KO and the Start of Earnings

Every earnings season has its own “feel” and the early read on the consumer staples Q1 EPS reports is that so long as the report isn’t a complete disaster, the momentum behind the stock (and the sector) is likely to continue as money flows into consumer staples persist for a variety of reasons (low volatility, yield, etc).

KO is an interesting test case – the stock was down hard with the market yesterday, but simplistically held the $40 level (old resistance, now support) and is up over 5% today on a print where the positives outweighed the negatives, but we wouldn’t characterize as outrageously bullish.


The company posted 4% global volume growth (versus consensus closer to +3% and against a +3% comp) –reported revenue declined 0.9% against a +5.9% comp while constant currency revenue grew 1.1% (+6.9% in the comparable quarter).  One change in this quarter when compared with recent history was the degree of operating leverage - +1.1% constant currency top line translated into +5.1% growth in operating income (currency neutral).


What we liked:

  • Solid global volume growth number
  • Degree of operating leverage
  • Superb volume performance in Eurasia (+15.0%) which drove much of the upside versus consensus
  • +$0.01 versus consensus on EPS (not a lot, but better than the alternative)
  • Beginning stage of bottler transformation in the U.S. (long-term positive) – expanding, swapping and consolidating territories with the ultimate goal of improving both efficiency of distribution and efficacy of delivering product to consumers

What we didn’t like:

  • We probably won’t see any material change to 2013 consensus (for our part, estimates remain unchanged following this quarter’s results)
  • Cash from operations declined 3.7%, as accounts receivable increased 4.0% and inventories increased 4.8% (Q1 is not a significant cash flow quarter for the company, however)
  • Price/mix was flat in the quarter (against a +3.0% comp)

Like many of the names in consumer staples, we don’t see a compelling need to run out and chase KO (particularly +5.0% today).  Difficult comparisons persist though the balance of 2013, but the quarter just reported displayed the company’s ability to effectively manage through multiple headwinds.  Looking at the sector more broadly, we are happy to take a beer frame (watch and learn) on the short side as it is clear that the demand for low volatility, relatively high-yielding assets persists.


Call with questions,



Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Gold: Don't Catch A Falling Knife

With the panic selling that took place in gold yesterday, many investors have wondered if it's worth buying at $1300/oz or at current levels. We stick by the old adage of "don't catch a falling knife." We're of the impression that gold will continue to head lower now that the commodity bubble brought on by Federal Reserve Chairman Ben Bernanke has popped. The US dollar will appreciate and drive down commodity prices further which will increase consumption and growth, a net positive for the economy. And when the economy is doing well, people don't flock to gold out of fear. Any bounces in gold remain an opportunity to short the commodity and today's no exception.


Gold: Don't Catch A Falling Knife - SPOTGOLD


This note was originally published April 15, 2013 at 18:25 in Gaming

  • WYNN leads the pack with an amazing 71% ROI (based on 2012 EBITDA) on Wynn Macau and Encore
  • LVS’s $4 billion and climbing investment in Sands Cotai Central has depressed its ROI
  • Peninsula investments earned much higher ROIs but Cotai still looks like a great investment



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We think IGT has a lot of incentive to post a strong FQ2


Strong sales momentum, particularly in March, should contribute to an estimate-beating quarter in our opinion.  Our $0.32 EPS estimate exceeds consensus by $0.02 driven by a revenue estimate 3% higher.  Double Down (DD) could also outperform expectations as it did in FQ1.  Given the poor sentiment surrounding that acquisition, a DD beat could also be a catalyst.  Our sense is that any overall upside to EPS would be a surprise to the buy side. 


Going forward, we do not expect much change in F2013 guidance of $1.20 to $1.30 although a rise and narrowing of the range to something like $1.24 to $1.32 wouldn’t be surprising.  We remain at the top end of the guidance range (consensus is $1.26) which puts IGT’s valuation at slightly more than 12.6x FY2013 EPS.  On our FY2014 estimate of $1.45, IGT trades at only 11.3x.  Clearly at this valuation, IGT remains a “show me” stock for which every quarterly meet or beat could be impactful.





We estimate that IGT will report $587MM of total revenue and adjusted EPS of $0.32, 3% and 5% ahead of consensus, respectively.  Product sales of $279MM at a 54% gross margin.

