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WYN delivers an in-line quarter and stays steadfast in its buyback program


“We’re off to a great start this year, with an 18% increase in adjusted earnings per share. Our operating momentum is strong and our capital allocation philosophy is disciplined. This winning combination will
continue to enhance our growth and shareholder value, this year and in years to come.”


- Stephen P. Holmes, chairman and CEO




  • In the hotel group they had their best group openings ever, due to some large conversions.  Expect this to be a driving force going over.  They are doing particularly well with their Wyndham brand.  
  • Part of their success in the Lodging group is due to the Apollo initiative. More than 1/2 of the room nights booked are through their direct channel.
  • WAAM is changing their VOI strategy.  Recently signed a purchase and sale agreement for their WAAM 3.0 program - where they have a financial partner making investments for their future use. In the first instance their partner will purchase land in Las Vegas.  Expect to close on the deal 2Q13.  Proceeds to WYN will be $80MM. 
  • Think that the majority of their VOI sales will be in an asset light strategy
  • Their enhanced technology capability is helping them gain share in the exchange business
  • They consolidated their rental product on one website where customers can view all their inventory on one site
  • They are in the process of rolling out enhanced pricing tools in their UK Cottages businesses allowing them to yield manage more effectively. 
  • International RevPAR was flat and was negatively impacted by China - where economy brands are growing faster than other brands
  • Feel like their results in the exchange and rental business were good in the face of economic challenges in Europe
  • Rail acquisitions contributed $7MM of rental revenues but had no impact on EBITDA because of seasonality.  
  • VOI: Excluding the Shell acquisition, EBITDA would have been up $5MM. VPG was down due to difficult comparisons due to an upgrade program last year. Expect to come in at the low end of their guidance range in this segment. 
  • ABS front: completed a $300MM securitization (1.77% rate/ 90% exchange rate)
  • Added a $120MM debt associated with the Alex hotel.. even though legally it is their partner, they still had to consolidate. Their leverage was a little bit above their target range.
  • Expect around $5.45 of FCF in 2013.
  • Currency movements are causing a $10MM lowering of their guidance given last quarter 
  • Expect 87-90 cents of EPS in 2Q13. YoY comparisons will be challenging across all of their business. 



  • WAAM 3.0: similar to WAAM 2.0 in that they will provide financing to the end consumer. However, they are bringing in an partner to take down inventory.  Additional deals that they are working on now could be with the same partner or another partner. 
  • Owned hotel segment's ancillarily jumped a lot but most of that is pass-through, low margin revenue.
  • Is Rio Mar EBITDA positive? Yes - about $3MM
  • VOI- is that flatting out/ reaching maturity? VPG being down is not necessarily an alarming signal - it could be due to mix and the fact that they are pushing new sales vs. upgrades. 
  • Will margins be compressed if they focus more on new customers? If the mix of new customers increases that will lower margins but its just one of the levers....they just have a tough comparison from last year.
  • Their WAAM 3.0 partner is a financial partner. Inventory and land on their balance will decrease as they sell it to their partner who will complete it and deliver the finished inventory.  Their margins shouldn't be impacted negatively - if anything, this turns more into a fee for service business and more just in time. It will make the business less capital intensive.
  • Promotion lasted 3 Q's last year for upgrades. They will continue to seek out customers with higher than 700 FICO scores.
  • Tightened underwriting criteria wasn't really a factor in VOI.  They have made inroads in slowing defaults associated with the cease and desist activities.
  • WAAM 2.0: still be out there and they will continue to pursue opportunistic deals but may flip some 2.0 to 3.0 deals. The deal in NY is a 2.0 deal (Alex).
  • The WAAM 3.0 project is the LV project that they started a while ago. They will get $80MM upfront  $65MM for the building and $15MM for the land. Then as the inventory is completed and they need it they will take it down over time.The $80MM sale should close in 2Q13 as soon as some zoning issues are complete. The $80MM is above and beyond their core forecast of $750MM. The $80MM is about 1/3 of what they have on their balance sheet.
  • Exchange and rental outlook in Europe? Southern European product is moving really well.. indicated that Northerners are booking well. Northern to Northern travel has been slower.  They have seen a pattern of closer in bookings for this business. Think that their yield management system will help manage this pattern. The first quarter, you are booking Spring which isn't really a busy quarter. So it's too early to tell how the year will shake out since the summer is really the bulk of their business.
  • SS EBITDA would have been fairly flat to down slightly if you back out the Shell acquisition
  • Settled for less than they had reserved for and got reimbursed for some things as well... that was already in the forecast. What wasn't in there was the $10MM FX headwind.
  • Inventory spend in 1Q: $23MM
  • Any impact from the sequester? They don't see a big impact from it. 



