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




  • WORSE:  Despite management's effort to focus the call on what they accomplished in FY2013 it was hard to mask the fact that there wasn't much to be "extremely pleased about" in FQ4 or guidance.



  • SLIGHTLY WORSE:  Results missed expectations, but part of the miss was due to some non-recurring issues related to temporary delays in payment processing on Facebook and some disruptions related to the rollout of Apple's iOS7 platform.  Trends in October were at record levels.  IGT continues to expect DD to finally be GAAP accretive in F1Q 2014. 
    • We are pleased with our success at DoubleDown and we expect that the transaction will be accretive on a GAAP basis in the first quarter of fiscal 2014.
    • I think those (new) markets will develop perhaps a little bit slower than we thought, though my comment last period was in anticipation of multiple quarters. As we enter new markets, we do expect that there may be some downward pressure on ARPU as DAU picks up, and we did see a pickup in DAU. I think the positive surprise for us this quarter is that it didn't damage ARPU, and actually we're seeing incredibly strong conversion rates continue in our domestic markets.  Over time, I still expect that there may be some pressure on that ARPU number as we further penetrate the international markets, but we didn't see that materialize in this quarter which was a great surprise.


  • LITTLE WORSE:  Yields and installed base both declined 4% YoY.  IGT touted a QoQ increase in yields, although part of the lift was due to the conversion of lower yielding leased games and normal seasonality.  Gross margins were better though and capex remained disciplined.  Gaming ops margins and yields for 2014 are expected to be in-line with 2013.  
    • PREVIOUSLY: Gaming operations capital expenditures are expected to decrease year-over-year as we remain focused on disciplined capital deployment. 
    • We are striving to improve yields through a variety of initiatives.
    • We're holding up on margins which again is what we were focused on


  • BETTER:  Captured 40% share in Canadian/Illnois VLT market and increased North American ship share in FQ4. Although gains came at the price of lower ASPs and margins. IGT shipped over 4,700 units Video Poker units to CZR this Q
  • PREVIOUSLY:  We are confident that we maintained our industry-leading ship share in the replacement market this quarter.


  • IN LINE:  For the first time in 4 quarters unit sales were actually up YoY.  That said, they likely got a lift from some leased games converting to sale 
  • PREVIOUSLY:  I think we are starting to see some signs of improvement.  Despite ongoing challenges in certain regions, there is still significant potential in our international business as we leverage our investments in localized content and infrastructure improvements.



  • SAME:  Revenues increased 29% YoY primarily due to an expansion of our on-line desktop and mobile partners excluding the impact of our former European on-line pokeer network and a one-time bad adjustment in the prior year.  In 2014, they expect modest growth at IGTi as they launch on-line casino style wagering in US.
  • PREVIOUSLY:  We continued momentum in this business, both in our existing markets where we attracted 15 new partners since a year ago and are excited about new markets like New Jersey, where our prospects to partner with some of our land-based customers, we're working on now.


  • SAME:  Has entered into $200MM accelerated share repurchase agreement.
  • PREVIOUSLY:  We have about $520 million remaining on our board-authorized repurchase. We continue to target using that authorization over the next two to four years, which is consistent with what we've said in the past.


  • SAME:  Expect "modest" pick up excluding Canada & IL. Hoping that the CZR's deal will be a catalyst for video poker demand
  • PREVIOUSLY: We haven't really seen a significant change in the tenor of those conversations.  The volume has not picked up as far as the volume of the voice from the customer on concern about their budget. So I would say the volume is there. The people we're hearing from are different than they were a year ago or different than they probably even were a quarter ago.


Conference call didn't provide much comfort.  2014/2015 headwinds remain



"We are extremely pleased to report our fiscal year 2013 financial results. We continue to drive significant revenue and earnings per share growth through the successful execution of our strategy and disciplined approach to capital allocation.  Our goal, as always, is to maximize our returns to shareholders through targeted share repurchases, consistent dividends and robust earnings growth." 


