• run with the bulls

    get your first month

    of hedgeye free


E-Cig VUSE Drags on Quarterly Performance; RAI has LT Outlook

Reynolds American reported Q1 2014 adjusted EPS of $0.72 (flat Y/Y) that missed consensus of $0.74 and revenues of $1.94B that came in slightly above the Street at $1.91B. The stock is trading down today on mix results. Our neutral outlook on RAI remains intact.


On the positive side, RAI saw solid results from its core brands (Camel, Pall Mall, Santa Fe, and Grizzley), the company re-affirmed its FY EPS guidance of $3.30-$3.45 (or growth of 3.5% to 8.2% Y/Y), and saw strong pricing in the quarter (+4.2%) to offset RJR tobacco volume down -5.2%, which underperformed the industry cigarette volume down -4.4%.


On the negative side, RAI is boosting its e-cigarette spend on VUSE (nearly $60M over the last 6 months). Concerns on the call about just how much of a “drag” VUSE will be on the bottom line moving through the year or if the category can realize margins as high as cigarettes remained largely unanswered (more below).  Further, operating Margin dropped 220bps, and CEO Daan Delen’s decision to step down in May is a bit puzzling, however by all accounts he’s being replaced by a very capable operator in Susan Cameron who served as the company’s president and CEO from 2004-11 and rejoined the company’s board of directors in December 2013.


Our preferred tobacco stock is long Lorillard (LO). The company’s Q1 2014 earnings conference call is tomorrow at 1pm EST. (Email me if you’d like a copy of the Best Idea Long Presentation on LO)



On E-Cigs


E-cigs were once again a focal point of the call: the company began the call discussing its e-cig business under the brand VUSE and the majority of analysts’ questions in the Q&A were about VUSE.


As we’ve said previously, we expect 2014 to be a big year of investment for the company behind VUSE as it plans to roll-out nationally (and play catch up to LO’s blu as it competes alongside MO’s launch of MarkTen).


Today the company said that it will begin selling in Wisconsin and Indiana in early June, after its initial test state launches in CO and UT, where the company stated it has nearly 80% market share in each state. It then expects to launch by late June into 15,000 stores nationwide. 


CEO Delen brought forward a cautious tone to the VUSE rollout, suggesting that the company was “hedging its bets” by first gauging the 15,000 store rollout (and assessing the size of the overall category) before further launching into more outlets in the second half of the year. [For reference, LO’s blu has a national distribution in 85,000 retail outlets].  This cautious tone on the category’s growth and size echoes some of the slowing we’re seeing in the category, and certainly Delen’s tone does not strike the exuberance chord that we’ve become so accustomed to on the subject of e-cigs. 


RAI reinforced that its investment in VUSE is 1H weighted (heavy on factory and machine start-up costs and purchase of merchandise material to properly support the brand in the quarter and throughout the launch to 15,000 stores). We believe in RAI’s long-term strategy to grow VUSE as an add-on growth business and one to soak up declining cigarette smoking trends. That said, for RAI we’re concerned about the extent to which VUSE could cannibalize its tobacco business at a lower margin in the years out.  To this end we’ll be doing survey work to better understand these trends.  (Note: we do not see cannibalization risk for LO this year given its core smoker demographic (that differs from that of RAI and MO) smokes Newport menthol, its core business (~ 85% of total profits).


When questioned on the call about the potent for disappointment from the profitability of VUSE (being lower than cigarettes), Delen only said the company sees huge opportunity in e-cigs as a growth category. He thinks there are some technological shortcomings across the industry, but that VUSE is ahead of the curve. He added, he’s very confident that the current iteration of VUSE already meets what the industry is calling “next generation technology” and his team is diligently working on future enhancements (no discussion on what the future technology may incorporate). He reaffirmed he’s confident that VUSE can get cigarette-like margins over the long term.

Finally, on deeming regulation, the company reiterated that it has no knowledge of what they may include or when they might be announced. We continue to wait with bated breath, as the FDA will soon have to step in with a pronouncement to regulate e-cigs closer to traditional tobacco. Tick tock. 


