prev

October 31, 2013

October 31, 2013 - Slide1

 

BULLISH TRENDS

October 31, 2013 - Slide2

October 31, 2013 - Slide3

October 31, 2013 - Slide4

October 31, 2013 - Slide5

October 31, 2013 - Slide6

 

BEARISH TRENDS

October 31, 2013 - Slide7

October 31, 2013 - Slide8

October 31, 2013 - Slide9

October 31, 2013 - Slide10

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 31, 2013


As we look at today's setup for the S&P 500, the range is 16 points or 0.47% downside to 1755 and 0.44% upside to 1771.         

                                                                                                                      

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.21 from 2.22
  • VIX closed at 13.65 1 day percent change of 1.79%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: RBC Consumer Outlook Index, Nov. (prior 50.7)
  • 8:30am: Init. Jobless Claims, Oct. 26, est. 338k (prior 350k)
  • 9am: ISM Milwaukee, Oct., est. 53 (prior 55)
  • 9:45am: Chicago Purchasing Mgr, Oct., est. 55 (prior 55.7)
  • 9:45am: Bloomberg Consumer Comfort, Oct. 27
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change

GOVERNMENT:

    • President Obama to speak on private-sector jobs, new business investment at Commerce Dept.’s Select USA Investment Summit
    • NRC, FEMA meet to discuss preliminary draft changes to Emergency Preparedness Criteria
    • 10am: Sen. Banking Cmte hears from Fed-New York’s EVP on revising guarantee for mortgage-backed securities
    • 10:15am: Sen. Foreign Relations Cmte. holds hearing on Syria

WHAT TO WATCH:

  • Facebook to limit ads as younger teens using site less
  • Deficit in U.S. narrows to five-year low on record revenue
  • ECB makes crisis cash lines at central banks permanent backstop
  • Morgan Stanley said to take 30% stake in Mitsubishi UFJ firm
  • Bank of Japan sticks with campaign of record monetary easing
  • Starbucks forecast trails ests. as Asia gains slow
  • Goldman shrinking pay shows Wall Street poised for bonus gloom
  • Citigroup, JPMorgan said to put currency dealers on leave
  • Oracle pay under fire from pension funds before annual meeting
  • Twitter mum on profit has roadshow attendees questioning value
  • Visa profit matches estimates as $5b buyback plan is set
  • Allstate profit slides 57% on loss tied to sale of life unit
  • Metlife misses estimates as insurer incurs costs in Australia

AM EARNS:

    • Advance Auto Parts (AAP) 8:30am, $1.42
    • Alamos Gold (AGI CN) 6am, $0.07
    • Alpha Natural Resources (ANR) 7am, $(0.76) - Preview
    • AmerisourceBergen (ABC) 7am, $0.74 - Preview
    • Avon Products (AVP) 7:01am, $0.19 - Preview
    • Barrick Gold (ABX CN) 6:30am, $0.50 - Preview
    • Beam (BEAM) 7:30am, $0.58
    • Bell Aliant (BA CN) 6am, C$0.42
    • Belo (BLC) 6am, $0.12
    • Bombardier (BBD/B CN) 6am, $0.10
    • Boyd Gaming (BYD) 7am, $0.01
    • Cardinal Health (CAH) 7am, $0.85 - Preview
    • Catamaran (CCT CN) 6am, $0.48
    • Cigna (CI) 6am, $1.62
    • Clorox (CLX) 8:30am, $1.01 - Preview
    • ConocoPhillips (COP) 7am, $1.45 - Preview
    • Discovery Communications (DISCA) 7am, $0.73
    • Enterprise Products (EPD) 6am, $0.69
    • Estee Lauder (EL) 7:30am, $0.73 - Preview
    • Exxon Mobil (XOM) 8:02am, $1.77 - Preview
    • GrafTech International (GTI) 7:04am, $0.02
    • Harman International (HAR) 8am, $0.84
    • Hillshire Brands (HSH) 7:30am, $0.35 - Preview
    • Imperial Oil (IMO CN) 7:55am, C$0.99
    • Incyte (INCY) 7am, $(0.09) - Preview
    • Invesco (IVZ) 7:30am, $0.52
    • Iron Mountain (IRM) 6am, $0.30
    • LKQ (LKQ) 7am, $0.25
    • Magellan Midstream Partners (MMP) 8:02am, $0.59
    • Marathon Petroleum (MPC) 7:14am, $0.63
    • MasterCard (MA) 8am, $6.94
    • MGM Resorts (MGM) 8am, $(0.03) - Preview
    • Mylan (MYL) 7am, $0.79 - Preview
    • New York Times (NYT) 8:30am, $(0.03)
    • NII Holdings (NIHD) 6:30am, $(1.17)
    • NiSource (NI) 6:30am, $0.17
    • Ocwen Financial (OCN) 7:30am, $1.09
    • Perrigo (PRGO) 7:44am, $1.39
    • Pinnacle West (PNW) 8am, $2.17
    • PPL (PPL) 6:57am, $0.68
    • Quanta Services (PWR) 6:07am, $0.45
    • Realty Income (O) 9:15am, $0.61
    • SCANA (SCG) 7:30am, $0.92
    • TECO Energy (TE) 7:30am, $0.33
    • Teradata (TDC) 6:55am, $0.70
    • Teva (TEVA) 7:30am, $1.25
    • Time Warner Cable (TWC) 6am, $1.64 - Preview
    • TransAlta (TA CN) 7:45am, C$0.18
    • Valeant Pharmaceuticals (VRX CN) 6am, $1.41
    • ViroPharma (VPHM) 7:30am, $0.15
    • Western Refining (WNR) 6am, $0.50

