- Over the past four years, Connecticut gross gaming revenues (Foxwoods and Mohegan Sun) have had only 3 growth months. On an absolute level, CT GGR in February hit its lowest point since February 1998.
- Since 2009, the northeast area has seen the expansion of the New York and Pennsylvania markets (Genting Resorts World New York, Sands Bethlehem, Rivers Casino, Sugarhouse, and Valley Forge), which certainly have hurt Connecticut’s gaming business. But those new ‘growth’ markets have also slowed. In February, NY gaming revenues posted its 1st YoY decline since September 2008, while PA gaming has only expanded by 2% in the last 12 months.
- CT joins virtually all other mature, domestic casino markets in struggling to post growth
- The macro, higher gas prices, and smaller paychecks aren’t the only explanation as the demographics look awful for domestic gaming. The young generation is not gambling and the core gaming player base (+50 year old) is shrinking.
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.
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
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.
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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:
- Immediate-term TRADE resistance = 1565 (all-time closing high)
- Immediate-term TRADE support = 1539 (where we said buy this wk)
- 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.
Keith R. McCullough
Chief Executive Officer
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.
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.
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%
Joshua Steiner, CFA
Christian B. Drake
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.
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.
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