Our FQ4 estimate is 2 cents ahead of consensus for EPS and $6MM above the street on revenues.  No call on the near-term stock action but the long term fundamentals are potentially explosive.


4Q09 Preview

We estimate that BYI will report $0.57 of EPS and $228MM when they report on August 12th.  Here’s the breakdown:

  • Casino operations: $10MM
  • Product sales: 5,400 new unit shipments at $14,300 a piece, total gaming equipment revenue of $89MM at a margin of 48%
  • Systems revenue of $55MM at a 75% margin
  • Gaming operations of $74MM at a 70% margin
  • SG&A of $60MM
  • R&D of $20MM
  • Interest expense of $3.6MM


2010FY Outlook


From the last conference call:


“The Company is in the early stages of planning for fiscal 2010; however, it currently believes that its strong base of recurring revenues and diversified business model will allow fiscal 2010 Diluted EPS to exceed levels expected to be achieved in fiscal 2009.”


“We expect several positives for our earnings per share compared to the start of last year. First, a higher level of gaming operations revenue; second, a higher level of system maintenance and services revenues; third, lower interest costs; fourth, more international jurisdictions in which to sell; and fifth, much broader and more exciting products in both games and systems. Plus, our recurring revenues for this last quarter were up 48% of total revenues, giving us better visibility”


We think that BYI will give a wide guidance range on the upcoming call, like last year… the kind you can drive a truck through.  As a reminder, consensus is at $2.37 per share.  We agree that FY2010 should be a year of growth for BYI, despite an anemic number of new casinos/expansions opening over the next 12 months.   That being said, we think that 2010 is simply a “bridge” year for BYI and the slot industry as a whole…. The real upside is 2011-2013.


Here’s how we get growth in 2010:

  • Annualizing our 4Q09 gaming operations revenues and assuming zero growth, we get 5% year-over-year-growth.   If you add some units here you get to more than 5% growth
  • We have North American units down about 11% next year because we are assuming some pickup in the replacement market (see “REPLACEMENT/NEW: A TALE OF TWO DEMANDS”, published July 1, 2009) and total new unit shipments down 7%.  However, some decrease in unit shipments is offset with an assumption of 3% ASP increases, which we think is conservative
  • To date, BYI has sold very few conversion kits.  However, conversions should be a pretty good opportunity given the 90% margins (this is WMS’s secret sauce of +50% product sales margin).  We’re not suggesting that conversion sales will approach WMS because BYI’s base of games is tilted toward mechanical reels, but even 1000 conversion kits at $3k would add 3 cents a share
  • Interest expense was over $5MM in 1Q09 and we think that it will be about $3.5MM in 4Q09, and continue to modestly decrease into 2010.  That’s about $0.07 cents a year.  As a reminder, BYI is levered less than 1x
  • Recurring maintenance fees on units hooked up to BYI’s system grew to $13.1MM in 3Q09 from $12MM in 1Q09, and we expect them to grow to over $13.5MM in 4Q09. These fees are basically at 100% margin.  As more bonusing software is deployed on the roughly 100,000 iVIEWS in the field, BYI should be able to continue to grow the fees they get, even if they don’t install a single new system.  If we simply annualize our 4Q09 estimate for recurring fees, that’s another 3 cents
  • BYI has already announced several new systems contracts for its windows bases system.  We think Windows based product will allow them to tap a huge market of smaller casinos.  They are by far the largest supplier of systems for casinos with over 2,000 units


YouTube from 3Q09

  • “We continue to expect that the margin on our game sales will increase into the high 40s over the next several quarters”
  • “We are becoming cautiously optimistic that gaming operators replacement game-buying demand will begin to improve in the fiscal year 2010”
  • “Our retool product portfolio, combined with a pipeline of exciting new products coming up, increasing customer's satisfaction levels and a very strong list of sales opportunities, allowed me to be optimistic about the Systems business during fiscal year 2010 and beyond”
  • “So going forward, we do feel that 45% on game sales can definitely increase two or three points in the short-term and as we sell more conversion kits, we think that we have the opportunity to get the 50% plus. Of course, our interest cost is coming down which drives down our pretax margin. We are taking some initiatives as well on international tax planning, but it's premature to project the lower tax rate at this point.”


BYI reports its fiscal Q4 on Tuesday.  Earnings should be fine but, honestly, we have no idea how the stock will react. We do have an idea about the long-term though.



