Despite cautious commentary, big beat on higher VIP volumes in Q1




  • Best performing RC Volume ever
  • 2014 will have a challenging macro economy; Chinese economy unstable; cautious view
    • Indonesia - two elections coming up
  • Mass revenue:  flat in the past two years; will be flattish in the next few months.
  • Macau Junket incident:  must have some repercussions in the Macau market.  Will not know for sure in the next 2-3 months.  Will not significantly affect Singapore since that market doesn't use junkets.
  • VIP RC volume share:  59%
  • VIP revenue share:  55%
  • VIP breakout:  Chinese still most important.  Indonesia and Thailand also a big segment.
  • Japan:  gaming bill may pass in Lower House at end of May.  Will go to Upper House some time in early June - will be more challenging because ruling party does not have majority there
  • Number of high rollers have increased due to improvement in regional logistics
  • VIP win rate %:  3.0%
  • Mass share:  44%
  • Have not seen much impact from Malaysia/Korean incidents
  • Stronger Singapore $:  affects mass market (esp Malaysia); number of trips remain the same but bet per trip has gone down.  Eventually will affect number of trips too.
  • Chinese macro will affect premium mass market
  • Hold-adjusted EBITDA is same as reported EBITDA since they use 3.0% as normal
  • GGR win breakout:  62%VIP,  Mass 38%
  • Higher 1Q receivables impairment:  case by case basis.  
  • Jeju:  will receive building permit by end of June.  Will have groundbreaking event June/early July. 
    • No comment on Landing (their partner).  thinking of acquiring a separate small casino in Korea
    • Have not finalized submission plans; will build a 2,800 room hotel
  • Quite optimistic on Jeju Island - Chinese nationals do not need a visa to travel to Jeju, as opposed to traveling to Seoul;  Jeju only 1 hour flight from Shanghai. Northeast China has 800 million (no more than 2 hour flight).
  • VIP rolling volume grew 19% QoQ and 10% YoY
    • Extended reach of customers
    • 10% YoY growth sustainable?  It will be challenging.
  • 16k visitation breakout:  60% visitation USS, 40% visitation to Marine Life Park;  average spending USS $85, average spending MLP $33
  • Capex guidance:  
    • Jeju:  US$1 billion 
    • Jurong hotel: S$200 million (1Q/2Q 2015 projected opening), most of capex will be done in 2014


Takeaway: Current Investing Ideas: DRI, HCA, HOLX, LM, LO, OC, RH, and ZQK

Below are Hedgeye analysts' latest updates on our EIGHT current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.


We also feature three research notes from earlier this week which offer valuable insight into the market and economy.



Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less




DRI – On April 30, Darden announced that Chief Restaurant Operations Officer, Dave Pickens, will retire effective May 23.  DRI will not replace Pickens and plans to eliminate the position altogether.  Pickens, a career DRI employee, got a one sentence send off from the company and not even a “thank you” from CEO Clarence Otis in the SEC Filing. 


This move is, in our opinion, very telling as it suggests a very tense environment down at the company’s lavish corporate headquarters in Orlando.  We continue to believe the activists will get their way and, for that reason, favor DRI as a strong long-term investment.


HCA – HCA Holdings put up a good number for 1Q14 even without the benefit of the ACA.  The best part of the quarter in our view was the comment that births had increased 2% overall and commercially insured deliveries had increased 4%.  We think we have a really good model to forecast birth trends and a decent one for surgical trends.  If we get those two things right we think HCA’s stock price could get into the $70s in the next year or so.  

HOLX ­­– The title of our note reviewing Hologic’s earnings report was “Credibility Counts.”  Predictability counts too and we did a good job of seeing the upside in numbers but most importantly the upside in Breast Health that came from having the best 3D mammography placement quarter yet. 


There is still a lot of research ahead of us with HOLX.  The most critical is to figure out what radiologists will be paid in 2015 to run a 3D mammography.  Right now, there isn’t any incremental payment, which has been a headwind to system sales.  SO far HOLX has converted 6% of the facilities in the US, but with an extra payment to cover the cost of the equipment, we should see adoption accelerate meaningfully.


