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TWTR: Thoughts Into the Print (2Q14)

Takeaway: Potentially noisy print may send mixed signals to street. We'll be focusing on its core growth strategy, and its shrinking runway.


  1. NEW MOVING PARTS: Acquisitions, new ad formats, World Cup, management shakeup, potentially new metrics. There will be a lot of noise in this print distracting the street from the underlying trends in the core business.  
  2. WHAT'S MORE IMPORTANT: We believe TWTR's chief source of growth over the LTM has been, and will continue to be, surging ad load.  Ultimately, we expect this strategy has limited runway since it risks pushing its users away.
  3. WILL IT BE ENOUGH?: Upside to estimates is the ongoing street expectation; its quarterly sell-offs on strong results suggest as much. The question is how much upside is the street looking for? We don't know the answer, but either way, it's asymmetric setup to the downside.



TWTR has been very active this quarter.  The company has made 7 acquisitions in 2Q14, which we believe is a record for the company.  We are not sure how much they will contribute to the top-line, but if anything, it offers some upside to 2Q14 and guidance, especially considering the potential impact of the World Cup on engagement trends.


We've also seen some churn at the management level.  The company has eliminated its COO position, hired a new CFO (Noto), moving Gupta to oversee a group focusing on start-up acquisitions, in addition to replacing heads of Finance and Engineering.  


There may also be some added noise to the print.  WSJ reported that TWTR may introduce new metrics, supposedly to provide another perspective on user engagement (link).


A series of acquisitions, management shake-up, and potentially new metrics sound like management is scrambling; the question is why.  Maybe they're seeing what we're seeing: it's going to get that much tougher to deliver the type of growth the street is expecting under its current growth strategy.



The issue we see to future growth is how we believe the company is deriving it today: surging ad load (supply).  This isn't a reported metric, but the company's trends in reported ad engagements and ad prices paint the picture.


The metrics in the chart below are the sequential change in ad engagement and ad pricing as reported by management (-.86 correlation dating back to 2Q12).  We believe the ongoing deceleration in pricing is a reflection of an accelerating level of available ad inventory (supply).  


Twitter's ads are purchased through its self-service ad exchange, where the price is determined through a bidding process.  We estimate the average cost/ad engagement (price) has cumulatively declined 85% over the last 2 years.  We believe a continued surge of increasing ad inventory led to this decline.  The tight correlation between ad engagements and pricing during the period suggests rising supply has been its largest source of monetization growth.


TWTR: Thoughts Into the Print (2Q14) - TWTR   Ad Engagement vs. Pricing 2Q


It's important to note what happened in 2Q13, when TWTR saw its sharpest drop in ad price, which we see as massive supply shock in ad inventory. In order to sustain its growth trajectory, TWTR needed a comparable surge in ad supply in 2Q14, which is what we believe they've done.  We ran a small poll of twitter users asking if they have noticed rising ad load, 71% said yes (link).  Remember TWTR's ads are scattered throughout a user's timeline, so far such a high percentage of users to notice suggests the increase is considerable.


Now the issue with this strategy is that there will be a point where rising ad load will push the user away because TWTR's ad revenue/engagements are primarily driven by mobile (smaller screen).  We're not saying they will lose the loyal user, but the quasi-plugged-in casual user, who are more likely its newer members.  In turn, user growth will become more challenging because the company will have to produce growth alongside a growing churn issue.  If user growth starts to meaningfully decelerate, the street will likely punish the stock for it, even if revenues are climbing.  One way or another, something has to give: revenue or user growth.  



TWTR's short public history suggests it has fallen victim to outlandish expectations.  Despite the beats and raises on both the 4Q13 and 1Q14 prints, the stock has sold off on each.  With TWTR, the expectation isn't consensus, its beating consensus, so the question is how much of a beat is the street expecting?


We don't know the answer to that, but we do see an asymmetric setup to the downside.  Further, with upside comes a higher hurdle later on, as consensus increases estimates for 2014, but more so for 2015.  


So the longer-term question is what happens when to the stock when TWTR can no longer jump the ever-increasing hurdle? 


TWTR: Thoughts Into the Print (2Q14) - TWTR   Expectations

TWTR: Thoughts Into the Print (2Q14) - TWTR   Consensus Annual



Let us know if you have any questions, or would like to discuss further.  


Hesham Shaaban, CFA



Cartoon of the Day: Waiting for Godot

Takeaway: It's been a tough ride for Consensus Macro.

Cartoon of the Day: Waiting for Godot - 3  yield Godot 07.27.2014

MCD: McLibel 2.0?

We are bumping up short MCD to the Investment Ideas list.


MCD: McLibel 2.0? - 1


MCD is under siege on three continents (America, Europe, Asia) and senior management's response to these crises will determine the future and the future profitability of this company.  Hopefully we don't see a pattern of missteps similar to those that created one of the biggest public relations nightmares in the history of McDonald's.


Students of McDonald's history know that the "McLibel" case was a very dark period for McDonald's Corporation.  This case was an English lawsuit for libel filed by McDonald's Corporation against environmental activists Helen Steel and David Morris over a pamphlet highly critical of the company.  The litigation, drawn out over a ten-year period, embarrassed McDonald's and caused the U.K. business to underperform for more than a decade.


McDonald's is currently under attack from different groups over varying issues in three key countries across three separate continents.  How management handles these issues will be critical to the future of the company.


  1. In the U.S., McDonald's (and other QSR chains) are under attack for poor wages and inferior food quality compared to other, more "fashion forward," restaurants.
  2. In Russia, the country's Consumer Protection Agency has filed a claim accusing the restaurant chain of violating government nutritional and safety codes in a number of its burger and ice cream products.
  3. In China, the meat supplier issue is creating serious issues in the form of availability and product quality concerns.


