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EHTH: 1Q14 Initial Thoughts

Takeaway: Initial thoughts on the quarter below. We will have a more detailed note out later today.

SUMMARY BULLETS

  1. NO IFP MEMBERSHIP GROWTH: Despite 145K approved members, EHTH only gained 4K net new members off a base of 796K.  The variance is attrition; EHTH lost 141K accounts (18% of its 4Q13 IFP Customers).  We believed attrition would be worse, but then again, EHTH’s reported membership metrics are purely a management estimate, so we have to take it for what it is.
  2. STRONG 1Q13 APPLICATIONS, BUT WILL DECLINE: 1Q14 Applications are comparable to 4Q13 (both very strong).  However, management suggested that IFP application volume will decline in both 2Q13 & 3Q13, consistent with our thesis, but may have taken some by surprise.  This also means EHTH’s 2014 prospects are tied to the flow-through of its 1Q14 applications to net IFP membership growth in 2Q14.
  3. 2Q14 IS A MIXED BAG.  We have to assume the attrition headwind will mitigate into 2Q14 since much of that was tied to forced plan cancellations that terminated at year end 2013.  Now the debate is whether EHTH lost members to the public exchanges from its limited ability to sell subsidized plans.  Given the size of the HHS enrollment figures, particularly toward the end of Open Enrollment, attrition is likely, but the magnitude is tougher to measure.
  4. EVALUATING THE SHORT POSITION: A 2014 Guidance cut seems more likely following the 1Q print, but we’re not sure that matters much at this point.  Sentiment around 2015-and-beyond growth could drive the stock higher, and we won’t have a catalyst to refute that till 3Q13 at the very earliest.  The closer we get to 2015, the less a 2014 guidance cut will matter. 

 

 If you have any questions, or would like to discuss further, let us know

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


MACAU: ANOTHER BIG FINISH TO A MONTH

April GGR finished up 11% owing to a big final 3 days. The placeholder strikes again.

 

 

As we wrote about in our Tuesday note, “WE’VE BEEN PLACEHOLDERED”, the last few days of April were likely to be volatile yet strong.  While the fundamentals remain solid, the strength in the numbers the past 3 days was probably due in part to an understatement of the prior week’s revenues.  That week sure looked like a “placeholder” week to us as reported table revenues totaled the recurring sum of exactly HK$5,425 million.

 

Daily table revenues for Monday, Tuesday, and Wednesday of this week averaged an estimated $HK1,210 million, up 34% from the disappointing prior “placeholder” week.  We saw this phenomenon occur with the big finish to March and the light last few days of January in addition to numerous other examples from prior years.

 

MACAU: ANOTHER BIG FINISH TO A MONTH - m3

 

 

So what is the conclusion?  Based on sequential trends, our math suggested April should’ve been up 13-14% yet growth fell a little short at 11%.  However, we suspect a low hold percentage early in the month may have caused the slight shortfall.  All in all, it’s business as usual in Macau despite all the consternation.  We’re still expecting a big May that should keep the newfound positive momentum (since Tuesday) going on these stocks.  WYNN continues to look the best to us over the near term.


HOT - SHAREHOLDERS SCORE A VICTORY!

HOT's negative stock performance relative to MAR should narrow and close over the coming weeks/months.

 

 

Call to Action:

We expect HOT’s negative stock performance relative to MAR to narrow and close over the coming weeks/months due to the reactivation of HOT’s share repurchase plan.

 

Details:

  • Last night, HOT announced it intends to utilize the approximately $614 million remaining on its share repurchase authorization by year-end.
  • Based on yesterday's closing price per share, the potential repurchase is about 8 million shares or 4.1% of the outstanding shares. 
  • Since the Company did not repurchase any stock since October 2013, we expect HOT to be an aggressive buyer of shares over the next several weeks.
  • Recall last week’s Q1 earnings conference call where analysts and investors lodged a very intense and vocal challenge to management for the lack of any share repurchase activity as well as an under-levered balance sheet despite a very positive and upbeat lodging industry and company outlook.  Then, on Wednesday, Starwood announced the resignation of CFO Vasant Prabhu.
  • Based on the events over the past week, it may be safe to conclude the person preventing the share repurchase was Mr. Prabhu, himself.  

Implications:

  1. HOT average daily trading volume for the prior 10 and 20 days was:  2.18 million and 1.80 million shares respectively.
  2. Assuming average daily trading volume increases to 2.5 million shares per day and HOT is a 10% VWAP buyer (250,000 shares per day), the company could complete the repurchase transaction over 32 business days. 
  3. However, given the market announcement, HOT could be more aggressive as a percent of daily volume and thus complete the repurchase more quickly.
  4. Most recent data indicated HOT short interest of 2.3 million shares or 1.19% of the outstanding
  5. On a YTD basis, HOT -4.3% vs. MAR +18.6%, more than two standard deviations of underperformance.
  6. Over the last twelve months, HOT +17.9% vs. MAR +36.7%, a 3.2 standard deviation of underperformance.

