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FTSE In Bullish Formation

The FTSE 100 Index, which is essentially London's version of the Dow Jones Industrial Average, is doing quite well for the year-to-date. The index is up +11% compared with the Dow, which is up +12.7% year-to-date. This morning's economic data in the UK was the manufacturing Purchasing Managers Index (PMI), which came in at 49.8 for April versus 48.3 in March. That positive news has kept the FTSE in bullish formation and we expect the index to rise higher over the next month.

 

FTSE In Bullish Formation - ftse100


TWO CHINAS?

Takeaway: Financial system headwinds continue to outweigh consumption tailwinds within the Chinese economy.

SUMMARY BULLETS:

 

  • All told, financial system headwinds continue to outweigh consumption tailwinds within the Chinese economy. This morning produced tons of dovish inflation readings out of Asia for the month of APR, which is very consistent with the formerly counter-consensus call we have been making since the start of the year (i.e. global disinflation). This morning’s incremental confirmation was headlined by China’s Input Prices PMI, which ticked down to the lowest level since DEC ’08. It’s too bad that financial system risks and regulation are what they’ve become in China – a headwind to economic growth, at the margins. We’re seeing that manifest to a small degree in the headline Manufacturing PMI and to a much larger degree in very crucial subcomponents of the Manufacturing PMI release: New Orders, Backlogs of Orders, and Purchasing of Inputs all ticked down MoM.
  • Over the immediate-to-intermediate term, the recent regulatory crackdowns on the credit instruments most responsible for perpetuating China’s buoyant property market and unsustainable fixed assets investment will weigh on Chinese growth. Over the long term, however, these macroprudential measures are quite necessary if the Chinese Communist Party is to accomplish its goals for economic rebalancing – a task so critical that the failure of which would undermine social stability and, with it, the Party’s claim to power.
  • Given the offsetting consumption tailwinds highlighted above, it’s tough for us to pound the table on shorting China here. That being said, we remain very negative on industrial commodities and the currencies and equity markets of the Latin American and African commodity producers. For more details, please refer to our recent EM Crises Black Book where we outlined this view in great detail.

 

This morning produced tons of dovish inflation readings out of Asia for the month of APR, which is very consistent with the formerly counter-consensus call we have been making since the start of the year (i.e. global disinflation). This morning’s incremental confirmation was headlined by China’s Input Prices PMI, which ticked down to the lowest level since DEC ’08. Needless to say, our thesis on the Chinese consumer economy continues to play out in spades.

 

TWO CHINAS? - 1

 

It’s too bad that financial system risks and regulation are what they’ve become in China – a headwind to economic growth, at the margins. We’re seeing that manifest to a small degree in the headline Manufacturing PMI and to a much larger degree in very crucial subcomponents of the Manufacturing PMI release: New Orders, Backlogs of Orders, and Purchasing of Inputs all ticked down MoM.

 

TWO CHINAS? - 2

 

TWO CHINAS? - 3

 

The -2.3ppt MoM decline in New Export Orders to 48.6 is a stark reminder that sluggish global growth remains a headwind to incremental liquidity flow into the Chinese banking system from abroad. That, coupled with an not-yet-quantifiable amount of NPLs associated with the 2009-10 stimulus package and a high volume of existing long-term loans, will weigh on monetary expansion in China for the foreseeable future.

 

TWO CHINAS? - 4

 

TWO CHINAS? - 5

 

That’s a direct negative for those sectors that rely most on said monetary expansion to drive performance – banks, property developers and raw materials producers (69.1% of the SHCOMP if you include the Financials at 44.2%, Energy at 16.7% and Materials at 8.2%). Moreover, there are some notable industries within these sectors that are rife with excess capacity (particular producers of raw materials that feed into fixed assets investment), especially in the context of a Chinese economic rebalancing.

 

TWO CHINAS? - 6

 

TWO CHINAS? - 7

 

The latest data point we came across with respect to the topic of industrial overcapacity in China came from the China Iron and Steel Association (CISA), which recently reported: A) slowing industry-wide profit trends (CNY 1.34 billion in JAN, CNY 998 million in FEB, and CNY 267 million in MAR); B) an accelerating number of loss-making enterprises (34.9% of the total in 1Q13, which trended higher throughout the quarter to 45.3% of the total in MAR); and C) record levels of output amid slowing economic growth (average daily crude steel output for 1Q13 reached a record 2.13 million metric tons). These figures rhyme with the latest Industrial Profits data, which slowed from a run rate of +17.2% YoY in JAN-FEB to +5.3% YoY in MAR.

