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SANDBAGGING IN THE DESERT

We think IGT is sandbagging the numbers.  Nobody can accuse us of being eternal optimists.  This is the first time we've made the claim that guidance was conservative and we did bring our numbers down to 25% below the Street on Monday in our note "IGT: PLENTY OF EARNINGS POWER FOR PATIENT INVESTORS".  IGT guided below even our numbers.  This is exactly what we hoped the company would do, especially with a new CEO taking over.  Smart move, Patti.  Now we'll see if she is the aggressive and unemotional cost cutter that we believe her to be.  Move over TJ, aka Mr. Nice Guy.

 

We've scrubbed the model after the quarter and our estimates actually went...UP!  Our financing projections changed to now assume a one year extension of the credit agreement combined with a new bond deal.  Previously, we expected a bond deal and a completely new credit facility.  Essentially, this strategy allows IGT to smooth the interest cost mark-up over 2 years versus our previous assumption of a year.  We are now projecting fiscal 2008 and 2009 EPS of $0.87 and $0.89, respectively. 

 

Now that the earning cat is out of the bag, the real story here is IGT's long-term core earnings power.  The probability of earnings meets and beats are high, in our opinion, so what is the true earnings power?  Our conclusion from our 4/21 note still holds:  $1.40.  However, given the pent up replacement demand, we are likely to see a v-shaped recovery and IGT "over earning" the $1.40 for a few years.

 

The market reaction to the awful quarter and guidance yesterday was to send the stock slightly higher.  The bottom could be in.  Estimates are likely to be met or exceeded.  As shown below, only 5 out of 19 sell-side ratings are positive.  Upgrades are coming, especially when they beat the next quarter.  Finally, the valuation, even on our Street low 2010 estimate, is reasonable, and downright compelling on core EPS.

 

SANDBAGGING IN THE DESERT - IGT analyst ratings


COLM: CAN'T GET OUT OF ITS OWN WAY.

This company never ceases to amaze me. If you were to ask me a week ago (as some clients did) I'd have said that I thought that COLM would smoke the quarter by a factor of 2x, but that SG&A and capex would numb the impact of a weak backlog and an FX headwind for the reminder of the year.  Net/net, not a big bull event, but be weary of following the herd onto the short side.  That was in the low $30s. Though the stock has since rallied to $37, I think that my original statement will prove to be flat-out wrong.

 

The consensus is going to end up shaking out in the $1.50-$1.75 range. There's no way this stock could maintain a 3-handle with that earnings base.  To be clear, I think that they are absolutely sandbagging, and will come in between $2.00 and $2.25.  Let's watch this one real close. If estimates come in closer to that $1.50 line and the stock gets obliterated, it's definitely worth a look-see.

 

As always, there's a ton of moving parts around the fundamentals here. What's the biggest positive that jumped out at me? The core Outerwear business performed quite well - up 10% yy. Not only is this the highest margin product for COLM, but it is the best authenticator and halo for the brand. On the flip side, just about everything else was flat-out embarrassing. This company simply can't gain traction in any of its non-outerwear businesses.

 

As noted above, I was in the camp that cutting costs and capex could be a buffer here for '09 and '10. In fact, I was about to beat the company up for taking capex UP in '09 by 10%. But pondering about how little traction these non-core products and brands have, I'm in the camp that COLM needs to invest more rather than cut - or simply close down what's not working (which management will not do).

 

The other option would be to sell the company, which is plausible if the right partner is willing to buy it and 'leave it alone' (i.e. VFC). That's probably closer to reality now than it was a month ago.

 

In the end, every story has its price. Let's see where numbers shake out. If this is oversold into sandbagged expectations, it may be a trade. For longer-term investors, there are clearly deep deep issues worth researching. We're on the case.

 

COLM: CAN'T GET OUT OF ITS OWN WAY. - 4 24 2009 7 37 08 AM


SOMEBODY WANTS TO OWN A BIG SLUG OF GAMING

The Nevada Gaming Commission is considering an amendment to allow an institutional investor to own up to 25% of the voting stock of a gaming company without getting licensed, up from the current 15%.  Las Vegas Attorney Frank Schreck proposed the amendment and we doubt he's doing it on his own.  Someone is funding the cause.


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PENN’S MATH = RE’S MATH

In our 4/20 post, "GAMING REGIONALS: THE FALLACY OF EV/EBITDA", we "normalized" PENN's underleveraged free cash flow.  We assumed PENN would make an acquisition at 6.5x EBITDA and generate a 5% net free cash flow return.  PENN outlined their return metrics in the Q1 earnings call this morning and, low and behold, our projections were confirmed:  5% is the number.

 

The following is our calculation of a hypothetical $1.25 billion acquisition (presumably a Strip property).  We chose 1.25 billion because it essentially levers the company up one turn to about 3.5x, still under the 4x target.  With PENN on the record, we can "YouTube" management when they announce their next acquisition.  We believe this return focused management team will not sway from their discipline.

 

PENN’S MATH = RE’S MATH - PENN s math


Penney and Jordan Got Game!


Brazilian Shorts Get Waxed

The Client is back and the cash register is ringing...

 

A core theme of our work on the Chinese Stimulus program is that as the Ox starts waking up he will be craving the basic materials that countries like Australia and Brazil provide. In the case of Brazil, data has arrived demonstrating that in the form of increasing shipments of iron ore. Total Chinese ore imports totaled over 52 million metric tons for March, with more than 22 million tons worth coming from Brazil. 

 

Without a doubt this data is a huge shot in the arm for Brazilian exports which are concentrated so heavily on commodities and certainly explains why the Bovespa is trading up again today.  Although anecdotal reports put Chinese ore stockpiles at about 1.5 months worth of imports and growing -an uptick that could signify speculative purchasing, all signs point to continued strength so far this month with expectations that it will continue.

 

We are long the Brazilian equity market via EWZ and remain bullish on prospects there as Chinese demand works through the global chain. In the coming days will be delving into the other half of the export equation for that nation -Agricultural commodities, as well as  drivers for domestic demand, but for now the Client is the most important part of the story.

 

PS:  Anyone out there short shipping stocks?  

 

Andrew Barber
Director

 

Brazilian Shorts Get Waxed - braz1

 

Brazilian Shorts Get Waxed - braz2

 


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