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BYD 1Q2013 REPORT CARD

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

 

 

OVERALL

  • BETTER: BYD's focus on operating margins finally began to show dividends as they came in with a pretty handy beat.  There was even renewed optimism that Locals revenues may actually turn the corner in coming quarters.

 

BYD 1Q2013 REPORT CARD - BBB

 

LOCALS 

  • BETTER:  Operating efficiencies drove the higher than expected EBITDA.  BYD is cautiously optimistic going forward.  The Orleans, in particular, is doing well.  Spend per visitor in 1Q is flat.  March revenues improved dramatically from January/February or 'relatively flat' YoY. 
  • PREVIOUSLY: 
    • "We saw reasons for guarded optimism in this region later in the quarter, as business trends started to improve. The declines we saw in October to November moderated in December, and that positive trend has continued into the first quarter."
    • "Customer accounts are up. Spend per visitor is down."

MARKETING AND ADVERTISING EFFICIENCIES

  • BETTER:  They had solid traction on their marketing and advertising initiatives. EBITDA margins beat our expectations across the wholly owned portfolio
  • PREVIOUSLY: "We refined our marketing and advertising programs and made significant changes on our casino floor, and we began to see the benefits of this in the fourth quarter as visitation strengthened month-by-month across our Locals business. In 2013, we will continue looking for ways to improve our core business, not just in Nevada, but across our portfolio.

CONSUMER BEHAVIOR

  • BETTER:  Consumers are becoming used to higher payroll taxes but offsetting that were the tax refunds coming in, improvements in investment portfolios, and strengthening economic conditions across many regions
  • PREVIOUSLY: "As other companies in our industry have already reported, gaming customers   nationwide pulled back in the fourth quarter due largely to economic uncertainty surrounding the elections and the fiscal cliff. While we actively worked to mitigate the impacts of these trends on our business, they did affect our operations. These trends continued into the first quarter. Our customers are now adapting to the impact of higher payroll taxes that took effect January 1; continued uncertainty from Washington over federal spending and taxes is affecting consumer behavior as well."

VEGAS TRENDS 

  • SAME:  Unemployment has declined below 10% and the pace of jobs have been accelerating. The housing continues to be in recovery mode.
  • PREVIOUSLY: "We are encouraged by signs of continued improvement in the Southern Nevada economy. The unemployment rate has been declining in recent months and home prices rose substantially throughout 2012. Las Vegas is still far from the boom years, but the trend is in the right direction, and we believe we will see modest improvement throughout this business in 2013."

DOWNTOWN 

  • WORSE:  Business levels have been weak.  BYD is focused on improving operating margins and continues to be optimistic with the upcoming redevelopment of Downtown.
  • PREVIOUSLY: "Visitation remains solid, especially among our Hawaiian customer base, and we gained 250 basis points in market share from the third quarter to the fourth, further expanding our leading position in the Downtown market. We believe those positive trends will continue. Our Hawaiian business remains strong and we will benefit from the ongoing redevelopment of Downtown, which continues to drive new business, new visitors and new residents into the area."

KANSAS STAR 

  • SAME:  Marketing spend rose in the quarter compared with the abnormally low levels during its introductory period. BYD expects visitation to grow, particularly with the opening of a 6,000 room arena in late June.  Kansas Star remains on track to generate $100MM in annual EBITDA.
  • PREVIOUSLY: "Looking ahead to the first quarter, Kansas Star will be comparing to a strong introductory period, when it was able to generate robust visitation with very little marketing spend. That is obviously not sustainable and customer reinvestment has increased to more realistic levels. Winter weather has presented more of a challenge in the first quarter of 2013 as well. But we remain quite optimistic about Kansas Star's long-term potential and we expect that Kansas Star's margins will remain the highest in the Peninsula portfolio and project that the property will generate about $100 million in annual EBITDA going forward."

