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Takeaway: KLAC's announcement this morning puts our "Dividend and Buyback" theme back into focus.
Hedgeye Semiconductor analyst Craig Berger noted earlier this morning that the "Dividend and Buyback" theme is back in focus today after KLA-Tencor Corporation (KLAC) -- a SemiCap equipment firm -- raised its dividend 11% and authorized a new $1 billion share buyback.
Berger spent a fair amount of time during his recent launch discussing how the Semiconductor sector is transitioning into a Cash Return story, and how that's bolstering sector stock performance.
In his detailed and proprietary Cash Return Affordability Analysis, Berger highlighted five other firms in addition to KLAC which could make large dividend or buyback increases, and two others that are in acquisition mode, but could also possibly increase Cash Returns.
Click below to watch Berger's recent Cash Returns & Dividends video:
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: Another solid data point from ICSC. WMT US CEO doesn't give US consumer clean bill of health. TGT hires three for e-commerce.
EVENTS TO WATCH
ICSC - Chain Store Sales Index
Takeaway: Another solid data point from the ICSC numbers this week - sales up 3.3% on top of a 2.9% number last year. While numbers have climbed steadily since the 13th week of the year, we'd point to WMT's US CEO Bill Simon's comments from this morning quoted in the story below. Not exactly a clean bill of health for the median US consumer.
WMT - U.S. job rebound not spurring spending, Wal-Mart's Simon says
Takeaway: Nothing earth shattering here, but when WMT talks about the US consumer we listen. The company has over 30 petabytes of shopper data to draw conclusions from. All in, this is not a ringing endorsement for the median consumer in America. And it doesn’t bode well for our two least liked names in this space - TGT and KSS. When we looked at shopping intent over the last 3 quarters, WMT was the only retailer in the space with positive readings, so if it is still feeling the macro heat then that pain is being felt across the rest of the industry. Yes, one could argue that WMT is more exposed to the lower end consumer than most of the names in the chart below, more TGT than KSS. But we'd argue that TGT's brand transformations over the past 5 years (P-Fresh, RedCard, etc.) has only increased its exposure to the lower end shopper.
TGT - Target Appoints Three New Officers, Spanning Information Technology, E-commerce and Digital Product Teams
Takeaway: Kudos to TGT on these hires. We don't have any edge on any of these 3 personally, but the fact is that TGT has one of the worst performing e-commerce businesses in the industry. Clearly new blood is needed in order to innovate and implement the type of changes that need to be made. We feel like a broken record saying this, but…those changes won't be cheap.
BBBY - Bed Bath & Beyond Inc. Board of Directors Authorizes New $2.0 Billion Share Repurchase Program
PETM - PetSmart Shareholder Longview Joins Call for Company to Consider Sale
CA - Carrefour to Close Stores in India
Tickers: MGM, CZR, WYNN, BEL
MGM: Macau Growth Under Threat as Chinese Travel Farther: Ho Bloomberg
"I'd say the slowdown in the economy and the fact that now the foreign destinations might become competitors" are the biggest risks to Macau's growth," said Pansy Ho, co-chairwoman of MGM China. As Chinese tourists travel more frequently and farther afield, the city could gradually lose its appeal, said Ho, who's nicknamed "casino queen" by local media. "We're already beginning to see that the customers coming through our doors are more demanding, they now know how to differentiate."
Takeaway: As more Asian destinations open up to casinos in the future, Pansy's point makes sense. The Chinese macro concern is also warranted.
1680:HK Macau Legend – (Apple Daily) reported that the company's application for 50 to 100 new tables for Macau Legend was submitted in December last year, and that the company’s management had expressed confidence to fund managers and stock analysts that approval could be gained within the first half of this year - however, so far there has been no news on the approval. Back on October 8, 2012, the company in consultation with Sociedade de Jogos de Macau SA submitted a request to the Gaming Inspection and Coordination Bureau to increase Macau Legend’s table allotment from 146 tables to 500 with the initial 50 to 100 new tables as the first batch of the 350 tables that Macau Legend would like to apply for from the government.
Takeaway: Slower than expected table game approval process...this could be a foreshadowing of the difficulty in securing new tables for the properties that are expected to open in 2015 and 2016.
