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Today we shorted Carnival Cruise Lines (CCL) at $33.52 a share at 10:03 AM EDT in our Real-Time Alerts. Carnival bounced off an oversold low, but remains in a bearish TREND view per our Cruise Line specialist, Felix Wang.




McDonald’s is set to release March sales, along with 1Q13 earnings, tomorrow before the market open. Expectations are muted for March comparable sales but we believe the back half of the year is where there is most potential for a disconnect versus expectations. The stock has broken higher from $85 with no supporting increase in earnings estimates. The 1Q13 consensus estimate of $1.26 or 3% EPS growth looks aggressive but the company has many levers to manage the number. We will be hosting a call on April 25th to go through our bearish stance on MCD FY13 EPS versus expectations in more detail.


The company reported February sales on March 13th and, since then, MCD has outperformed the market by 340 bps. We continue to believe that the stock is ahead of the company’s fundamentals, with little upside to earnings for 2013 leaving the multiple embedded in the stock stretched.


Specific to the earnings release, we will be focused on the following:

  • Any update to 2013 guidance (sales, costs, reimaging, FX)
  • US comp in April
  • Commentary on competition in the QSR segment and MCD's value push


The charts below illustrate what we believe the investment community will perceive as good, bad and neutral results for the US, Europe, and APMEA March sales.


MCD SALES PREVIEW - mcd us comps


MCD SALES PREVIEW - mcd eu ocmps


MCD SALES PREVIEW - mcd apmea sss



Howard Penney

Managing Director


Rory Green

Senior Analyst


2Q13 Macro Call: Our Process


Hedgeye held its 2Q13 Macro Call for institutional subscribers this week, which covered several themes we think will be big and noteworthy in the second quarter of 2013. We began the call with CEO Keith McCullough outlining his process. We use a combination of fundamental research combined with quantitative risk management.


The quantitative process involves using risk management signals and levels to determine entry and exit points for a stock or index. It involves a multi-duration model that includes: TRADE, TREND and TAIL. The fundamental research utilizes our world-class research team to find ideas that we can apply to our quantitative model.


We look at a combination of politics, monetary policy, economic health and other factors to see where certain companies and countries are at and how to trade them.

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BRAZIL: Getting Smoked

Brazil's BOVESPA Index dropped -2.1% yesterday and is down -13.4% year-to-date. One of the worst performing markets on the planet, the country just experienced a 0.25% rate hike to 7.5% on central bank borrowing rates by Alexandre Tombini, the governor of the central bank of Brazil. It's the first rate hike since July 2011 and has given investors plenty to worry about. We like staying short commodities and short Brazil through the iShares MSCI Brazil Index ETF (EWZ).


BRAZIL: Getting Smoked - BOVESPA


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • IN-LINE: PENN's quarter was more or less in line with our expectations once you strip out some of the one time corporate charges and underperformance in the Southern Plains segment


PENN 1Q 2013 REPORT CARD - pa1



  • SAME:  There has not been much change in spend per visit.  Any admission trends were impacted by cannibilization or weather-related.  Overall promotional activity across the regional markets have been rational.
    • "It certainly is more at the lower end with less trips, the retail consumers.  We are seeing some trip decline throughout all the segments of the business.  Some of that is due to cannibalization. But generally the big issue and the majority of our loss of business volumes have been at the retail end."
    • "March was clearly better than January and February, and we can talk about weather, we can talk about timing and tax returns, we can talk about the payroll tax. January and February clearly were not good months for our industry as a whole. And March, we saw a bit of recovery. Now, there couldn't have been pent-up demand from weather. Weather and timing of tax returns are two things that you would think would be just a timing issue and would come back in March. So I don't know that we're prepared to call March a consumer recovery, but it was certainly nice to see at the very least that some of the lost business from the first half of the quarter came back in March. From what I hear, we're not alone in saying that."


  • SAME:  PENN remains on schedule and on budget with the re-branding and facility upgrade of Hollywood Casino St. Louis, which is expected to be completed later in 2013.
    •  "The acquisition there of Harrah's St. Louis I talked about earlier, that closed in November. We've decided to invest about $60 million in that property (this year); some new slot machines, some new carpets, facelift."