PM EARNS:

    • American International Group (AIG) 4pm, $0.96
    • Apartment Investment & Management (AIV) 4:05pm, $0.50
    • Camden Property Trust (CPT) 4:17pm, $1.02
    • DCT Industrial Trust (DCT) 4:10pm, $0.11
    • Fairfax Financial (FFH CN) 5:02pm, $4.26
    • First Solar (FSLR) 4:02pm, $0.95 - Preview
    • Fluor (FLR) 4:05pm, $1.03
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.23
    • Mohawk Industries (MHK) 4:01pm, $1.90
    • MRC Global (MRC) 4:01pm, $0.45
    • Newmont Mining (NEM) 4:43pm, $0.32 - Preview
    • Northeast Utilities (NU) 4:15pm, $0.73
    • Omega Healthcare  (OHI) 6pm, $0.62
    • ON Semiconductor (ONNN) 4:05pm, $0.16
    • Piedmont Office Realty Trust (PDM) 5:02pm, $0.35
    • Public Storage (PSA) 5:05pm, $1.89
    • Republic Services (RSG) 4:10pm, $0.49
    • Southwestern Energy (SWN) 4:30pm, $0.50
    • Standard Pacific (SPF) 4:02pm, $0.12
    • Trimble Navigation (TRMB) 4:05pm, $0.36
    • Western Forest Products (WEF CN) Aft-mkt, C$0.04

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Crude Trades Near Four-Month Low as U.S. Stockpiles Climb
  • Oil Gambit Helps India Mining Billionaire Lead Rio: Commodities
  • Palm Oil Has Biggest Monthly Gain in Three Years as Supply Drops
  • Gold Extends Decline as Fed Sees Growth While Keeping Stimulus
  • Copper Heads for First Monthly Drop in Four on Taper Speculation
  • Cocoa Pares Fourth Monthly Gain as Demand for Halloween Is Over
  • Rebar Posts Monthly Loss on China’s Weak Winter Demand Outlook
  • Wheat Declines to Four-Week Low as India Seen Boosting Shipments
  • Barrick to Stop Pascua-Lama Mine Construction to Conserve Cash
  • Exchange Failure Prompts Commodity Bourse Audit: Corporate India
  • West African Oil Surge to Asia Seen Threatened: Energy Markets
  • Singapore Challenged as LNG Hub by Trading Delay: Southeast Asia
  • Copper 2014 Forecasts Slump to Low on Supply Additions: BI Chart
  • Glencore Xstrata Says Third-Quarter Copper Output Gains 34%

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 



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.

