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PNK 3Q REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL: 

  • WORSE - PNK missed our Street low adjusted EBITDA estimate as trends deteriorated in September. 

 

ASCA SYNERGIES

  • BETTER:  Mgmt said they are even more confident that they will realize more than the targeted $40MM in synergies than they were last quarter
  • PREVIOUSLY:  
    • We still believe that we are going to be able to not only meet the goal of $40 million in synergies, but we believe that, from what we've had exposure to up to this point, we're going to be able to exceed that.
    • There is a large portion of that that is entirely driven by combination of public company costs, i.e., one board, one set of financials, as well as integrating the teams in effectively, mostly down in Las Vegas. We have done an enormous amount of work on this, and while there is some effect on the margin by virtue of Lumiere, the reality is that the scale of the company and our ability to realize savings through better procurements, a better marketing program that will look to do best practices, really remains largely unchanged.

CUSTOMER TRENDS

  • WORSE:  Operating environment continues to be challenging.  September was a disaster and was the prime contributor to the big earnings miss.  However, revenues in October have been sequentially better.
  • PREVIOUSLY:  
    • In terms of guest behavior, in the second quarter, we saw trips decline at a greater rate than spend per trip. Meaning that people came less often, but their spend per trip was pretty much in line with historical levels.
      • Midwest it is a little bit more pronounced than down South, but nonetheless it's softness that we're seeing pretty much across the portfolio.
      • The impact has been more pronounced at the lower tiers

L'AUBERGE BATON ROUGE

  • SAME:  The property continues to grow the market with the hotel producing the 2nd highest REVPAR at the company.  Mgmt believes the market remains underpenetrated. 
  • PREVIOUSLY:  We continue to see strong guest acquisition and growing loyalty among our guests. Repeat visitation is very strong, with over 55% of our guests returning for multiple trips. The hotel continues to be a good story, with occupancy now in the mid-90s consistently. And our regional high end business continues to grow every month, although at a lower pace than we had originally anticipated.

L'AUBERGE LAKE CHARLES RENOVATION

  • SAME:  PNK has completed the renovation of their standard hotel rooms and have received very favorable guest feedback. 
  • PREVIOUSLY:  The second phase of the renovation will begin this fall after the busy summer season.

HORSESHOE CINCINNATI IMPACT

  • WORSE:  While mgmt seems optimistic on Belterra's ability to withstand the Cincinnati competition, we would note that their 3Q gaming revs fell 15% and the promotional environment remains fierce.
  • PREVIOUSLY:  The impact of Horseshoe Cincinnati has been less than anticipated so far.

BOOMTOWN NEW ORLEANS

  • SAME:  The additional guestrooms have helped the property.  Mgmt sees more upside ahead. 
  • PREVIOUSLY:  Finally, in New Orleans, we continue to see an improvement in the operating performance of this property

RIVER DOWNS

  • SAME:  The project budget remains $209 million, excluding license fees, original acquisition costs, and capitalized interest, and is scheduled to open in May 2014.
  • PREVIOUSLY:  The facility is well underway and we're excited about bringing the property into our portfolio in the second quarter of 2014.

CORPORATE EXPENSE RUN RATE

  • MIXED:  While mgmt said on an apples-to-apples basis, corporate expense fell $4MM YoY, it is not entirely clear.  The accounting change made comparisons difficult.
  • PREVIOUSLY:  
    • We've been running right around $5 million or so, call it mid-$5 millions on the current set of portfolio, and that's the set we have that clearly we're working through that as it relates to the combined company.
    • So while I don't expect if we were to, without the acquisition, that that number will change in any material way in that $5 million to $5.5 million per quarter, certainly we'll recalibrate that and give you some parameters once we complete the acquisition.

FNP: 3-Bagger. Add on Weakness

Takeaway: We think FNP is a 3-bagger, but it won't get there tomorrow. Our thoughts ahead of the print.

