- Macau gaming operators’ property EBITDA grew 9% QoQ to $1.9 billion.
- With a high VIP hold of 3.1% in Q4 2012, Sands China increased its market-leading property EBITDA share to 32.5% from 27.8% in Q3 2012. It is the highest level since Q2 2010. Remember that Sands Cotai Central opened on April 11, 2012.
- MGM and MPEL rose slightly while Galaxy, SJM, and Wynn all lost share. Despite VIP hold near 3%, Wynn’s share broke below 15%, a steep drop from its 25% peak in Q4 2010.
Volume weaker while number of transactions picked up slightly in Q1
Upper upscale (UUP) & Luxury Transaction Trends for Q1 2013
- Q1 2013 worldwide hotel transaction volume (UUP & Luxury brands) was $2.0 billion, down from Q4 2012's $3.2 billion but higher than Q1 2012's $1.1 billion.
- The number of US luxury/UUP hotel transactions was 7 in Q1 2013 compared with 9 in Q4 2012 and 7 in Q1 2012.
- The number of non-US luxury/UUP hotel transactions was 7 in Q1 2013 compared with 3 in Q4 2012 and 4 in Q1 2012.
- REITs were very active and there was a spike in portfolio deals.
- Relative to a two-year trailing average, US average price per key (APPK) in the UUP segment gained 7% at $280k. Non-US APPK in the UUP segment fell by 10% to $287k; however, IHG received a solid >$1MM APPK for its sale of the InterContinental London Park Lane.
- According to Fitch, the hotel delinquency rate in March was 7.71%, lower than the 8.87% seen in December. The delinquency rate remains well below the relative high of 14% seen in Q3 2011.
Knapp released his casual dining same-restaurant sales estimates for March comparable sales and traffic growth. The Knapp data do not jive with Black Box Intelligence’s numbers, likely due to the many discrepancies between the indices, but suggest a sequential improvement in March from February as all five weeks that impacted last month’s data had positive comparable sales growth. That said, some noise in the data, as Easter fell on March 31st 2013 versus April 2nd 2012 and spring breaks shifted year-over-year, makes it difficult to discern exact magnitudes of the sequential moves in comparable sales and traffic growth.
Black Box Intelligence reported that March 2013 same-restaurant sales grew +0.5% while comparable traffic trends declined -2%. This results differed significantly from the Knapp results, detailed below.
Knapp Sequential Moves
March estimated Knapp Track same-restaurant sales growth came in at +2.2%. If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of +200 bps. This would be the greatest acceleration in two-year average trends since January 2010 but follows the -240 bps deceleration seen in February, which was partly caused by the impact of weather.
March estimated Knapp Track same-restaurant traffic growth came in at +0.7%. If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of +180 bps. This would be the greatest acceleration in two-year average traffic trends since January 2010 but follows a weak February deceleration of -250 bps.
Casual Dining Stocks Continue to Outperform...In Fewer Numbers
Casual dining stocks continued higher in March. We have found it interesting that the number of casual dining stocks outperforming the S&P 500 has dropped off a cliff in the last week. While this could be a normal correction after a period of strong performance, the general trend in casual dining same-restaurant sales growth has been negative and would suggest that casual dining stocks – on average – could see a longer period of underperformance if the general malaise in casual dining sales trends continues.
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Takeaway: Top line pressure is likely to be center stage this earnings season, coming from multiple fronts. How much pressure can the industry offset?
This note was originally published April 11, 2013 at 11:15 in Financials
Overall, we expect this earnings season will be lackluster for the banking sector. Outside of ongoing credit quality improvements and a recovery in housing, there will be little good news for management to discuss. Top line pressures will become more notable, while credit tailwinds, vis-a-vis provision expense/reserve release, will be simultaneously fading. Offsets to these two pressure points will be expense reduction initiatives and falling sharecount from active repurchase programs. Another offset may be relatively upbeat guidance with respect to a reduction in future costs, both legal and operational, relating to legacy mortgage troubles. We think 1Q results are likely to set expectations fairly low for the duration of 2013.
- Loan Growth - Status Quo - Overall, loans grew by 0.8% QoQ in 1Q13, which was flat with 0.8% QoQ growth in 4Q12.