BYI CONF CALL NOTES

Solid quarter driven by systems (how much was recurring?) but cracks emerging in gaming ops and product sales.

 

 

CONF CALL NOTES

  • Game sales: 3,213 in NA of which 2,182 units were replacements 
  • International sales were down partly due to importation restrictions into Argentina offset by increased sales in Mexico
  • ASP continued to be impacted by lower priced VGT units and mix to lower price jurisdictions internationally like Mexico
  • Gaming operations: NY lottery market was very strong 
  • Centrally determined system units declined due to removal of certain licensed fees in Mexico
  • Systems:  was slightly ahead of their expectations. 
  • Expect Systems margin of 75% for full year 2014
  • Effective income tax rate was lower due to a settlement with the IRS from an audit of their financials of 2006-2009
  • Received an additional 27k shares as part of their ABB program
  • MJ - want to be starting something and Jackpot Empire were released in the first Q
  • Based on their current release schedule, they do not expect their WAP install base to grow QoQ in 2Q but do expect growth to resume in 2H14
  • Lots of rave reviews around ProWAVE cabinet.  It will start shipping in early 2014. They believe that the fact that most of their game library will be available on day 1 will be huge for them.
  • Expect systems revenue to grow at least 10% YoY in FY14
  • Super Slot Line product drastically reduces the cost of upgrading casino floors. This will allow them to sell a lot more of their system applications.
  • Interactive - continue to expand their presence in Europe.  Both as a content and technology provider they are well positioned in the US. Expect to go live in NJ & NV.
  • They will be able to offer their customers a single view of their customer - which is a key point of differentiation for them
  • Have received gaming approvals in 14 of the 20 jurisdications needed for closing
  • Kevin's assumption of the acquisition integration frees up management to focus on running their business
  • 1Q results came in slightly ahead of their expectations. Now expect that quarterly diluted EPS will now be more equally weighted across the remaining Q's.
  • Their guidance does not include the 9 cent favorable tax settlement with the IRS in this first Q
  • They are confident that they will see meaningful growth resume in their gaming operations business in the 2H14

Q&A

  • Customer feedback from the ProWAVE cabinet and they expect to see sales in F3Q.  They don't think that ASPs will increase greatly when they release the cabinet.  They don't expect margins to be impacted by the new cabinet - they are just charging a higher ASP so they don't expect a hit.
  • Flat to slow growth in gaming operations install base - not a decline
  • International game sales fell short of expectations. It's not where they want to be. They have been working hard to developing game content that appeals to international jurisdictions. Feel like that effort is beginning to bear fruit but they are not yet there...content is getting better so sales should follow. Hoped that they would be getting a few more games into Argentina but that didn't happen. Believe that SHFL will help them
  • Updates on synergy guidance - early close will save them about $18MM of expenses. Still think it will be at least $30MM.
  • Thinks that WAP yields will continue to improve. They are positive about the yield improvements in the future
  • Takeaway from G2E was that they need to stay on their toes with R&D and innovation
  • Haven't seen any real competitive pressures in the Q. Expect 2Q to be equal or greater than Q1. Still feel like they are getting more than their fair share of the IL market.
  • NASCAR took yields down a touch this Q
  • Game sale ASPs - domestically, prices are more or less holding up the same as before. Given that NA sales aren't a huge part of their business, they have been able to maintain price more so than competitors.  ASPs were hurt by more sales to Mexico in the Q.
  • Regulatory changes in Mexico - don't believe that that will have an impact on them. Most of the changes are really attacking grey area single machine locations and skill based games.
  • Biggest drop was more of conversion to sale of non-premium games. With regards to their premium footprint it remains quite healthy. 
  • They are investing a lot more R&D in the WAP and daily fee segment going forward. Pawn Stars is doing great. Have a lot of good content coming in the premium daily fee segment.