- Patti Hart, CEO of IGT




  • Systems revenues were up 39% YoY for the year
  • Excited about the momentum in game sales
  • 2014 product line up created a lot of interest at G2E
  • Expect modest growth in product sales in 2014, excluding Canada and IL.  Anticipate stable gross margins as higher ASPs offset lower non-machine revenue.
  • Increased cash flow through lower capital expenditures in gaming operations
  • Install base was partly down due to a conversion to sale of lease games
  • 2014 Gaming operations: expect margins, yields, capital expenditures and install base to be in line with 2013 results
  • 4Q  results in DD: temporary delays and some disruptions with the rollout of OIS 7. Despite this, DD was still the top grossing app in August.  October was also a record month for them as they rolled out a new Monopoly game.  They expect that the acquisition will be GAAP accretive by 1Q14.
  • IGTi: expect modest growth as they continue to launch casino style wagering in the US
  • Expect SG&A in 2014 to return to a normalized range of 19-20% of revenue and R&D to return to 10-11% of revenue
  • Argentina was also a 1 cent impact per share
  • Expect to take out the convertible notes due in May with R/C capacity and the proceeds of their notes issuance
  • 2014: weighted average share count of 250-255MM
  • Remain focused on disciplined capital investment
  • It's all about content for them, expanding and managing their distribution network, and maximizing value by generating cash flow and returning cash flow



  • 1,500 Canadian units shipped this Q and about the same in IL
  • Expect modest growth in the game sales market excluding IL & Canada for 2014
  • On a mix adjusted basis, ASPs were relatively flat.  Not seeing any unusual promotional activities.
  • Lost 1-2 cents in SG&A which was one time, lost a penny in bad debt and lost a penny on FX. 
  • Gaming operations install base: Some leased units converted to sales. Had some closures in the Mexican market. Pleased with the QoQ increase in yields.
  • They shipped about 2/3rds of the Video Poker units to CZR. The shipment to CZR was the first major replacement of video poker that they have seen in a while. This will pressure ASPs.
  • Going forward they expect margins to return to more normal levels in 2014 in product sales. Feel like the CZR replacement of their video poker machines will be a catalyst for more replacement of the VP install base
  • Guidance includes share reduction as a result of the ASR
  • International yields were up
    • I'm sure as a result of the conversion of the leased units to sales and the closure of the Mexican locations
  • September was a 1 month anomaly where they had to adjust for temporary delays in payment processing on Facebook. October was a very good indication of that rebound - record bookings, record new and revised players, and launched their most successful game. 
  • Expect to see flat to slightly (1-2%) increase in US GGR. 
  • Think that the year will be back end weighted
  • Feel like they are in process of becoming a much bigger/strategic phase of DD's life
  • Facebook platform revenue down slightly, but mobile was up 11%
  • Saw growth in their European real wagering 
  • Monetization is lower in Europe, as expected. It hasn't materially impacted their overall results, though. 
  • Most of the lease conversions are opportunistic. It's very hard to predict since it's contingent on customer liquidity.

Get Long The British Pound

Long GBP/USD (via the etf FXB)


Our bullish call on the British Pound vs the US Dollar was strengthen this morning with the ECB unexpectedly cutting its main interest rate by 25bps to 0.25%.  In our minds, it’s now anyone’s guess how the central bank currency wars between the USD and EUR will play out.  However, anchored on our Q4 2013 Macro theme of #EuroBulls (presented on 10/11/13), we continue to like British Sterling.


The Bank of England was also out this morning and announced no change to its interest rate (anchored at 0.5% since March 2009) and kept its asset purchase program target (QE) unchanged at £375B. 


