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YES IGT THE DEC DOWNTURN WAS PREDICTABLE

While we didn't expect such a big FQ1 miss, we correctly predicted the September and December downturn in regional gaming revs.  There is more contributing to IGT's woes, however. 


"I don't know anyone who wasn't surprised by the December results..." – John Vandemore, IGT CFO

 

Sorry, John but Hedgeye predicted both the September and December downturns within 1% of actual YoY growth.  Check our research on hedgyeye.com.  It was simply the math in our model.  The chart below shows our monthly projections for 2013 along with the actual YoY growth.

YES IGT THE DEC DOWNTURN WAS PREDICTABLE - sss 

IGT punted FQ1 and gave qualitative guidance that looks even worse than the low end of their previous 2014 range.  Management blames sickly regional gaming revenue and its impact on IGT’s yields but the problems are deeper.  Yes, the casinos are facing declining demand from slot players but IGT is losing share in gaming operations, ASP’s are under pressure, and 20% annual declines in North American slot demand over the next two years will be tough to overcome.

 

We turned negative on IGT in our 10/10/13 Black Book “SLOThy GROWTH” (we also attached a video link below).  In fairness, we did not expect a 5c miss in Q1 despite getting the December GGR analysis right.  IGT usually can pull a few levers to make the quarter, although for the 2nd quarter in a row, they couldn’t.  IGT’s full year FY2014 guidance always looked high and management finally confirmed that.

 

So where does IGT go from here?  With the stock clearly underperforming in Q4 and in January – IGT is indicating down another 10% pre-market – it looks pretty washed out.  Even with the bad weather, our model is actually projecting a rebound in regional GGR in January – still down low single digits but an improvement over December’s -10%.  Is that a reason enough to buy the stock?  No, but the next negative catalyst may be a few months off.

 

While IGT faces 2 years of negative headwinds, we’ve often thought the company should be private and that possibility remains.  Strong free cash flow, a low valuation, strong balance sheet, and limited capex needs still hold.  Remember that private equity was interested in WMS and one firm actually made it to the final round of the bidding process.  IGT’s size is more suitable for private equity and unlike WMS, generates a lot of free cash flow. 

 

With all that said, the risk/reward looks about equal after the open today.

 

http://app.hedgeye.com/media/644-video-jordan-beware-of-these-3-gaming-stocks?media=all&page=1

 

YES IGT THE DEC DOWNTURN WAS PREDICTABLE - xx

 


Get the Macro Right!

Client Talking Points

#GrowthDivergences

Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. This has implications for investors around the globe. Country/sector/asset picking matters in a lower variance, divergent performance environment.  Some big YTD divergence and the YTD is only a few weeks old.

#FlowShows

We expect a continuation of fund flows out of fixed income and into equities during Q1. The “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering. According to the latest ICI Fund Flow Survey, Equity flows perked up strongly after a negative week to start '14 with the biggest inflow in 10 weeks. This strong weekly inflow coupled with the slight outflow from last week has now moved the 2014 weekly average to a $3.9 billion average inflow for equities to start 2014, a follow through on 2013's positive trends where $3.0 billion per week on average flowed into stock funds.

#InflationAccelerating

Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. The reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.

Asset Allocation

CASH 33% US EQUITIES 15%
INTL EQUITIES 18% COMMODITIES 9%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

GHL

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.

Three for the Road

TWEET OF THE DAY

Markets aren't about calling tops and bottoms - they are all about risk managing ranges @KeithMcCullough

QUOTE OF THE DAY

"It's not that I'm so smart, it's just that I stay with problems longer."

-Albert Einstein

STAT OF THE DAY

Treasury prices surged Friday in their second day of strong gains. The 10-year note was down 5 basis points at 2.722%, on track for its lowest close since the end of November.


THE M3: VIP HOTEL BOOKINGS; SPRING FESTIVAL; SATELLITE CASINOS

THE MACAU METRO MONITOR, JANUARY 24, 2014

 

 

BLOCK BOOKINGS FOR VIPS HOIST HOTEL ROOM RATES Macau Business Daily 

A jump in room rates in four-star and five-star hotels over the Lunar New Year holidays is due in part to block bookings by VIP gaming promoters. Sources expected rates over the peak period to be at least double what they were usually.  The president of the Macau Travel Industry Council, Andy Wu Keng Kuong, said four-star and five-star hotel rooms were “almost fully booked” for the Lunar New Year holidays, which begin on January 31. “The third to the sixth days of the Chinese New Year holidays are usually the period with the heaviest bookings,” Mr Wu said. “The nightly rates for four-star and five-star hotels in this period range from 3,000 patacas [US$375] to 7,000 patacas,” he said.

