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P: As Good As It Gets Wasn't Good Enough (2Q14)

Takeaway: P had everything working for them in 2Q14, which amounted to decelerating revenue growth...It only gets tougher from here


  1. THE GOOD: P produced revenues above its 2Q14 guidance range, but only inline with consensus, and well below our estimates.  Total listener hours accelerated sharply (up 29% y/y vs. 13% in 1Q14), largely driven by surging per-listener usage.  P increased 2014 revenue guidance increased by $15M to $895M-$915.  
  2. THE BAD: Inline Revenues translates to a marked deceleration in revenue growth, which is a concern on a 33%-100% increase in ad load, on what could be its peak growth in listening hours for the year.  The road get tougher from here as P comps past both the listener cap and ad load increase.  Further, the guidance raise was likely fueled by seasonal political ad spend.
  3. THE UGLY: The longer-term story.  The dichotomy between user growth and monetization (ad load) will become more evident from here.  There is limited headroom on both fronts; declining engagement (hours/user), if not the users themselves, may be closer than some would like to believe given P's attrition issues that have gone largely unnoticed.  Increasing ad load will only exacerbate the issue, especially with growing competitive threats competing for a share of P's 77% internet radio market share.



P produced revenues above its 2Q14 guidance range, but only inline with consensus, and well below our estimates.  P delivered continued strength in mobile advertising, with revenues growing 54% y/y (vs. 59% in 1Q14) on our estimate of a 40% y/y increase in mobile ad-supported listener hours.  Listener hours on a per-user basis accelerated sharply in 2Q, up 20% y/y (vs. flat in 1Q14), with total ad-supported hours up 23% (vs. -2% in 1Q14).  P raised its 2014 guidance by $15M to $895-$915


P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Ad hours 2Q14



Inline revenues is actually a disappointment when considering everything P had going for them this quarter.  2Q14 is the first, and only full comp, on the mobile listening cap that led to per-user listening hour declines last year, in turn, the surge in 2Q14.  Further, P's redesigned ad feed (2 double-ads every 20 minutes vs. 1 ad every 15 minutes prior), cumulatively increased ad load by 33%-100%.


Combined increasing ad load on surging hours led to a deceleration in advertising revenue growth: 39% in 2Q14, which had the extra benefit of surging listener hours, vs. 45% in 1Q14, which only carried the increased ad load.  Moving forward, P will comp out of both tailwinds next quarter, so it only get tougher from here.


P did increase revenue guidance (up $15M), but much of that is fueled by the biennial ad spend around elections.  Management stated that political ad spending had been in the "high single-digit millions" in prior years, and that it should be higher this year.  


P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Ad Load distribution


User growth slowed into the high-single digits for the first time.  That was largely telegraphed by P's monthly releases, but still drew a few questions during its earnings call.


In the link below, we speak about the headwind to P's user growth moving forward. Declining engagement (hours/user), if not the users themselves, may be closer than some would like to believe given P's attrition issues that have gone largely unnoticed.  Further, we expect P's stated strategy of progressively increasing its as load will exacerbate this issue given a growing wave of competitive threats looks to capture some of P's ~77% market share in internet radio.


There is more work to be done here, largely breaking down P's TAM, which includes the proportion of its total accounts that may duplicate user accounts.  We have started doing some survey work, and will be publishing a note shortly.  Stay tuned.


P: As Good As It Gets Wasn't Good Enough (2Q14) - P   Attrition


For more detail on our longer-term thesis, see note below.  If you have any question, or would like to discuss in more detail, let us know



P: Shot Across the Bow

07/23/14 10:27 AM EDT




Hesham Shaaban, CFA




A Q2 beat and unchanged implied 2H guidance. Might as well sell?  We beg to differ.




We’re buyers of PENN on the stock's weakness given likely better than expected July revenues to be released by the states in 1H of August, our expectation of a Q3 earnings beat, and the potential for a strong opening for PENN’s 2 new racinos opening in mid to late Q3. 


PENN’s stock took a surprising turn down following a strong market opening.  The 11% intraday reversal was likely driven by guidance confusion, PNK’s ugly results and an uncomfortable conference call, the weak performance by PNK’s new racino - Belterra Park, and animal spirits.