Here are the main factors underpinning our bullish GBP/USD Call:

  • Regime:  we are bullish on the regime change at the BOE, replacing Mervyn King with Mark Carney – we believe Carney has fresh ideas and a focus to use forward guidance to direct the economy to stable growth
  • Fiscal Policy:  we expect (and are already seeing signs of) the country’s decision to issue austerity before its regional peers during the global recession as paying off in spades via accelerated growth over its European peers. We’ve seen steady improvement in the country’s deficit (as a % of GDP), from -11.4% in 2009 to -6.1% last year and is forecast to hit -4.4% in 2014
  • Monetary Policy:  we do not expect rate cuts or additional QE over the medium term. In the last policy meeting (October), the BOE voted (9-0) to keep rates on hold and the asset purchase program unchanged
  • Economic Data:  we believe that the health of an economy is reflected in its currency – the data suggests continued improvement (more below) which should bolster the GBP versus major currencies
  • Vs the USD:  we see a very favorable comparison versus the U.S. Dollar as Bernanke/Yellen burn the Greenback via delaying the call to taper (likely pushed out to March 2014)


By the Charts:


  • GBP/USD – the cross is trading comfortably above over our intermediate term TREND level of support

Get Long The British Pound  - zz. gbp usd


  • GDP – we expect outperformance versus most of its European peers, built largely on choking down austerity first during the great recession.  The European Commission in its autumn report this week raised UK GDP expectations, to +1.3% in 2013 from +0.6% and to +2.2% in 2014 versus a previous estimate of +1.7%.

Get Long The British Pound  - zzz. uk gdp


  • PMIs – UK Services and Manufacturing PMIs continue to outperform continental Europe.  UK Services PMI for October hit a 16 year high at 62.5! (above 50 = expansion). The UK PMI Construction also rose to 59.4 OCT (exp. 58.7) vs 58.9 SEPT


Get Long The British Pound  - zz. pmi


  • Confidence– Below we show business and consumer confidence, both trending higher since mid 2012

Get Long The British Pound  - zz. uk confidenc


  • Manufacturing and Retail Sales – confidence is a huge piece of the consumption puzzle; we see the trend in manufacturing and retail sales moving positively over the intermediate term. UK Industrial Production popped to 2.2% SEPT Y/Y (exp. 1.8%) vs -1.5% AUG

Get Long The British Pound  - zzz. retail sales and manufacturing


  • CPI – Inflation remains sticky and high, however we expect a #StrongCurrency to increase purchasing power by deflating imported inflation

Get Long The British Pound  - zz. uk cpi


Matthew Hedrick


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.


Takeaway: The labor market deterioration observed over the last few weeks was largely optical as we revert back towards trend-line improvement.

The Initial Jobless claims data is taking a backseat this week to the advance estimate of domestic, 3Q13 GDP  (3Q13 GDP: Juiced By Inventories) and the surprise ECB policy decision - ECB Cuts, EURO Plunges! – which is serving as the lead driver of risk assets globally today. 


However, this week’s claims data provides important confirmation that the deterioration in the labor market observed over the last few weeks was largely optical and should reverse over the coming weeks as we revert back towards trend-line improvement. 


Below is the detailed breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


-  Hedgeye Macro





The Jury is Back and Has Reached a Verdict (on the labor market)

Last week we lamented the inability to conclude whether a negative inflection in the labor market was occurring based on lagged CA state level data. This week can speak more definitively. The labor market remains strong. The chart below shows the Y/Y trend in NSA initial claims nationally. The red line highlights the trend rate of improvement prior to CA's IT-related fiasco. The data has now resumed that pre-CA trend rate of improvement.


We won't belabor the point other than to say that the labor market appears not to have skipped a step as we had potentially feared. One thing we will call out, however, is that consumer confidence/comfort has fallen to a new YTD low. We include a chart later in this note illustrating that. The chart shows the 4-week rolling average of the weekly Bloomberg consumer comfort survey, but the weekly data is no less reassuring. It's unusual to see a divergence between the labor market and the consumer comfort survey data. We'll take a closer look and report back with any worthwhile findings next week.




Nuts & Bolts 

Prior to revision, initial jobless claims fell 4k to 336k from 340k WoW, as the prior week's number was revised up by 5k to 345k.


The headline (unrevised) number shows claims were lower by 9k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -9.25k WoW to 347.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.4%










Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT



We’re stunned by the valuations we are seeing in the casual dining industry.  Is anyone even willing to buy casual dining names at these levels?