  • In 1Q13, WYN repurchased 2.4 million shares of its common stock for $140 million. From April 1 through April 23, 2013, the Company repurchased an additional 620,000 shares for $39 million. The
    Company has $328 million remaining on its current share repurchase authorization.
  • The increase in adjusted net income reflects stronger operating results primarily in our Lodging and Vacation Ownership businesses. EPS also benefited from the Company’s share repurchase program, which decreased weighted average share count by 7% year-over-year
  • Reported net income included several items that are excluded from adjusted net income. The net effect of these items reduced first quarter 2013 net income by $71 million... primarily related to the early extinguishment of debt
  • The growth of free cash flow largely reflects favorable working capital utilization
  • Lodging
    • Results reflect RevPAR gains, a larger system size and revenues associated with the Wyndham Rio Mar in Puerto Rico, which became a Company-owned hotel in the 4Q12.
    • Domestic RevPAR increased 6%
    • Total systemwide RevPAR increased 4%, reflecting proportionally greater growth of lower RevPAR
      hotels in China
    • Company’s hotel system consisted of approximately 7,380 properties and over 631,800 rooms, a 4% room increase YoY
    • The development pipeline included 950 hotels and approximately 110,000 rooms, of which 55% were international and 59% were new construction.
  • Vacation Exchange and Rentals
    • In constant currency and excluding the impact of acquisitions, revenues increased 1%.
    • Exchange revenue per member increased 3%, while the average number of members remained flat
    • Excluding acquisitions, vacation rental revenues were flat, reflecting a 6% increase in the average net price per vacation rental offset by a 5% decrease in transaction volume.
  • Vacation Ownership
    • Excluding the acquisition of Shell Vacations Club, revenues increased by 2%.
    • 10% increase in tour flow offset by an 8% decrease in volume per guest.
    • The increase in EBITDA was The increase was primarily due to the favorable resolution of a lawsuit and the Shell acquisition
  • Balance Sheet items
    • Cash & equivalents: $217MM
    • Long term debt: $3.0BN
    • VOI receivables, net: $2.8BN
    • VOI inventory: $1.1BN
    • Securitized VOI debt: $2.0BN


Morning Reads From Our Sector Heads

Todd Jordan (GLL):


Carnival Cruise Lines slashes prices in wake of ship problems (via Travel Weekly)


Josh Steiner (Financials):


Guy Looks Up At Scoreboard And Surmises The Final Score Is Homo Sapiens 1, Computers 0 (via Dealbreaker)


BlackRock Shelves Platform For Bonds (via WSJ)


Too-Big-to-Fail Bill Due Today Faces Opposition in U.S. Senate (via Bloomberg)


Howard Penney (Restaurants):


Chipotle’s Slow London Sales Open Door for U.K. Burritos (via Bloomberg


Matthew Hedrick (Europe):


Letta Named Italian Prime Minister as Impasse Ends (via Bloomberg)


Kevin Kaiser (Energy):


RPC, Inc. Reports First Quarter 2013 Financial Results (via RPC)


Jay Van Sciver (Industrials):


Rockwell Automation Reports Second Quarter 2013 Results (via Rockwell Automation)




Hold The Line

Client Talking Points

Slicing Through The VIX

The S&P 500 held its line of support for us at 1557 on an immediate-term TRADE basis. Guess what happened to volatility (especially after that fake AP tweet was taken care of)? The VIX fell back below TRADE support of 14.82. We can go much lower and the pain trade right now, as far as the VIX goes, is at 10.97. Remember: Nothing is impossible.