Call or email with questions,




Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Cartoon of the Day: Will Apple Deliver?

Takeaway: All eyes are on AAPL.

Cartoon of the Day: Will Apple Deliver? - Apple cartoon 4.23.2014

Subscribe to Hedgeye.

CCL: Removing Carnival from Investing Ideas

Takeaway: We are removing CCL from Hedgeye's high-conviction stock idea list.

After enjoying a nice ride higher over the last 6 months or so, Carnival’s valuation of 16x 2015 EPS looks fair to Gaming, Lodging & Leisure Sector Head Todd Jordan. 


Near-term risks include:  

  1. Continued choppiness in Caribbean pricing for the industry.
  2. Increased macro risks including consumer spending pressure* and higher oil prices. 

We remain constructive over the intermediate term as CCL yields should outperform Street expectations as the brand continues to regain lost value and brand rebuilding costs should abate.


CCL: Removing Carnival from Investing Ideas - car4 

*#ConsumerSlowing: The cyclical increase in consumer spending growth from the 2009 lows is under pressure. Rising food prices and a stagnating USD continue to squeeze average Americans on the margin. Given the potential for further USD depreciation and a continuation of global commodity inflation as a real macro risk, we think U.S. consumption growth will slow as it bumps up against difficult compares heading into 2Q and beyond.


Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.




  • Revenues: $646 million
  • EBITDA:  $71 million
  • EPS: $0.04



PENN Q1 2014 - EARNINGS PREP - penn1



  • Are spending trends improving in April among the different tiered customers?
  • How much of the weakness is macro related versus demographics? i.e. only baby boomers playing slots.
  • New obstacles in Jamul deal?
  • Sioux City as discontinued ops?
  • Is the promotional environment still rational despite horrible GGR trends in Q1?
  • Lower budget for refresh of casino (slot) floors? 
  • Outlook on Toledo/Columbus before and after more racinos come into the market
  • Outline the New York opportunity



  • Fall 2014 opening
  • Opening up with 1,000 in Dayton and about 850 in Austintown and be able to grow beyond that as demand warrants.
  • Still looking at margins in those two racinos in the high 20%s or better.


  • Early 2016 opening


  • Expect a decision in 2Q

Consumer trends:

  • Relatively soft and cautious consumer environment, particularly at the lower end worth statements of our rated database, those who typically spend a $100 or less per gaming visit.

Promotional environment:

  • Promotional environments remain mostly rational in our competitive markets


  • Feel comfortable with a 20% stabilized ROI
  • (03/14/14) broke ground on the property

New Competitors:

  • Starting in Charles Town, clearly the opening of Horseshoe Baltimore in the August-September time period will have far less effect from what PENN saw with Maryland Live opening up in 2012 and then adding table games in 2013. 
  • Similarly in Lawrenceburg, the Horseshoe Cincinnati effect on Lawrenceburg will certainly have a much greater effect on the Miami Valley opening, which occurred about a little less than two months ago, and a less of effect of what's going to happen with River Downs or Belterra Park opening up. 

Cost efficiencies:

  • There are still some additional operating efficiencies out there to pursue...That includes, obviously, payroll. We still have approximately 25% of our labor costs remain variable, so there's opportunities there. 
  • [Marketing] tend to be very disciplined.


  • Capex budget for 2014 includes maintenance CapEx of about $88 million.  Continue the historic spend of about 60% of that on gaming floor refreshment and the project CapEx for new projects is $176 million for the year.


  • Expect Toledo to grow because PENN don't really have any other supply affecting that business as they go into the balance of 2014 into 2015.

  • (Columbus) there's going to be an effect of the opening of our Dayton operation later this year and the recent opening of the Miami Valley on the Dayton customer.So that's going to have some dampening effect on Columbus as PENN absorb that supply.


We detailed our expectation for a #HousingSlowdown in our 2Q14 Macro themes call  - CLICK HERE - and (TEASER) we’ll be launching comprehensive coverage of housing in the next few weeks. 