What you might not know is how the government indirectly sets prices for medical procedures like 3D mammography and  how unbelievably obscure and political the whole process is.  The price setting process is deeply political between advocacy groups and manufacturers on one side, and academics and CMS (the government) on the other. 


Advocacy groups want a high price to drive adoption and access and the manufacturers want to sell product, while the academics think there is too much screening, or the wrong kind of screening, and CMS has spending restrictions.  The lower the reimbursement, the less equipment gets sold, and CMS spends less both in the near term and longer term.


While there is indeed a process to define a price, the result can be manipulated easily.  There is no formula.  guess that’s why we have yet to find anyone with a firm answer to our question or guidance on how we can get an answer on our own.  Whatever CMS sets the price for 3D mammography will be the baseline price for every other insurance company to set their price.  


LM – The intermediate term revamping of Legg Mason continued this week with an inline quarter for the period ending March 30th which closed out the firm’s fiscal 2014 period. We are not judging the merits of our recommendation of LM shares on short term quarterly numbers as we believe the value in LM stock is the ongoing turn around after a long period of underperformance. When zooming out from a multi-year view, the LM story is clearly improving which will unwind this long standing negativity now that the firm’s important fixed income business (which is 52% of assets under management and 37% of revenues) is on firmer footing. Legg booked a fixed income inflow in its annual period ending this quarter, the first inflow in over 5 years, which is proof that the firm is on the road to starting to rebuild its asset base. With the run in equities starting to stall out and institutional pension funds starting to increase their bond exposure, we view Legg as a defensive investment in the current well valued stock market.




LO – Lorillard was up a monster +8.5% on the week (vs +1.7% average for MO, PM, RAI), fueled by rumors throughout much of the week that RAI is interested in acquiring LO. Despite the rumor helping our Best Idea Long Call, we think a hypothetical deal (especially an imminent one) is challenged:

  • Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
  • Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.   

RAI could look to divest such menthol brands as Kool, Winston and Salem, which could serve to change the consideration of the FTC/DOJ, however that’s far from a given.  Additionally, we think the recent announcement that Susan Cameron will replace Daan Delen on May 1 could also be fueling speculation that she wants to come out of the box “strong” – which is drumming up rumors about this deal. 


We maintain our bullish stance on LO supported by 1.) Its leading share and profitability of its core menthol business, 2.) Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and 3.) The upside growth in its blu e-cigarette business that commands leading share in the U.S.


As part of the Best Idea’s thesis we have not factored in a RAI + LO deal, nor has there’s been any comment from either LO or RAI to suggest this is more than just a rumor.   


OC – The office market is beginning to show an increase in activity. Office completions in the second graph below displayed a sharp uptick for Q4 2013. Furthermore, heavy construction and machinery companies noted an increase in construction activity in Q1 earning calls. Caterpillar’s Construction Industries segment had sales over 17% Year-over-Year. Crane and aerial work platform companies Manitowoc and Terex noted pickups in their book-to-bill ratio – a positive sign as these booking and sales pass through to companies like Owens Corning.




RH – Last fall Restoration Hardware made the decision to cut its fall Source Book. We’ve discussed the potential implications of this strategy ad nauseum, but the numbers speak for themselves. The company realized an estimated $38mm in cost savings related to this shift in strategy in FY2013, and realized revenue growth of 32% in the 2nd half of the year.


The one drawback in this new strategy, as it relates to 2014, is the timing of the new product assortment release across the company’s three main channels – stores,, and Source Book. 1Q is almost closed and the company is up against a 41% comp in the first quarter of last year with no newness to help drive the comp. Revenue estimates are conservative for the quarter as a result growth is heavily weighted towards the back half of the year to coincide with RH’s 2014 new product launch. Which makes sense to us. We’ve gotten glimpses of the company’s assortment in categories like Outdoor, Baby&Child, as well as Rugs, but the full breadth of the assortment has yet to be released. That changes next week when the 2014 Source Books start arriving in homes which coincides with the launch of the full line up on the company’s website and stores (the stuff that will actually fit). For the full year we are modeling revenue growth of 25% compared to the Street at 20%.