- Margin Headwinds Ongoing - 1Q13 saw some relief in the average yield spread QoQ, but banks have largely run out of room on the funding side and are now facing unmitigated earning asset yield pressure. CBSH is a good example today with NIMs down 28 bps QoQ vs. expectations for down 11 bps.
- Credit - Fading Tailwinds - Credit is still improving, but provision expenses have largely flattened out. The odd silver lining may be that with little to no loan growth there's no need to grow provision expense.
1Q13 Revenue: Expect To Be Disappointed
* Loan Growth - Total loan growth appears to have grown at 0.8% QoQ, which was roughly flat with growth in 4Q12, based on seasonally-adjusted H8 data. That said, The overall trend in loan growth remains lackluster. Loan growth through 1Q12 had been sequentially accelerating up to a peak of +1.6% QoQ, only to then decelerate in 2Q12 and 3Q12 and remain roughly flat since then. Overall, we don't see this as a notable source of strength for the sector.
* NIM - Net interest margin pressure will persist this quarter in spite of the sequentially improved yield spread. The sector's ability to further reduce funding costs continues to decelerate. Meanwhile, pressure on interest-earning asset yields persists. If Commerce Banc is any indication this morning, the sector is not conservative enough on NIMs. CBSH saw NIMs decline 28 bps QoQ vs expectations for 11 bps. Given the relatively modest expectations for NIM compression this quarter, roughly 5 bps Q/Q, we would expect to see more banks than not disappoint on this front. On the other hand, CBSH shares are down less than 2% this morning,
* Non-Interest Income - Mortgage banking is the primary driver of Q/Q change here, and the news isn't great. Application volume in 1Q13 was down 6% QoQ, but primary/secondary spreads have compressed by ~20 bps Q/Q from 1.16% to 0.96%. Taken together, this implies sequential declines of roughly 21% in production revenue. There will be some offset to this from the servicing side as rates ended the quarter a bit higher than where they started. A small silver lining is that as of the latest data, spreads have modestly re-widened to 106 bps.
Joshua Steiner, CFA
Rob Campagnino (Consumer Staples):
Herbalife Ties to ‘Work From Home’ Promoters May Draw New Scrutiny (via NYT Dealbook)
Todd Jordan (GLL):
Singapore economy contracts in first quarter (via Channel NewsAsia)
Howard Penney (Restaurants):
McDonald's Tackles Repair of 'Broken' Service (via WSJ)
Brian McGough (Retail):
Sears Holdings Establishes New Business Unit Focused on Entertainment-Driven Fashion Brands (via Sourcing Journal Online)
Client Talking Points
A Broken System
The Eurozone is a broken, interconnected system of countries with high unemployment, pension problems and structural banking issues. The European Central Bank, the International Monetary Fund, and Germany have all been working in tandem as Troika in an effort to slap band aids on to wounds whenever and wherever necessary. Slowly but surely, the Troika is learning from its past mistakes made in Greece and Cyprus and will be able to better assess issues in the future. Currently, things look "fine" for lack of a better term. Nothing is great, but bond auctions around various countries are going well despite high coupons and the liquidity is still there.
We posted a write up to a fantastic Bloomberg article (link) yesterday that featured CEO Keith McCullough discussing Yale Hockey tradition and history. Later that evening, Yale would go on to beat UMass Lowell in OT to advance to the championship round of the Frozen Four and will play Quinnipiac this weekend. This is a once in a lifetime event that we're extremely proud to be a part of. Both Yale and hockey run deep in the corporate culture at Hedgeye and we look forward to the Bulldogs securing victory this Saturday.
|FIXED INCOME||6%||INTL CURRENCIES||30%|
Top Long Ideas
Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock. Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS. We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT. Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.
With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.
HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.
Three for the Road
TWEET OF THE DAY
"@CBOE Apr #VIX up 0.30 to 13.45 on stock market weakness in the premarket. Financials under pressure - VIX closed @ 12.24 yesterday." -@RussellRhoads
QUOTE OF THE DAY
"What a blessing it would be if we could open and shut our ears as easily as we open and shut our eyes!" -Georg Christoph Lichtenberg
STAT OF THE DAY
Retail sales fell a seasonally adjusted 0.4% last month to mark the biggest decline since last June, the biggest drop in nine months.
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