$5 in free cash flow – ‘nuff said.  Umm, not so fast.  There’s a lot more to say.

That is the bull case in a nutshell - $5 in free cash flow per share post deal.  I’ve heard it/read it from the buy side and sell side alike.  In fact, I’d go so far as to say it is consensus.  PNK is a consensus long.  There, I said it.  And why wouldn’t it be?  With the acquisition of Ameristar (ASCA), $5 in free cash flow per share is coming in 2015 for a yield of 25%.


But wait, wasn’t that $5 calculated pre-divestitures?  And if you like PNK with 25% yield, then you must love Boyd Gaming (BYD) at over 25% with less leverage.  Come to think of it, there are a lot of holes in the long PNK thesis.

  • $5 is not sustainable.  PNK maintains $271 million in federal NOLs – which have value but should be valued separately (NPV of over $1 per share) – so the $5 should be tax effected to calculate recurring FCF.  This adjustment results in FCF per share of $4.05 to $4.25.  But…
  • The $5 was calculated before the FTC forced PNK to divest ASCA Lake Charles and Lumiere Place.  Assuming these assets can be sold for 7.0-7.5x EBITDA, the $5 becomes $4.30-4.50.  Tax effected, FCF per share drops to $3.25-$3.45.
  • So $3.35 is not a bad number right?  Well, let’s not forget about leverage and its impact of FCF yield.  More than 6.5x post deal leverage is not sustainable.  Free cash flow will not accrue to equity holders until PNK reduces its leverage to under 4x or 2018 at the earliest.
  • All this FCF accretion and calculations are predicated on the sustainability of this ridiculously low interest rate environment.
  • As a reality check, let’s evaluate the old gaming valuation standby metric of EV/EBITDA.  I calculate a multiple of over 8.0x 2014 EV/EBITDA and 7.5x 2015.  Remember that regional gaming companies have traded within a range of 5.0-8.0x forward 12 months EBITDA.
  • But valuations have been re-rated higher as gamers are viewed through the real estate prism.  PENN’s announced REIT conversion certainly had this impact.  However, we don’t think PNK will reach low enough leverage to pursue a REIT conversion until 2019.
  • The real estate angle notwithstanding, do we really want to put historically high multiples on a business with declining ROICs and falling ROIs on new builds?  The US is already saturated with slots and there is no end in sight in terms of potential for new states legalizing casinos. 
  • At the same time that supply is increasing, demand is waning – and it’s not the economy, stupid!  Domestic casinos face a declining slot customer base.  The data suggests that Baby Boomers are the last of the generational slot players.  I’m Generation X – the Atari generation – and I’m not going to start playing slots when I turn 60.  





Don't Go Chasing Waterfalls

Client Talking Points


An epic 48 hours. Witness the huge move in the US Dollar. The levels in our Hegeye model matter folks. Big time. The USD Index TREND line recaptures (= $81.21) as the Yen (vs USD) TREND line snapped ... fast (96.17). Everything else we call our "Waterfall" model of globally interconnected risk followed that along with ripping 10yr UST rates. Getting the dollar right matters.


Ka-boom! Gold is officially crashing again (down -3.5% this morning and -22.2% YTD). Why? Gold hates US growth expectations rising and the rising bond yields that have been front-running the Bernanke Fed. This morning’s move isn’t new – it’s called capitulation. Meanwhile, oil failing at our $106.22 TREND line is good news for consumption – won’t matter for US stocks until we re-test 1605-1610 support.


It's official. The least obvious short call in 2013 Macro is becoming much more obvious now that every Asian and Latin American Equity Index has snapped our intermediate-term TREND line. Russia and Brazil? Now down -16% and -22% YTD, respectively. #Pain. Let us know if you want to review our #EmergingOutflows slide deck from a few months back. We called this.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


Hedgeye Risk Management reiterates its 6mth old call to have 0% of your assets in Commodities and/or Fixed Income



A real decision is measured by the fact that you've taken a new action. If there's no action, you haven't truly decided.
- Tony Robbins


On August 18, 1913, on an unbiased roulette wheel at Monte Carlo, evens came up 26 times in a row. The probability of this occurring is 1 in 136,823,184. 