 

MORE CHINESE TRAVELLING ABROAD FOR SPRING FESTIVAL Macau Daily Times

A survey by China’s tourism academy shows, among the city dwellers who bought vacation packages for the Chinese New Year, 40% are travelling abroad, 30% are going somewhere within the Chinese mainland, and the rest are travelling to Hong Kong, Macau, or Taiwan, CCTV reports.  China’s Tourism Academy predicts that tourists during Spring Festival this year will number up to 225 million. Yu Zirong, Deputy General Manager of China Int’l Travel Service, Shanxi, said.  Yu Zirong also said the volume of individual and small group travel during Spring Festival has risen by about 30% over last year.

 

FRESH PUSH BY 'SATELLITE' CASINOS TO OWN JUNKET OPS Macau Business Daily

The drive for Macau’s satellite casino operators to acquire interests in VIP junket operations appears to be gathering pace.  China Star Entertainment Group Ltd says in a Hong Kong filing it’s in talks to acquire a company entitled to profits from VIP gaming in the city.  China Star is controlling entity for Hotel Lan Kwai Fong in downtown Macau, a property under a casino licence from SJM.  The significance of the moves is that they could potentially mean defacto casino operators making commercial decisions about VIP credit issuance or at least having a direct commercial interest in policy on such credit issuance – even if the junket room is not on their own premises.


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Life Inside the Box

“If we lack emotional intelligence, whenever stress rises the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.  This, more often than not, is precisely the wrong approach in today’s world.” 

- Robert K. Cooper PhD

 

Robert Cooper is a neuroscientist and strategic advisor to CEOs and many Fortune 500 companies.  Taking on the work that Dr. Cooper requires is certainly not easy.  According to Cooper, your brain is organized to reflect everything you know in your life.  Or, in other words, your brain is a record and an artifact of your past. 

 

Consistent with this line of thought, Cooper poses the following question: Does your environment control your thinking or does your thinking control your environment?

 

To help you ponder, we ask the following questions:

  • What does your daily routine look like? 
  • Did you wake up today and hop out of bed on the same side? 
  • Did you shut your alarm off with the same hand? 
  • Did you go to the bathroom like you always do? 
  • Did you shower and follow the same grooming routine? 
  • Did you dress the way your coworkers expect you to dress? 
  • Did you follow the same breakfast routine and do you get angry when the morning commute to work is just slightly off the normal pace?

I’m sure many of you will find that you often revert back to a routine in life you are comfortable with or, in Layman’s terms, the same-old, same-old life.  This is considered living life inside your box and it is much more prevalent among us and our colleagues than we’d like to acknowledge.

 

Admittedly, this may be too much philosophical thinking for a Friday morning.  But, the metaphor of switching to autopilot during rising levels of stress could be the norm for a CEO whose company you have invested hundreds of millions of dollars in and whose stock is underperforming.  Isn’t this a scary thought?  What if this routine keeps him/her in survival mode and prevents him/her from making the right decisions for the company he/she is running?

 

Back to the Global Macro Grind

 

I often refer to this decision making process in the restaurant space as the “6 Stages of Grief.”  This is a cycle that some companies tend to go through before they can see life outside the box.  As I see it, today’s activist investors provide a version of neurological therapy for this grief.

 

Unfortunately, the news of an activist investor can actually provoke a series of decisions based on past experiences that might be inconsistent with what is appropriate for today’s environment.  When an activist investor arrives on the scene, it’s only natural that “as stress rises, the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.”

 

Whether it’s a letter from Dan Loeb saying you’re an idiot or a letter that says “we look forward to maintaining an open dialogue and working with you to ensure that value is created for all shareholders,” either one could put management on the defensive and get them to react in ways that could potentially destroy shareholder value.

 

Sadly, this is precisely the path of destruction that the CEO of Darden Restaurants is headed down.  

 

As I said earlier this week, the challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up, break out of their box, and implement meaningful change.  It is their challenge, their job, and their responsibility not to be more of the same. 

 

When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become fuzzy.  As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis.  The operational performance of DRI has stagnated and it is, without question, time for a significant change.

 

As Keith said in yesterday’s Early Look, we are short a significant number of restaurant names.  On yesterday’s earnings call, the CEO of Starbucks, Howard Schultz, went out of his way to emphasize the decline in bricks and mortar retailing.  Starbucks was wisely in a position to win in this environment.  Mr. Schultz is a great example of a CEO, at least in my space, that is willing to take on the difficult task of recognizing when and where he can strengthen his company.

 

To be honest, I welcome the commentary about bricks and mortar retailing as it relates to my short call on CAKE.  My original thesis was shorter term, but his comments could make our bearish call on CAKE more secular in nature.  In the short run, however, we believe the price spikes in the dairy complex are unaccounted for and suggest that EPS estimates are too aggressive for the company in 2014.

 

Moving on to a broader concept, the biggest risk to the consumer and restaurant space in 2014 is our MACRO theme of #InflationAccelerating.  The CRB Index, milk, cheese, natural gas, cattle, hogs and coffee are all up more than the S&P 500, as gold continues to signal higher lows.  With the Bloomberg Consumer Confidence Index flat week over week at -31, sluggish Per Capita Disposable Income, and a stagnant job market, it could be challenging for most companies to take price in order to offset inflation.