BYD 1Q13 CONF CALL NOTES

Solid quarter, cheap stock

 


"We saw positive momentum across our operations in March, driving first-quarter results that were ahead of our previous expectations. We were particularly encouraged by improvements in our Las Vegas Locals business, as we were able to generate EBITDA growth for the first time in more than a year"

 

- Keith Smith, President and Chief Executive Officer of Boyd Gaming

  


CONF CALL NOTES

  • Expect to see better results from their initiatives as external factors abate.  
  • Feel good about the overall direction of their Locals business
  • Borgata: Remains the clear market leader 
  • Cautiously optimistic about the trends they are seeing:  investment portfolios growing, refund checks arrived, people are getting used to higher payroll taxes, Locals economy is improving (home sales, unemployment, etc.).  
  • They are seeing the highest level of development on the Strip that they have seen in years.
  • In AC the recovery from Sandy is strengthening as they enter their peak season
  • On track to complete the sale of Dania Jai Lai in May
  • Starting to see full benefits of the Peninsula acquisition
  • Intend to be amongst the first to offer online gaming in the state in NJ and are evaluating the best way to offer online poker in Nevada
  • Saw strengthening conditions in many of their markets, especially in the Locals markets.  Orleans has done well.
  • Diligently focused on improving operating margins in the Downtown market. 
  • South: difficult comp to a year ago Q. Delta Down still posted an all-time record quarter. 
  • Marketing expense was unusually low at Kansas Star when they first opened. The current spend run rate is more normal. This property remains on track to generate $100MM of EBITDA
  • Focused on improving margins in coming quarters
  • Balance sheet:
    • Debt: $4.1BN ($1.2BN related to Peninsula) 
    • Cash: $322MM ($30MM related to Peninsula) includes proceeds from Echelon sale. Post Q close a portion was used to redeem debt
    • Leverage: 3.89x Secured Leverage vs. 4.5x Max. 7.0x leverage vs. 7.75x covenant
  • Corporate expense includes $1.1MM for Peninsula
  • Increase in D&A is due to inclusion of Peninsula
  • Interest expense was $93MM excluding the LVE.  Interest expense should decrease by $2.5MM/Q as a result of the redemption of the notes.
  • Guidance for 2Q13:
    • EBITDA: 
      • Wholly-owned:  $132-137MM
      • Borgata:  $27-29MM
    • Tax rate of 35%
    • EPS: -$0.02 to $0.03

 

Q&A

  • Comparables are getting easier. Locals seems to be recovering but it's too early to call what they are seeing a trend given what's happened in the past
  • What was the biggest driver to the strong margins in the Locals market?  On the marketing side they had solid traction on their initiatives.  Staffing was also much more efficient. 
  • Think that the size of the i-gaming market in AC will be in the range of the numbers being projected
  • Think that i-gaming will be a nice addition to their business over the next few years. Not worried about the impact on their brick and mortar operations.
  • Any impact from the table game offerings in MD?  Too early to tell.  Unclear how last year's storm will impact AC this year
  • Locals:  on a spend per visitor basis, they are running about flat. 
  • BWIN will provide most of the software, the capital commitment is really around the marketing expenses. Those expenses typically come out of the revenues generated anyway.
  • No significant change to the promotional environment in AC.  Some small pullback in marketing. 
  • Promotional activity is normal in the locals market
  • No plans to raise equity to reduce leverage
  • Property tax appeal at Borgata is currently awaiting trial. Feel confident that they will get a rebate.
  • More streamlined labor levels? 7000-8000 employees in Nevada. Just adjusted labor to demand levels.
  • Kansas Star is a locals market-oriented casino but the permanent facility should attract a broader base of players
  • No change in capex plan for 2013
  • Biloxi market is a very competitive market.  IP has been more of an efficiency story vs. a revenue growth story for them.  They have done a good job increasing the EBITDA at that property and that should continue.
  • With respect to the LV Strip, they are very interested in being on the Strip at the right time and with the right asset

 

HIGHLIGHTS FROM THE RELEASE

  •  "As we look forward, we are excited by the potential of our online gaming strategy.  New Jersey and Nevada are now laying the regulatory groundwork for online gaming, and other states are considering legalization as well.  This emerging business provides a compelling opportunity to significantly grow and diversify our business, and we intend to take full advantage of it."
  • Las Vega locals: "Our new slot initiatives and associated marketing programs continued to perform well during the quarter, while EBITDA benefited from improved operating margins."
  • Downtown:  "Declines were the result of softness in business volumes early in the quarter.'
  • Midwest & South: "Winter weather impacted business levels early in the quarter.  However, trends began to improve across the region in March."
  • "The Peninsula properties performed in line with our expectations, including the Kansas Star, which opened a permanent casino and five new food and beverage outlets in late December."
  • "Borgata significantly outperformed the Atlantic City market in slot, table game and poker revenue, further increasing its leading market share as the region continued to recover from the impact of Superstorm Sandy." 

