LEISURE LETTER (04/29/2014)

Tickers: MGM, BEE, NCLH



Tuesday, April 29

  • Las Vegas March revenues out
  • NCLH Q1 – 10am , Passcode: 22334128
  • VAC Q1 – 10am , Passcode: 4679876
  • MGM Q1 – 11am , Passcode: 20455736

Wednesday, April 30

  • PNK Q1 – 8am , Passcode: 27759612
  • GLPI Q1 – 9am
  • MGAM Q1 – 9am  
  • MAR Q1 – 10am , Passcode: 10575194
  • H Q1 – 1130am , Passcode:  11561402
  • BYD Q1 – 5pm , Passcode:  44440004

Thursday, May 1

  • WYNN Q1 – 430pm , Passcode:  17666834
  • HST Q1 – 10am
  • OEH Q1 – 10am , Passcode: 22074904
  • FCH Q1 – 12pm , Passcode: 28469900
  • BYI FQ3 – 430pm
  • EXPE Q1 – 430pm

Friday, May 2

  • April Employment Report
  • HT Q1 – 9am , Passcode: 1398938

Tuesday, May 6

  • RHP Q1 – 10am , Passcode: 25122491
  • SHO Q1 – 12pm
  • TRIP Q1 – 430pm


MGM – CEO Jim Murren was interviewed by the famous Robin Leach and the Las Vegas Sun regarding MGM's new tourism/guest venues/experiences along the Strip.  Murren promised "the transformation will grow to include all of his company’s properties on the Strip."  (Las Vegas Sun)

Takeaway:  Seems like an attempt to refocus the investment thesis away from room rate growth, which slows post Q1.  We remain skeptical of a sustained, v-shaped Las Vegas recovery. 


BEE – announced it closed a new $300.0 million stock secured credit facility with an accordion feature allowing for additional borrowing capacity up to $400.0 million. The facility's interest rate is based upon a leverage-based pricing grid ranging from LIBOR plus 175 basis points to LIBOR plus 250 basis points.  Initial pricing will be LIBOR plus 200 basis points, which is a reduction from the previous facility's pricing of LIBOR plus 275 basis points.  The facility has a four-year term with a one-year extension available to the Company. The facility is secured by an equity pledge in direct and indirect subsidiaries that own, lease or operate five of the company's assets: the Four Seasons Jackson Hole, Four Seasons Silicon Valley, Marriott Lincolnshire, Ritz-Carlton Half Moon Bay and Ritz-Carlton Laguna Niguel hotels.  Deutsche Bank Securities Inc. and JP Morgan Securities LLC served as Joint Lead Arrangers and Joint Book Running Managers for the facility.

Takeaway:  Similar capacity, modestly lower rate which reflect the company's overall improved balance sheet. 


NCLH – kicked off a five-day promotion on Hawaii sailings. The Hang Ten offer gives customers a $100 per cabin on-board spending credit when booking a seven-day voyage around the islands on the Pride of America. Customers get an additional $100 credit when signing on for a longer cruisetour.  The credits are in addition to air credits of up to $400 and military, Latitudes Rewards and AARP discounts that also are available on select sailings.

Takeaway:  Are Hawaii promotions heating up as well?



Around 350 thousand tourists to visit Macau during Labor Day holiday Macau News

According to Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes, the number of tourists visiting Macau during the holiday period would be more or less the same as last year, adding even the number of hotel room reservations may increase during the holiday period, it will not be enormous. In 2013 a total of 342,000 tourists entered Macau over the Labor Day holiday (April 30 to May 2), according to official data.

Takeaway:  Golden Week is the prize anyway.


Macau Infrastructure - a new automobile tunnel, called Ka-Ho Tunnel, a project that will link the east of Cotai to the northeast tip of Coloane island - is expected to start in the third quarter of this year and last for at least 2 years. The tunnel construction project, which cost the project from over 254 million patacas (US$31.8 million) to about 540 million patacas. The proposed construction period ranges from 900 days to 930 days.  The two-way tunnel, comprising four lanes, will have its northern entrance start near the Rua da Central Térmica de Coloane in eastern Cotai. The tunnel will be connected to the area near Ka-Ho Port, the northeastern tip of Coloane island where Macau Oil Terminal and Macau Cement Manufacturing Co Ltd are located.

Takeaway:  As frustrating as the infrastructure delays have been, they are happening and should contribute to long term double digit Mass growth.


New Mexico Tribal Gaming -  The New Mexico Gaming Control Board reports that slots gambling at tribal casinos declined 0.1 percent last year compared to 2012.  Total tribal net win was $758.6 million in 2013 compared to $759.7 million the prior year.  The nine tribes and pueblos that have renegotiated their 2001 compacts pay the state between 3 percent and 9.75 percent of their net win.

Takeaway: Modestly better results than other jurisdictions but still flat and not positive growth. 


China Economic Growth - The International Monetary Fund raises its economic growth forecast for China but warns that its financial system faces risks due to the rapid expansion of debt. The IMF’s 0.3 percentage point increase to 7.5 percent in its growth outlook for China.

Takeaway: Surprising but not a negative.


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.

