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THE LEISURE LETTER (3/11/2014)

BYD, CCL, PENN


EVENTS TO WATCH:  UPCOMING EARNINGS/CONFERENCES 

 

TODAY

  • REGENT cruise lines 4Q 2013 conference call:  
  • CZR 4Q 2013 conference call:  5 pm (36895079)
  • STN 4Q 2013 conference call:  4:30 pm  

Monday-Thursday, March 10-13

  • 2014 Cruise Shipping Miami Conference

Wednesday, March 12

  • SGMS F4Q 2013 conference call:  5:00 pm (pw: 36357318)
  • MTN FY2Q 2014 conference call:  4:30 pm

Friday, March 14

  • Hyatt Investor Day

COMPANY NEWS

BYD - Activist investor Elliott Management and EICA disclosed a 7% and 5% in BYD, respectively.

 

Takeaway:  We welcome activist involvment in BYD as operating change needs to be made. Margins and win per position have lagged the competition. With the right operating team in place, we estimate BYD could enhance EBITDA by $110 to $150 million, or $8 to $10 of equity value.  

 

CCL - Another sickness outbreak on 'cursed' cruise ship Oriana Southern Daily Echo

P&O Oriana has suffered yet more problems after norovirus broke out for the second time in a week.  The ship is due to dock in Southampton on Thursday.   So far 4 of 1,740 passengers returning from on its Northern Cape winter cruise have been struck by the highly contagious bug.  On March 2, the liner was delayed by 12 hours leaving Southampton on March 2 after 57 previous passengers went down with Norovirus and the ship had a broken propeller.

 

Takeaway: Terrible luck for P&O Cruises UK (CCL brand)

 

PENN –will break ground on Plainville casino on Friday

 

Takeaway:  PENN moving quickly to open what should be a high ROI property, even with a 49% gaming tax rate

INDUSTRY

No more than 6 gaming licensees post-2020 Macau Business Daily

Secretary Tam says there “should be no increase” in the number of gaming concessionaires – six at present – allowed in the city’s gaming market following the expiry of the current permits in 2020 and 2022.

 

Takeaway:  An obvious positive for current Macau operators 

 

MACRO

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.


ACTIVATING BYD

With EBITDA margins trailing the competition by an average of 500bps, some shareholder pressure should not be a surprise. But will the new Activist be successful?

 

 

We’ve long thought that BYD was ripe for activist shareholder involvement.  In fact, we’ve had discussions with such activists but the major push back has been major insider ownership - around 40%.  BYD is an operational underperformer and should either put the right management team in place or sell the company to a better operator.  Will Bill Boyd acquiesce or even sell?  That remains to be seen but he is in control.

 

The reality is that BYD underperforms its competition both at the company level in terms of EBITDA margin as well in each of its markets.  BYD’s property EBITDA margin trails the average competitor in most of the company’s markets by 200-800bps.  Moreover, gaming revenue per position also falls short of the competition by up to 10%.

 

With the right operating team in place, we estimate BYD could enhance EBITDA by $110 million to $150 million, or $8 to $10 of equity value.  BYD closed at $11.80 yesterday and while the stock will no doubt be up in the morning, considerable upside will still remain if operational changes are made and even more through the sale of the company.  We’re pretty sure GLPI would take a look.  

 

For an activist looking for BYD to pursue its own REIT split, we would view that as unlikely.  BYD's debt levels are too high and significant NOLs remain.  BYD is likely 3 years away from even considering that option

 

The following charts show BYD’s underperformance.  Note that the data used for this analysis covers 2013/2013.  Given the PNK acquisition of ASCA and the PENN/GLPI split, it seemed more comparable and easier to present.  We believe the margin differential hasn’t changed much.

 

ACTIVATING BYD - A1

 

ACTIVATING BYD - a2

 

ACTIVATING BYD - a3

 

ACTIVATING BYD - a4



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Life and Light

“The life and light of a nation are inseparable.”

-James A. Garfield

 

That’s the opening quote to a fantastic US #history book I cracked open this past weekend: Destiny of The RepublicA Tale of Madness, Medicine, and the Murder of a US President, by Candice Millard of Kansas City, Missouri.

 

After serving only 200 days as President of the United States (MAR-SEP of 1881), Garfield was shot by a whacko loser by the name of Charles Guiteau. Not unlike many of us, Garfield never thought of himself as part of a “class.” While he was raised poor, he empowered himself with the light of self-education. He was one of the smartest Presidents America has ever had.