 

HIGHLIGHTS FROM THE RELEASE

  • The Company increased its fiscal 2014 guidance for Diluted EPS to a range of $3.80 to $4.10 and now expects that quarterly Diluted EPS will be fairly equally weighted during fiscal 2014. This guidance does not reflect the impact of the planned acquisition of SHFL entertainment or any acquisition-related costs or savings or the effect of the favorable tax settlement realized during the first quarter of fiscal 2014.
  • The acquisition is expected to close prior to the end of this calendar year. The completion of the SHFL entertainment acquisition remains subject to SHFL shareholder approval, the approval of certain gaming regulatory authorities, and other customary closing conditions.
  • "We showcased seven new wide-area progressive (“WAP”) titles at last month’s Global Gaming Expo (“G2E”), up from three new titles shown last year, reflecting our escalating R&D commitment to our gaming operations footprint. Customer response to our new WAP, premium, and for-sale content, as well as to our new Pro Wave cabinet, which was one of the stars of the show, was very encouraging.”
  • “Operating margins increased to 25 percent when excluding costs related to the planned acquisition of SHFL entertainment, which marks our highest quarterly level in more than three years"
  • “Revenues that are recurring in nature were a quarterly record and represented 57 percent of total revenues driven by a first-quarter record in WAP revenue and quarterly records in systems maintenance and services revenues."
  • "During August, we amended our existing credit facility and successfully syndicated our new $1.1 billion Term Loan B with an all-in yield of 4.375 percent. The planned acquisition of SHFL entertainment will be funded with proceeds from the Term Loan B and excess capacity on our existing Revolving Credit Facility, which had $505 million undrawn as of September 30, 2013.”
  • Gaming equipment: 3,995 new units / ASP: $16,307
    • 20% international 
    • 456 IL VLTs
    • ASP of new gaming devices decreased 3 percent to $16,307 per unit from $16,853 last year, primarily as a result of lower ASP’s in certain international jurisdictions
    • Gross margin increased to 50% from 47% last year, due to continued cost reductions on the Pro Series line of cabinets and sales mix.
  • Gaming operations: Gross margin increased to 70% from 69% last year, primarily due to lower jackpot expense
  • Systems: 
    • Maintenance revenues of $25MM. 
    • Gross margin decreased to 75%, primarily as a result of the change in product mix. Specifically, hardware sales were 30% of systems revenues, and software and service sales were 37%, as compared to 26% for hardware and 34% for software and services in the same period last year.
  • SG&A increased to 29% of total revenues as compared with 27% last year, primarily driven by $5 million of costs associated with the planned acquisition of SHFL entertainment.
  • In connection with the pending acquisition of SHFL entertainment, the Company incurred professional and other fees totaling approximately $5.2 million during the first quarter of fiscal 2014, with additional acquisition-related fees and expenses anticipated to be incurred throughout the balance of fiscal 2014.

$DRI: PENDING DISASTER FOR DARDEN?

Takeaway: Current street estimates remain disconnected from reality.

Editor's note: Hedgeye Restaurants Sector Head Howard Penney continues to bang the "Dismantle Darden Drum." Here is a complimentary excerpt from his latest research note and a link to video interview.

 

$DRI: PENDING DISASTER FOR DARDEN? - HIND

 

We believe we’ve been very clear on how this will end for Darden (DRI), we just don’t know the timing.  As analysts, trying to advocate for significant change, the biggest issue we need to deal with in the immediate-term is business trends.  We can summarize the current trends in two words – not well!

 

The being said, the FY2Q114 earnings call will be the most important call of CEO Clarence Otis’ career.  His ability, or inability, to handle the current pressure should help shed light on the timing of future events.

 

On some level, we believe the case for significant change at Darden could be strengthened on December 20th, when the company reports FY2Q14 results.  In our view, current street estimates remain disconnected from reality.  The current estimate for DRI's FY2Q14 is $0.22 and we believe that $0.12 - $0.15 is a better number.  

 

Below, we share incremental thoughts on DRI’s fundamentals.

  • The 2nd quarter is traditionally the lowest for the company, seasonally.
  • Seafood inflation will accelerate meaningfully q/q and will continue for the balance of the year.
  • Same-restaurant sales trends have been disappointing so far.
  • DRI has not introduced any new promotional items and still has the promotional items that have not been working.
  • There is no cohesive plan to fix the crown jewel – Olive Garden.