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

June 20, 2013

June 20, 2013 - 20



June 20, 2013 - 10yr

June 20, 2013 - spx

June 20, 2013 - dax

June 20, 2013 - dxy

June 20, 2013 - euro



June 20, 2013 - nik

June 20, 2013 - VIX

June 20, 2013 - yen

June 20, 2013 - oil

June 20, 2013 - natgas

June 20, 2013 - gold

June 20, 2013 - copper

Bubbles Pop

“I wonder how much it would take to buy a soap bubble, if there were only one in the world.”

-Mark Twain


The last of the central planning bubbles left in the world is now popping. It’s called the bubble in super sovereign debt.


Everything else that’s imploding this morning was already popping. That’s not new news.


Gold crashing today isn’t new news either. It’s called capitulation.


Back to the Global Macro Grind


Our Waterfall metaphor was right because the big macro factors signaling this move in bonds was measurable. As both the VOLUME (of debt) and VELOCITY (rates rising) started rising at a faster rate, you could see Bernanke’s policy decision approaching the dam.


And no, it wasn’t a sign to buy the damn dip. At least not in Gold or US Treasuries, that is…


I don’t think it’s helpful to give you live quotes and/or pictures of this bifurcation point in Global Macro market history. Neither do I think you need me to rant and/or remind you on why we saw this Waterfall coming. It’s time to tell you what we’d do next.


Most of the time, risk management starts with the what not-to-dos:

  1. Don’t buy Gold, Silver, or Commodities (our asset allocation to those has been 0% for 6 months)
  2. Don’t buy US Treasuries, or Yield Chasing slow growth Equity ideas like Utilities or MLPs
  3. Don’t buy Emerging Markets (#EmergingOutlows is our Q213 Macro Theme)

Once you cross all that stuff off your list, you run out of places to put your money.


So, slowly, from here you can start to buy back:

  1. US Dollars
  2. US Financials levered to a steepening yield curve
  3. US Consumption Equities whose demand curves enjoy #StrongDollar tax cuts

Remember, it’s summer time – and the list of options is narrow – so take your time.


Since US Equities are really the only place we‘d like you to be (for now), here are the key levels to watch:

  1. US Dollar Index intermediate-term TREND support = $81.21
  2. SP500 intermediate-term TREND support = 1583
  3. US Financials (XLF) intermediate-term TREND support = $18.43

Rates rising at an accelerating rate is big risk, primarily because consensus was not positioned for it. Again, going back to our favorite thermodynamic metaphor (VOLUME + VELOCITY of water rising at an exponential rate as you approach the dam), what we have here this morning is a lot of unprepared white water tourists getting really wet.


If you’ve never tried this at home, don’t try Niagra first. Class VI Whitewater Rafting in  West Virginia will get you all the hands on experience you’ll need. When you participate in markets, you have to respect that there are other people (who may not be able to swim) in your raft. And the risk associated with decisions they are forced to make happens fast.


If you have already hedged your Commodities and/or Fixed Income exposures this morning, you are on the shore. So take the time to think through the opportunity that you are staring at downstream:

  1. This point of max entropy (ripping yields) won’t happen every day – that risk is already over the Waterfall
  2. Rising bond yields is a pro-growth signal backed by accelerating 6 month consumption, employment, and housing growth
  3. Steepening curve (bond yields) = wider Yield Spread = bullish for Financials (XLF) that earn an accelerating return on that

I am sure Bernanke is a wonderful father and a nice man. But, folks, he has failed in being able to arrest gravity. He had no business promising people smoothing economic gravity was possible. That was his mistake. That’s his legacy. It’s also yesterday’s news now. The last of his soapy bubbles is finally popping. And there’s no price where he can buy “price stability” in bonds back.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $104.08-106.64, $81.21-82.18, 96.17-98.83, 2.21-2.46%, 14.76-18.98, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bubbles Pop - Chart of the Day


Bubbles Pop - Virtual Portfolio

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