Bullish Call On Lorillard Remains Despite Ho-Hum Quarter | $LO

Takeaway: Despite a lukewarm quarter, our long-term bullish outlook remains unchanged.

Here are some key takeaways from a research note that was originally sent to subscribers on April 25, 2014 by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Consumer Staples on Twitter @HedgeyeStaples.


Bullish Call On Lorillard Remains Despite Ho-Hum Quarter | $LO - real cig and e cig


  • Lorillard reported Q1 2014 results on 4/24 that were lukewarm, missing Street estimates on the top and bottom lines, however the stock closed up on the day.
  • Our long-term bullish outlook remains unchanged and built on 1) The strength and profitability of its advantaged menthol portfolio; 2) Our belief in the limited menthol regulatory risk over the longer term; and 3) Upside growth in its blu e-cigarette business that commands leading share in the United States.
  • LO had impressive price/mix of +5.8% to offset total cigarette volume decline of -2.9% (outperforming the total industry at -4.0%). Total LO retail market share in the quarter rose 30 basis points to 15.2%, its highest level ever and its first quarter above 15%, and Newport’s share grew 40bps to 13% while LO’s share of the menthol market was flat year-over-year at 40.7%, but improved 80bps sequentially.
  • blu E-Cigs: Net sales for blu declined -10.5% y/y to $51 million, versus flattening growth across the entire category (slowing to +10% in the quarter). The loss was a contribution of lower prices of its rechargeable kits and a pipeline inventory build versus the previous year quarter. LO announced a $10-20MM spend over next 6 to 9 months to rebrand the U.K.’s SKYCIG as blu and continue to support incremental brand building for blu in the U.SIn the U.K. as in the U.S., the longer term strategy of the e-cig business is clearly not selling blu at break-even or a loss, however in the near term the company is willing to take the charge and investment now to win long term brand loyalty in a category with huge growth potential -- we support this strategy.



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Vanishing Volume

Client Talking Points


The Korea Composite Stock Price Index broke our intermediate-term TREND line of 1983 support (it closed down -0.23% overnight at 1964) – see our macro analyst Darius Dale’s bearish research note yesterday on South Korea heading into what we call “quad 3” in our GIP model (stagflation).


UK continues its playbook follow through as tighter monetary policy = stronger currency = stronger purchasing power, home price appreciation, confidence, etc… and UK GDP ramps to +3.1% year-over-year in Q1 (double the USA which you’ll get tomorrow – oh, the UK had “weather” too). $1.68 GBP/USD last continues to look great.


Our reading of total US equity market volume weakened (down -7% and -20% versus the one-month and three-month volume averages, respectively) on yesterday’s +0.3% SPX bounce. Both the Nasdaq and Russell were down on the day (-6.5% to -7.5%, respectively) from their bubble highs. Tread carefully out there.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


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.

Three for the Road


COMMODITIES: Corn and Oil up another +0.5-6% this morning #InflationAccelerating @KeithMcCullough


"Your assumptions are your windows on the world.  Scrub them off every once in a while, or the light won't come in." - Isaac Asimov


Shares of Facebook have slumped 10% since the company released a widely celebrated first-quarter earnings report a week ago. (MarketWatch)


Macau’s “unique” reporting methodology could portend a volatile end to April.




The setup for a sharp positive reversal in Macau stocks may be before us.  It’s possible that last week’s sluggish Macau table revenues were underreported and with the corresponding catch up over the last 3 days, April could push into double digit growth for the month.  A strong May could continue the momentum.  



We’ve written about “the placeholder” in previous notes.  The Macau government fails to secure the comprehensive data for its weekly release and issues a placeholder average daily table revenue (ADTR) figure of HK$775 and investors panic over the low level of revenue.  It wasn’t long ago that HK$775 million per day was considered a strong number but we’re way past that. 


With ADTR of HK$903 million – still below expectations – this past week, the placeholder issue wasn’t as obvious.  However, this past week contained only 6 days since the prior week’s data was not released until Tuesday rather than the typical Monday.  Hedgeye’s crackpot team of statisticians quickly calculated the reported gaming revenues over 6 days of $5.425 billion actually averages to the magical HK$775 million when divided by 7 days.  Apparently, the placeholder is a weekly number not a daily number.


Moreover, upon further review, there appears to be more than one placeholder.  In fact, there appear to be 4 over the past 3 years:  HK$4,655m (8 times over 205 reporting observations), HK$5,425m (17x and the most common), HK$6,200m (8x), and HK$6,975m (6x). On a 2014 YTD basis, there appear to be 6 placeholders in the 18 periods, while during Q4 2013 we believe 8 of the 12 periods were placeholders. 





After eyeballing the data, it appears that sometimes the “catch up” occurs either in the week following the placeholder week or in the last week of the month.  We’re not positive April will end with a bang – sometimes the catch up is negative – but it should be volatile.  For example, following a HK$5,425 million placeholder for the week ended 1/26/14, the last five days produced ADTR of only HK$555 million, 36% below the average for the month.  On the other hand, March contained two placeholder weeks, and the last week of the month posted an ADTR 32% higher than the January average.


Either way, we remain constructive on May in Macau and with the already stocks reflecting a VIP slowdown, that could be the catalyst these stocks need.

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