Euro Trip

We covered our short position in the Euro yesterday (via FXE) at the low end of our risk range: 1.29-1.31. There's plenty of long-term TAIL risk for the EU that should have those trading the currency on their toes watching every move the ECB makes. Will they cut rates to zero? Will they bail everyone and their mother's pension out? Wait and see. The next meeting is May 2nd and we'll know a lot more then and knowing is half the battle. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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


"Kingsbridge Armory in The Bronx to be transformed Bronx into the world’s largest ice-skating mecca stks.co/iSgJ AWESOME" -@LDrogen


"I may not have gone where I intended to go, but I think I have ended up where I needed to be." -Douglas Adams


Over $20 billion has been redeemed from exchange-traded products that focus on gold.

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Stuff Changes

This note was originally published at 8am on April 10, 2013 for Hedgeye subscribers.

“We are made of the same stuff of which events are made.”

-Ralph Waldo Emerson


That’s the opening volley from astrophysicist Eric Chaisson in one of my favorite risk management books, Cosmic Evolution. What’s up with that? What’s up with a chaos theorist prefacing his ideas with the penmanship of a mid-19th century American essayist? It’s all about the storytelling folks. As Taleb recently wrote in Antifragile, “evolution does not depend on narratives, humans do.”


While finding the deep simplicity of the Global Macro point that matters can often feel like finding Waldo himself, Chaisson channeling Emerson is consistent with our discipline of Embracing Uncertainty. Emerson was labeled as a “transcendalist” – he preached individualism and self reliance; he did not support dogmatic and/or traditional organizations.


We’re human, so we want things about markets to make simple sense within our organizational boxes. But markets change, fast and slow. Sometimes they make sense. Sometimes they don’t.  In the heat of a thermodynamic moment, does every phase change make sense to everyone? Does that change care if you understand it? Of course not. Best we can do is try to keep up.


Back to the Global Macro Grind


Keeping up with the US stock market hasn’t been easy for the #PTCs (professional top callers). Every time the SP500 sells off to a higher-low (1540 on Friday), they claim victory. Every time we rally off those higher-lows to higher all-time highs, I hear crickets.


Crickets? What are crickets? Do you hear them on the floor of the NYSE? Crickets – you can hear the hum when something was supposed to happen, and didn’t. #crickets


While I am not entirely sure what kind of a risk management process top-calling is, it fits within the confirmation biases of consensus. My tally is up to 28 high profile PMs, strategists, pundits, etc. who are currently still trying to call the top in US stocks. Maybe this time is different – maybe they’ll all nail it, at the same time. Maybe not.


Quantifying sentiment in markets is probably the hardest thing to do – I’ve tested and trialed almost every voodoo signal I have been issued on this front, and I am left with very few that I’d actually act on. Let’s consider those few:


1.   Sentiment Spread – the II Bullish/Bearish survey data doesn’t tell me much on most metrics other than its historical spread (ie Bulls minus Bears). This morning, that spread is +2990 basis points wide. Over a decade of my tabulating/monitoring this spread, a relatively safe sell zone is +3500-3700 basis points wide. A relatively safe buy zone is 900-1500 basis points wide.


2.   Exhaustion (VIX vs SPX) – while plenty will quibble with this for theoretical reasons (“front month doesn’t reflect sentiment” … “term structure matters more”, etc. etc.), for me it’s just a signal that I’ve built for myself that works most of the time. The problem with it is that it’s not signaling all of the time. So I have to wait on it.


If you’ve studied thermodynamics, you’ll agree that waiting for a certain amount of entropy matters before you register a certain amount of consequential change (energy). That’s one way to conceptualize my VIX/SPX signal. What I am waiting on is:


A)     SPX immediate-term TRADE oversold

B)      VIX immediate-term TRADE overbought


Sounds simple, because it is – after you’ve incorporated multiple-factors across multiple-durations in order to contextualize that immediate-term moment. In other words, it’s a lot easier to roll with the conclusion after the process signals it.


I’m not submitting that I haven’t been run over by my signals once in a while. Nor am I suggesting that either the Sentiment Spread or the VIX/SPX signal are stand alone silver bullet signals. They are just two of the many tells I use instead of gnomes.


Just to roll through putting the aforementioned into action:

  1. On Friday morning, the SP500 was immediate-term TRADE oversold at 1540
  2. On Friday morning, the VIX was immediate-term TRADE overbought at 15.23

So, our #RealTimeAlerts (immediate-term signaling product) acted, aggressively on that, covering shorts and buying stocks (including the SPY itself). This is not about taking victory laps – this is about being accountable to what I do and why. I feel like putting my process out there like this makes it better. Sharp clients question it; so do my analysts internally. In the end, for me at least, that’s a win.


