Crushing Commodities

Commodity prices have been under pressure since the beginning of the year. The rise of the value of the US dollar has contributed greatly to the decline in prices across the board. On Monday, gold, oil and other commodities sold off en masse as investors fled the asset class and liquidated their positions. Gold fell anywhere between -10% intraday to -7.5% at the close. The CRB Commodity Index, which measures 19 different types of commodities, took a big hit on top of an already difficult year yesterday. You can see the decline in the chart below.


Crushing Commodities - image001

Momentum Continues Behind Spirits

Taking a quick look at Louis Vuitton Moet Hennessy’s (LVMH) results presentation from this morning, we see that the momentum in spirits brands continues, displaying strength on strength.  Lapping a +15.5% constant currency comp in Q1 2012, the company posted a +7.0% result.  For the spirits companies, the results improve as a lateral when breaking out Champagne and Wines versus Cognac and Spirits.  Champagne and Wines grew only +0.3% (reported) versus a 12.2% comp while Cognac and Spirits were +9.0% (reported) versus a very difficult comp, +27.9% reported in Q1 2012.


In terms of geography, Asia was +12.0%, the U.S. +9% and Japan +7.0%.  These results augur well for the spirits companies in our coverage (Brown Forman and Beam) whose valuations are becoming more interesting as the stocks lag and the rest of the staples group grinds higher.

Valuation has been our stumbling block with respect to the spirits names, not business momentum. So, as most of the staples group rushes head long in the race for most absurd valuation, the spirits names get incrementally more interesting as those companies might not have the most “attractive” valuations in staples, but at least there is something to warrant a premium valuation.



Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


MPEL held poorly but still should beat the Street.  Here are the details.



As we wrote about in our Macau preview notes (“MACAU: A PREVIEW OF THE PREVIEW”, 4/9/13) and (INVESTABLE MPEL”, 03/21/13), MPEL remains our favorite name in the space with the catalyst of a terrific Q1 earnings release looming.  More importantly, the valuation continues to linger at a big discount relative to most Macau names and could be ripe for a 2-3 multiple turn increase in its EV/EBITDA valuation.  MPEL should transition from a trading vehicle to a core long-term holding for many long only investors which should help inflate the multiple to something more realistic:  11-12x (post-opening of MSC).


We are projecting that MPEL will report $1,119MM of net revenue and $267MM of EBITDA, 3% and 5% ahead of consensus, respectively.  More importantly, on a hold-adjusted basis (using each property's historical hold rate), our EBITDA estimate goes to $285 million.  Another strong quarter should bring the company closer to gaining the respect that it deserves from the investment community.





We estimate that City of Dreams will report $826MM of net revenues and $240MM in EBITDA; 4% ahead of consensus despite low hold at the property.

  • Our net casino win projection is $810MM
    • VIP net win of $425MM
      • Assuming 17.5% direct play we estimate $25BN of RC volume (up 11% YoY) and a hold rate of 2.6%
      • Using CoD’s historical hold rate of 2.88%, EBITDA would be $18MM higher and net revenues would be $67MM higher
    • $340MM of mass win, up 36% YoY - a record for CoD.  Mass revenues reached a record $127MM in March, and have remained above the $100MM mark for the past 5 consecutive months
    • $44MM of slot win
  • $17MM of net non-gaming revenue
    • $25MM of room revenue
    • $17MM of F&B revenue
    • $20MM of retail, entertainment and other revenue
    • $45MMM of promotional allowances or 73% of gross non-gaming revenue or 5.5% of net gaming revenue
  • $464MM of variable operating expenses
    • $404MM of taxes
    • $46MM of gaming promoter commissions in addition to the rebate rate of 90bps (we assume an all-in commission rate of 1.08%)
  • $24MM of non-gaming expenses
  • $98MM of fixed operating expenses up 7% YoY and $2MM QoQ

We project $259MM of net revenues and $40MM in EBITDA for Altira, 7% below the Street

  • We estimate net casino win $270MM
    • VIP net win of $257MM
      • $11.9BN of RC volume (flat YoY) and a hold rate of 2.92%, which is in-line with the property’s historical hold rate
    • $22MM of mass win, down 13% YoY
  • $3MM of net non-gaming revenue
  • $184MM of variable operating expenses
    • $144MM of taxes
    • $37MM of gaming promoter commissions in addition to the rebate rate of 95.5bps (we assume an all-in commission rate of 1.26%)
  • $3MM of non-gaming expenses
  • $32MM of fixed operating expenses

Other stuff:

  • Mocha slots revenue and EBITDA of $34MM and $8MM, respectively
  • D&A:  $95MM (guidance of $90-95MM)
  • Interest expense:  $31MM (guidance of $38-40MM)
  • Corporate expense:  $21MM (guidance of $20-22MM)

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WWW: Core Mid-Cap Long

Takeaway: We think that there’s a lot more than meets the eye at WWW. Despite the solid 1Q print, there’s plenty of runway to go.