  • Our channel checks have indicated that IGT had very strong sales momentum in March, some of the best that the company has seen in years. We believe that some of the strength is attributable to ongoing promotions which offered incentives to order products prior to the quarter close.  We would expect to see a slower sales pace in April.
  • NA sales of $135MM and gross margin of $74MM
    • $143MM of NA box sales: 10,215 gaming machines at ASP of $14k
    • 7,915 replacements and 2,300 new units
      • ~800 shipments to IL
        • We heard some conflicting things here.  The company indicated that shipments should be up QoQ.  However, another one of our channel checks told us that IGT only shipped 775 units in the Q.
      • ~3,400 shipments to Canada
        • 1,375 to Saskatchewan
        • 1,500 to Manitoba
        • 500 to Quebec
      • 1,200 units to OH
        • 800 to Cincinnati
        • 400 to Thistledown
    • ASP’s should be down QoQ and YoY given the larger shipment to Canada of lower priced VLT machines
    • Non-box sales of $55MM, down a little QoQ.  1Q benefited from IP fees.
  • International sales of $80MM and gross margin of $40MM
    • $59MM of box sales:  3,700 units at an ASP of $15.8k
    • Non-box sales of $21MM
    • 50% gross margins

Gaming operations revenue and gross margin of $308MM and $190MM, respectively

  • End of Period install base of 57,632
  • Core gaming operations revenue of $249MM, implying an average win per day of $49/day
  • $59MM of interactive revenue
    • $46MM of DoubleDown revenue
      • During the JPMorgan conference, CEO Patti Hart indicated that DD revenues per user were trending at 31 cents.  In late March, IGT executives indicated that revenues per user and DAU’s were up QoQ and that the revenue momentum that they've seen the last few quarters in the business is continuing.
    • $13MM of other interactive revenue

Other stuff:

  • SG&A: $108MM
    • Management guided to a pace of $110MM/Q
  • R&D: $57MM
    • R&D is typically higher in 2Q
  • D&A: $20MM
  • Net interest expense: $21MM
  • 37% tax rate
  • Weighted average shares outstanding: 266.5MM
    • According to the Company, they were in a self-imposed black-out period due to the ADER proxy fight that ended March 5th.  The normal end of period black out period started up again on March 15th.  Therefore, we are fairly confident that IGT did not purchase much stock during the quarter.

Q2 Macro Themes Call Today

Q2 Macro Themes Call Today  - 2Q13clients 04.16.13


Hedgeye's Macro Team, led by CEO Keith McCullough and DOR Daryl Jones, is hosting its highly anticipated Quarterly Macro Themes conference call with a presentation and a live Q&A session for participants. The presentation highlights the three most important macro trends that our team has identified for the quarter, analyzing potential impacts across multiple scenarios and identifying investment opportunities. The Q2 2013 Macro Themes Call will be held today, April 16th at 1:00pm EDT.              





#GrowthAccelerating: After a positive growth inflection in the U.S. macro data to start the year, the key risk management consideration from here is whether domestic growth can accelerate in the face of seasonal and fiscal policy headwinds. Alongside strong dollar benefits to discretionary demand, labor market, housing, and birth trends should remain supportive of consumption over the intermediate term. 


#StrongDollar: It all starts and ends with the Buck. We see a stronger U.S. dollar deflating Bernanke's commodity bubbles which should boost U.S. consumption. In particular, we highlight a bullish set-up for the USD versus the EUR and JPY.


#EmergingOutflows: Consistent with our call for continued U.S. dollar strength and commodity deflation, we think the very early innings of the next round of emerging market crises is upon us. Sustained USD appreciation exposes EMEs to a variety of economic risks that asset allocators have not had to appropriately discount for over a decade.




  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 714341#
  • Materials: CLICK HERE (Slides will download one hour prior to the start of the call.) 


For more information please email .

Morning Reads From Our Sector Heads

Brian McGough (Retail):


J. C. Penney Taps Credit Facility (via WWD)


Howard Penney (Restaurants):


McDonald’s, Wendy’s improve health perception (via Nation's Restaurant News)


China Stuck With Sub-8% Growth as G-20 Confronts Slowdown (via Bloomberg)


Matthew Hedrick (Europe):


Portugal - Back In The Penalty Box (via Zerohedge)


Kevin Kaiser (Energy):


Brent Crude Below $100 (via WSJ)


Jay Van Sciver (Industrials):


Grainger Reports Record EPS Of $2.94 For The 2013 First Quarter (via Grainger)


Rob Campagnino (Consumer Staples):


10 Things Coke, Pepsi, and Soda Industry Won’t Say (via Yahoo! Finance)



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