WTW: Why We're Still Short

Takeaway: WTW price suggests limited room for error moving forward; meaning we can stay short until the street finally gets the secular decline theme


We have been mulling over what to do with WTW shares, wondering if there was anymore downside left in the short after selling off almost 30% since its earnings release.  


After further analysis, it appears WTW is now considerably overvalued, which implies that the street is baking in upside to 2014 guidance or a return to revenue growth in 2015.  We do not believe either is likely; particularly the latter (see our most recent notes and slide deck below for more detail).  


So even if the company can surprise to the upside in 2014, we doubt the stock will move much higher in response.  On the other hand, if WTW fundamentals deteriorate further, it could trade much lower; especially as we draw closer to 2015 when the secular themes become more evident.  


WTW: Staying Short

02/14/14 12:09 PM EST


WTW: Short Slide Deck

01/30/14 11:00 AM EST


WTW: Initiating Short

01/22/14 09:21 AM EST 


WTW is now trading near its peak LTM valuation on both a NTM P/E and NTM EV/EBITDA basis (both on an absolute and relative basis).  That statement seems counter intuitive given the considerable miss on 2014 guidance.


Prior to its 2014 guidance release, consensus was expecting 2014 EPS of $2.77.  WTW issued 2014 EPS guidance of $1.30-$1.60, missing EPS guidance by 48% at the midpoint.  However, the stock is down ~29% since its earnings release; resulting in a considerable divergence on P/E basis (the "E" declined more than the "P").  Net-net, WTW's trading multiples have expanded considerably since the 2014 guidance release


In the charts below, we're showing a time series of WTW's valuations relative to its historical peak and trough ranges over the past 1,3, and 5 years.  The first chart is WTW's NTM P/E and NTM EV/EBITDA valuations on an absolute basis; the multiples have expanded roughly 5x and 4x turns, respectively, since its earnings release.  


WTW: Why We're Still Short - WTW   PE Bands 2 26 14

WTW: Why We're Still Short - WTW   EV Bands 2 26 14


The same dynamic holds on a relative basis (vs. the SPX).  In the charts below, we are showing a similar time series of the spread between WTW's multiples vs. those of the SPX (in order to remove the impact of beta from WTW's valuation).  The relative valuations have expanded as well, which implies that the street believes WTW should be trading inline with the SPX on a NTM P/E basis, and 4x above on a NTM EV/EBITDA basis.  


WTW: Why We're Still Short - WTW   PE Spread Bands 2 26 14

WTW: Why We're Still Short - WTW   EV Spread Bands 2 26 14



Hesham Shaaban, CFA




Thomas W. Tobin



video | Keith's Macro Notebook 2/27: EUROPE YEN UST10YR


REMINDER - We will be hosting a brief conference call today, February 27th at 11:00am EST to discuss why we think market participants may finally be appropriately bearish on Brazil.



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 896782#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the start of the call


With the Bovespa Index down -54% in USD terms since peaking in APR ’11, we now think it’s appropriate to explore whether or not the currently distressed prices of Brazilian assets represent real value or if they remain a value trap. We will conclude the call with a live Q&A session.




  • A review of our bearish thesis and key risks over the next few quarters
  • Scenario analysis on whether or not this is a good time buy
  • Is the bottoming process underway for Petrobras (PBR) and Vale (VALE)?






Contact for more information.


We look forward to your participation on the call. Please email with any questions you'd like us to address.


-The Hedgeye Macro Team

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CHART OF THE DAY: Double Bubble Trouble



Double Bubble Trouble

“Double, double toil and trouble. Fire burn, and cauldron bubble.”

-William Shakespeare


They say Shakespeare wrote Macbeth sometime between 1. But my contacts tell me he could have written it in 2007. The prescience of his dark tragedy would have been a big call for CNBC.


But, from an economic forecasting and risk management perspective, what has really changed since late 2007? On mute, I can still see the same old broken sources telling me that the future slopes of growth and inflation are going to be what they were in the prior twelve months. Huh?


It’s brilliant really. To get paid to forecast the weather on a 6-12 month lag, that is.


All the while, the anti-consensus fires begin to burn as the next macro risk starts to bubble. What do I think right now? I think that US inflation can absolutely double in 2014; double, double, cut US GDP in half, and there will be trouble.


Double Bubble Trouble - bub


Back to the Global Macro Grind


Turning bearish might sound like it comes right out of Scene 1 of Macbeth. I’m in my dark man-cave, I’m wearing jorts beside a boiling cauldron and three witches. Thunder strikes as my arthritic hockey knuckles pound the keyboard. “Thrice the brinded cat hath mew’d!”


