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INVESTABLE MPEL

Close to a 52 week high but here’s a compelling case for significant multiple expansion.

 

 

Why are we still positive on MPEL after the stock has reached an all-time high?  After all, we could cut bait after first recommending the stock at $4 per share back in the summer of 2010, clap ourselves on the back, and take a victory lap.  We understand that with the volatility in this group and especially MPEL, a couple of weeks of “sluggish” GGR growth could haircut the stock considerably.  But we’ll take the lumps over the near-term because we firmly believe that this stock is ripe for some serious multiple expansion and on potentially higher numbers.

 

The long-term (Tail in Hedgeye speak) and intermediate term (Trend) thesis can be summed up quite succinctly.  After a 2 ½ year period of consistent upward earnings revisions, outperformance in the best performing casino market in the world, three major growth drivers including highly profitable same- store revenue growth, and a $12 billion market cap, MPEL is now a real company deserving of a real multiple.  Over the near-term, we’re projecting another beat for Q1 2013 – despite lower than normal hold – and for FY 2013.

 

Shockingly, higher EBITDA drove most of the quintupling of the stock in 2 ½ years.  That’s how good management has performed (or how bad they were performing 3 years ago).  On a forward basis, despite the run, MPEL only trades at 8x 2014 EV/EBITDA after excluding Macau Studio City construction costs.  Back at $4 in 2010, the multiple was 7x.  The other US listed Macau operators currently trade between 9x and 14x.  Remember that operators in Macau pay no income tax on casino profits, so an 8x multiple seems utterly ridiculous to us.

 

INVESTABLE MPEL - mpel

 

We don’t think MPEL is yet considered an investable stock by most investors.  A glance at the top twenty shareholders indicates very few institutional long only investors, relative to a WYNN or LVS.  We think more long only investors are inevitable – it’s happening already, trust us – which will push the multiple higher, in our opinion.  What’s the right multiple?  We think a 11-12x multiple is sufficient for now, which implies a $30 stock with upside from there as investors begin to look forward to the opening of Macau Studio City.

 

In summary, here is why we think MPEL deserves a higher multiple:

  • Near-term: Macau booming again and MPEL maintaining/gaining share.  Q1 and 2013 estimates – and thus implied 2014 – need to go higher.
  • High ROI unit growth: Macau Studio City should open by 2015.  With one of the best locations in Cotai, the fastest growing region in Macau, a 20-30% ROI is not unreasonable.  Moreover, MPEL has structured a favorable investment/management contract in the Philippines with the Belle Casino.
  • Huge cash flow and cash balance:  Prohibitive covenants gone, net debt of roughly zero, and free cash flow (before project capex) well over $1 billion.  In other words, Macau Studio City will be funded entirely out of free cash.
  • Dare I say a proven management team?  I’m not sure it can be denied any more following the turnaround they have engineered.
  • Continued evolution of shareholder base toward more long only investors

Breadth of the Market's Move

Takeaway: Here's a chart that speaks to the breadth of the market's advance since the lows of 2009.

The chart below speaks to breadth of the market's advance and is an alternative view of style factor performance. It shows smaller cap, higher beta and higher growth are outperforming, When you give those companies a higher weight it shows up in the performance spread between the cap-weighted and equal-weighted.  Apple hasbeen a drag on the S&P's relative performance in recent months, too.

 

Breadth of the Market's Move - S and P Redux


Not Perfect: SP500 Levels, Refreshed

Takeaway: Month/Quarter end will get real interesting now. I might come right back and buy SPY at 1535-1539 again. We’ll see.

POSITION: 10 LONGS, 7 SHORTS @Hedgeye

 

They took a good run at the YTD closing high into yesterday’s close, then backed off – and then failed this morning on what I thought was very good US economic data (Jobless Claims, Existing Home Sales/Inventory – see our Macro Team’s notes on both).

 

Problem is, of course, that everything eventually gets discounted. I don’t think it has been yet, but there was enough to think about here today to get out of the way (sold my SPY) while I think it through some more.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1565 (all-time closing high)
  2. Immediate-term TRADE support = 1539 (where we said buy this wk)
  3. Intermediate-term TREND support = 1485

 

In other words, the market is still bullish TRADE and TREND, but it’s not perfect. Perfect is as perfect does, and that would have been hitting a fresh YTD high this morning on US economic data that supported it.

 

Month/Quarter end will get real interesting now. I might come right back and buy SPY at 1 again. We’ll see.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not Perfect: SP500 Levels, Refreshed - SPX


Early Look

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INITIAL CLAIMS - FULL STEAM AHEAD

Takeaway: Labor conditions continue to chug ahead. This is both causing, and being caused by, housing's rally.

Clean and Simple takeaway this week - Labor Market Trends continued to accelerate as non-seasonally adjusted initial jobless claims improved to -7.5% YoY as compared with improvement of -5.6% in the previous week.  Employment and Housing are now reflecting some virtuous circularity.  