The housing data of the last few days continues to offer further, positive confirmation of the marked, and geographically pervasive, slowdown in housing demand. 


Home price growth follows the slope of demand and current demand measures (Existing/Pending/New Home Sales) continue to flag while mortgage application data thru mid-April is signaling a further deceleration in forward transaction activity.   


That the deceleration in activity is occurring in the face of both the positive shift in weather and declining interest rates makes it that much more notable. 


While weather probably exaggerated some of the underlying weakness to start the year, we continue to think that the collective impact of stagnant income growth, declining affordability, a reversal in institutional interest, and the implementation of QM regulations will serve to pressure housing demand over the intermediate term. 


Below we provide a summary highlight of the recent data: 


APRIL DATA:  The NAHB HMI and weekly MBA mortgage data represent a couple of the most real-time measures of existent demand/sentiment trends and both continue to signal weakness.


  • Mortgage Applications:  The composite mortgage application index declined 3.3% WoW as the Purchase Applications and Refinance sub-indices hit new lows in YoY growth.  As it stands, Purchase Applications are down -19.3% off peak and -18.5% YoY while refi activity is down -71% YoY!

 HOUSING: HICCUP OR HARBINGER? - Mortgage Apps 042314


  • NAHB HMI:  Headline NAHB confidence increased 1pt MoM in April vs the downwardly revised March print with builder confidence flat or down across geographies with the exception of the Northeast.  Confidence in the West region slid for a third consecutive month, continuing its expedited 26 pt drawdown from a peak reading of 71 just three months ago. The composite index is now down 10 points off its December peak of 57.







MARCH DATA:  Home price growth decelerated and both Existing and New Home Sales slowed sequentially in March.  The slowdown, coming post the weather inflection, was again pervasive across geographies, further confuting the "its the weather" in isolation thesis.   


  • Existing Home Sales:  Existing Home Sales declined -0.2% MoM and -8% YoY – accelerating 70bps vs the -7.3% decline in February.  Sales were down across geographies with the West region again leading the declines

HOUSING: HICCUP OR HARBINGER? - Existing Home Sales by Region march



  • New Home Sales:  New Home sales declined -13% YoY, marking the 1st month of negative year-over-year growth since September of 2011.   The Northeast was the lone region recording a MoM increase in sales while year-over-year sales growth declined across all geographies.

HOUSING: HICCUP OR HARBINGER? - New Home Sales by Region


HOUSING: HICCUP OR HARBINGER? - New Home Sales by Region march



  • Corelogic HPI:  The preliminary estimate is for a sequential deceleration of 160bps in home price growth in March – the slowest pace of growth in 13 months and the largest sequential deceleration since June of 2006 .  As a reminder, the march/april data will be the first to reflect any early impacts of QM implementation, which went into effect on January 10th.    




Christian B. Drake



Coffee Prices Go Gangbusters, Fed Says Eat an iPad

Takeaway: That cup 'o joe is gonna cost you.

Approximately 100,000,000 Americans drink coffee. Every day. That’s a lot of latte macchiatos. Unfortunately, for coffee lovers looking to get their fix, prices are rocketing higher.


Just yesterday, coffee prices spiked another 7%. That brings coffee’s year-to-date gain to over 90%. (No, that’s not a typo).


Coffee Prices Go Gangbusters, Fed Says Eat an iPad - coffee spot


Incidentally, historical pattern-search trend analysis from Eidosearch this morning ranks CME coffee futures (KT) as the most bullish 1-month set-up of any market-level indicator.     


Coffee Prices Go Gangbusters, Fed Says Eat an iPad - coffee


No worries. The Fed says to go eat a REIT or an iPad. 


Coffee Prices Go Gangbusters, Fed Says Eat an iPad - coffee usd table

Subscribe to Hedgeye.

Coffee Prices Go Gangbusters, Fed Says Eat an iPad - coffee prices 04.21.2014

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.