  • SAME:  Ohio State Racing Commission has a view of the racing environment is 'obsolete' and demand is slowing; thus, Penn is at an impasse until the Ohio commission agree to a rational amount of seating. As of now, no change in proposed 2014 opening.
  • PREVIOUSLY:   "Racing Commission has decided that they think we need more seats for the racing section of those businesses. So the process is a little bit on hold at this point. We're not changing the opening date from 2014, while we seek a resolution there."


  • SAME:  March optimism is being extended into April.  Repeat visitation has been strong. PENN expects another build up in revenues in July/August time frame.  
    • "With Columbus, I'm not spending any time worrying about where Columbus is going to end up. It's going to be fine. It's showing sequential growth. It's showing increased visitation. It's showing improvements in the slot customer base. Clearly the fact that Scioto was out first in the market with very aggressive marketing upfront was not ideal. The reality is, over the long term – and I don't mean years, I mean a few more months, I think you'll see the Columbus property really come into its own in terms of getting an appropriate level of market share."


  • WORSE:  PENN raised corporate overhead guidance by $11MM due to higher development and stock liability expense (related to the higher share price). If we exclude development costs of $2.5 million and liability based stock compensation charges of $3.1 million, Q1 corp expense came in at $21.6MM. For Q2-Q4 2013, there will be $3.5-4MM development expenses and $5.5MM of stock liability charges.
  • PREVIOUSLY:  "I would expect corporate overhead to come back to a more normal level, probably on a normalized basis somewhere around $80 million would be our expectations."


  • SAME:  Q1 $62.7MM capex ($21.8MM maintenance capex, project capex: 1/2 wrap up costs at Columbus/Toledo, $6MM on tracks, rest on Hollywood St. Louis).  2013 capex will be $94.2MM maintenance capex and $277MM project capex.
  • PREVIOUSLY:  "Looking at 2013, we're expecting $275 million of project CapEx and roughly $97.9 million worth of maintenance CapEx for next year. Looking at the first quarter, I would break that down that we expect to spend roughly $49.4 million on project CapEx in the first quarter and $27.2 million of maintenance CapEx."


PENN’s quarter wasn’t too bad.  The underperformance of the Southern Plains segment could have negative implications for PNK.


“Our first quarter adjusted EBITDA results were approximately $4 million below our guidance. Despite the first quarter challenges, operating results at Penn National’s East/West and Southern Plains segments exceeded the results contemplated in our guidance while the Midwest segment results met our expectations."


- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming




  • 2012 was an especially good winter weather season.  While 2013 was "normal," there were 2x as many snow days. 
  • Happy with the way that they have managed costs in markets impacted by new supply
  • Iowa gaming commission just awarded a license to Hard Rock to build a casino in Sioux City despite them being the licensee in the city. They are mystified by the announcement. This is not the last word on this subject.