CWN:AX Crown Resorts – the company today secured a restricted gaming license for its Crown Sydney development, Barangaroo. As a result of receiving probity clearance, Crown will pay $95 million to the state government within five days. A $5 million deposit was paid in July 2013. The Crown Sydney project it still subject to planning approvals and negotiations with Lend Lease and the Barangaroo Development Authority. Crown’s restricted license allow visits by only members and their guests, prohibition of poker machines and minimum bet limits on table games. The features are designed to tailor the casino to high rollers.
Takeaway: The approval was widely expected and once operational the property could generate more than half of Crown Resorts revenues and profits.
CZR – A consortium including Caesars, OUE and Lippo Group paid into an escrow account the initial US$10 million deposit toward the cost of land for a major gaming resort near South Korea’s Incheon International Airport. The investors hope to complete the approval phase within eight months, with a possible first phase opening in 2018. A condition before moving to the development phase will be that the consortium gets approval from Incheon Development & Tourism Corp – the body charged with urban redevelopment and economic growth in the area – for the design of the resort
Takeaway: A positive step in the ultimate development process.
IKGH – (Macau Business Daily) According to IKGH, “any opening of additional casinos and hotels is likely to result in a significant increase in the number of VIP gaming rooms, intensifying competition in Macau’s VIP gaming business and for VIP gaming promoters.” Iao Kun has VIP gaming rooms in the StarWorld Hotel and Casino, the Galaxy Macau, the City of Dreams Macau, Sands Cotai Central and L’Arc casino.
Takeaway: So trying to secure VIP rooms in the new properties might be a good strategy?
WYNN & 1128:HK – (Macau Business) The International Union of Operating Engineers has asked the Macau government how certain mainlanders came to hold rights to land in Cotai where Wynn Resorts Ltd means to build a casino-resort. International Union of Operating Engineers representative Jeffrey Fiedler said: “The Macau government should provide an explanation about how this group from Beijing acquired this initial commitment for the land in Cotai.” Wynn Resorts Ltd paid the holders US$50 million (MOP400 million) for the rights to develop the land.
Takeaway: While considered a gadfly by most Macau observers, Mr. Fielder is trying to make life difficult for Mr. Wynn.
BEL – announced that it has signed a management agreement with Cadogan Estates Limited to operate The Cadogan, a 64-key hotel on Sloane Street in the heart of Chelsea, London, as part of the Company’s collection of luxury hotels and travel experiences. The property will close at the end of July, undergo a $48 million investment project and the Belmond Cadogan will open in summer 2016. The re-conceptualization will include the complete refurbishment of all public areas and the reconfiguration of 64 rooms to 54 in order to accommodate demand from luxury travelers for larger junior suites and suites.
Takeaway: A great property addition in a great location and city, which we believe will command a super-premium ADR.
Japanese Gaming Expansion – (Kyodo News) Following the recent Universal Studios Japan announcement that it would seek to add a casino to its property in Osaka, Japanese theme park operator Huis Ten Bosch Co Ltd announced it is searching for a partner to develop a casino resort next to its Nagasaki, flagship property if casinos become legal in the country. Huis Ten Bosch President Hideo Sawada indicated “We’re seeking a sophisticated and elegant European-style facility next to the Huis Ten Bosch theme park," while also noting his company would not directly operate the facilities – at least on the short-term – due to lack of know-how on gaming operations.
Takeaway: Local companies taking the public relations lead in Japan for companies which look to enter the gaming business.
Japanese Gaming Expansion – (Japan Times) MGM Resorts International and Macau-based Galaxy Entertainment Group Ltd are the front-runners to win a licence for an Osaka casino resort, if casino gambling is legalised in the country, the Japan Times reports. The newspaper said Osaka Governor Ichiro Matsui and Osaka Mayor Toru Hashimoto on Tuesday reacted negatively to the idea of USJ Co Ltd, the operator of Hollywood-themed entertainment park Universal Studios Japan in Osaka, bidding for a casino license. Japan Times quoted Mr Matsui as saying: “USJ has no experience at all in the casino sector.”
Takeaway: We believe this story is merely noise in the intensifying public relations battle.
Massachusetts Gaming – (Boston Globe) Mayor Marty Walsh and Mohegan Sun have reached an agreement in principle regarding a deal in which the casino developer will pay the city to make up for a Suffolk Downs casino. In accepting the casino company’s offer, Walsh would give up on his insistence that East Boston vote on the project as a “host community” under the 2011 casino law.
Takeaway: Mohegan in the lead but too many interested parties.
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.
This note was originally published at 8am on June 24, 2014 for Hedgeye subscribers.
“The very substance of the ambitious is merely the shadow of a dream.”
