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FDA Finally Proposes E-Cigarette Regulations - They’re Surprisingly Mild!

This morning the FDA proposed a new rule that would extend the agency’s tobacco authority to cover additional tobacco products not previously regulated – e-cigarettes, cigars, pipe tobacco, nicotine gels, waterpipe (or hookah) tobacco, and other dissolvables. 


Our focus is the e-cigarette impact, which we’ll go through below, however of note upfront is how surprisingly mild the proposed rules are – our work with most major e-cigarette manufacturers suggested they were expecting even more “deeming” regulations. 


We view today’s proposed regulations as having no negative impact on Lorillard (LO), our preferred tobacco stock, and in some cases may benefit the larger e-cigarette manufacturers.


What’s in the Proposed Regulation?

  • Manufacturers must register with the FDA and report product and ingredient listings. Producers would also be subject to FDA inspections
  • Manufacturers may only market new tobacco products after FDA review, but would have two years after the new rules are finalized to do so -- in the meantime companies can keep their products on the market
  • Ban on the sale of e-cigarettes, cigars and pipe tobacco to anyone under 18 (requiring people buying them to show photo identification to prove their age, measures already mandated in a number of states)
  • Manufacturers would no longer be able to offer free samples
  •  E-cigarettes would have to come with warning labels saying that they contain nicotine, which is addictive
  • Companies would not be able to assert that e-cigarettes are less harmful than real cigarettes unless they got approval from the F.D.A. to do so by submitting scientific information
  • No sales of e-cigarettes in vending machines in public places where minors are allowed

What Wasn’t Touched in the Proposed Regulation?

  • No proposal to ban flavors in e-cigarettes and cigars
  • No move to restrict the marketing of e-cigarettes
  • No proposal to ban online sales, only age verification

The proposed regulation is likely step 1 as the FDA tries to better understand the science of e-cigarettes, user trends, and to get the ball rolling on regulation after dragging its feet on a proposal for many months.  This proposal is now open to a public comment for 75 days, and then the agency will make final changes, a process that will likely be counted in months.


We view today’s proposals, even if they all become final, as positive for our bullish call on Lorillard and its e-cigarette blu:

  • The regulations could serve to consolidate the industry given the FDA registration and ingredient requirements
  • blu can maintain selling its flavored e-cigarettes
  • No ban on marketing will serve Big Tobacco’s deeper marketing spend pockets

Call or email with questions,



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Regional headwinds continue.  April soft.  Guidance also hurt by the removal of Sioux City from guidance - finally.



Q1 2014 Results:

  • Difficult weather first 6-7 week = soft revenue
  • Consumer environment, esp low end <$100 losing trips and customers
  • Competition more intense at Charlestown, L'Burg and entire Illinois
  • Property level margins unchanged, despite lower GGR
  • +5% YoY data base customer spend
  • Visitation trends "very concerning" esp. Charlestown & L'Burg
  • Lower EBITDA guidance:  50% is Charlestown & L'Burg
  • Easter Weekend: visitation and GGR trends DOWN 20% YoY!
  • March soft, April continuing with March trends

Remainder of 2014:

Expected a transitional year due to new supply but more challenging year than expected due to persistent customer softness

  • Forecasting constant margins
  • Revised pre-opening expenses
  • Removed Argosy Sioux City from forecast
  • Maintenance CapEx $80M total for the year

2015/2016 - positive outlook based on development pipeline

  • Mahoney on target for early fall opening
  • Plainville expect to open 2Q15
  • Jamul Village expected to open "early 2016"
  • NY Catskills, partner with Cordish $750m Orange County development, filed $1m app w/ NYS, final app due June 30th