We would like to offer some longer term thoughts on the sector and BYI, in particular, worth bearing in mind any time the stock experiences weakness.  We’ll have a detailed EPS preview out a little later.


At $39, BYI is trading at 18x effectively trailing EPS, and 16x consensus forward EPS.  That doesn’t sound exciting, you say.  Well, we would argue that BYI and the entire sector deserves a premium multiple, given that they have managed to grow through one of the worst replacement cycles in history and are on the verge of a sizable replacement cycle.  As a reminder, BYI is on track to grow EPS 19% this year, and even consensus estimates expect 8% growth for FY2010 which is another awful year, cyclically, for the space.  How many companies in Gaming, Lodging or Leisure have achieved that kind – or any kind of growth this year?  How many will have another down year in 2010?


While BYI should be one of the few companies in our sector to actually grow its business in FY2010, that’s not one of our key thesis points.  We view FY2010 as a “bridge” year to the beginning of a huge replacement cycle and this is precisely why we like BYI and the slot space… a lot over the long term.


We entered this cyclical slowdown when gaming operators became so leveraged that every dollar went towards avoiding covenant breaches.  With Harrah’s, MGM, LVS, STN, and numerous other smaller players (Tropicana, Black Gaming, Twin Rivers, TRMP, Greektown, Herbst…) all in dire financial straits, the market for replacements simply dried out.  Since the big boys weren’t refreshing their floors, there was no reason for even better capitalized players to do so either.  Hence the downward spiral.


Fast forward to today and we’ve got expanded gaming coming in Maryland, Kansas, Illinois and Ohio.  Discussions are continuing in Iowa, Pennsylvania, Massachusetts, Arizona and other jurisdictions to expand gaming.   Aqueduct looks like it may actually get slots in the next 18 months, PNK is commencing construction in Louisiana, and Sugar House and Foxwoods are finally breaking ground in Philadelphia.  Our thesis is that incompetent politicians lay the groundwork for slots.  Slots beget slots.  States are on spending sprees, citizens are taxed almost to the max, and slots are again becoming the revenue answer. 


There are over 850,000 units in North America, but room for so many more.  New markets are great and provide a big boost to slot sales but they also grow and stabilize replacement demand.  Once the ball gets rolling we’ll get several years of 100,000 replacement units, up from the 31,000 units we’re estimating for 2009.


The thesis applies to all the slot players but BYI looks the most attractive to us:   

  • It’s a lot cheaper than WMS
  • BYI lacks the "hair" of IGT
  • Conservative accounting and high amounts of deferred revenues provides some visibility for next year
  • The systems business is a little lumpy, but is a great business that the Street under appreciates and clearly doesn’t understand.  BYI should fair very well in a networked world… whenever it happens.  In the meantime, products like iVIEW help deliver applications with high ROI to casinos
  • Already the lowest cost provider on the “participation side”
    • BYI offers many of its premium games on a fixed fee basis ($50-$60/day) vs taking a % of coin in or being on a 20/80 split.  Operators really like this and its one of IGT’s biggest gripes about BYI
    • Because so many of BYI games are either fixed fee or leased, they have less exposure to the economic headwinds of lower win per days
  • Large base of old spinning reel games that are past their depreciable lives
  • Low base internationally, making comps easier
  • Hadrill has sold companies before so a buyout at a premium is always a possibility
  • Litigation risk is at lowest level in years with the Wheel patent thrown out and the remaining litigation is really just a work around issue 


Family members have confirmed with us that Stanley Ho will recover.


That's good news for the Ho family and probably Macau gaming as a whole.  Uncertainty, at least over the near term, is rarely good.  However, Stanley Ho is 87 years old so we are going to have to cross that bridge at some point.  For now, status quo looks pretty good.

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


THE WEEK AHEAD: August 10-14


As usual, we have a full plate of critical economic data on deck for the upcoming week. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


Sunday/Monday August 10


Europe: June Industrial Production and Manufacturing Production data will be released in France on Monday morning. In the UK, July BRC Retail Sales, Same Store and House Prices data will be released.


Asia: Sunday evening will be eventful with Japanese Machinery Orders and Current Accounts data as well as July M2, Credit and Liquidity measures. Australian Housing Finance data for June –inclusive of financing for single family homes and multi-family units—will be released at 9:30PM. At 10PM Chinese PPI and CPI data for July will be released, followed by Korean PPI at 11:00. Singapore will release revised/final Q2 GDP in the evening.