I’m in the throes of the Nevada desert with some colleagues and friends of Hedgeye. Later today, we will be attending the 2014 NHL Awards at the Wynn Casino. For the hockey players receiving awards, this is the epitome of their success and acknowledgment of their ability to fulfill their lifelong dreams. They have reached the pinnacle of their chosen profession. In hockey speak, they are #LivingTheDream.
Incidentally, Las Vegas, as much as any city in America, also epitomizes a dream - the American dream. From 1940 to the last census in 2012, the self-proclaimed “entertainment capital of the world” grew its population from some 8,000 inhabitants to almost 2 million, for a CAGR of north of 8%. This growth rate well outpaced the overall population growth rate in the United States, which increased by only about 1.5x during the same period.
As a function of this massive growth, 18 of the world’s largest 25 hotels are now in Las Vegas, the strip is the brightest place on earth that can be seen from space, and almost 40 million people annually visit Clark County (the home of Las Vegas). Despite these staggering statistics, on many metrics Vegas actually peaked in 2007. In that year, according to the Las Vegas Visitors and Convention Bureau, total gaming revenue in Clark County was $10.9 billion versus $9.7 billion in 2013.
Admittedly, gaming revenue in Clark County has recovered a fair bit off the recent bottom when it troughed at $8.8 million in 2009. Regardless, the fact remains that Las Vegas gaming revenue is still well off the peak and hasn’t grown since 2005. So, is this Las Vegas dream dead? Is the American dream dead?
On both questions, the answer is likely no. But whether we use the term the “new normal,” or some other cutesy name to describe the prospect for American domestic economic growth, the next five plus years will likely continue to be a normalizing of the excesses of the early 2000s. In many ways, Las Vegas remains the poster child for the boom and subsequent bust of that period.
Of course, as investors, we can always dream of a rampant reacceleration of economic growth, but as Shakespeare also wrote:
“And this weak and ideal theme, no more yielding than a dream.”
Back to the Global Macro Grind...
In the category of “more nightmare than dream” is the under-allocation of corporate pension funds and university endowments to the U.S. equity allocation rally that began in 2009. According a report out late yesterday, the average college endowment had a 16% allocation to equities in June 2013, versus 23% in 2008 and 32% a decade ago. Meanwhile, corporate pension funds on average had 43% of their portfolios allocated to equities versus 61% in 2003. Given the outperformance of U.S. equities over that time, it is likely that many of these institutions have been notable laggards in performance.
One clear threat to the equity bears is the potential that these large institutions begin to chase performance in unison. For a broad based allocation to equities to occur, these institutions would generally have to be of the view that GDP growth is set to accelerate and likely meaningfully so. If history is any indication, this is unlikely to occur.
In the Chart of the Day below, we’ve looked at annual GDP growth in the United States going back to 1950 charted against the 10 year rolling average of growth. The takeaway from the chart is simply that U.S. GDP growth has been steadily coming down over time, and has had a sharp step down following the last recession. The U.S. economy seems to have now entered a phase of lower growth. Absent any evidence of acceleration of this trend, it will be difficult to compel large asset allocators to over allocate to the growth asset class of equities.
Speaking of not normal, according to Xinhua yesterday, noted Chinese economist Li Yining, “refuted the notion the Chinese economy is in decline saying that the previous high growth rates were not normal”. According to Yining’s analysis, China’s GDP should be higher than the released figure based on the fact that housing construction in rural areas is not included in the Chinese GDP calculation while it usually is in other regions.
Perhaps the Chinese government will take a page out of the U.S. government’s playbook and change the calculation as the economic statistics becomes less suitable to its needs. This is, of course, a page right out of the U.S. government’s playbook as the U.S. government has changed how the Consumer Price Index is calculated several times over the last few decades. (Ironically, this was also a period when the U.S. government had increasing obligations that were tied to inflation / CPI.)
To her credit, this ever changing methodology of changing inflation may in fact be the reason that Federal Reserve Chair Janet Yellen said last week, “recent readings on, for example, the CPI index have been a bit on the high side but the data are noisy.”
“Noisy” is an interesting characterization as the government’s own measure, CPI, actually jumped above 2.0% last month. Meanwhile, what is not noisy to those of us who eat, fuel our vehicles, or consume goods that have commodity inputs (read: most goods) is that the CRB Index is now up almost 12% year-to-date. We tend to agree with Yellein, that is noisy!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.47-2.64%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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.