prev

PM – Getting Smoked

This note was originally published July 18, 2013 at 12:43 in Consumer Staples

Philip Morris International reported Q2 2013 results this morning and as we expected volumes were heavily impacted, down -3.9% Y/Y, contributing to top and bottom line misses versus consensus. FY 2013 EPS guidance was revised down to $5.43-5.53 versus prior guidance of $5.55-5.65, and FX was a $0.07 headwind to earnings.

 

PM – Getting Smoked - marl

 

CFO Jacek Olczak described today’s results as a “surprise”, despite being foreseen as a challenged quarter. Volumes were down across all four of its regions (EU, EEMA, Asia, and LA), with only Asia outperforming expectations with a result of -3.5%.

 

We think PM will be challenged to meet its full-year guidance, given a weak macro environment, dampened consumer spending across many of its regions, a persistent FX headwind with our #StrongDollar call, and the company’s only main lever against volume declines: taking up price.  

 

Our quantitative levels are flashing bearish across the immediate and intermediate term TRADE and TREND durations.

 

PM – Getting Smoked - hedrick

 

 

What we liked:

  • CFO’s belief that Russia’s excise tax increase will be passed on to consumer and outlook for a reasonable tax environment in 2H
  • Japan - expected FY 2013 volume down only  2% 
  • In the EU, PM cited slight optimism in the reduction of government austerity measures throughout the region as a tailwind for discretionary spending and was optimistic that the region’s volume results, at -5.9% Y/Y this quarter (versus -10.1% last quarter), would improve in 2H

What we didn’t like:

  • Q2 adjusted EPS $1.30 vs consensus $1.41
  • Revenue $7.92B vs consensus $8.17B, and down -4.4% Y/Y
  • Devaluation of the Australian Dollar, Indonesian Rupiah, Mexican Peso, Russian Ruble, and Turkish Lira cost 7 cents to the bottom line
  • EU volume -7% for FY 2013 vs 6.5% previously
  • Russia - impacted by higher excise taxes (9-22%) implemented in the beginning of the year, expect FY 2013 volumes down 6-7%
  • The CFO cited the impact of higher excise taxes in Russia and macro headwinds on discretionary income: Lower wage dynamic, as utilities prices up 10% this quarter (vs 5% last year), with broader inflation running at 7%
  • Turkey - resurgence of illicit trade. Expect FY 2013 volumes down by 7-9%
  • Philippines weak on tax increases

 

Other: On E-cigs


On the Q&A there were a couple questions on E-cigs. CFO Olczak kept his words brief but said that the market is difficult to estimate, and he doesn’t think it is more than 1% of the industry, which itself might be a high estimate. He believes demand and interest overall is much stronger in the U.S. than in Europe and that what’s distinguishing the category is its lower price points versus traditional cigs, and that the taste profiles don’t compare. He cannot size up if the category will be one with staying power, or one that is a fad. Finally, he hinted that PM could get involved in the market in 2016/7.  

 

