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



  • 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



  • 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



  •  "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

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

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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,




Robert  Campagnino

Managing Director





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

VIX: Slice And Dice

The S&P 500 made a move to the upside yesterday after the AP Twitter hoax was over and done with, breaking through and holding above its TRADE line of resistance at 1557. In turn, volatility (VIX) took a nose dive and fell below our TRADE support line of 14.82. The VIX is quite capable of going lower and we would not be shocked if we saw it dip below the 11 mark if and when the S&P 500 is above 1600.


VIX: Slice And Dice - YTD VIXSPX

Early Look

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