2013 Year-To-Date Casual Dining Statistics:

YTD Performance

  • Casual dining stocks are up +47% versus +24% for the S&P 500


YTD Macro

  • Conference Board Consumer Confidence is up +21.9%
  • The US Unemployment Rate has improved from 7.9% to 7.2%
  • US Initial Jobless Claims SA have improved from 373 to 340
  • Daily National Average Gasoline Prices are down -1.8%
  • US Disposable Income Per Capita is up +2.9%


YTD Fundamentals

  • On average, casual dining EPS revisions are down -2.9%
  • On average, calendar year revenue growth for companies in the Hedgeye Casual Dining Index is estimated to be +3.7%
  • On average, calendar year EPS growth for companies in the Hedgeye Casual Dining Index is estimated to be +8.6% on a normalized basis (excludes RT and RUTH)
  • On average, same-store sales for companies in the Hedgeye Casual Dining Index have declined from +1% in 1Q13 to +0.5% in 3Q13
  • According to Knapp Track, casual dining traffic is down -2.6% through September
  • According to Black Box, casual dining traffic is down -2.6% through September


YTD Valuation

  • On average, the EV/TTM EBITDA multiple for the Hedgeye Casual Dining Index is up +58.9%
  • On average, the P/TTM E multiple for the Hedgeye Casual Dining Index is up +48.9%
  • On average, the P/TTM CF multiple for the Hedgeye Casual Dining Index is up +50.5%

The late 1990s marked the beginning of a decade of growth for the casual dining industry.  During this time, the average cash flow multiple was 7x.  Today, we estimate the average cash flow multiple to be around 10.7x, as the majority of large, mature names have little to no growth.


Declining traffic, coupled with an earnings miss, used to instill fear in restaurant investors, often sending valuations for those companies to trade closer to 5x cash flow.  This has not been the case lately.  It is our view that the casual dining sector is in secular decline due, in large part, to the increased competition from fast casual restaurants and grocers.  Valuations are stretched and appear to be approaching peak levels.  We believe that the charts below are beginning to resemble a bubble.











*The Hedgeye Casual Dining Index includes BOBE, BWLD, CAKE, CBRL, DRI, EAT, RRGB, RT, RUTH, TXRH.




Howard Penney

Managing Director



Takeaway: We are removing NSM from the Hedgeye Best Ideas list as a long.

This note was originally published September 27, 2013 at 15:07 in Financials

We Think It Makes Sense to Step Aside For Now

We have been consistently bullish on Nationstar Mortgage since adding it to Hedgeye's Best Ideas list back on February 27, 2013 at a price of $38-39. The stock has had a good run since then, recently trading in the $56-57 range, but today many of the themes and catalysts we thought were misunderstood earlier in the year have either come to pass or are now far better understood and priced in. Consequently, we think most of the good news is now reflected in the valuation. Consider that in just the last few weeks there have been at least two positive initiation reports and one upgrade of the stock from the sell side. In fact, there are currently 8 buy ratings on the stock, more than at any other point in the company's history.


We expect there will likely be near-term positive catalysts in the form of deal announcements. Inside Mortgage Finance has written that sizeable MSR transactions are to be expected in the near-term from Wells Fargo ($40 Bn), JPMorgan ($70 Bn) and, most recently, Citi ($61 Bn). Recall that in their second quarter earnings release, Nationstar bumped up its guided pipeline for bulk deals by $100bn, or roughly in line with the sum of the reported WFC & JPM deals. Clearly, there is high probability, but also high expectations, that NSM will win a large share of those big deals. We wouldn't be surprised to see the stock rally further on such announcements. Historically, deal announcements have been a catalyst for upside as they often led to upward guidance/estimate revisions, not just for NSM but for peer companies OCN and WAC as well.


So, Why the Change?