 

All told, financial system headwinds continue to outweigh consumption tailwinds within the Chinese economy. Over the immediate-to-intermediate term, the recent regulatory crackdowns on the credit instruments most responsible for perpetuating China’s buoyant property market and unsustainable fixed assets investment will weigh on Chinese growth. Over the long term, however, these macroprudential measures are quite necessary if the Chinese Communist Party is to accomplish its goals for economic rebalancing – a task so critical that the failure of which would undermine social stability and, with it, the Party’s claim to power.

 

Given the offsetting consumption tailwinds highlighted above, it’s tough for us to pound the table on shorting China here. That being said, we remain very negative on industrial commodities and the currencies and equity markets of the Latin American and African commodity producers. For more details, please refer to our recent EM Crises Black Book where we outlined this view in great detail.

 

Darius Dale

Senior Analyst


PNK 1Q13 CONF CALL NOTES

Strong margins pushed EBITDA in-line with recently reduced consensus but above our estimate.

 


"We are encouraged that year over year revenue, EBITDA and margin performance improved as the first quarter progressed, with the stronger trends seen in March continuing in April. We are optimistic that improving fundamentals and a continued focus on cost control and profitable revenue growth initiatives will drive improved operating performance as we progress through 2013."

 

- Anthony Sanfilippo, President and Chief Executive Officer of Pinnacle Entertainment   

 

 

CONF CALL NOTES

  • Softness in January/February with rebound in March and postive trend has continued into April
  • Marketing reinvestment as % of revs was unchanged YoY and -130bps QoQ
    • L'Auberge Baton Rouge marketing spend was 150bps lower QoQ
    • Trips were lower while spend per visit was flat in Jan/Feb; March saw improvement in both categories as they came back close to 2012 levels
    • Double digit growth in top 3 tiers
  • L'Auberge Lake Charles: 16% YoY room nights out of service in 1Q (particularly impacted weekends)
  • Belterra: market very competitive; just completed renovated buffet
  • March/April guest experience has been pleasant
  • On track to close ASCA acquisition; beginning the state-by-state approval process--starting with NV Gaming Board; another regulatory hurdle is the FTC
  • Will continue to focus on reducing debt
  • L'Auberge Baton Rouge:  27,000 first-time visitors; repeat visit rate has been 50% 
  • St. Louis:  considerable softness; disciplined cost control and rational marketing spend at Lumiere and River City; 
  • Southern Indiana: soft in 1Q, down 13% YoY; Columbus competition affecting visitation; Horseshoe Cincinnati impact too early to say but so far impact has been muted
  • Belterra hotel renovation project later in 2013 

Q&A

  • Recently opened up permanent paviliion that leads into River City casino
  • Four Seasons at Lumiere: has increased regional advertising, attracting non-local visitors
  • 1Q Pre-opening expense:  legal bills associated with ASCA transaction
  • [Margins] "What we're doing is sustainable"
  • Should see op margins improve at Baton Rouge
  • Remaining ACDL challenges:  operating plan to manage the resort; still need resumption of funding from banks; still need working capital for 1st resort
    • PNK not exactly confident ACDL will open
  • Capex River Downs:  $209MM budget; capex will start trending up when building comes out of the ground.  4Q/1Q 2014 will take the bulk of the capex spend.
  • AC transaction: may close in 3Q
  • Happy that Ohio Racing Commission approved request to race at Beulah Park. 
  • Nothing unusual on hold at Baton Rouge
  • Texas legislation: unlikely
  • Ohio internet cafe crackdown:  not sure of impact on River Downs
  • Post-closing ASCA transaction leverage:  PNK expects 'sizable FCF, significant NOL for tax purposes. 3.5-5.0x target leverage.  Would like to get to <4.0x in a few years.
  • No comment on potential selling ACDL interest

 