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%

TGT - Why We Think TGT Is A Short

Takeaway: This model leaves no room for error. We’re 27% below consensus by Yr3. 2.5/1 down/up. TGT has more to worry about than just the data breach.

Conclusion: We’re short Target. We think that the model that management is selling to the Street leaves no room for error. Everything has to go right, and nothing can go wrong. We’re in the twilight of a department store margin cycle, margins are at peak, our proprietary survey shows that visitation at Target stores is down materially, and worse yet, the share appears to be going to Wal-Mart. We could make a case that target.com is one of the worst e-commerce businesses in retail, and it is certainly not making up for the shortfall in stores. Lastly, Canada expectations are extremely high, and our analysis of demographics around new Canadian stores leaves us with the view that management growth and profitability expectations are a pipe dream. In the end, we’re 27% below the consensus in year 3 of our model – which is a huge delta for this company. We get to downside to the high $40s ($13/14) if we’re right, but about $5/$6 upside if we’re wrong – that’s nearly 2.5 to 1. We’ll take that anyday on a sleepy mega cap retailer like Target.  

 

TGT - Why We Think TGT Is A Short - tgt financials

 

Earlier this week, we published our 47-page deck on why we think Target is a short.  We can’t print all the slides here, but here are five that we think are among the most notable.

 

1. The Macro Setup is not pretty. We just finished the fifth year of a margin expansion cycle for department stores. When we look back historically, we don’t think that there’s ever been a ‘year 6’. And by a country mile, we’re trading at peak valuations on these margins. The core of the TGT call goes far beyond this, but this is an extremely uninspiring backdrop.

 

TGT - Why We Think TGT Is A Short - tgt1

 

2. Visitation is down. We’re all tired of hearing about the Data Breach. But the reality is that the fallout is extremely notable. We just conducted our third Department Store consumer survey and we can gauge sequential changes in visitation intent on an absolute basis, and relative to other retailers. This shows how TGT went from 13 visits (TTM) in 3Q, to near 14 in 4Q (pre-Breach), to 11 today. That might not seem severe, but that’s 20% by our math.

 

TGT - Why We Think TGT Is A Short - tgt2

 

3. Share is going to Wal-Mart. Not exactly the retailer we’d want to lose share to if we were Target. When WMT takes share, it has a tendency to not give it back. We have a lot of research in our deck that shows how consumers rank them on price, discounts, and product quality. The trends are compelling.

 

TGT - Why We Think TGT Is A Short - tgt3

 

4. Dot.Com can’t save TGT. When other retailers get into trouble with their stores, often e-commerce makes up the difference. Our analysis of target.com’s traffic trends suggest that dot.com is performing just as poorly as the stores – if not worse. Based on our research, we can make a case that Target has one of the worst e-commerce businesses in all of retail.

 

TGT - Why We Think TGT Is A Short - tgt4

 

5. Canada can’t save Target, either. We pulled up the lats and longs for both Canada and US stores, and then analyzed demographics in a 20-minute driving radius. Canada lacks the density and income characteristics around its stores that Target enjoys in the US. That’s not to mention that there is a cannibalization issue given that 11% of target customers already shop in Target US stores. Consensus revenue estimates assume that Target Canada outstrips share of wallet levels Target has in the US. The company’s guidance assumes productivity levels above US levels. We think both are extremely unrealistic.

 

TGT - Why We Think TGT Is A Short - chart5

 

Call replay can be accessed by clicking the link below:

Replay: CLICK HERE


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In the first of three parts of an interview with Chris Ciovacco, the founder of independent money management firm Ciovacco Capital, Keith and Chris discuss the cornerstone to a top investor – the investing process.

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BYI F3Q 2014 CONF CALL NOTES

Solid Q, particularly in systems. Wide FQ4 guidance equally brackets consensus.

 

 

PREPARED REMARKS

Financial Results:

