There shouldn’t be much to cheer about this earnings season but the stocks probably reflect lackluster results. We’re not sure decelerating Mass is priced in yet.
Sure, Street estimates have come down but so have the stocks. Thus, the Q2 earnings season doesn’t look like much of a catalyst, positive or negative, for the group. On an individual company basis, LVS looks like it could disappoint, particularly on a hold adjusted basis since Sands China generally played lucky during Q2. MPEL should come in light as well but we would caution would be shorts: a big share buyback announcement could (and should) be in the works. On the positive side, Galaxy looks most interesting to us. In the face of a difficult junket environment, Galaxy seems to have found the special VIP sauce and we project a slight Q2 beat.
But don’t forget about the upcoming mass deceleration…
Q2 VIP disappointment is well known and mostly reflected in the sell side estimates. The comparison between Hedgeye and the Street is detailed in the chart below. Note also that we’ve included our hold adjusted EBITDA estimates for Q2 as well. Since we mostly know property level hold percentage before the companies report, we adjust our estimates for good/bad hold.
Galaxy: Earnings Beat and VIP Strength
Galaxy looks like the only stock that could pop with earnings (maybe also MPEL if it announces a big buyback). We’ve been very impressed with that company’s performance on the VIP side despite the well-publicized headwinds. As can be seen in the following chart, the company’s portfolio of properties (mostly Starworld and Galaxy Macau) have performed very well on this metric to go along with the market mass strength. While some of the share gain in Q2 could've come from the 2 Wynn VIP rooms facing construction disruption, the trend was already under way.
The bigger issue is the likely mass deceleration in 2H – not just Q3. We think the 30-40% mass revenue growth enjoyed by the casinos could dissipate to the high teens by the end of the year. As we pointed out in our 06/13/14 note “MACAU: HANDICAPPING MASS DECELERATION” – not only are comparisons difficult but July 2013 marks the month when casinos began jacking up table minimums on the mass floor. Lapping that and keeping 1H Mass growth rates will be a challenge.
The trade set up for Q2 earnings doesn’t look as it has in prior quarters. However, over the intermediate term, we remain negative on the stocks overall. We’re not sure sentiment has fully captured decelerating mass growth.
TODAY’S S&P 500 SET-UP – July 10, 2014
As we look at today's setup for the S&P 500, the range is 36 points or 0.75% downside to 1949 and 1.08% upside to 1985.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
We wanted to know what your thoughts are on the upcoming earnings season. In today’s poll we asked: Do you think S&P 500 earnings will surprise more to the upside or downside this quarter?
In the video below Macro Associate Christian Drake tells us why he thinks lowered earnings estimates and increased stock buybacks will likely correspond to S&P 500 earnings surprising to the upside. Can companies accelerate sales or expand margin growth? That’s a different question and Drake says that neither seem likely.
BOBE remains on the Hedgeye Best Ideas list as a long.
It was a disastrous quarter, and year, for Bob Evans Farms and its management team. The reality is we don’t like the company for what it is, but rather for what it could be. Activist investor Sandell Asset Management has been working tirelessly to unlock this hidden value. If BOBE reports another quarter similar to the one it just did, we won’t have to wait much longer. Management consistently referred to the company’s FY14 performance as an aberration and gave an optimistic outlook for FY15 – too optimistic, in our view. But we think the street will see right through this and estimates will come in below guidance. This company is a mess and first quarter trends are uninspiring. But sometimes ugly can be beautiful. We believe it’s only a matter of time before Sandell gets their way. You can review our full bullish thesis here.
Limping out of 4QF14
4QF14 revenues and EPS declined -17% and 32%, respectively, on a year-over-year basis. Management rattled off a long list of excuses for the poor performance during this morning’s call including severe winter weather, plant startup inefficiencies, high sausage material (sow and trim) costs, unforeseen supplier issues, an ongoing proxy contest and efforts to strengthen internal controls. FY14 and 4QF14 same-store sales decreased -2.1% and -4.1%, respectively. Management attributed 3.4% of the 4Q same-store sales underperformance to severe winter weather. Adjusted, this implies that same-store sales were only down -0.7% in the quarter. We have a difficult time giving credence to this, considering that same-store sales were down -2.7% in April. Mind you, this is with pleasant weather and a refreshed asset base!
Management brought down FY15 EPS guidance from $2.80-3.00 to $1.90-2.20 and guided to a full-year SSS gain of +1.5-2.5%. Most notably, this SSS guidance assumes a negative comp in 1Q, a flattish comp in 2Q and a high-single digit comp in both 3Q and 4Q. Following a disastrous FY14 and a slow start to FY15, we believe this guidance is outlandish. When pressed on this issue during the call, management cited a renovated store base, the Broasted Chicken rollout, an expectation for improved weather, increased marketing spend (including the “Get in on Something Good” advertising campaign) and stronger executional focus as the key same-store sales drivers. While these may be feasible SSS drivers on the margin, this company will not drive high-single digit increase in 2HF15. We simply don’t see how they will get there.
Management guided to eight new restaurant openings in FY15 and has finalized deals for four new Bob Evans Express units (two airport locations, two mall locations). They also expect to license up to ten Bob Evans Express locations during the fiscal year.
Words of Caution
Despite the aggressive guidance, management listed a number of current impediments to the company’s operations including macroeconomic headwinds, health care costs, a struggling core (lower and middle income consumers) market, commodity cost pressures and an increasingly competitive environment.
Commentary on Recent M&A Activity
Management was specifically asked about the high multiples currently being awarded in the packaged foods business. In fact, one investor pressed management on what they’d do if they received a HSH-like multiple for BEF Foods. Alas, management steered clear of that question. They did, however, reinforce their commitment to the foods business noting that an aberrative 2014 is behind them. On that front, they pointed to transformational investments (which have resulted in a lower cost structure), brand synergies, their insourcing strategy and their desire to continue to grow the business as reasons to hold on to BEF Foods. To be fair, they did note that if they received an offer for the foods business they’d look at it, but the overwhelming sense from day one is that management has no intention of selling this segment. Sandell appears adamant on making this happen and we think shareholders should be too.
06/13/14 BOBE: Reiterating Best Idea Long
05/15/14 BOBE: Asset-Light Is Right
05/02/14 New Best Idea: Long BOBE
Call with questions.
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