Bullish Formations

Right now, several sectors are in bullish formation across all three of our durations: TRADE, TREND, and TAIL. They include US Consumer Discretionary (XLY), US Consumer Staples (XLP), US Healthcare (XLV) and the S&P 500. As you can see in the chart below, year-to-date performance has been outstanding thus far for 2013. Here's the scorecard as far as the aforementioned sectors go:

 

  • S&P 500 (SPY): +10.8% YTD
  • Consumer Discretionary (XLY): +13.7%
  • Consumer Staples (XLP): +17.3%
  • Healthcare (XLV): +19.4%

 

Bullish Formations - bullishformations


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FDX: USPS Contract Adds to Positive Optionality

Takeaway: The USPS contract adds relevance to the Express restructuring and removes an overhang. We expand on the Express restructuring option view.

FDX: USPS Contract Adds to Positive Optionality

 

  • USPS Contract:  The USPS has a strong union.  In the 1980s and 1990s, the USPS and UPS often clashed, and there are probably many postal employees still around who remember the hostility.
  • Switching Costs:  As we noted here, companies servicing government contracts adequately usually keep the work.  Switching suppliers is riskier and more time consuming for government employees than sticking with a current relationship.
  • Downgrades Ahead of USPS Decision:  We wonder whether recent sell side downgrades were partly trying to front-run what seemed like a potential contract loss (UPS was generally positive on their prospects in our conversations, in our view).
  • Margin May Be Lower – For Now:  We do not have a good estimate of the margin attached to the new contract.  Most government contracts are to some extent based on costs, so that may add more relevance to the prospective FedEx Express cost reductions.
  • Express Restructuring Call Option:  As we have written before, it is not a stretch to view the current FDX market valuation as providing a “free” option on the success of the FedEx Express restructuring, in our view.  We think the values of FedEx Ground and FedEx Freight can be summed to explain most, all, or more than all of FDX’s current valuation.  We can critique/trash the table below as well as anyone.  We do not like sum of the parts comparable company analyses for a number of reasons – contact us if you want a list.  We also do not like selecting point multiples for a number of reasons, such as the tendency of analysts to select multiples that fit their own narrative.  We don’t even like the kinds of multiples we have the data to use in this analysis (i.e. EV/EBIT).  With those caveats, we present such an analysis below just to illustrate a reasonable view supporting the Express optionality argument.  We know the table is not precise, but think it provides a generally on target way to think about FDX.  We also think that leases are not a relevant factor in the analysis – ping us for those details if you are interested (for example, see aircraft fleet composition for FDX and UPS – owned, chartered, short-term lease or long-term operating lease).

 

FDX: USPS Contract Adds to Positive Optionality - tt1


LO -Better Pricing, Better Profit

Lorillard is the second of the domestic cigarette manufacturers to report, and the results are obviously consistent with RAI’s – weaker volume, better pricing and profitability.  We still aren’t seeing a whole lot to do in the domestic names at this point.

 

What we liked:

  • EPS ahead of consensus ($0.66 vs. $0.64)
  • Solid increases in net revenue per unit (+3.6%) and operating income per unit ($4.47)
  • Continued good performance from the electronic cigarette segment  - $50 million in revenue and $7 million of operating income
  • Newport volume declined only 1.6% in the quarter, outpacing the industry by a wide margin, driving total volume declines of 2.3% in the quarter
  • New $500 million share repurchase program (announced on March 8th) keeps “creeping LBO” trend going

What we didn’t like:

  • Volume decline was against easiest comparison of the year
  • Increase in revenue per unit (pricing) was against easiest comparison of the year, Q2 and Q3 are more difficult
  • Per unit operating income comparisons get more difficult in the next two quarters as well
  • Sequential decline in electronic cigarette segment profitability (same level of operating income as in Q4 on $11 million increase in sales

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



Corn Getting Clobbered

Corn is down -26% from the peak of the commodity bubble (aka the Bernanke Top) that occurred mid-September 2012. Though the commodity caught a slight bounce this morning, it continues to get clobbered along with oil, gold and the rest of the agricultural commodities due to a strong US dollar that's poised to continue to appreciate in value. Year-to-date, the Teucrium Corn Fund ETF (CORN) is down -11.4% and sinking. 

 

Corn Getting Clobbered - CORNETF


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