 

The irony of all this is that one of the few names I like on the long side is Darden Restaurants.  The CEO’s tendency is to do more of the same, only harder.  While I’m typically not a proponent of this line of action, it has indeed created a significant opportunity for a lot of money to be made.

 

It has also provided me with the material for a scathing attack on what has arguably been the largest case of value destruction in Casual Dining history.  For the record, if you’re reading this Mr. Loeb, I have everything you could possibly need to write your best letter yet.

 

Function in disaster, finish in style.

 

Howard Penney

Managing Director

 

Life Inside the Box - chartofday

 

Life Inside the Box - rta1


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 24, 2014


As we look at today's setup for the S&P 500, the range is 28 points or 0.03% downside to 1828 and 1.51% upside to 1856.                           

                                                                                                    

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

*Levels  as of 1/23/14

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.40 from 2.42
  • VIX closed at 13.77 1 day percent change of 7.24%

MACRO DATA POINTS (Bloomberg Estimates):

  • No major data releases
  • 7:05am: BoE’s Carney speaks at Davos
  • 12pm: ECB’s Draghi speaks at Davos
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • Sec. of State John Kerry attends talks on Syria in Montreux
    • Treasury Sec. Jack Lew, Commerce Sec. Penny Pritzker attend Davos
    • House not in session, Senate meets in pro forma session
    • 10:30am Chairman Reince Priebus addresses Republican National Cmte winter meeting
    • 11:30am Homeland Security Sec. Jeh Johnson speaks at U.S. Conference of Mayors winter meeting
    • 1:30pm Gov. Rick Snyder, R-Mich.; former NYC Mayor/Bloomberg LP founder Michael Bloomberg discuss economic case for immigration reform

WHAT TO WATCH:

  • Samsung profit growth slows as iPhones win sales, won gains
  • Ziggo says talks to be taken over by Liberty making progress
  • Starbucks sales trail estimates as U.S. growth decelerates
  • McKesson to purchase Celesio in deal after earlier offer failed
  • China bank regulator said to issue alert on coal mine loans
  • Qualcomm acquires patents from Hewlett-Packard, including Palm
  • JPMorgan’s Jamie Dimon said to get increased compensation: NYT
  • Morgan Stanley gives Gorman $5.06m of shares for 2013
  • Jana partners takes big stake in Juniper: Reuters
  • Goldman may ban some person-to-person instant messaging: WSJ
  • BofA may buy own stake held by Korea Investment Corp: Maeil
  • Boeing to give ANA order discounts as 787 compensation: Nikkei
  • CNN says some of its social media accounts were compromised
  • AT&T unlikely to bid for Vodafone in near-term, Oriel says
  • U.S. says no leeway in Iran oil exports based on inflated data
  • FOMC, Yellen, Obama’s address, Egypt: Week Ahead Jan. 25-Feb. 1

EARNINGS:

    • Bristol-Myers Squibb Co (BMY) 7:30am, $0.43  - Preview
    • Covidien PLC (COV) 6am, $0.94  - Preview
    • First Niagara Financial Group (FNFG) 7:15am, $0.20
    • Honeywell International (HON) 7am, $1.21 - Preview
    • Kansas City Southern (KSU) 8am, $1.10
    • Kimberly-Clark (KMB) 7:30am, $1.39  - Preview
    • Procter & Gamble Co/The (PG) 7am, $1.20 - Preview
    • Stanley Black & Decker (SWK) 6am, $1.30
    • State Street (STT) 7:30am, $1.19  - Preview
    • WW Grainger (GWW) 8am, $2.62  - Preview
    • Xerox (XRX) 7am, $0.29

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Natural Gas Set for Biggest Weekly Gain Since 2012 on U.S. Cold
  • Brent Slumps as Premium to WTI Narrows to Least in Two Months
  • Big Data From U.S. Cornfields Spurs Farmer Concerns: Commodities
  • Copper Trades Near One-Month Low Amid China Credit-Risk Concern
  • Wheat Snaps Seven-Week Slump as Freezing U.S. May Harm Crops
  • Gold Extends Gains in London, Rising to Highest Since November
  • Libya Oil Growth Crimped as Gunmen Block Eastern Port Hariga
  • Cocoa Advances as Lower Reserves Add to Shortage; Coffee Falls
  • Rebar Rises for First Week in Seven After China Money Rates Drop
  • Platinum Talks Today Will Seek End to Pay Strike Crippling Mines
  • Colder Weather Forecast for U.S. as Freeze Brings Texas Ice
  • Vitol to Trafigura Chasing U.S. NGLs as Traders Cash In: Energy
  • Curtailment, Trucks, Contracts Are Aluminum Themes: 2014 Outlook
  • Super Bowl Fans Eat 1.25 Billion Wings as Corn Crop Lowers Costs

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

 

 

 

 

 

 

 

 

 

 

 

 

 


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