Admittedly, we thought management could’ve provided better Q3 guidance.  July is looking about 400bps better YoY than June per our model and supported by channel checks.  Indeed, revenue guidance was strong but the flow through looks pretty conservative.  Nevertheless, implied 2H guidance was unchanged, and Q3 guidance came in a little better than the Street when factoring out the Kansas City EBITDA adjustment and pre-opening expenses.  We think these items caused some investors to conclude that guidance was lowered and lower than the Street.  It wasn’t and forward estimates are likely not going down.


We remain above the Street and management guidance for Q3 to the tune of $5-6 million in EBITDA on an apples to apples basis.  The regional gaming states will begin to release July revenue figures in 2 weeks which should be another catalyst.  Finally, we suspect the Street is pessimistic regarding the Youngstown and Dayton racinos which should open August/September 2014.  Assuming no change in current regional gaming trends, we suspect the Street’s Q4 EBITDA estimate of $57 million will prove light as well.



Looking ahead to July, our model is projecting only a 1% YoY decline in same store sales for the mature regional gaming markets versus the 5% drop generated in June.  Our advance read into Missouri and Pennsylvania suggests both of those markets are in the black on a YoY basis relative to our previous expectation of another monthly decline.



Indeed, PNK’s results were not encouraging.  But it had to catch up with them one of these quarters.  PENN has kept investors sober about regional gaming trends and the sell side estimates conservative.  We think that remains the case going forward.


There is no doubt that PNK’s Belterra Park racino has had a disastrous opening and investors are likely making the read through to PENN’s upcoming racino openings in Youngstown and Dayton. However, as PENN management pointed out on their conference call, these markets are much more isolated (see Toledo) and will face very little competition.  Location is everything when it comes to racinos.



On an apples to apples basis, excluding pre-opening but making management’s KC adjustments, we’re projecting Q3 and 2014 EBITDA of $71 and $290 million, respectively, versus management guidance of $66 and $279 million.

CHART OF THE DAY: U.S. Housing Compendium Courtesy of Your Favorite Macro Team

CHART OF THE DAY: U.S. Housing Compendium Courtesy of Your Favorite Macro Team - Compendium 072414


To quickly review the evolution of our housing call: After being discretely bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly negative at the beginning of 2014 and elevated #HousingSlowdown to a top Macro theme for 2Q14. 


investing ideas

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Boy Band

“Shot everytime Janet says “Slack””.

-Hedgeye FOMC drinking game


I was trained as a research scientist, not as an economist.  Given that I’m charged with front running the flow of the domestic macro economy, that could be viewed favorably or not – and is probably most dependent on one’s particular ivory tower predilection. 


Truthfully, in a debate with an econ PhD scored on the use of technical jargon and unnecessarily complicated verbiage to describe largely pedestrian macro concepts – I’d probably bet on the other guy.


Generalize the contest to one scored on general cerebral alacrity and proficiency in information processing and contextualization – I bet on myself.  I’m cool with that tradeoff. 


The “Yin” thing about hours of toil in grad school biochem labs and research libraries is that it builds transferable analytical skills. 


The “Yang” - when comparing science with investing –  is that the conclusiveness of the output and the manner in which the research is applied is almost antithetical. 


Generally, the goal of scientific research is to arrive at a definitive, singularly right answer.  In investing, such a thing rarely exists.  Even if a hard conclusion is, in fact, reachable, bandwidth and time constraints often limit the ability to fully distill the available data.   


For someone trained as a scientist, big-time decision making based on imperfect information, data mosaics, and preponderances of evidence amounts to living in a kind of perma-purgatorial state of cognitive dissonance. 


If the Hedgeye Macro team was a Boy Band, I would probably be “the overly analytical, loveable one.


Boy Band - 11


Back to the Global Macro Grind


Hard hat utilization among the domestic construction bulls continues to run at peak capacity with the housing market throwing up nothing but bricks in 2014. 


Wednesday’s Mortgage Application data showed housing demand to start 3Q is running -3.6% QoQ with the purchase index sitting just 6% above the 10Y lows recorded during the peak weather distortion back in February. 