Even after the big move we still think that FNP is a BIG idea, with 3x upside over a 3-4-year time period. That said, we’re neither here nor there on tomorrow’s print. Here’s our thinking into tomorrow…

  • FNP remains one of our favorite TAIL ideas, as we think that 1-2 years out the stock starts with a 4 (versus $27.66 today).
  • But we don’t feel strongly about it one way or another headed into tomorrow’s print.
  • This company gives guidance based on what it thinks it can hit, not on what it can beat. Our point is that if we want to get sucked-in to the game of ‘beat by a penny/miss by a penny’, this can literally go either way.
  • There’s not likely to be an announcement on the sale of Lucky or Adelington with the release, though we’ll likely get added color on terms surrounding the previously announced sale of Juicy. All in, don’t expect any thesis-shifting strategic announcements.
  • Our bigger picture call is simple. Kate Spade (which accounts for all of FNP’s EBIT) is going from $700mm in revenue at a 12% EBIT margin (with leverage), to $3-4bn in revenue at a debt-free 20% margin. We think people have the revenue trajectory partially correct, but they’re still way too low on the margin. In the end, consolidated EBIT will go from break-even (currently hurt by divisions that are on the block) to $800mm. The stock is expensive on earnings today, but is trading at 3.4x its $900mm EBITDA number.
  • The punchline on this name is that an 8x EBITDA multiple on our $900mm EBITDA number gets us to a stock of about $75 vs the current $27.66. It won’t happen overnight, as we all know stock moves aren’t linear, but will grind higher quarter after quarter, year after year.  
  • This has been and will continue to be the perennial ‘I missed it’ stock for investors, who subsequently watch it go up another 25% in their face.

PNK 3Q 2013 CONFERENCE CALL NOTES

Muddy quarter but a big underlying miss. October was better in regional gaming land, however.

 

 

"Overall, operating trends were generally soft during the 2013 third quarter. The revenue environment was challenging across all of the Company's key markets due primarily to macroeconomic weakness, and in some isolated instances, an increase in the number of competing gaming facilities. In response to this, we began making adjustments to operating and marketing expense levels of our properties in the third quarter, and will address any persistent revenue softness with continued expense reductions over time. Beyond these normal course operating and marketing expense refinements, the Company expects synergies and cost efficiencies from the acquisition and integration of the operations of Ameristar to provide additional support and to offset the impact of revenue softness on the cash flow produced by our properties."

 

-Carlos Ruisanchez, President and Chief Financial Officer of Pinnacle Entertainment

 

 

CONF CALL

  • Operating environment challenging
  • Since close of transaction, paid $71MM of term loans
  • $20MM synergies:  public company costs, labor (moving to select leadership teams for combined company) and scale efficiencies
    • Marketing/healthcare efficiencies to come
    • Still believe they will exceed synergy target of $40MM
  • Trends:  October was better than September (it could be as good as July)
  • Will roll out of combined Discovery loyalty program in Q2 2014 
  • L'Auberge Lake Charles table drop, table rev and retail rev hit records; hotel did well 
  • St. Louis:  River City significantly outperformed the market; new hotel opened in August 28.  37% increase in guest satisfication.
  • Indiana/Southern markets:  increased competition.  Adjusting marketing spend to reflect current business conditions.
  • L'Auberge Baton Rouge:  growing the market, 53.4% market share (highest since opening); hotel demand remains high (property producing the 2nd highest REVPAR at combined company)

Q & A

  • Corporate expenses:  apples-to-apples basis down $4MM YoY
  • 16th straight quarterly REVPAR improvement in PNK
  • Business fairly in great shape
  • Saw softness in August and September; spend (including marketing) will adjust to current business conditions
  • Focused on profitability, not market share 
  • 4Q:  synergies - consolidating marketing program 
  • Remaining $20MM of synergies:  will be achieved without any revenue; more positive on the synergies than a quarter ago
  • Baton Rouge margins:  20%
  • Bossier City been impacted by Margaritaville and Oklahoma; Margaritaville has not grown the market
  • Feel very good about New Orleans; continuing to build a hotel there
  • Baton Rouge:  guest satisfication high; market remains underpenetrated
  • Very bullish on Lake Charles market
  • Revenue synergy opportunities:  1) putting PNK's hotel yield automated system in ASCA portfolio 2) combining myChoice program next Spring 3) legacy PNK has established marketing infrastructure and will leverage it.
  • Ohio internet cafes have stopped operating
  • River Downs: will open with 1,600 VLTs 
  • Belterra: has held up very well.  Has mitigated competition from Cincinnati.
  • Leverage goal: 3.5x-4.0x
  • Cash flow of combined firm should continue to grow
  • Colorado floods in September impact on ASCA Black Hawk:  not meaningful
  • Expect Landry to get Lake Charles license by end of year 
  • Would like $100-110MM in cage cash
  • Depreciation run rate: +/- $50MM off of the $200MM number in a previous quarter
  • Capitalized interest guidance:  couple of $MMs - Lake Charles, Belterra Park (minimal cap interest), and stopped capitalizing interest in River Downs