>> CLICK HERE FOR INTERVIEW WITH HOWARD PENNEY ON DARDEN <<


DRI: PENDING FY2Q14 DISASTER?

We believe we’ve been very clear on how this will end for DRI, we just don’t know the timing.  As analysts, trying to advocate for significant change, the biggest issue we need to deal with in the immediate-term is business trends.  We can summarize the current trends in two words – not well!


The being said, the FY2Q114 earnings call will be the most important call of CEO Clarence Otis’ career.  His ability, or inability, to handle the current pressure should help shed light on the timing of future events.

 

On some level, we believe the case for significant change at Darden could be strengthened on December 20th, when the company reports FY2Q14 results.  In our view, current street estimates remain disconnected from reality.  The current estimate for DRI's FY2Q14 is $0.22 and we believe that $0.12 - $0.15 is a better number.  

 

Below, we share incremental thoughts on DRI’s fundamentals.

  • The 2nd quarter is traditionally the lowest for the company, seasonally.
  • Seafood inflation will accelerate meaningfully q/q and will continue for the balance of the year.
  • Same-restaurant sales trends have been disappointing so far.
  • DRI has not introduced any new promotional items and still has the promotional items that have not been working.
  • There is no cohesive plan to fix the crown jewel – Olive Garden.

 

Sales Trends


For the year, Darden is still guiding to sales growth of +6-8% and blended same-restaurant sales growth for the Big 3 to be +0-2% -- this is after the company reported -2.3% blended same-restaurant sales growth in FY1Q14.  The current consensus estimate for blended same-restaurant sales growth in FY2Q14 is +0.6%.  Given anemic casual dining trends and DRI’s lack of a cohesive strategy to fix the core business, we believe these estimates may be off by 1-2%.

 

DRI: PENDING FY2Q14 DISASTER? - OG

DRI: PENDING FY2Q14 DISASTER? - RL

DRI: PENDING FY2Q14 DISASTER? - LH

 

 

Food Costs – Seafood Inflation Acceleration

Management Commentary on the FY4Q13 Earnings Call – June 2013

“In terms of specific food categories and items, total seafood prices for fiscal 2014 are expected to be higher than fiscal 2013, because of the shrimp supply disruptions.”

 

Management Commentary on the FY1Q14 Earnings Call – September 2013

“Seafood inflation was normal in [FY1Q14], but we now expect double-digit inflation in the second, third, and fourth quarters, primarily related to the shrimp production issues in Asia.  The source of the problem has been identified, but getting solutions in place is taking a little longer than we expected when we spoke to you in June.”

 

As you can see, management was not prepared for the spike in shrimp costs back in June.  Fast forward to September, and management finally realized there is going to be a significant increase in shrimp costs.  Red Lobster is currently promoting Endless Shrimp Tuesday’s, which is very likely to pressure margins in the quarter.

 

DRI: PENDING FY2Q14 DISASTER? - FOOD COSTS

 

 

Labor Cost Deleverage


Current consensus estimates are for labor costs to increase +30 bps y/y in the quarter, after increasing over +100 bps y/y in each of the last three quarters.  In FY1Q14, restaurant labor expenses were +100 bps higher due to lower average wage inflation, reduced productivity and sales deleverage at Olive Garden and Red Lobster.  Given the current sales trends, we do not see how the trends in FY2Q14 are going to improve sequentially.

 

DRI: PENDING FY2Q14 DISASTER? - labor costs

 

 

Other Expenses


Other restaurant expenses have been up significantly (+100 bps on average) for the past four quarters, due to the acquisition of Yard House and other reasons.  Currently, street estimates are for other expenses to increase +10 bps y/y in FY2Q14.  In our opinion, this estimate does not fully account for a large enough impact from sales deleveraging at Olive Garden and Red Lobster.

 

DRI: PENDING FY2Q14 DISASTER? - other expenses

 

 

G&A – The Wild Card


In an effort to cut some fat from the company cost structure, we are expecting to see approximately a $7 million (net) expense associated with G&A cuts in FY2Q14.

 

 

 

Howard Penney

Managing Director

 

 

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next