Conclusion: Despite its outperformance year-to-date, we think that WWW has all of the tools to keep grinding higher. We're looking at $700mm+ added revenue over 3-years at a 20%+ incremental margin with disproportionately little capital  needed to accomplish its goals.  Ultimately, we think that WWW has 3 to 1 upside/downside over the next 12/18 months. 



The bear case on WWW is simple. The company started to see a slowdown in its core footwear business, so it went ahead and did a transformational acquisition by paying a steep price for Collective Brands’ PLG division potentially near the peak of the cycle for its largest and most defendable brand – Sperry. Other brands like Saucony and Keds have upside, but are not in the 'great' category like Sperry arguably is. On top of that, the stock is trading at a high teens multiple on the company’s guidance. There are two realities associated with this bear case. 1) Most of it is correct.  And 2) all of it is irrelevant.


First off, let’s look at the sentiment on WWW and all agree that people are more bearish on the name than we’ve even seen in the modern history of the company (ie even in the years not displayed by this chart). We’re likely seeing some covering on today’s print, but it still leaves the name in record bearish territory according to our sentiment monitor.               


WWW: Core Mid-Cap Long - wwwsi


Secondly, we think that this bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and RNOA. Specifically, our math suggests that in the three years following the initial acquisition year (where there will be outsized accretion) we should see the following…

a)      The addition of over $700mm in revenue – split fairly evenly between the Performance and Lifestyle groups.


b)      $150mm in incremental EBIT (20% incremental margin on top of the 8.4% reported last year).


c)       The asset base should remain relatively flat over that time period at about $3bn. The cash cycle can, and should, come down 20-30% from 2012 levels.  There’s no reason why this business should have 115 days inventory and DSOs of over 60.


d)      Over that same time period, interest expense should come down by 40% as WWW uses free cash to repay debt. As a result we should see shareholder’s equity double from $644mm ($13 per share) in 2012 to $1.3bn ($27 per share) in 2016.


e)      Importantly, RNOA should climb from 10% up to 16%, with steady improvements each year.  Admittedly, the one catch is that this is a company that once had returns of 30%. The PLG deal changed that – likely permanently (or at least for a very long time). Nonetheless, returns have bottomed and are headed up systematically. It's very important to note that it's near impossible to find an example where a company's RNOA roadmap went up (margins improving) and to the right (turns improving) simultaneously without the stock meaningfully outperforming peers.


WWW: Core Mid-Cap Long - wwwrnoa


In the end, we’re modeling 30%+ growth in earnings over each of the next two years, and 20%+ at a sustainable rate for at least the next three years. Our estimates are only 5% ahead of consensus this year, but by the end of our modeling time horizon (2016) we’re 25% ahead of the Street.


WWW: Core Mid-Cap Long - wwwestimates



In the end, this is probably one of the best managed and most consistent companies in retail. Accretion is ahead of plan, inventories are in very good shape, and though there is admittedly a permanent impediment to achieving asset turn levels WWW saw prior to the deal (acquiring as opposed to growing organically), WWW has a multi-year platform from which to grow. Add on accelerated cash flow generation and subsequent debt paydown, and we think that this story has legs (look at HBI over the past year – it’s the mother of deleraging stories. We’d put FNP in a deleregaing bucket as well – at least as it relates to expectations for proceeds from its asset sales.)  


The stock is hardly washed out – we get that. But the reality is that this for a high quality globally diversified portfolio that has consistent 20-30% EPS growth and improving returns we don’t think that arguing a high teens multiple is a stretch. 18x our 2014 estimate of $3.55 gets us to a $64 stock, or 36% above current levels. Take that out to 2015 and 2016 and we’re looking at $75 and $95, respectively. When we juxtapose that alongside 15x ehat we think is a worst case $2.50 in EPS power, we’re looking 3 to 1 upside/downside over the course of a 12-18 months.



WWW SIGMA: Inventories are extremely clean, which has continued bullish implications for gross margins.

WWW: Core Mid-Cap Long - wwwsigma     



Playing The Volatility Game

One way we trade the S&P 500 is by examining volatility. When the CBOE Volatility Index (VIX) is at extremely low levels, usually around or below 13, and the S&P 500 is overbought and above our immediate-term TRADE line of resistance, we look for an opportunity to sell the index and vice versa. Yesterday's spike in volatility and downturn in the S&P 500 was brought on by exacerbated selling in gold, commodities and yesterday's tragedy in Boston. When this sort of anomaly happens and happens quickly, we sit back and wait. No need to rush into a market that doesn't work with your trading method.


Playing The Volatility Game - VIXSPX

PODCAST: Talking About Gold


Today’s Question & Answer portion of our Morning Investment Call held for Hedgeye subscribers focused on the topic du jour: gold. CEO Keith McCullough talks about where gold will trade next as fund managers and institutional investors rush to sell their positions in the precious metal.


No matter which way you put it; gold is crashing. What should surprise investors is how some people stay bullish on gold until it gets to a price like this morning’s. The reality is that a strong US dollar has popped the commodity bubble brought on by Federal Reserve Chairman Ben Bernanke and it’s looking very ugly this morning. You can listen to the full Q&A session with Keith in the audio posted above.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.