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Record Domestic Equity Inflow

Takeaway: Domestic equity funds put up a record weekly inflow last week above the prior record from the first week of '13 and also higher than 2007

This note was originally published October 31, 2013 at 11:02 in Financials

Record Domestic Equity Inflow - cashcircle

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual fund flow broke to near all-time highs for the week ending October 23rd with a $13.5 billion total inflow into both domestic and world equity funds. Domestic equity mutual fund flow of $9.1 billion last week was an all-time record for U.S. stock funds in any 5 day period and eclisped the prior weekly record of $7.7 billion from the first week of 2013.  As a result, total equity mutual fund trends in 2013 now tally a $2.8 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow.

 

Fixed income mutual funds conversely continue to have persistent outflows. This week's tally, although a sequential improvement, measured another $2.3 billion withdrawn from bond funds which has pushed the 2013's weekly average fund flow to a negative $719 million. This compares to very strong trends which marked last year when bond mutual funds averaged a $5.8 billion weekly inflow.

 

ETFs also experienced strong subscriptions last week, with inflows in both equity and fixed income products. Passive equity products experienced inflows of $13.0 billion for the 5 day period ending October 23rd with bond ETFs contributing $1.3 billion during the same time period. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results.

 

Record Domestic Equity Inflow - cast1

 

For the week ending October 23rd, the Investment Company Institute reported the second strongest weekly inflow into both domestic and world stock products in the history of the data set of $13.5 billion. The only other larger weekly inflow for total equities was during the first week of 2013 where $14.3 billion came into both fund classes. The domestic equity result of a $9.1 billion inflow was the largest U.S. weekly stock fund in history, larger than the prior record of $7.7 billion in the first week of the year and over 2.5x the best week in 2007. World stock fund inflows totaled $4.3 billion last week, the best 5 day result since the beginning of February 2013 and resulting in now 25 consecutive weeks of foreign stock fund flow. Including this week's new record high in domestic stock fund flows, the year-to-date weekly average for 2013 for all equity mutual funds has moved to a $2.8 billion inflow, a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds continued their weak trends for the 5 day period ended October 23rd with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $2.3 billion outflow, a sequential improvement from the $5.7 billion lost in the 5 day period prior, but still exhibiting weak trends. Both categories of fixed income contributed to outflows with taxable bonds having outflows of $1.3 billion, which joined a $1.0 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 16 of the past 21 weeks and municipal bonds have had 21 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $719 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

 

 

Record Domestic Equity Inflow - ICI 2

Record Domestic Equity Inflow - ICI 3

Record Domestic Equity Inflow - ICI 4

Record Domestic Equity Inflow - ICI 5

Record Domestic Equity Inflow - ICI 6

 

 

Passive Products:

 

 

Exchange traded funds mirrored the trends in mutual funds with a strong result from equity ETFs and a weak performance from fixed income passives. Equity ETFs posted a $13.0 billion inflow, the third largest weekly inflow for equity ETFs all year. The 2013 weekly average for stock ETFs is now averaging a $3.3 billion weekly inflow, a 50% improvement from last year's $2.2 billion weekly average inflow.

 

Bond ETFs managed an inflow for the 5 day period ending October 23rd with a $1.3 billion subscription, breaking a trend of 3 consecutive weeks of passive bond outflows, but hardly a robust number. Despite this slight net new subscription in bond ETFs, 2013 averages are flagging with just a $275 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

 

 

Record Domestic Equity Inflow - ICI 7

Record Domestic Equity Inflow - ICI 8

 

***Contact sales@hedgeye.com for more information.

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


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