Seriously. Let’s get real here. All the boys know that my first creative writing paper in the English department @Yale was given back to me with the word “ungradable.” While I may have only had upside from there, I have no business writing you poetry this morning.


Back to the call. If I boil down our entire US macro view right now to “inflation doubles, and growth gets cut in half” what does that mean? 

  1. #InflationAccelerating – US Consumer Price Inflation (headline) goes from 1% y/y to 2%
  2. #GrowthSlowing – US GDP growth gets cut in half from our #GrowthAccelerating call high of +4.12% in Q314

So easy a Mucker can do it.


I’ve been on the road seeing some really smart and really successful customers of ours in NYC and Connecticut for the last few days and the feedback to our call is:

  1. “You’re the only strategist hammering on #InflationAccelerating right now”
  2. “When do you think it will matter?”

While I think it will matter a lot more as the year progresses, we are quickly approaching the ides of March… and with the US stock market still down for the YTD, I’d argue it already matters. It already matters.


Gold is ripping (up again this morning to +11% YTD), and plenty of bonds (and/or stocks that look like bonds; Utilities +7% YTD) are crushing consumption growth stocks too. That’s where this call really matters – from both a sector and investment style perspective.


To be clear, my being bearish on inflation’s impact on the slope of US growth expectations doesn’t mean I am universally bearish on every asset class you can buy.  My asset allocation model is basically the opposite of what it was on this day in February of 2013:

  1. Long Commodities
  2. Long Foreign Currencies vs the US Dollar
  3. Long Fixed Income
  4. Net Long European Equities
  5. Net Short Japanese Equities
  6. Net Short US Equities

As you know, I’m big on process. So you shouldn’t be surprised about my re-positioning. As we move towards what we call “Quadrant 3” in our GIP (Growth, Inflation, Policy) risk management process, all I’m doing here is what the playbook tells me to do.


Any monkey can be long something. Over 90% of #OldWall ratings aren’t sell. So when I whip up the bearish brew, I get that people care more about how that might taste than telling them to buy Twitter (we still think you should be short that btw).


So when I say I’m “Net Short US Equities”, there are a few explicit positions you can see on that front:

  1. More US equity SHORTS than LONGS in #RealTimeAlerts
  2. Short Consumer and Financials (XLY, XLP, and XLF) vs long Healthcare and Energy (XLV and XLE)

If you think it’s a low-stress life to be publicly publishing my research team’s Best Short Ideas in a market that is just coming off its all-time highs, think again. The venom we’ve received (from non-customers) on short ideas like Kinder Morgan (KMI) and Nationstar (NSM) is real.


But I like it.


“Swelter’d venom sleeping got,

Boil thou first i’ the charmed pot”


Ah, the poetry of it all. I’m looking forward to seeing how the market reacts to its first big slowdown in US GDP tomorrow morning.


Our immediate-term Macro Risk Ranges are now (our Daily Top 12 ranges are in our Daily Trading Range product). We’ll be hosting a Flash Call on Brazil at 11AM EST today. Please ping if you’d like access.


UST 10yr 2.64-2.80%


Nikkei 144

EUR/USD 1.36-1.38

Brent 108.18-110.69

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Double Bubble Trouble - UNITED STATES


Double Bubble Trouble - Virtual Portfolio


Releasing the first installment of our new daily product - The Leisure Letter.  The LL will provide context to company/industry/macro news impacting our sector.




  • HLT – F4Q13 earnings, conf call @ 10am
  • ISLE – F3Q14 earnings, conf call @ 11am        

Friday, February 28

  • Nevada Gaming Revenue Report for Jan 2014 released
  • MA slot parlor decision made:  Cordish (Leominster), PENN (Plainville), Raynham Park

Monday, March 3

  • None           

Tuesday, March 4

  • CONEXPO-CON/AGG – Las Vegas thru Friday           

Wednesday, March 5

  • BYD – 4Q13 earnings, after market close, 5pm conf call


MGM - MGM Grand Detroit January revenue of $41.2MM, -8.5% YoY.

Takeaway:  Impacted by weather but Jan still better than Dec’s 11% decline.


WYNN - President of Marketing, Linda Chen, sold 4,600 shares of WYNN at $230 for $1.058MM on Feb 24.  Following the completion of the transaction, the insider now directly owns 100,000 shares of WYNN.

Takeaway:  Over the past month, Linda Chen sold 54,600 shares of WYNN stock at an average price per share of ~$222.  


HLT - HIlton's first Q out of the block was a good one with adjusted EBITDA besting estimates $603 million vs our estimate of $567 million.  Net room growth was greater and debt lower than anticipated - both positives.  While RevPAR guidance was solid and in line, adjusted EBITDA guidance for Q1 and 2014 was tepid.  CapEx guidance was a little higher than anticipated.