We have always regarded three dynamics as paramount for NSM shares to move higher: Growing UPB, Improving Servicing Margins and Maintaining GOS. We think the company has delivered on all three fronts to date, and we are not concerned with the progress being made toward the first two dynamics. It's the third one that worries us.  


Our primary concern, and the reason for our change in view, is our expectation that Nationstar will struggle to beat estimates going forward due to pressure on both volume and gain-on-sale margins in the mortgage origination business. After spending considerable time working with our model, we are now currently expecting $1.14 in 3Q13 earnings, which is down from our prior expectation of $1.72 and is now below Street expectations for $1.27. Further, we have baked 15 bp sequential quarterly increases into our expectations for long term interest rates throughout 2014 and this has had a profoundly negative effect on our outlook for next year's earnings power. Based on that bump up in rate expectations, we're now expecting NSM to earn $5.37 in 2014, down from our previous expectation for $8.30-9.35. You may find yourself at odds with our assumption of rising rates throughout 2014, particularly in light of the Fed's recent pronouncements and Summers' withdrawal from consideration. Our basis rests upon the strengthening labor market data we track in the initial jobless claims series, which we think will exert growing pressure on prices and, in turn, should pressure the Fed to begin to constrict credit.



We've assumed that HARP volumes are relatively unaffected by the rate change. The guidance is for half of 2013's core production target of $23 billion to be HARP, or roughly $11.5 billion. In the first half of the year, we estimate the company originated $4.5 billion in HARP loans, leaving $7 billion in production for the back half of the year. We've split this evenly at $3.5 billion per quarter. However, the remaining non-HARP origination business we have haircut by 40% vs. our prior baseline forecast. Multiple datapoints support the appropriateness of such a haircut. Cardinal Financial recently pre-announced the quarter citing a 40% drop in Q/Q mortgage origination volume (both purchase & refi) coupled with material compression in gain-on-sale margins. MBA volumes 3QTD are down Q/Q by 47% for refi and purchase volumes are down 9% 3QTD vs 2Q13. Given that most of NSM's volume is refi-based, we think a 40% haircut outside of the HARP channel is reasonable. 





We've also assumed gain-on-sale margin pressure. Here's the comment management made on the 2Q13 earnings call, hosted in early August: "With the recent rise in interest rates, we've seen some pressure on market pricing, mainly in the premiums on HARP originations." Generally speaking, HARP loans fetch a 250-500 bps GOS premium to non-HARP loans based on a December 2012 Fed study, which can be found here: Fed Study. Taking the mid-point of the 250-500 bps premium, we estimate that last quarter HARP GOS revenue accounted for roughly 60% of total GOS revenue while only accounting for 38% of volume. The average 30-Year FRM rose to 4.45% thus far in the third quarter, up from the 2Q13 average of 3.67%. That 75-80 bps Q/Q increase in rates is likely to weigh heavily on HARP premiums. Remember, HARP loans fetch a smaller premium in a rising rate environment as traditional loans become more valuable. We've nevertheless been conservative in our treatment and assumed roughly a 25 bps decline in Q/Q total GOS margins.  


Based on the combination of these factors, reduced volume vs. prior baseline and lower GOS margins, we've lowered our expectation for GOS revenue to $288mn in 3Q down from our prior thinking of $365mn. While management has indicated that they can and likely will bring some further efficiency to the cost side of this business, we doubt it will be enough to offset the compressed volumes and spreads especially considering the magnitude of efficiency improvement seen in 2Q13. #ToughComps


In short, while we think the long-term opportunity in the servicing business remains attractive, we think expectations are already high on that front without sufficient deference being paid to the pressure on the originations business. We would sell Nationstar at these levels and consider an alternative without heavy origination exposure, like Ocwen.


Ocwen (OCN) as an Alternative

We think it makes sense to roll out of Nationstar and into Ocwen, ticker OCN, where investors can still benefit from the secular trend in servicing but without the significant risk to the GOS business. 


Our expectation is that 3Q13 earnings from NSM will disappoint and likely will serve as a catalyst for a rotation out of NSM and into OCN.











Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT



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