Yesterday’s New Home Sales data for June was equally uninspiring, declining -8.1% MoM and -12% YoY.  Notably, the June decline was on top of a -12% downward revision to the May data.


To quickly review the evolution of our housing call:   After being discretely bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly negative at the beginning of 2014 and elevated #HousingSlowdown to a top Macro theme for 2Q14. 


With demand flagging, home prices in conspicuous deceleration and the ITB down -6% YTD (vs. the SPX +7.5%), that call has played out rather well. 


Does it still have legs?   We think so.


THE SECRET SAUCE:  There’s endless housing data available and enough moving parts across the industry to build as much nuance into a housing call as one would like.   Where we can, however, we prefer to keep it simple.  


Two core, empirical realities sit underneath our base contextual framework for modeling the housing market and the resultant impact on market prices


I won’t keep the sauce secret, but I will make you work for it, kinda   You’ll internalize it too if you actually go through this 2 step exercise – Pop-tarts have more directions than that!


  1. Plot housing demand (pending home sales Index)  vs. price (Case-shiller 20 City HPI Index) with demand leading price by 18-months
  2. Plot Home Price change vs. ITB (U.S. Home Construction ETF)


What you’ll observe is that demand leads price by 12-18 months and housing related equities track the 2nd derivative of price like a glove.  


In other words, current demand trends tell you what home prices will do about a year from now and, if the model holds as it has for numerous cycles, equities will follow the slope in HPI. 


“RIDING THE SHORT BUS”:   The Corelogic HPI data for June showed home prices growing +7.7% YoY – a sequential -110bps deceleration in the rate of home price change vs. the +8.8% recorded in May.  In fact, we have seen approximately 100bps of deceleration in HPI in each of the last four months since the February peak of +11.8% YoY growth.   Housing demand trends in 2H13 suggest the home price deceleration should continue over the back half of 2014 – implying there’s still some runway left on the short side.       


CAPTAIN OBVIOUS:  “Everyone expects HPI to decelerate at this point, isn’t that priced in?”…we’ve heard some version of that reasoning multiple times this year and at multi-points along the recurrent housing cycle.  We get that sentiment and, intuitively, it feels more right than not, but the data argues otherwise.   We’re inclined to stick with the data.  With more downside in HPI, demand listing alongside weak income growth and regulation dragging on credit availability, we think sideways represents the bull case for housing related equities over the intermediate term.  


GOING BOTH WAYS:    A flattening and inflection in the 2nd derivative on HPI will be a key signal for us in terms of shifting off our bearish view.  Who knows….by then, maybe the labor data will have held positive, incomes will be growing at a multiple to HPI, comps will be easy, we will have annualized the implementation of the QM regulations and we can get back on the long side.        


DRINKING GAMES:  I’m on vaca with the fam next week, so I’ll miss the non-event that will be the official reporting of growth accelerating in 2Q off the easiest, non-recession comp ever. 


I will, however, try to rally the beach brigade for a ‘spirit’-ed searching of the FOMC announcement for “slack” mentions.


Back in the day, the FOMC “shot” word was “dollar”, but somewhere along the way we had to switch it up...you’d think the man whose lone job was to control the supply of money would have mentioned “the dollar” or “currency” at least once in 8 years…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.45-2.55%


Shanghai Comp 2091-2146

VIX 10.32-14.11

USD 80.32-81.07

Gold 1

Copper 3.20-3.29 


To Growth,


Christian B. Drake

Macro Analyst


Boy Band - Compendium 072414

Incarcerating Investors

This note was originally published at 8am on July 11, 2014 for Hedgeye subscribers.

“Who wouldn’t invest in that?”

-Matt Taibbi


That’s what Matt Taibbi (of Rolling Stone fame) asked about incarcerated Americans. I read his recent rant of a book, The Divide, while I was on vaca last week and he made an interesting point: “the very brokest people in America, Hispanic immigrants, are one of America’s last great cash crops” (pg 217).


Incarcerating Investors - taibbi thedivide c10a7d26a1bcacd568ecc9eec422a64d3df77b32


Long Big Government via the slammer? It’s actually an epic growth chart if you look at it from 1920-2014. If you don’t want to be long what’s born out of central-planning-policies-to-inflate (Slow-growth bonds, utilities, REITS, etc.), it’s just another way of being downright bullish on the bearish realities of America.