The other side of the buy/cover signal is to have the discipline to sell/short on the bounce. We’ve seen that for a few days since the Friday lows, and now, as the SP500 makes another all-time high, we’ll get another SPX overbought/VIX oversold signal too.


Will that happen at VIX 12.21 and SPX 1576? I don’t know. And that’s the point. Embracing Uncertainty in a non-linear and dynamic ecosystem like this is what I do. Stuff Changes. So I need to change alongside it.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1544-1585, $103.86-107.78, $3.29-3.47, $82.23-83.34, 96.12-100.05, 1.71-1.82%, 12.21-14.51, and 1561-1576, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Arrow Points Up

“Entropy is time’s arrow.”

-Arthur Eddington


That’s not a new reality. But it’s always an important one to remember. Arthur Eddington was the British astrophysicist who first called entropy “time’s arrow” in his 1927 book, The Nature of the Physical World.


You don’t have to be a physics guru to understand the concept of entropy. The 2nd law of thermodynamics calls entropy the price paid by an ecosystem when energy changes. I love applying that thought to markets – particularly when they are undergoing phase transitions.


“The rates of change of entropy differs for each specific event. All the while the rate of change of time itself is taken to be uniform, ceaseless, and non-negotiable.” (Chaisson, Cosmic Evolution, pg 31)


Back to the Global Macro Grind


Moving fast, and slow. That’s what markets do. If you could have a signal to probability weight that the market’s entropy is about to change fast, you’d take it. Or at least I would. Some signals really matter.


One of the most basic relationships in a market is expected price versus volatility. The key word is expected. The two factors (price and volatility) have to be contextualized across multiple durations.


With those thoughts in mind, let’s look at the price of the SP500 vs front-month US Equity Volatility (VIX):

  1. SP500 is in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  2. VIX is in a Bearish Formation (bearish TRADE, TREND, and TAIL)

Three days ago, points 1 and 2 were not true:

  1. SP500 was bearish TRADE (below 1557)
  2. VIX was bullish TRADE (above 14.82)

In between now and then, you were allowed to make a risk managed move (buy and/or cover) on the explicit signal (SPX breaking out, back above 1557, and VIX breaking down through 14.82). You were also allowed to ignore my signal. It’s a free world, sort of.


I rarely ignore my signal.


Obviously I am simplifying this basic relationship between expected price/volatility. I can front-run the gotcha guys who will say that using front-month VIX instead of the implied term-structure of volatility’s curve is a mistake. But why is it if the signal works?


Mixing theory with practice is a dangerous game. You don’t have to take my word for it on that – try it with your own money at home. Some have mathematical theories. Some have qualitative theories. There’s a lot of baggage in theories that don’t embrace change.


My sense is that consensus still isn’t bullish enough on the SP500. My sense is that consensus isn’t bearish enough on US Equity Volatility. But, to be clear, my senses aren’t based on how I feel. My sense is my signal.


What is the most probable path that consensus considers improbable this morning?

  1. SP500 going to 1603
  2. VIX dropping to 10.97

Do you disagree with that? Why?


On Thursday (last week) at 3PM EST here’s where the market was:

  1. SP500 = 1538
  2. VIX = 18.16

This morning:

  1. SP500 = 1578
  2. VIX = 13.48

The context of this 3-day move (across durations) matters. Intermediate-term TREND support for the SP500 (1515) wasn’t violated on the downside inasmuch as intermediate-term TREND resistance for the VIX (18.89) didn’t break-out on the upside.


Should there be a difference between how you feel about a market when volatility drops 25% in a straight line? Should you make decisions based on feelings? Or should you re-model what’s becoming more or less probable for different expected price and volatility parameters?


I’m asking too many questions this morning. And I apologize for that. Maybe I should have just written a one sentence Early Look that said my model is signaling an up arrow for the SP500, and a down one for VIX to 1603 and 10.97, respectively.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $96.68-104.06, $82.47-83.19, 97.27-101.31, 1.68-1.80%, 10.97-14.82, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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