Matthew Hedrick

Senior Analyst


PENN YOUTUBE

In preparation for PENN's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

POST CONFERENCE CALL FORWARD COMMENTARY

  • [Hollywood St. Louis]  "We're planning to spend roughly $61 million in total to rehab the property. One of the things about purchasing an asset from Harrah's was we recognized that there have been some deferred maintenance and also that the property needed to be refreshed and obviously the slot product needed some updating."
  • "The two next projects are Youngstown and Dayton racetracks. Capital spend, which includes $125 million for license, basically a relocation fee and a gaming license. And so we're looking to $267 million and $257 million of cap spend, which will happen over the course of the next year and a half. We expect to open sometime in 2014." 
  • "Jamul Indian Village project, which will require us to get some financing. We have a backstop financing there from 2010, but we'll be in the market, looking to do a single standalone credit facility for the Indian project in California. Capital spend there is projected at $350 million and obviously you can see that there's no gaming taxes, which is a great thing."
  • "We're going to create a new publicly-traded company, GLPI, which will hold the majority of PENN's real estate, with the majority of the non-real estate holdings being held at Penn National, the existing company. It's a tax-free spinoff of common stock to the PENN shareholders and we will be refinancing all of PENN's existing debt, including the new credit facilities and the subordinated debt, and that hopefully will take place sometime in the fourth quarter."
  • "We're also taking care of the other preferred equityholders by redeeming at par for the preferred stock held by the Centerbridge and that agreement states that it's at par, regardless if PENN shares should happen to be trading north of $67 at the time of the spin, and they still receive par, they're not entitled to any premium or extra earnings in exchange for agreeing to be redeemed at par."
  • "We're going to enter into agreements with PENN's competitors, which I think on a sale leaseback arrangement, at least we expect to, we think that would have been very difficult to try and do something like that with the existing PENN company as an operator. But as a separate REIT, we expect that that will be our primary method for growth."
  • "One of the, probably most significant terms is that if the lease, at the end of any period, if the operator chooses to not renew the lease, there's a requirement that the operator has to basically sell or transfer it's gaming license and gaming equipment to the successor tenant. That was a very important element of the lease, because we wanted to ensure that there was no danger that these facilities would ever be not be able to operate as a gaming facility. We clearly think that's the best use for the property and we didn't want to have that drag on valuation."
  • The fixed base rent component, which has annual escalators subject to a minimum rent coverage of 1.8. There's a 2% rent escalator basically on the replacement cost of building as of 2013. That'll be annual escalator, so long as the rent coverage is better than 1.8.  The fixed rent component for the facilities other than Toledo and Columbus gets reset every five years at 4% of revenues for the trailing five years, so every five years, we'll have a rent reset based on the performance of the properties under the lease. And then Columbus and Toledo are adjusted on a monthly basis at 20% of revenues."
  • "Next steps, we have to finalize the Carlino Group agreement. We need to finalize our financing agreements with our banks. We also have to start the process of refinancing of all of PENN's existing debt and putting in place the bank agreement, as well as the bonds for the transaction going forward. And then we would expect that in the fourth quarter that we'll complete the spin and the E&P purge will happen hopefully in the first quarter of 2014, at which point in time, we'll make our REIT election."
  • "Higher dividend is better, it's basically the mantra. So we will do as many transactions as we can, so long as each transaction improves the dividend per share. And that's really going to be our driving force."
  • "The one that's in the gaming industry that everybody is focused on as being the absolute worst market in the United States right now, I'm not sure if that's true, but it's Atlantic City. So clearly, you could do a transaction in Atlantic City and there would be tons of operators in Atlantic City who'd be thrilled to sell you your property, that would probably be accretive to your dividends in the first year. And then eventually as the continuing trend in Atlantic City develops, if they couldn't pay the rent, oh well, too bad, see you later."

YOUTUBE FROM Q1 CONFERENCE CALL

  • "What we have in the second to the fourth quarter is approximately an incremental $9 million of corporate overhead for Q2-Q4, of which we think about $3.5 million to $4 million is related to development costs and roughly $5.5 million for the stock price movement through March 31.  That expense will go higher because our stock was at roughly $54 at the end of the quarter. And clearly, it's trading higher. So, we will continue to see some additional expenses there.
  • "Looking out for the year, we're expecting maintenance CapEx at $94.3 million, project CapEx of roughly $277 million. That would include total expenditures for Columbus and Toledo, wrapping to be around $36 million." 
  • "And then we've got $13 million for the Hotel at Zia, and then we expect to spend another $47.8 million in St. Louis. And then there's some other stuff kind of floating through that gets us to a total of project CapEx of $277 million for the year."
  • [Revenue trends] "We're actually taking our property level guidance up in the second through fourth quarter versus where we were before by roughly $7.2 million. And as I touched on earlier, we're offsetting that with some expectations around development costs and the stock employee expenses of $9.1 million. So on a full year basis in the second through the fourth quarter, we did take it down a couple of million. But I would characterize that as actual trendline improvement from the property levels, offset by some corporate expenses related to what we're doing in the different jurisdictions."
  • [Ohio] "I think you're going to see another build that will start in the July-August timeframe as we hit the summer months as well. We're still working on marketing activities to continue to expose our new property to customers for the first time, and that's gone very well. Our repeat visitation has been very, very strong; our database growth continues to be very, very strong. So, this is very typical what we've seen in how Penn National opens a property in both Toledo and Columbus."
  • "Most of our data suggests that the weather had a big impact on visitation. We didn't see much change in spend per visit at our core properties year-over-year. Most of the effect was admission trends and visitation trends that I think were either impacted by new competition in our markets or weather-related. It doesn't seem to be any change in consumer spending when they do visit our properties. It's been more of the same, generally flat."
  • "My expectation is once the internet cafes do get contained, we will see improved business volumes, and it's just going to be a wait and see approach on how we address the overall count in the Columbus operation. But I would expect at this point that the 2,500 count that we have there today will get us through 2013."
  • "We continue to have active discussions with partners that are very interested in talking to Penn National about working together for online poker or online gaming, as it advances state-by-state. We continue to see that it's not something that's going to happen at the Federal level in 2013, but we think it will continue to evolve state-by-state. It's very difficult to predict how quickly."
  • "I would continue to characterize overall the promotional activity across these regional markets as fairly stable."

European Banking Monitor: Getting Better

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

---

 

European Financial CDS - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.

 

European Banking Monitor: Getting Better - ww. banks

 

Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.