 

Being “smart” isn’t a big differentiator in this profession. On paper, I don’t really know anyone who is dumb. But thinking that an un-elected-central-planning-bureau can smooth our economic lives and provide us with a pre-18th century enlightenment is. While hope is not a risk management process, that’s all I have left that America’s currency finds her footing.

 

Back to the Global Macro Grind

 

As I alluded to in yesterday’s Early Look, 1 was one of the best economic periods in American history for a reason. The US understood the value of owning what was becoming the world’s reserve currency. There was no Federal Reserve to devalue it.

 

Life and Light - 567

 

Fast forward 100 years, and we have ourselves quite a scene to observe in global macro markets every day. Places like Argentina (who had the same standard of living as the US in 1920), missed having Presidential periods of sustained real (inflation adjusted) economic growth like 1 (Reagan) and 1 (Clinton) where the value of America’s currency rose with interest rates.

 

Our Global Macro Theme of 1H13 of #StrongDollar + #RatesRising is gone now. And, on many levels, that’s just a sad thing. It provided for what George Gilder recently coined as “information surprise” in the US economy. It was the life and light that the current @FederalReserve isn’t allowed to understand.

 

In case you are thinking about moving to another country, here’s what’s headline news around the world this morning:

 

1. New Zealand’s Prime Minister, John Key, is calling for a new country flag to represent the “end of the colonial era”

2. Swedish Consumers are enjoying #StrongCurrency Tax Cuts (Consumer Prices, CPI, -0.2% y/y for FEB)

3. UK Industrial Production #GrowthAccelerating to +2.9% y/y as the British Pound tests fresh 3yr highs

 

In other words, there is plenty of life and light in this world. You just have to stop navel-gazing politically in the US and realize that countries are racing against America as she always has against them.

 

But why do these headlines matter? What do these countries currently have in common?

 

1. NEW ZEALAND’s #StrongCurrency Policy (the Kiwi) has generated some of the strongest real GDP growth rates in the non-EM world. Consumer Confidence (which tracks the strength of a country’s currency) is testing all-time highs.

2. SWEDEN, while still recovering from its loss to the Canadian hockey team in the Gold medal game @Sochi, continues to reap the rewards of having a currency that can’t be devalued by some Japanese bureaucrat

3. UNITED KINGDOM continues to remind all those who followed in the footsteps of a raging Keynesian policy to devalue the Pound that real-inflation-adjusted economic-growth in the UK has accelerated alongside the purchasing power of its people

 

Don’t worry, all is not yet lost. But the US stock market’s volume could be. At the all-time highs in the SP500, volume has been as dead as a doornail. In both monetary policy and in market interest (CNBC ratings at all-time lows), the US is starting to emulate Japan. The land of the rising sun and “forward rate guidance” (Japan) saw its stock market volume hit 5 month lows last night too.

 

What if the life and the light were to just leave? And I mean literally. What if enough of us get what’s going on to simply not show up as the last lemming to buy the all-time bubble high from someone else who doesn’t call the all-time high price bubbly? What if all there is left is the last short seller covering his shorts high after shorting the January lows?

 

What if?

 

If, if, then statements aren’t new to evolution. Neither were they new (yesterday) to a part of this world (Latin America) that has tried, tried, and tried again to devalue its currencies as the best path to political power and prosperity.

 

Argentina, Brazil, Chile (Equities) were all down -1.2-1.6% yesterday as hedge funds continue to race to get net longer of a US stock market they got way too short of only a month ago (-80,000 net short futures/options contracts in Index +E-mini).

 

Latin American Equities (MSCI Index) are down almost -10% YTD as its people deal with unsustainable debt levels, deficit spending, and failed Policies To Inflate their way out of it via currency devaluation. The purchasing power and currency of The People are inseparable.

 

Our immediate-term Global Macro Risk Ranges are now as follows (Top 12 Daily Trading Ranges is a separate subscription product):

 

SPX 1

Bovespa 441

USD 79.38-80.11

Pound 1.66-1.68

Brent 106.93-110.61

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Life and Light - Chart of the Day

 

Life and Light - Virtual Portfolio


Durability

This note was originally published at 8am on February 25, 2014 for Hedgeye subscribers.

“To defeat the aggressors is not enough to make peace durable.  The main thing is to discard the ideology that generates war.”  

- Ludwig von Mises


Von Mises is considered by many to be one of the fathers of libertarian thought in the United States.  He wrote, lectured and taught broadly on many topics beyond economics, including sociology, philosophy, and engineering.  As his student F.A. Hayek said, he was “one of the best educated and informed men I have ever known.”