HIGHLIGHTS FROM THE RELEASE

  • "The operating environment was challenging in the 2013 first quarter, with economic pressure from the payroll tax increase and the delay in tax refund checks dampening business volumes at our casinos. We worked diligently to control costs and increase marketing and operating efficiency across the system during the first quarter, which helped reduce the impact of soft demand trends on the cash flow our assets produce"
  • ASCA acquisition update:
    • On April 25, 2013, Ameristar stockholders approved the acquisition. The Company continues to expect the transaction to close in the second or third quarter of 2013, subject to closing conditions, including the receipt of required regulatory approvals.
    • On April 2, 2013, Ameristar Casinos successfully completed a consent solicitation relating to its 7.50% Senior Notes due 2021 for a consent fee of $19.00 for each $1,000 in principal amount of notes, 50% of which was paid shortly after the expiration of the consent solicitation. The Company paid $9.8 million for the initial portion of the consent fee payments in April 2013, with the balance expected to be paid to bond holders upon closing the transaction. Following this consent, the Company now expects to complete the Ameristar merger using a simplified structure, which provides for a singular, unified capital structure for the combined companies.
    • "We have spent the past few months doing more detailed integration planning and analysis, and have grown increasingly confident in the scale benefits and synergy opportunities the combination of the two companies will create. We are confident we can achieve at least $40 million of synergies and efficiencies of scale between the two companies."
  • Consolidated Adjusted EBITDA margin decreased... principally due to L'Auberge Baton Rouge still being in its operational ramp up period
  • Loss from continuing operations was negatively affected by the $92.2 million non-cash impairment charge related to the Company's investment in ACDL, pre-opening and development costs primarily associated with the Ameristar acquisition, increased interest expense related to a bond offering and term loan completed in March 2012, and generally soft economic conditions, particularly during the first two months of the 2013 first quarter.
  • L'Auberge Lake Charles: 
    • Began the first phase of an extensive room-remodeling program in the 2012 fourth quarter, which continued into the 2013 first quarter and was completed in April of 2013. During the 2013 first quarter, the room remodeling program displaced approximately 13,631 available room nights at the property. The property anticipates beginning the second phase of the room-remodeling program in the Fall of 2013, which will renovate the remaining 240 rooms and is expected to be completed in the first half of 2014.
    • "L'Auberge Lake Charles experienced significant disruption from the execution of the first phase of its room renovation program, which displaced approximately 16% of its available room nights on a year over year basis and exacerbated the generally soft market conditions the property experienced for the first two months of the first quarter. A focus on expense discipline and marketing efficiency mitigated some of the impact that the decline in revenues had on the property in the first quarter. Operating trends in Lake Charles improved in March, and stronger business volumes continued in April. We are optimistic that the elimination of disruption from the property's renovation program in April, coupled with generally improved market conditions and a continued focus on operational efficiency, will permit the property to resume growth as we progress through the seasonally stronger Spring and Summer months."
  • The St. Louis segment experienced generally soft market conditions. Expense discipline limited the impact of revenue declines on Adjusted EBITDA and permitted year over year margin expansion in the segment.
  • The year over year decline in Boomtown New Orleans' 2013 first quarter revenues was driven principally by lower gaming volumes, but cost containment and increased marketing efficiency implemented at this property limited the impact this had on Adjusted EBITDA and margins.
    • "A new leadership team assumed the operation of Boomtown New Orleans in the 2012 fourth quarter, and we are proud of the progress our team members there have made in stabilizing and improving the business. Gaming revenue performance of the property improved in each successive month of the 2013 first quarter, and this improvement continued into April. In addition, significant progress was made in streamlining the operating expense structure of the property, while simultaneously improving service levels and the quality of the property and guest experience. As we progress through 2013, Boomtown New Orleans will continue its focus on operational efficiency and driving profitable revenue growth."
  • We are very pleased with the initial performance of L'Auberge Baton Rouge, particularly during its second full quarter of operation. The property saw its gaming volumes increase in each month of the 2013 first quarter, with record gaming revenue and Adjusted EBITDA performance in March. Cash non-gaming revenues have been very strong since the inception of operations, and the property's mychoice player loyalty database grew 40% in the 2013 first quarter. "We expect L'Auberge Baton Rouge to continue to ramp up its operations and Adjusted EBITDA production in 2013, particularly through growth of gaming volumes from regional high-end players, further database growth and continued rationalization of its operating expense structure."
  • Belterra's 2013 first quarter Adjusted EBITDA was negatively affected by lower gaming volumes, elevated repair and maintenance expenses, new competition in several of its Ohio feeder markets, and the closure of two food and beverage outlets for remodeling. The property's newly renovated buffet re-opened on March 13, 2013. The second food and beverage outlet is expected to open in the second quarter of 2013.
  • The reduction in 2013 first quarter corporate overhead expense was driven principally by efforts to eliminate non-value added expenses at the Company's Las Vegas headquarters, as well as a ramp up of cost savings and property allocations.
  • River Downs:
    • Demolition of the existing grandstand and related facilities was completed in the 2013 first quarter, and construction of the new gaming entertainment center commenced in the 2013 first quarter with the placement of foundation pilings. 
    • The project budget remains $209 million, excluding license fees, original acquisition costs and capitalized interest, and we plan to open the facility in the second quarter of 2014.
  • "The expansion of River City in St. Louis remains on budget and is on schedule. We expect the event center to open in June of 2013, and the 200-room hotel to commence operations by the Fall of 2013. The opening of the garage has alleviated pressure on parking availability at the property, and we look forward to the hotel and event center rounding out River City's amenity set as those elements come online in 2013. $56.5 million of the $82 million budgeted for this project had been incurred through the 2013 first quarter."
  • "In New Orleans, we commenced construction of a $20 million, 150-room hotel. We expect the hotel to open in the second quarter of 2014, and to round out the amenity set and improve the geographic reach of Boomtown New Orleans."
  • On March 4, 2013, ACDL received notice from MGM Hospitality of its decision to terminate its contract to operate Phase 1 of ACDL's Ho Tram Beach development in the Southeast coast of Vietnam, effective June 2, 2013. On April 5, 2013, ACDL received the formal approval from the Government of Vietnam of its requested amendment to its Investment Certificate. Significant risks and challenges remain to opening Phase A1 of the Ho Tram Beach development, as well as subsequent phases of the master plan for Ho Tram Beach. These include the manner in which the Phase A1 resort will be opened and operated, the resumption of funding by its Vietnamese bank syndicate, securing a working capital facility to operate the Phase A1 resort, securing additional funding needed to complete the remaining elements of the Ho Tram Beach master plan, and remaining in compliance with its amended investment certificate. As a result of the current circumstances, the Company recorded an impairment charge of $92.2 million, writing down the remaining asset carrying value of its investment in ACDL.
  • In the 2013 first quarter, the Company entered into an amended definitive agreement to dispose of its land holdings in Atlantic City for total consideration of approximately $30.6 million. The transaction is subject to a financing contingency. The transaction is now expected to close by the end of the 2013 third quarter.
  • Capital expenditures: $39 million; cash expenditures totaled $15.6 million for the River City expansion, $4.4 million for the River Downs redevelopment, and $11.6 million for the Lake Charles and Belterra remodeling projects. Excluding land and capitalized interest costs, approximately $56.5 million of the $82 million budget for the River City expansion project and $7.5 million of the $209 million budget for the River Downs redevelopment has been incurred.
  •  Capitalized interest in the 2013 first quarter was $0.4 million versus $5.4 million in the prior year period.