On Monday, Chinese Fixed Investment data for July will be released. With the intense scrutiny of the roaring real estate and equity markets on the mainland by bubble watchers, all eyes will be focused on this data point as a potential precursor to tightening measures.


Tuesday August 11


US: The 2-day FMOC meeting begins on Tuesday. The treasury will be auctioning 3 year notes in the afternoon.  Weekly ICSC Redbook and ABC Consumer Comfort index data will be released, as will June Wholesale Inventory and Sales figures and DOL Q2 Productivity and Labor cost data. Goods and Services data for June will be released by the Census Bureau. Weekly MBA mortgage data will be scrutinized for more signs of recovery in the domestic housing market, while EIA stock measures for oil and gasoline are not expected to contain any major changes.


Europe: German CPI levels for July will be released on Tuesday, as will June UK Trade Balance data.


Asia: Chinese Trade data for July will be released on Tuesday morning while Industrial Output and Retail Sales figures for July will be released at 10PM. We will be watching this data closely –in particular looking for any signals of cooling demand from imports. Japanese Consumer Confidence and CGPI measures for July will also be released that day.


Wednesday August 12


US:  The second day of the FOMC meeting will culminate in a policy announcement at 2:15PM. Also on Wednesday afternoon, the July Treasury Budget will be released and a 10-year note auction will be held.


Europe: France and Italy will both release CPI Data on Wednesday while the UK will have a slew of data points released, including Claimants, Wage data and the BOE Inflation Report. Eurozone Industrial Production data for June will be released and a 10-year German Bunde auction will be held.


Asia:  After a busy Tuesday, Wednesday will be somewhat quiet on the economic release front in Asia, with Indian Industrial production data for June in the morning expected to test the ability of India bulls to put a positive spin on stagnation. Japanese final Industrial Production for June will also be released.


Thursday August 13


US:  Thursday morning will bring the release of July Retail Sales, July Export Price Index, July Import Price Index and June Business Inventories.  The Treasury will hold a 30-year bond auction at 1PM, with M2 data slated for release at 4:30PM. EIA weekly Natural Gas figures will be released.


Europe: On Thursday morning, German, French and Eurozone Q2 GDP releases will dominate headlines. Spanish Consumer Inflation data will also be released that morning.


Asia:  After last week’s sequential decline, the Indian Wholesale Price Index is expected to register higher.  RBA Governor Stevens delivers his Semi-Annual testimony to Parliament at 7:30PM, an opportunity for him to again outline his decision to begin raising rates as the robust Australian economy continues to maintain positive growth.  


Friday August 14


US: We will be focused on the July CPI release at 8:30AM as well as Industrial Production and Capacity Utilization data scheduled for 9:15. The preliminary Michigan Sentiment Index release for August is on the calendar for Friday morning as well.


Europe:  Spanish Q2 GDP will be released on Friday morning, while German, French and Eurozone Q2 GDP data will be released early on Saturday morning.  Other major economic data points going into the weekend include Eurozone July CP and FT House prices for July in the UK .


Asia: Hong Kong Q2 GDP will be released on Friday morning, while Japanese Q2 GDP will arrive at 7:50PM. Expect Chinese M2 data for July to reflect even greater liquidity last month.  



The market seems to be returning to “where it should be” in terms of Macau casino revenues following the implementation of visa restrictions and the global economic slump, according to DM.  They also forecast that from October to December, we could see monthly revenues surpass the MOP10 billion levels. 



City of Dreams is a success. MPEL’s VIP volume levels are back above MOP40 billion.  MPEL is the second-biggest concessionaire in terms of rolling-chip turnover, significantly ahead of all competitors except SJM.  DM sees weakness in their mass revenue figures; the mass table revenue for MPEL in July was just MOP170 million – even lower than the MGM grand.  Mass is “where the margins are” and it is where the future lies for Cotai.  COD needs to ramp up a lot more on the mass floor in order to meet the expectations for a US$2.1 billion property. 



MGM’s “laughable” EBITDA number of US$15m was accompanied by the news that Jim Murren is sending his best operations and marketing people to devise a turnaround plan.  The numbers for July, however, show that MGM Grand Macau is no longer a laughing stock. 