ZQK – This week Quiksilver CEO Any Mooney had an appearance on a major financial network. CEOs appear on TV all the time. But there were two things that stand out to us. 1) Mooney is solitary and reclusive. He never struts his stuff on TV. This was highly unusual for him to do. 2) His appearance was on the last day of the quarter. His tone was upbeat, and consistent with our positive view on the stock. If it turns out that business trends are not positive, we cannot imagine that he would have delivered that message on the last day of the quarter. That would otherwise be a major liability – one that we think he’s smart enough to avoid.  


*   *   *   *   *   *   *

Click on each title below to unlock the institutional content.


Why We Think Target Is a Short

Retail Sector Head Brian McGough explains why Target has more to worry about than just the data breach. 



Panera Bread: Much Noise, Little Clarity

Managing Director Howard Penney breaks down his reasons for keeping Panera on the Hedgeye Best Ideas list as a SHORT.



ICI Fund Flow Survey: Below Average for Stocks, Better Than Average for Bonds

Financials analyst Jonathan Casteleyn takes a granular look at the most recent data which showed a rebound in both equity and fixed income flows, albeit to just running year-to-date averages.


Market Week In Review: Notable Highlights from Hedgeye

Takeaway: Here's a quick look at some of the top video clips, cartoons, market insights and more out of Hedgeye this past week.


Market Week In Review: Notable Highlights from Hedgeye - ktoc

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.


In the final part of a wide-ranging interview with Buddy Carter, a private investor and former proprietary trader at Goldman Sachs, Carter and CEO Keith McCullough talk through why it's crucial for investors to have a repeatable process.


Hedgeye retail analyst Brian McGough explains why he doesn't like Target (and it has nothing to do with the recent security breach of its credit cardholders).

Morning Newsletter

Here's a snippet from CEO Keith McCullough's "Morning Newsletter" sent to subscribers Friday morning. (Click here to learn more about becoming a subscriber).


Market Week In Review: Notable Highlights from Hedgeye - km


U.S. GDP posted its smallest gain in three years on Wednesday, barely inching along at only a 0.1% annual pace in Q1. Hedgeye's macro team has been warning about this for months.

Market Week In Review: Notable Highlights from Hedgeye - GDP cartoon 04.28.2014 large


Over 800,000 Americans dropped out of the labor force in April, slipping back to a 36-year low.

Market Week In Review: Notable Highlights from Hedgeye - job derby 05.02.2014


Epic Consensus Head Fake In the 10-Year Treasury

Market Week In Review: Notable Highlights from Hedgeye - benryan large

Despite an initial, brief sell-off in 10-year yields following this morning's positive jobs number, the bond market showed its immunity to lagging indicators and consensus expectations. Click here to continue reading.


Did You See Panera Bread? You Could've Made Money Listening to Hedgeye's Howard Penney...

Market Week In Review: Notable Highlights from Hedgeye - p5

Fast-casual food chain Panera Bread reported earnings and lowered 2014 guidance which sent its shares tumbling 4.4% in after-hours trading Tuesday evening. Restaurant sector head Howard Penney nailed it. Click here to read more.


Poll of the Day: Will shares of Twitter ever surpass its record high of $74.73?

Market Week In Review: Notable Highlights from Hedgeye - t5

At the time of posting, an optimistic 61% of voters leaned YES; 38% NO. Click here to view the poll and results.



Learn more about becoming a Hedgeye subscriber.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Cartoon of the Day: Jobs Recovery?

Takeaway: Over 800,000 Americans dropped out of the labor force in April, slipping back to a 36-year low.