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OIL: Dog Days Ahead?

Brent crude oil is down for the second day in a row as global supply rises. Down -2.5% this morning to $99.85 a barrel, the commodity has crossed below the all-important $100/barrel mark. Considering this is happening on a day where the US dollar is down (dollar down, commodities up and vice versa), when the US dollar catches a bounce and heads back up, oil and gold are likely to take another multi-percentage point hit. Lower oil prices are a boon for the American consumer. No one likes paying high gas prices at the pump.

 

OIL: Dog Days Ahead? - 3mo brentoil


Corn: Taking A Cut

Oil isn't the only commodity having a down day; corn is taking a beating, down nearly -5.8% this morning to $6.40 a bushel. Corn and other agricultural names like wheat and soybeans put in their all-time highs last summer, so with the strong dollar vanquishing the great commodity bubble that was brought forth by the policies of the Federal Reserve, it should come as no surprise that corn is heading lower week-after-week. This is a big plus for our consumption = growth thesis considering how widely used corn is among different food products.

 

Corn: Taking A Cut - CORN6mo


ENR - Big Beat on EPS, But No Flow Through

ENR reported a big beat versus consensus this morning, $1.80 versus $1.27, but oddly didn’t take the opportunity to increase its full-year guidance (remains $6.75 to $7.00).  Odder still, the maintained guidance range includes a higher level of cost savings – to a range of $50 to $60 million from the prior range of $25 to $35 million.  We expect a positive stock reaction given the magnitude of the EPS beat, but that the reaction should be muted given the lack of flow through to full-year EPS and the likely need for negative EPS revisions in 2H.



What we liked:

  • Big beat versus consensus
  • Increased annual cost savings target (to a range of $50-$60 million from $25-$30 million)
  • Increased total project cost savings target to $225 million from $200 million
  • Very good gross (+148 bps) and operating (+398 bps) margin performance
  • A promise to increase advertising and promotion spending in 2H

What we didn’t like:

  • No flow through to full year guidance on huge EPS beat and higher annual cost savings, implying a material reduction to 2H consensus
  • Lackluster (+0.3%) currency neutral sales growth
  • Advertising and promotion expenses declined 8.2% in the quarter after declining 1.7% in Q1
  • Weird revenue guide down in the Personal Care segment (to low single digit increases from prior mid-single digit sales growth), but only reflects 1H weakness, as the company expects 2H sales growth in the 3-5% range – so a call for material improvement in sales trends in this segment
  • Company is still anticipating low single digit sales declines in Household Products, but an odd Q4 2013 call out of weakness

Bottom line, sales trends remain anemic, but cost savings provide substantial income statement flexibility.  The name isn’t particularly expensive on consensus numbers (14.1x calendar ’13) but our issue is that we have a difficult time seeing any opportunity for material EPS growth once cost savings have run their course.   The battery category remains challenging, and beyond that we don’t see the opportunity for sustained growth in the company’s other categories.

 

Call with questions,



Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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P:

 

Matt Hedrick

Senior Analyst




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