 

European Banking Monitor: Getting Better - ww. sov 1

 

European Banking Monitor: Getting Better - ww. sov 2

 

European Banking Monitor: Getting Better - ww. sov 3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Getting Better - ww. euriborpng

 

ECB Liquidity Recourse to the Deposit Facility – Deposits fell almost 12 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Getting Better - ww. facility


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....

Takeaway: Numerous callouts on the risk front this week, though mostly to the positive.

Key Takeaways:

While you were focusing on earnings from major banks last week, there were a number of notable developments on the macro risk front. In short, risk continues to fall globally. A client forwarded us this a while back and, frankly, it seems apropos for the moment. You Have to Admit ... 

 

* European Financial CDS - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.

 

* Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.

 

* High Yield (YTM) Monitor – High Yield rates fell 35.1 bps last week, ending the week at 5.96% versus 6.31% the prior week. However, yields remain well above their recent lows of 5.17% on 5/9/13.

 

* Markit MCDX Index Monitor – In spite of Detroit filing for the largest municipal bankruptcy in U.S. history on Friday, Markit MCDX municipal default swaps were narrowly changed, rising a mere 3 bps on the day and actually falling 2 bps week-over-week. #PricedIn

 

* Chinese Steel – Steel prices in China rose 1.2% last week, or 41 yuan/ton, to 3450 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 3.1% downside to TRADE support. #AsymmetricShortTermSetup

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged

 • Intermediate-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 15

 

1. U.S. Financial CDS -  Swaps were sharply tighter last week on the heels of stronger-than-expected earnings that also saw the XLF rise 1.9% (now up 8.1% MoM). GS, MS, BAC and C were the leaders, tightening 13-22 bps on the week. Overall, swaps tightened for 26 out of 27 domestic financial institutions.

 

Tightened the most WoW: GS, BAC, C

Widened the most/ tightened the least WoW: XL, ACE, CB

Tightened the most WoW: MET, PRU, AIG

Widened the most/ tightened the least MoM: AGO, CB, JPM

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 1

 

2. European Financial CDS - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 2

 

3. Asian Financial CDS - Asia tightened across the board last week with Chinese banks leading the way. Chinese banks tightened an average 11 bps WoW, while Indian banks were narrower by an average 7 bps. Japanese banks tightened by 2 bps, on average.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 17

 

4. Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 18

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 3

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 35.1 bps last week, ending the week at 5.96% versus 6.31% the prior week. However, yields remain well above their recent lows of 5.17% on 5/9/13.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.9 points last week, ending at 1804.75.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 6

 

7. TED Spread Monitor – The TED spread rose 0.7 basis points last week, ending the week at 24.17 bps this week versus last week’s print of 23.46 bps.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.4 points, ending the week at -1.6 versus -3.0 the prior week.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits fell almost 12 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 2 bps, ending the week at 93.03 bps versus 95.02 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 11

 

12. Chinese Steel – Steel prices in China rose 1.2% last week, or 41 yuan/ton, to 3450 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 219 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 3.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

High-End Smartphone Boom Ending as Price Drop Hits Apple (via Bloomberg)

China's Gansu province hit by powerful earthquakes (via BBC)

Australia’s Waning Boom Saps Mining Area Housing Demand (via Bloomberg)

 

Morning Reads on Our Radar Screen - earth1

 

Daryl Jones – Macro

Japan's Abe has chance to show true colors after big election win (via Reuters)

Turkey headed for a recession (via Sober Look)

 

Josh Steiner – Financials

Existing home sales take a breather, but prices soar (via Reuters)

Higher Rates Aren't Enough to Stall Housing (via WSJ)

 

Howard Penney – Restaurants

McDonald's outlook weakens on competition in U.S., slower European sales (via Reuters)

CHART: MCD - its only a matter of time before the BLUE line (stock) catches up with the RED line (EPS) (via Hedgeye)

 

Jonathan Casteleyn – Financials

Wall Street Commodity Trading in Jeopardy Amid Fed Review (via Bloomberg)

 

Matt Hedrick – Macro

Portugal’s Coelho Wins Backing From President to Complete Term (via Bloomberg)

 

Jay Van Sciver – Industrials

Lennox International 2nd-Quarter Net Rose 44%; Raises Year View (via WSJ)   

                  

Tom Tobin – Healthcare

Health Insurance Exchange Rates Surprisingly Low (via Health Leaders Media)


MACAU SOFTENS

We are lowering our full month GGR growth projection to 14-19% following a softer week in Macau.  Average daily table revenue for the week was HK$781 million, up only 1% from last year and down 11% from June’s rate.  We are hearing that VIP volumes were sluggish this past week. 

 

MPEL and MGM continue to pace below trend in terms of market share while Galaxy and SGM are trending better.

 

MACAU SOFTENS - h1

 

MACAU SOFTENS - h2


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next