decline, the Japanese that had their assets abroad repatriated and began purchasing Japanese real estate, and purchased more, and purchased more.   In fact, at one point choice properties in Tokyo’s Ginza district were trading hands at $20,000 per square foot.

 

For Japan, the acquiescence to the United States to devalue the U.S. dollar led to an asset bubble of incomparable proportions and then an effective lost decade(s) of economic activity (and then some) as the Japanese economic system de-levered.  My point in highlighting this is simply that devaluations, like much of government intervention in the markets, has unintended consequences.  In hindsight, the Japanese likely never would have signed up for the Plaza Accord had they understood the unintended consequences.  In part, this experience is likely shaping their new policy of going at their currency strategy alone, rather than suffering the beggar thy neighbor option of a Plaza Accord type agreement.

 

There is obviously a worst case scenario as it relates to currency wars, that scenario in which all nations devalue at once.  Not unlike during the Cold War, when both the Soviets and Americans were armed to the hilt with nuclear weapons, this global devaluation is also likely a race to MAD (Mutually Assured Destruction).  For lack of a better term, we’ll call it Currency Armageddon.

 

The broad implications of a massive global currency war actually relate back to the quote from Dwight Eisenhower at the start of this note.  In a normal war, goods are taken from the people to create weaponry.  As a result, the average person is worse off during a war.  On some level, a currency war is no different. 

 

As currencies are devalued, the purchasing power of the average citizen is degraded and as a result so is their ability to purchase basic goods. If you don’t believe me, ask the average citizen of Venezuela whose purchasing power was decimated by this move on Friday.  This quote from a recent Bloomberg article about a rush to buy airline tickets was particularly apropos:

 

“I came because I heard American Airlines is going to raise fares by 100 percent, that’s to say, above the devaluation.”

 

Interestingly, there is an alternative to Currency Armageddon and its unintended consequences. This is the exchange rate system implemented post World War II called the Bretton Woods system.  In this period of semi-fixed exchange rates, competitive devaluation was not an option.  Not surprisingly, under Bretton Woods global economic activity thrived and was stable. 

 

This is not to say that Bretton Woods was an ideal system, but what seems less than ideal is the ability of major governments to unilaterally devalue on a whim, which is the nature of the monetary system today. The most recent example of this is of course Japan and the rampant devaluation of the yen.  This will last until the average retiree in Japan starts to feel the fiat currency squeeze like the Venezuelans have.  Interestingly, Japan is almost half way there with a Yen that is down over -15% in only three months.

 

Now, on one hand, shorting the yen was an existing idea we re-presented on our Best Ideas call on November 15th and that trade is up ~14% since then, so we are happy about that.  But as we contemplate risk managing future economic shocks, the idea of Currency Armageddon is a risk that every day seems less and less like a tail risk and more like a 2013 type event, despite what we might be reading in the Irish newspapers.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $116.52-118.72, $79.82-80.54, 92.78-94.66, 1.93-2.01%, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Currency Armageddon  - Chart of the Day

 

Currency Armageddon  - Virtual Portfolio


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