  • Ohio Track Expectations:  Dayton & Mahoney Valley no changes to pro forma plan & expectations
  • EBITDAR: rent credit adjustment under master lease in remainder of the year
  • NY Outlook:
    • Catskills: managed 50/50 JV with Cordis, very excited
    • Capital Region: looking, not sure of capital commitment, more difficult due to protection on purse supplement to race tracks.
  • MA Gaming Act recall:  continuing construction, full steam ahead, believe voters will understand 10,000 jobs and revenues to state. 
  • WPD per slot $500 for 1st 2 years until new competition opens
  • Jumal: $200-$250 win/unit/day target
  • IL VLT:  27% of all IL GGR and cannibalizing casino GGR
  • FCF 7% or better on all new development opportunities and expect NY Orange County to hit or exceed target
  • Promoting less in St. Louis than last year - GGR is reported by the state gross not net so net growth will be higher
  • Demand picked up from mid-Feb to mid-March
  • Guidance: toward the end of March to current, demand has softened resulting in lower guidance
  • Project Capex:  budget for full year $72m in Ma, $70m in each of Dayton and Youngstown, Jamul $84m
  • 25% more weather impacted days in 2014 vs 2013 - can't really quantify the impact
  • Weakness is across the demographic spectrum at the <$100 segment
  • No change in enthusiasm for gambling - weakness is purely economic - especially for households <$75k in income
  • Harrah's Tunica:  demand for Tunica hurt by Arkansas. PENN doesn't see a repurposing of the asset.
  • Optimistic on Toledo - one of the worst winters ever in Q1
  • Cosmopolitan - $2b is too high.  PENN has not actively engaged but if they did they would need a partner
  • PENN still looking at a Strip property




















The Hour Between Dog And Wolf | $DRI

Takeaway: The sun is beginning to set in Orlando and it’s becoming increasingly difficult for management to distinguish between dog and wolf.

The Hour Between Dog And Wolf | $DRI - 1389668 bigthumbnail


Yesterday was a big day – DRI rose 3.5% on 2x the average daily volume.  As we’ve said before, the theme here is consistent: The stock rises on days change is in the air and falls when management publicly digs their heels in.


The title of this note derives from the French saying: “L’heure entre chien et loup.” It refers to the moments following sunset, when the sky darkens and vision becomes unclear, making it difficult to distinguish between dogs and wolves.


We’re using this expression to create a metaphor for the uncomfortable situation that is unfolding at Darden, following the news that Starboard Value has won shareholder consent to call a Special Meeting. With yesterday’s victory, the sun is beginning to set in Orlando and it’s becoming increasingly difficult for management to distinguish between dog and wolf.


From where we sit, there is enough light to see the animal in front of them is a dog. Unfortunately, management appears predisposed to a certain view. As a result, they see a wolf and, by extension, feel trapped. It didn’t have to be this way. The truth is, there is a way out of this situation that would leave all constituents feeling safe and shareholders feeling happy. For some reason, this has been so unclear to the powers that be in Orlando.


Part of the haze may be stemming from the notion that Starboard only got 55% of shareholders to consent. On the surface, this might appear like a slim margin of victory. However, the turnover since the record date, shares short and the retail component are all factors that suggest this is a convincing margin of victory. We hope Darden’s advisors will give the Board and management a straight story, so that they can see the situation more clearly. If they wait until nightfall, however, we suspect that dog could soon become a wolf.


This French saying also highlights the stark contrast between the “familiar and comfortable” and the “unknown and dangerous.” Ever since activists began pushing for change at Darden, management has retreated and found solace in the confines of Orlando, where they have lived a comfortable life for many years. Between the lifestyle they are fighting to protect and the considerable financial resources at their disposal, they have been unwilling to face the harsh reality of the situation. In its 18 years as a public company, Darden has never found itself in a similar situation. Knowing how to properly respond, therefore, can be a daunting task.


Under significant pressure, CEO Clarence Otis has been unwilling to hold himself accountable for his decisions. For example, Mr. Otis failed to stress test his plans to create shareholder value with critical Wall Street analysts, opting, instead, to conduct one-on-one meetings with shareholders. Alas, the moat he has built around his castle is not serving him well. As a result, the Board and management now find themselves in the center of a very uncomfortable situation in which they are losing control of the company.