 

Below is the detailed analysis of the claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact 

 

Labor Market Strength Shows No Signs of Deterioration

The optical (i.e. SA) claims number was slightly better than expected in spite of rising nominally WoW. Our focus is on the trends in the NSA data, where we saw further acceleration in improvement in the latest week. This past week, the rolling NSA (non-seasonally adjusted) initial jobless claims improved by -7.5% YoY as compared with improvement of -5.6% in the previous week. What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last six weeks. Refer to the second chart in this note for additional perspective.

 

We think it's also worth noting that the trajectory of 2013 is now mirroring 2012 with a nearly identical slope of +16 bps (vs +14 bps in 2012). This is the strongest leading indicator for housing trends, lender credit quality trends and loan growth trends. Moreover, it raises expectations of the Fed backing off, which pushes the long end higher, alleviating pressure on margins.

 

On the SA (seasonally-adjusted) front, the numbers also looked good. This is what the market is paying attention to. As a reminder, the SA data is now facing a small, but growing headwind over the coming six months. The first chart in the note tells the story well. 

 

The Data 

Prior to revision, initial jobless claims rose 4k to 336k from 332k WoW, as the prior week's number was revised up by 2k to 334k.

 

The headline (unrevised) number shows claims were higher by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7.5k WoW to 339.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.6%

 

INITIAL CLAIMS - FULL STEAM AHEAD - JS 1

 

INITIAL CLAIMS - FULL STEAM AHEAD - JS 2

 

INITIAL CLAIMS - FULL STEAM AHEAD - JS 3

 

INITIAL CLAIMS - FULL STEAM AHEAD - JS 4

 

INITIAL CLAIMS - FULL STEAM AHEAD - JS 5

 

INITIAL CLAIMS - FULL STEAM AHEAD - JS 6

 

INITIAL CLAIMS - FULL STEAM AHEAD - JS 7

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Jobless Claims: Full Steam Ahead

Takeaway: The labor market is strengthening. This is both causing, and being caused, by housing's rally.

 Labor Market Strength Shows No Signs of Deterioration

The optical or seasonally adjusted jobless claims number was slightly better than expected in spite of rising nominal week-on-week numbers. Initial jobless claims this week rose 2,000 to 336,000 this week.

 

Our focus is on the trends in the non-seasonally adjusted (NSA) data, where we saw further acceleration in improvement in the latest week. This past week, the rolling NSA initial jobless claims improved by -7.5% year-on-year as compared with improvement of -5.6% in the previous week.

 

What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last six weeks. Refer to the char below for additional perspective.

 

Jobless Claims: Full Steam Ahead - march21jobless

 

We think it's also worth noting that the trajectory of 2013 is now mirroring 2012 with a nearly identical slope. This is the strongest leading indicator for housing trends, lender credit quality trends and loan growth trends. Moreover, it raises expectations of the Fed backing off, which pushes the long end higher, alleviating pressure on margins.

 

 


JCP: Our Take On The K

Takeaway: The good outweighs the bad in JCP’s 10K disclosure.

The good outweighs the bad in JCP’s 10K disclosure. Here are some key points.

  1. Commented that the letter it received from bondholders (that one the people speculated was from Icahn to back Ackman into a corner) claiming JCP had defaulted on its commitment has been rescinded. A default would have caused a chain reaction with other tranches of debt, and potentially caused a major liquidity event. That risk is now mitigated.
     
  2. Capex for 2013 is coming down to levels on par with 2012. That frees up about $200mm in our model, and of course, in JCP’s liquidity. We like this change, because quite frankly – JCP spending $1bn (even with its remodel program) borders on ridiculous.
     
  3. Pension expense (non-cash) to decline in 2013 by about 40%. On top of that, expected rate of return is down to 7% from 7.5%.
     
  4. On the negative side, JCP added risk factors of chance of non-cash asset impairment charges, and potential limited use of NOL carryforwards. Not good, and we’re curious as to why there would be a limit in the ability to use NOLs. But the end result is that this not a disaster.  
     
  5. There was also a comment on change in strategy could take longer. JCP had to do that given that a) it is starting to be promotional again and does not know the full impact. And 2) the Martha Stewart trial is in limbo, and JCP might have to change to alter the scope of the product in the event of an adverse outcome.
     
  6. One credibility point is that the company noted that it ended the year at 116,000 employees, that’s 27%, or below a year ago. On one hand, that represents major progress in JCP's restructuring.  On the flip side, it’s more than 2x the number of people Ron Johnson said had lost their job when he testified under oath earlier this month at the JCP/M/MSO trial. The year-ago number was likely inflated due to a higher number of seasonal employees on the books on the final day of the prior year – so the figures could likely be dissected many different ways. But either way, Johnson haters will use this as a knock on his credibility.
     
  7. There was no commentary on 1Q performance, but we caution that we still need to get past what will likely be an abysmal 1Q performance (25% of square footage will be under construction) before we start to see improved productivity from the new shops that get put in place in May.

 

When all is said and done, we think the good outweighs the bad. We still think anyone with an immediate-term investing horizon shouldn’t look at JCP as a long, but that it will turn in 2H13.


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