 

Despite von Mises massive amount of writing and incredibly influential friends and students, such as Jacques Rueff the monetary advisor to Charles de Gaulle, Italian President Luigi Einaudi, and novelist Ayn Rand to name a few, there were periods in his career in which von Mises work was largely ignored.  Nonetheless, his ideas remained durable.

 

Durability - 34

 

The animal kingdom has some profound examples of durability as well.   Three of the best examples of durability include:

  • Planarian worm – Can regenerate large portions of its body and if cut in half can become two separate functioning worms;
  • Cockroach – Has extreme radiation resistance  (likely to survive a nuclear war), can survive for weeks with its head cut off and can live for months without food; and
  • Rat – Fine swimmers, can chew through steel, can go for a couple of weeks with no food or water and can eat almost anything as a diet.

Luckily, living in the modern world doesn’t require us to go for weeks without food or chew through steel, but as stock market operators the first two months of the year have required durability.  Specifically, January started with an almost 6% dive in the SP500 and February has seen more than a hundred point positive recovery.   Obviously timing the markets is a much chagrined strategy, though an ability to do so would certainly have helped in the first two months of the year.

 

Back to the Global Macro Grind...

 

On the topic of durability, any investor that has put money into Brazil over the past four years has had to endure a halving (think Planarian worm) of the Brazilian stock market.  In part, which is highlighted in the chart of the day, this has been driven by the dramatic decline in Petrobras (PBR), the largest single component of the Bovespa.   As the chart of the day shows, from its peak PBR has lost more than 80% of its value.

 

This coming Thursday at 11am ET, we are going to host a conference call on Brazil with the explicit title, “Brazilian Equities Down -50% From 2011 Peak, Time to Buy?” On the call, we will review the bearish thesis, but take a more opportunistic look at getting long of Brazil.  At ~ 7.0x earnings versus a peer mean of ~12x earnings, PBR may be an interesting way to play a recovery in Brazilian equities.  If you aren’t currently a Macro subscriber, please email sales@hedgeye.com for details on how to access the call.

 

On the macro news flow front this morning, China is once again dominating.  While most global stock markets are either up or down small, the Shanghai Composite is down just over 2%.  There are three key factors that appear to be weighing on Chinese equities:

  • The Shanghai Property Index closed -2.2% and hit a fresh 8 month low;
  • Many of the major publicly traded developers continued to sell off, even as the major banks all said there was no change to real estate related loan policy and have not halted real estate financing operations; and
  • Finally, there was a report that an Executive Director of the Bank of China was arrested in a corruption probe.

The key benefit to Chinese investors of increasingly liquid stock markets is that they can get out of the way, and remain durable, by selling, which they did in spades in the last 24 hours.

 

Flipping back to the U.S. for a second, it is interesting to note that the SP500, and equities generally, have recovered nicely in February, the assets and sectors that are performing the best remain those that most embody slowing growth and accelerating inflation.  Specifically, while the SP500 is now down only -0.04% on the year, gold is up +10.9%, healthcare is up +6.9%, and utilities are up 6.5%.  So, yes, slowing growth and accelerating inflation endures!

 

Interestingly, from a stock perspective, the fact that lower yielding stocks outperformed last year actually benefited a number of short calls we made in the MLP sector.  Disappointing MLP fundamentals only added to the macro tailwind last year, which carried into this year when one of our Best Idea shorts Boardwalk Partners (BWP) got cut in half after reducing their distribution by 80%. 

 

The next big short on our horizon, and on our Best Ideas list, is Kinder Morgan (KMI).   Barron’s kindly quoted my colleague Kevin Kaiser and wrote this weekend:

 

“Kinder Morgan's valuation is crazy," says Kevin Kaiser, an energy analyst at Hedgeye, an independent Connecticut research firm and the company's most visible critic. "The distributable cash flow is overstated because the maintenance capital is understated." He thinks Kinder Morgan MLP units could drop below $50 and the GP below $20 -- both roughly 40% lower than the current quotes.”

 

Tomorrow, Kaiser will be discussing the durability of Kinder Morgan and MLP accounting in a conference call with energy accounting expert Julie Hannink from CFRA (email sales@hedgeye.com for details).   It’s not clear to any of us that MLPs or their distributions are durable enough to be starved of capital expenditures. 

 

Our immediate-term Macro Risk Ranges are now as follows:

 

SPX 1816-1853 

UST 10yr Yield 2.68-2.81% 

VIX 13.44-15.66 

USD 79.81-80.51 

Gold 1282-1345 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Durability - chartofday

 

Durability - virtual


March 11, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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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.

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