  • F(x) losses FYTD $0.09/share
    • $0.02 impact in FQ2
  • Sold, 5,278 with 3,459 units in North America and 2,496 were replacement units
  • ASP $17,203, up 7% 1,100 premium Pro Wave cabinets and higher ASP in Int'l markets and lower VLT/VGT  
  • Gaming Ops: down based on rental and daily fee revenue due to customer buy-out of older non-premium units.  Gross Margins were 65% driven by higher Jackpot expenses of $1.5M vs. last 8 qtrs   2,198 leased at lower margins and $1M of asset charges - expect segment annual Gross Margin 67-71%
  • Systems Revenue:  ahead of expectations due to end game hardware upgrades.  Gross Margins 71%, down from 73% due to higher mix of hardware revenues = 45% of total revenues vs. 38% last year.
  • Maintenance Revs:  $24.4M
  • Table Products:  $29.5M of utility  $14.6M proprietary table game revenues.  Leased 70% of total revenues.  Margin 76% ex $2.3M of charges
  • Eff Income Tax Rate 37%,  F4Q 36%-37%
  • $1.9B of debt outstanding, since SHFL paid down $102M of debt.
  • FCF was $166M YTD, inclusive of acq costs vs. $150M year ago
  • Paid down $64M of debt, 3.9x leverage debt while repurchasing approx 150,000 share for $10M of common stock
  • Leverage Ratio below 3.75x, then borrowing cost fall by 25 bps
  • Allocate majority of FCF to debt repayment to reduce leverage to 3x by end of Calendar Year 2015.
  • Updated full year fiscal 2014 guidance for adjusted EPS to a range of $4.35 to $4.50.
  • Annual guidance includes $3.21 per share for the nine months ended March 31, 2014, which is comprised of adjusted earnings per share of $3.12 plus add-back of $0.09 per share loss from unfavorable foreign currency movements incurred during the first nine months of fiscal 2014.
  • This results in a range of adjusted EPS expected for the remaining three months of fiscal 2014 of $1.14 per share to $1.29 per share. - consensus is $1.21

General Commentary:

  • First full quarter of combined, SHFL $40M cost synergies by end of calendar year 2014
  • Reorganized sales structure by region and yielding value
  • Good utilization of India development centers for SHFL products
  • EGM sales good quarter 22% 
  • First YoY increase in NA replacements ex Canada
  • Illinois during FQ3: 739 VGT units sold, sold >4,100 units thus far, expect to continue to sell into IL until 2015
  • Expect to sustain the year-over-year improvements in North America replacement sales during Q4 as well.
  • Equinox cabinet doing well in Asia (Macau, Philippines, Singapore and Cambodia), Australia - 1,819 units shipped to international regions in Q1
  • Optimistic to leverage SHFL content worldwide,
  • SHFL EGMs shipped 5,278 across the globe
  • Despite a 60 units sequential decline in overall WAP installed base, cash connection grew by 30 units and WAP revenue set an all-time quarterly record with yields up about 11% versus the previous quarter.
  • MD3 Shuffler replacing MD2 and MD1 Shufflers
  • Interactive: I-Gaming gaining traction in NJ and more free to play gamers signing up daily
  • Systems: iVIEW, iVIEWDM and Elite Bonusing Suite - top 5 customers = 35% of revenues vs. 45% previously.
  • Added two new Ohio casinos to systems business.
  • The majority of the 450,000 slots connected to BYI systems are still either without an iVIEW or have an old version of it and thus may not be capable of leveraging the newer system software features including the Elite Bonusing Suite, bonusing modules. And to-date, there are only 34,000 iVIEW DMs in the field.
  • Systems revenues at least >25% greater in 2014 than prior year, but 2015 likely lower than 2014 but at higher margin than 2014.
  • TableView optical chip recognition product is very close to completing its field trial at two casinos with a very high accuracy level. 
  • Strength of BYI and SHFL, producing higher revenues and add'l cost saves.   
  • Gross profit from North America replacement sales represented only 11% of gross profits during the quarter and in Gaming Operations, only 45% of revenue was variable fee based. Even within variable fees, a significant portion was based on the highly stable New York lottery market.
  • Asia: strong systems pipeline
  • More than 50% of revenues are recurring.
  • R&D spend rising with revenues
  • Focused on innovation and the future - core business will never waiver as look to drive new revenues
  • Look to new technology areas that will accelerate revenue and profit growth

Q&A

  • ASP trends, seeing any aggressive pricing or financing? value is found in BYI products, maintaining price discipline on game content, pricing flat to better since G2E.
  • ASP 7% increase - how frame ex. Star Games?   Domestic ASP +7% (Wave) and overall ASP +7% (Australia higher ASP and pulled overall ASP higher).
  • $10M repurchase, how frame vs. debt reduction - when see dislocation in market, will enter market.  Currently have just under $140M of add'l share repurchase activity remaining, also limited by debt covenants. Focused to achieve 3x leverage or lower.
  • Why 15c spread to guidance with two months remaining - delta of range is 3%...and early in integration of SHFL and now more broadly based
  • Pipeline - a lot more visibility by customers and hardware across all segments, and seeing lots of interest in I-View products. Customers desiring upgrading software.
  • Quick customer decisions may repeat, not specific to this quarter - was two customer specific. 
  • Systems maintenance side - why decline last two quarters while rest of systems increasing - FY15 > FY14 > FY13, last few quarters unique due to game count reductions, maintenance happening later.
  • Back out 1x, SGA line, adjusted SGA be down FY14 vs. FY 13, but look at SGA as % of revenue and drive toward an adjusted operating margin and want to increase adjusted operating margin. 

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