Takeaway:  We would take advantage of any weakness associated with the guidance.  CEO Nassetta has a history of conservative guidance and we expect Q1 to be another beat, similar to the HOT school of earnings management. The reality is that the lodging industry is in great shape and is a solid late cycle play. The HLT appeal lies in the development pipeline (#1 in the world), Asia under penetration, and the Blackstone related incentives to keep the stock moving higher. We still prefer HOT because of asset sales and their new found interest in capital returns, but HLT looks desirable on any weakness.


RCL - Azamara Journey damaged in Asia, drydocking planned - Cruise Industry News

According to Azamara, a cable floated up and hit the vessel while sailing into Tokyo, damaging the ship’s propeller and propeller shaft.  The 2000-built ship will require a short emergency drydocking to fix the issue, ending its current voyage early

Takeaway:  ‘Routine’ incident shouldn't have an impact on numbers.


RCL - Cruise Sales Open for Anthem of the Seas – Cruise Critic

Based in the UK for its maiden season, which starts on August 1, 2015. Anthem will be sailing on 3 to 14 night itineraries from Southampton, with the inaugural cruise a 14-night roundtrip Spain and Mediterranean beaches cruise.  Fares start at £1,949 per person for an inside cabin.

Takeaway:  Ship premium will be closely watched later in 2014.


REGENT - Century Casinos announces the introduction of a fleet-wide progressive jackpot on board of all eight vessels of Regent Seven Seas Cruises and Oceania Cruises throughout 2014.  The company believes this is the first such fleet-wide progressive jackpot in the upper premium cruise industry.

Takeaway:  Gaming contributes significantly to onboard spend and bigger jackpots attract more coin in.




New York Catskills Zone -  Several bidders expressed an interest in building casinos in the Catskill Zone.  One team, a partnership of Cordish Companies, Hard Rock and Simon Properties is looking at a site near Woodbury Common Premium Outlets.  The second applicant is Louis Cappelli, who is looking to build a $550MM resort in Monticello, at the former site of the Concord, a borscht belt hotel.   Empire Resorts proposed a $600MM complex also near Monticello.  Finally, Penn National Gaming also indicated the company is reviewing Orange County sites as well.

Takeaway:  An update of interested parties. While a ways off, NY could be part of a new slot cycle in 3-5 years. IGT, BYI, and SGMS still face major headwinds over the next 2 years including limited new slot markets.


Larger jackpots in AC - The New Jersey Division of Gaming Enforcement approved regulations allowing AC casinos to offer wide-area progressive slots linked to casinos in other states, thus creating higher jackpot payouts.  IGT will operate the wide-area progressive system.

Takeaway:   Good development for operators and suppliers but minimal impact near-term


Philadelphia’s 2nd Casino License - five companies desiring to build the second casino in Philly presented their plans to the Pennsylvania Gaming Control Board on Wednesday.  The five applicants include:

  1. A partnership between Cordish Cos and Greenwood Gaming Inc for a $425MM Live! Philadelphia casino in South Philly
  2. Bart Blatstein’s $600MM Provence at Callowhill Street west of North Broad Street.
  3. Penn National Gaming’s $480MM Hollywood Casino at 700 Packer Avenue.
  4. Joseph Procacci’s $428MM Casino Revolution.
  5. Market8 at a price of $500MM located at Eighth & Market Streets.

Takeaway:  No opinion yet on probabilities


Las Vegas – to see more music festivals

  • Pasquale Rotella, Electric Daisy Carnival founder and Insomniac Events CEO, announced that his company will launch Las Vegas editions of its popular Southern California festivals “Beyond Wonderland” and “Nocturnal Wonderland”. 
  • Dates and venues for each festival were not released.  Electric Daily Carnival returns to Las Vegas Motor Speedway for a fourth year from June 20-22, 2014 and the industry-focused EDMbiz Conference and a new dance music awards show will bookend the EDC events. 
  • During 2013, EDC brought in more than $278 million to local economy with more than 345,000 attendees.

Takeaway:  Such events are catalysts for bringing the younger (20s and 30s) generations, who typically are not interested in traditional gambling, to Las Vegas to experience music, dining, and entertainment. It's the right move but we're not sure investors have fully embraced the long-term decline in slot demand as the core customer base shrinks and is replaced by lower margin, non-gaming customers.



Versace sells stake to Blackstone with Macau luxury hotel project in hand The Standard

Versace, which is set to open Palazzo Versace with SJM on the Cotai Strip in 2017, said it had agreed to sell a 20-percent stake to US private equity firm Blackstone Group in a deal that values the group at 1 billion euros.



Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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