Yesterday, Jeffrey C. Smith, Managing Member, Chief Executive Officer and Chief Investment Officer of Starboard Value LP, went on CNBC to discuss Darden’s proposed separation of Red Lobster. Reading between the lines, Mr. Smith is very clear about what needs to happen at Darden:


“There clearly have been operational issues and clearly there are strategic issues now and that all starts at the top. I mean, so as a shareholder, our power, our control is with the Board. Our power is, in theory, at some point to be able to nominate directors and potentially replace the Board if they’re not doing a great job in overseeing management and how the business is being run. The biggest decision for a board is in choosing the CEO and continuing to choose the CEO and I think there are some strategic issues here and operational issues. So, is Mr. Otis in a hot seat?  I think he is in a hot seat.”


The shareholders of Darden have spoken – it is time for significant change.


One wild card, and a current “unknown” to outsiders, is the financial performance of Darden to-date in 4QF14. With nearly two-thirds of the quarter in the books, management knows precisely how the period is shaping up. The leverage they might have with shareholders is to prove their recent operational initiatives are gaining traction. However, given the current data we are seeing on sales trends, we highly doubt there will be much good news to talk about when they report earnings. In fact, considering the lack of momentum in the business, we expect to hear disappointing guidance for FY15. Even after two disastrous years of -10% and approximately -25% EPS growth, it’s unlikely they will be able to hit the current consensus estimate of 12% EPS growth in FY15.


Change is in the air.


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Editor's Note: This note was originally sent to subscribers on April 23, 2014 at 8:16 a.m EST by Hedgeye Restaurants sector head Howard Penney. Follow Howard on Twitter @HedgeyeHWP.

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Takeaway: Looking past the Easter-driven seasonality, this morning marks the fifth week in a row of strong initial claims data

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


Labor Continues to Improve

Easter week is notoriously choppy from a data standpoint so investors should take the single-week seasonally-adjusted initial claims data with a grain of salt. In fact, in the past decade, the average w/w change has been +20k, which is more or less in-line with the 25k increase seen this week.


Our preferred method remains looking at the rolling NSA claims on a y/y basis. On that measure, the level of newly unemployed Americans was lower by 11% year-over-year, which was slightly worse than the prior week's 12% decline, but still a very strong rate of y/y improvement.


Since the start of 2014, that's the second fastest rate of improvement we've seen, eclipsed only by the previous week's 12% figure.


The data in hand so far continues to bode well for the April NFP jobs report due out next Friday, May 2.


The Data

Prior to revision, initial jobless claims rose 25k to 329k from 304k WoW, as the prior week's number was revised up by 1k to 305k.


The headline (unrevised) number shows claims were higher by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 316.75k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -12.0%












Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Are US Births Beginning a Multi-Year Rebound?

Takeaway: An analysis of the Current Population Survey is forecasting a rebound in births in the United States.

Are US Births Beginning a Multi-Year Rebound? - baby hospital watch this  007


Using the Current Population Survey (CPS), reported monthly by the US Census Bureau, we've derived a curve for US Births that closely approximates data reported by the US Census Bureau on a significant lag. 


The latest data for the CPS is for March 2014. The CPS analysis shows that births accelerated in Q4 2013, despite the tough year over year compare. This result was apparent in relevant company reports, and appears to have continued in Q1 2014 at a similar pace.


Are US Births Beginning a Multi-Year Rebound? - birth projection


As it relates to HCA (one of the stocks we’re currently recommending in Investing Ideas), inpatient admissions should see a tailwind, given 25% of Hospital Industry admissions are maternity related.


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Editor's Note: This is an excerpt of a research note that was originally sent to subscribers on April 22, 2014 by Hedgeye Healthcare sector head Tom Tobin. Follow Tom on Twitter @HedgeyeHC.


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