MGM’s mass table revenue of MOP192 million was higher than MPEL (including City of Dreams and Altira) and not far off that taken by Wynn (MOP273 million).  MGM’s property is the same scale as its neighbor, with high quality décor, so the excuses for underperformance are running out. DM sees it as being a traffic issue which, they say, is largely predicated on poor marketing.



Stanley Ho’s recent illness has done little to dent investors’ confidence. Stock prices in both SJM Holdings and Shun Tak Holdings have not digressed from the Hang Seng Index by much this week. This is hardly surprising, given that Shun Tak is really controlled by Pansy Ho now, and SJM is run by a very capable management team led by Ambrose So.
DM asks, “what are the succession plans for its chairman and largest (indirect) shareholder?” Dr. Ho does not control a majority of shares of STDM, which controls SJM Investments, which controls SJM Holdings.  Who the other major stockholders (the estate of Henry Folk, New World’s Cheng Yu-tung) support to succeed Dr. Ho will be the key factor.





Executive Council spokesman Tong Chi-kin said that in light of the increasingly heated commission war among casinos, it was necessary for the government to introduce anti-competition measures.  The decision to cap junket commissions could be implemented within 30 days of approval and would be enforced with fines of up to MOP 500,000 or, in serious cases, by suspension of junket licenses.

Casino executives have been supportive towards the idea of a cap but the challenge has been working out how to enforce the measure among Macau’s six licensed casino operators, 200 or so licensed junket agents and 4,000-plus unlicensed and unregulated junket "sub-agents".

Some executives have publically remarked on the enforcement issue, with Sheldon Adelson joking, “I committed to do it on the honor system, the breach of which will be reason to beat people up with a wet spaghetti noodle.”

DM is skeptical about the plan, explaining that commissions are just one part of the relationship between operators and junkets.  Credit is an important component – the more a player has, the more tempted he/she is to play. The issue of “side betting” is another problem the government will have difficulty regulating.  In addition, how will it affect revenue sharing deals?



Macau’s chief executive-elect, Fernando Chui Sai-on, is flying to Beijing on Monday to collect his appointment letter.  He is expected to receive his appointment leter from Premier Wen Jiabao.  Political commentator Larry So Man-yum said Macau people were eager to see which state officials would meet Dr Chui and whether they appeared to support him.  People are also waiting to see whether Dr. Chui will ask for favors from the central government, such as easing restrictions on mainlanders visiting Macau.  Dr. Chui’s reputation has taken a hit recently, following the awarding of a MOP32 million contract to a company owned by an election assistant to Dr Chui. The contract was formally approved by Chief Executive Edmund Ho Hau-wah on July 28th, two days after Dr Chui was chosen.


US Employment: We Warned Them...

When I posted my note on 7/6/09 titled “*Charts Of The Week: Unemployment's Double Top”, I knew almost immediately how right I was going to be on calling a top in the unemployment picture. Why? That’s easy  - no one, other than the math, agreed.


Wall Street’s narrative fallacies always make sense because they are fictional. There are inconvenient truths associated with non-fictional stories – particularly those backed by quantified mathematics.


Below Andrew Barber and I have 2 charts:


1. The first is just refreshing that Chart of The Week from last month – this is all about rate of change. This is now very straightforward. There was a double top of fear established by unprecedented sequential monthly unemployment accelerations of 50 basis points. This morning’s was a deceleration on BOTH a sequential AND an absolute year-over-year basis (see chart #1 – there is only one red bar in it).


2. The second chart should be forwarded to all of the Depressionistas. Not only is the notion of Great Depression style unemployment ridiculous, it’s quite reckless in its fear-mongering rhetoric. I think I called the short side of 2008 as well as most, but that didn’t mean I needed to buy into this consensus groupthink about the 1930’s. Never mind Depression, the peak in this US economic recessions unemployment rate is unlikely to surpass that of 1982!


Other than the shorts getting royally squeezed for one last day of Macro Matters, what do we do with all of these charts and green bananas flinging around on our screens? I’m patiently making some sales.


Ben Bernanke is way behind the curve. Both the US currency and bonds markets are reminding him of as much this morning. Once he rightly signals a rate hike versus this ridiculous “emergency level of ZERO”, the US Dollar will stop going down at the same rate. When that happens, stocks will stop going up at this rate.


Rate of change matters.



US Employment: We Warned Them...  - unempl8


US Employment: We Warned Them...  - unempl9


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.