Cartoon of the Day: Jobs Recovery? - job derby 05.02.2014

The State of E-Cigs; Updates From Industry and Big Tobacco

Having cleared Q1 earnings from the Big Tobacco companies we follow (LO, RAI, MO, PM) and given the FDA’s release last week of proposed regulation, it’s time to re-assess the e-cigarette landscape: what’s developing at the industry and company level, and what are the biggest takeaways?

***We want to make note that in the coming weeks we will be doing an e-cigarette and e-vapor survey. We hope to better understand consumer adoption trends, brand and product type preference, and user profile.  We look forward to bringing you the results.***

  • Brand Leaders: LO’s blu continues to maintain dominance of the c-store channel at ~44% dollar share followed by LOGIC (~22%) and NJOY (14%). Dollar share trends since the beginning of 2013 demonstrate steady growth for LOGIC, steady decline for NJOY, and after expeditious growth in 1H13 a flattened share since August 2013 for blu. The XAOC data shows a slightly different lineup, but lead by blu (45%), followed by FIN Brand (Victory) (16%); Ballantyne Brands 14%, and NJOY falls to the 4th position at 10%.
  • Pricing and Volume Dynamics Weaken: Across most brands we’ve seen volume and price tapper off since mid-2013 based on a number of factors: (i) monster year-ago comparisons, (ii) introduction and flooding of the market with new kits from existing manufacturers alongside RAI and MO beginning to launch nationwide, and (iii) severe discounting and promotion within a competitive environment, engaged at driving trial (of new product) and winning brand loyalty. E-cigarette sales growth slowed to ~ 5% in April compared to ~ 150% in 2013.  As we’ll hit on in more detail below, we think the weakness in the category is also a reflection of the rise of larger vaporizers (sold at vapor shops) that are not being counted by industry scanner data (more on vaporizers below).
  • The proposed regulation from the FDA was surprisingly light: NO proposal to ban e-cig flavors; NO move to restrict the marketing of e-cigarettes; and NO proposal to ban online sales. (For more see FDA Finally Proposes E-Cigarette Regulations - They’re Surprisingly Mild!). Our work with most major e-cigarette manufacturers (including the private companies of NJOY, Ballantyne Brands, LOGIC, and Victory) suggested they were expecting even more “deeming” regulations. We suggest that the rather lax proposed regulations should serve to support investment behind the industry, from Big Tobacco to the hundreds of independent (and smaller) manufacturers, given the latter can leverage online sales and flavors. (Note: MO, RAI, LOGIC and NJOY only sell e-cigs in traditional tobacco and menthol flavors).
  • Q2 2014 will usher in intense competition: RAI and MO will be launching their e-cig brands, Vuse and MarkTen, respectively, on a national level after success in initial test market states. They’ll attempt to claw back on LO’s share leadership with blu. We expect consolidation in the industry as all of U.S. Big Tobacco ramps its e-cig distribution, however the pace of consolidation may be slower given the FDA’s favorable (regulation mild) stance on the existing industry.
  • Commentary that larger vaporizers (tank/pens/mods/open systems/etc.) are taking share from “tradition” format e-cigs like blu: LO CEO Murray Kessler said he believes vaporizers -- sold primarily at vape shops -- are taking some share from blu and other “traditional” style e-cig players (the format Big Tobacco is using today), because the products deliver a better experience at a lower price point. Although he was quick to note that this e-vapor format comes with regulatory challenges – in fact reading the tea leaves we think Kessler was betting the FDA was going to put more prohibitive measures on this format and e-vapor juice. Because the FDA largely didn’t touch non-traditional vaporizers and e-vapor juice, Kessler was quick to counter that LO is considering the landscape, and was suggestive that though the current traditional e-cig is the company’s format of choice, his team is currently working on devises that deliver superior vapor and battery life to close what may be a widening sales gap with vaporizers, etc. He expects these improvements to be rolled out over the next 6 months, and to hit the market piece by piece, rather than a giant roll out (similar to how new razor blades come out for the same razor). As noted, we’ll be doing survey work in the coming weeks to better understand the trends of non-traditional e-cig usage.
  • Category enthusiasm not shared by all: in the Q1 Big Tobacco conference calls we noticed a discernible difference in commentary about the quality and experience of an e-cig compared to a traditional cigarette. LO noted that larger vaporizers are better meeting the consumer’s desires, and along with MO, and RAI expressed a very bullish opinion about the direction of the technological improvements to better the experience. PM struck a much more cautious tone and said the flavor satisfaction is not there and underlines that while new product launches received great growth and enthusiasm, usage trends were quick to moderate. PM’s less than rosy tone comes as a surprise, given last year it announced it would accelerate the launch of an e-cig product to mid-2014, instead of a previous target of 2016/17, at a cost of $100MM, and then announced a  €500MM investment to build a manufacturing facility in Italy for Reduced Risk Products (RRPs), which include e-cigs.
  • Common Threads: Big Tobacco is excited to participate in the category, focused on investment behind it, and believes its ability to deliver rapid technological innovation can propel the category forward.  blu was by far the loudest in describing its strategy as RAI and MO are just now commencing nation distribution. We suspect that RAI and MO will take a similar tack to LO in their willingness to sell e-cigs at break-even or a slight loss over the near-term to gain/solidify market share, with the expectations for e-cigs to be a strong profitable growth business that enjoys margins at or above traditional tobacco. All are uncertain on just how the FDA will regulate e-cigs in the future, but agree that these proposed regulations are likely step one in a longer (hopefully science-based) approach to better understand e-cigs.