On that score, alongside my six man Jedi Macro Team, I’ll be presenting our Q314 Macro Themes of #Q3Slowing, #DollarDevaluation, and #Volatility’sAsymmetry at 11AM EST today. Ping our sales@hedgeye.com team if you’d like access to the slide deck and conference call. I’m inviting Ed & Nancy.


Back to the Global Macro Grind…


With Utilities (XLU) up to +13.7% YTD in a sea of mo bro red yesterday, those who are long of US domestic consumption growth (from an investment style factoring perspective) have been incarcerated by beta again. After dropping -4% this week, the Russell 2000 is down YTD. Not a bull market.


In all seriousness, I should probably have Christian Drake write the Early Looks for the rest of the year, because I’m running out of both Fed jokes and investment ideas. If I couldn’t get you to buy Gold Bond on any of its down days for the last 6 months, I’m probably not going to get you to buy it this morning.


Actually, you shouldn’t buy Gold or Bonds or anything equities that looks like a slow-growth #YieldChasing bond this morning anyway. On a relative basis to both beta (Russell 2000) and volatility (front month-VIX), the Gold Bond trade is as immediate-term TRADE overbought as the VIX is.


To review this week’s slammer move:


  1. VIX crashed to the upside (+24% in a straight line) after holding a line (10) that it’s never held below, sustainably
  2. Russell 2000 backed off like Brazilian ballers from its all-time-bubble-high of 1208 (March 4th, 2014)
  3. Gold broke out above our long-term TAIL risk line of $1324 (intermediate-term TREND support = $1272)
  4. Bond Yields resumed their bearish TAIL risk (for a US growth breakdown) after failing at 2.81% TREND resistance
  5. US Consumer (XLY) stocks moved back to flat YTD; Financials (XLF) and Industrials (XLI) broke my TRADE support lines


Sure, away from US momentum stocks getting put back in jail on Mon-Tue (i.e. the days Portugal wasn’t the latest weather excuse) there were some other things going on in the world. Japan, which has incarcerated its people with centrally-planned stagflation, was down every day this week.


But this sounds way too bearish for a man in a room who wants you to be right bullish on the bearishness of it all. Remember, if I am right, and US growth slows from Q2 throughout Q3, there is a ton to do on the long side:


  1. Buy Fixed Income
  2. Buy Foreign Currencies vs Burning Bucks
  3. Buy #InflationAccelerating via Gold, Oil, Energy Stocks, etc.


Heck, you can even probably think about buying Malaysian Equities (EWM) at this point! (*Emerging Markets do wonderfully when America is burning its currency credibility at the global stake – see 2011 for details)


Instead of putting me in commission jail (we don’t have a trading desk) for being bullish on bearishness, let me cherry pick some good news for you this morning instead of poking Portugal (pathetic bounce for the Portuguese PSI 20 this morning btw, still bearish TREND @Hedgeye):


  1. Malaysia was the 1st country in Southeast Asia to RAISE rates in 2014
  2. Malaysia hasn’t raised rates for their hard working Savers in 3yrs, so this is #cool for consumers
  3. Malaysia’s stock market only pulled back 0.5% on that, which looks like a buying opportunity


Newsflash to the US politicians who have incarcerated your savings and paid themselves in size with your tax dollars: when a country has the spine to raise rates, it gets ole school Ben Franklin frugality savers paid. And when we Can-Am ole school guys get paid on our savings, we can do crazy stuff like invest, hire, etc.


Yep. If you want me to get downright bearish on Gold, Bonds, etc. like I was last year – get your unelected gravity bending agency to raise rates. Dollar Up, Rates Up, Hiring Up, Capex Up – 1980s and 1990s style America. Who wouldn’t invest in that?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.59%

SPX 1953-1985

RUT 1155-1173

BSE Sensex 25034-26170

VIX 10.32-12.67

Pound 1.70-1.72

WTI Crude 101.76-104.31

Gold 1325-1345


Best of luck out there today – and go #Argentina!



Keith R. McCullough
Chief Executive Officer


Incarcerating Investors - Chart of the Day

July 25, 2014

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