  • Racing commission in Ohio discussions? Their current debate is down to seating.  They have a disagreement over what the state of racing is in 2013. They are trying to create an environment from day one that is not obsolete. Basically, the state of Ohio wants them to have more seats than Penn thinks is appropriate for market demand. They are hoping that the Ohio Racing Commission comes around to their point of view. Nothing more that they can do right now.
  • No changes on the proposed debt structure or interest expense
  • Expect incremental $9MM of corp overhead for 2Q-4Q--$3.5-4MM (development costs) and $5.5MM for stock price-related liability
  • Cash: $247.7MM, 
  • Total debt: $2.614BN - $2.276 BN was bank debt; capital leases of 2MM, 325MM bonds, 10MM of other. 
  • Capex: $62.7MM in 1Q13, $28.1MM was maintenance, 50% of the project capex was wrap up spending at Ohio and Toledo, $12.3MM Hollywood St Louis
  • 2013 capex: $94.3MM of maintenance, $277MM of project capex including Columbus/ Toledo ($36MM) wrapping costs, $173MM of Ohio track expenses. $13MM for the hotel at Zia and $47.8MM in St Louis. 
  • Hope that they will a few REIT approvals in the 2Q and a lot more in the 3rd quarter 
  • Slight reduction in revenue guidance? 
    • Took property level guidance up but offsetting with stock employee expenses of $9.1MM and higher development expenses
  • Think that the ramp in Ohio will resume this summer 
  • Gambling at internet cafes in Ohio are having a material impact on their operations at Toledo and Columbus. Have seen estimates that these cafes are can generate up to $500k of revenues. They want to see the cafes closed.
  • There has been a proliferation of illegal/ grey gaming in many states. It's happened in Florida as well as Texas. Ohio is the only jurisdiction where this is impacting their operations. 
  • Tables at Maryland Live has only been up and running for 7 days. Too early to know what the impact will be. 
  • Most of their data suggests that weather had an impact on visitation but they haven't seen a change in spend per visit at their properties. 
  • Won't say that properties hit by competition have maintained steady margins but they haven't been hit that badly
  • Removal of 500 slot machines in Columbus Ohio and reallocated them to other PENN properties. Feel that the 2,500 units are appropriate for current business volumes.  Do think that once the internet cafes are shut down, they will see better productivity on the slot side.
  • Shifts in OPCO/PROPCO guidance are just due to refining their view on the 2 entities. Still not 100% done there. There may be continued refinement in the estimates.
  • Expect the S-11 to be filed in the 2nd Q
  • Will be looking on an asset by asset basis for acquisitions for PROPCO
  • Have indications that there are other REITs looking at acquiring gaming assets. It's killing them that they cannot enter into conversations today with potential acquisition candidates. They are getting incoming calls that they can not entertain.
  • PROPCO rents changes for 2014: Ohio base rent will be set based on 2013 performance, new Ohio tracks coming online, 2% escalator on buildings if rent coverage is there
  • Continue to monitor online gaming as it unfolds state by state. Are keen to watch NJ unfold. Feel like it will negatively impact casino visitation but grow overall State revenues. 
  • They were the first property to open up tables games in March. Too early to predict the table run rate at Perryville and impact from Maryland Live
  • The philosophy of being rational marketers is an enterprise discipline applied on a market by market basis. Their competitors have been rational marketers too. 



  • “The overall adjusted EBITDA shortfall for the first quarter is primarily attributable to the following higher expenses, specifically, $2.3 million of REIT transaction costs, $1.9 million of development costs for potential opportunities in Massachusetts, Philadelphia and Sioux City and higher expenses of $3.4 million associated with our cash settled employee stock appreciation rights and restricted stock units due to the increase in our stock price"
  • "We believe we remain on schedule to complete the tax-free spin-off of the REIT to Penn National shareholders later this year and to make the one-time taxable cash and stock dividend to Penn National shareholders in January 2014, concurrent with the REIT election"
  • [Agreement with the Jamul Indian Village to jointly develop a Hollywood Casino branded casino] "Based on the pace of approvals and construction progress, the facility could open by early 2016 and upon opening will generate management and licensing fees for Penn National."  
  • "We remain on schedule and on budget with the re-branding and facility upgrade of Hollywood Casino St. Louis, which is expected to be completed later this year, as well as the commencement of construction of a 150 room hotel at Zia Park Casino which is expected to open in the second half of 2014"
  • “In Ohio, we are in active dialog with the Ohio State Racing Commission regarding seating capacity at the two VLT facilities planned for Mahoning Valley and Dayton. As the nation’s leading operator of pari-mutuel racing facilities, we share the commission’s deep commitment to supporting horse racing, but believe our proposed seating plan more accurately reflects current market demand. We are hopeful that a resolution to this matter can be reached soon which will allow the facilities to open as planned in 2014"
  • "We are currently engaged in discussions with the City around the statutorily required Host Community Agreement and expect those negotiations to conclude by early May. Meanwhile, at the State level, we’re anticipating the Massachusetts Gaming Commission will complete its suitability findings by mid- to late summer."
  • “In Iowa, we await today’s decision from the Iowa Racing & Gaming Commission, related to our two proposed Hollywood branded gaming and entertainment development projects in Woodbury County" 

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%