To underline how lax the proposed e-cigarette regulations were compared to expectations, below are three quotes from leading manufacturers:

  • Murray Kessler, CEO of Lorillard, owner of blu: "It appears that the FDA is taking a science-based approach, and that the proposed rule itself defines a constructive process that recognizes that e-cigarettes are different than combustible cigarettes.  Despite what I am sure will be a robust give-and-take process over the comings months, we remain committed to our belief that electronic cigarettes represent a major opportunity to align the interests of business and public health.  We look forward to working collaboratively with the FDA through the notice-and-comment rulemaking process to devise a reasonable, scientifically-based regulatory framework covering e-cigarettes."
  • Craig Weiss, President and CEO of NJOY: “By resisting calls to regulate ahead of – and indeed in opposition to – the science and data, [today] the FDA has brought NJOY a giant step closer to achieving its corporate mission of obsolescing cigarettes.”
  • Miguel Martin, President of LOGIC: “I would say that there were certain people that went into this thinking the FDA would be a foe — an irrational, illogical opponent to these devices…[But] they’ve hit the ball right down the middle of the fairway. It is early, I might change opinion, but the original set up on the process seems extremely fair.”

Have a pleasant weekend vaping,



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



The cerebral enervation is peaking today after three days of mind-numbing, testimony laden #JuryDuty and an early morning parsing of jobs mania,  so we’re going with the twitter’esque summary update in this week’s earnings scorecard. 


The trifecta of takeaways below sufficiently summarizes the prevailing trends. 



While consumer companies were the notable fundamental laggards in 4Q13, decelerating operating momentum has been pervasive to start 2014. 


At the three-quarter mark,  just 46% and 44% of companies have reported sequential acceleration in sales and earnings growth, respectively. Less than half of SPX constituents have reported sequential operating margin expansion as well. 


Easy forward comps is one way to frame it up for the panglossian-colored glasses contingent, I suppose.   #Weather





BEAT-MISS TRENDS:  The sales beat percentage worsened W/W and, at 52%, is tracking at its lowest percentage since 1Q13.   EPS beats, meanwhile, are tracking at their best level in years as proactive earnings management continues to reward both investors and management teams







THE PRINT:  Fundamental forecasting has mattered for a second consecutive quarter, particularly on the bottom line.  While the correlation between EPS beats and subsequent performance has been equivocal, of the minority of companies that have missed bottom line estimates, 75% have gone on to underperform the market by -3.7% on average over the subsequent 3 trading days. 






Christian B. Drake


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