How management responds to these issues is critical to the future performance of the company, as they are not insignificant markets.  If the company's initial response to the meat supplier issue is any indication, we could be in for an extended period of underperformance.


China - Last Thursday, McDonald's said it is sticking with a Chinese meat provider, even after saying earlier in the week that it may have been misled regarding sales of allegedly expired meat.  The supplier is Shanghai Husi, which is owned by U.S. based OSI Group, a longtime supplier of McDonald's.  Clearly, the company's ties to its Chinese supplier run deep.  Today, however, news came out that McDonald's cannot sell its core menu items in China.  China is the last bastion of growth for McDonald's and, prior to today's news, the company was not able to meet its unit growth targets.


Russia - We haven't seen any official response to the Russian lawsuit from McDonald's, but how they respond will be critical.  Is McDonald's a pawn in the ever-increasing tension between the U.S. and Russia or did McDonald's bring on this pressure by shutting down its three restaurants in Crimea after Russia's annexation of the peninsula in March?  Either way, McDonald's is in a very difficult spot.  They need to settle this issue immediately and not let another legal case be played out in the press.


U.S. - Wages are headed higher for McDonald's in the U.S. and the company needs to get ahead of the curve.  Unfortunately, being a franchised system, the issue is in the control of the franchisees.  They won't want to pay higher wages with same-store sales and margins declining.


Turning back to the McLibel case, some of the leading allegations were that McDonald's:


  1. Wastes vast quantities of grain and water
  2. Sells unhealthy, addictive fast food
  3. Alters its food with artificial chemistry
  4. Exploits children with its advertising
  5. Is responsible for torture and murder of animals
  6. Poisons customers with contaminated meat
  7. Exploits its workers and bans unions
  8. Hides it malfeasance


McDonald's is a strong global brand that must protect itself against erroneous allegations.  It appears that any one of these could be made again today.  With that being said, how management proceeds with all the issues the company is currently facing will determine the financial performance of the company for the balance of the decade.


Howard Penney

Managing Director


Fred Masotta


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Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.




  • Total revenues:  $162 million
  • Adjusted EBITDA:  $106 million
  • FFO:  $0.62/share
  • AFFO:  $0.65/share



Q2 2014:

  • Total Rental Income:  $476 million with ~$418 million from PENN, ~$13 million from Casino Queen, ~$48 million to account for property taxes paid by PENN, and reduced by ~$3 million to account for non-assigned land lease payments made by PENN
  • Net Revenue:  $162.1 million
  • Adjusted EBITDA:  $106.6 million
  • Net Income:  $44.1 million
  • Real Estate Depreciation:  ~$24 million
  • Non-real estate deprecation: ~$3 million
  • Funds From Operation:  $69.4 million
  • Adjusted Funds From Operation:  $76.8 million
  • Net Income, per diluted common share: $0.39
  • AFFO, per diluted common share:  $0.65

FY 2014:

  • Net Revenue:  $630.1 million
  • Adjusted EBITDA:  $416.1 million
  • Net Income:  $177.5 million
  • Real Estate Depreciation:  ~$93 million
  • Non-real estate deprecation: ~$12 million
  • Funds From Operation:  $271.1 million
  • Adjusted Funds From Operation:  $299.7 million
  • Net Income, per diluted common share:  $1.50
  • AFFO, per diluted common share:  $2.54



  • What is the REIT investment community missing about the GLPI story?  Why as of June 30, 2015 did only five REIT/Real Estate funds own GLPI?  Why is the REIT investment community ignoring GLPI?  What steps is GLPI taking to expand ownership by the dedicated REIT/Real Estate funds?
  • Given Steven Snyder's comments at the Goodwin Proctor tax seminar in May regarding the IRGC ruling that the not-for-profit counterpart holds the gaming license and GLPI would not pursue additional acquisitions in Iowa, why is GLPI holding talk with ISLE -- when ISLE owns three casinos and more than 20% of ISLE EBITDA is from Iowa?
  • Update on the The Meadows Race Track & Casino acquisition - targeted closing date?  Interest and potential value by selling the operator license? How much equity needed to complete this transaction?
  • Argosy Casino Sioux Falls
    • Given Iowa Supreme Court and the closure on Wednesday, July 30th, what is the timing and amounts of changes analyst should be modeling pertaining to the closure/shutdown?  Do these changes include any assumptions or residual value -- machines/tables/boat?
    • What are the costs related to the removals of the boat?
    • Will historical numbers be restated to exclude Argosy Sioux Falls?
  • Any indications Casino Queen is attempting to refinance its $43 million term loan? 
  • Discuss the current valuation gap between potential sellers and buyers of gaming assets?
  • Thoughts on diversifying tenants.  Would you consider sale/leasebacks with BYD, PNK, or even an MGM?



Development Pipeline

  • Mahoning Valley Race Track - Planned budget $100 million, $25.9 million expended as of 12/31/2013, and $35.5 million spent as of 03/31/2014.
  • Dayton Raceway - Planned budget $89.5 million, $26.2 million expended as of 12/31/2012, and $39.1 million spent as of 03/31/2014.


  • On May 14, 2014, announced an agreement to acquire The Meadows Racetrack and Casino located in Washington, Pennsylvania, a suburb of Pittsburgh, Pennsylvania, from Cannery Casino Resorts, LLC for $465 million. The purchase price, which the Company intends to fund with a combination of equity and debt, represents approximately 9 times the property's 2013 EBITDA

Rent Escalator

  • Need to wait to get out and past the end of the second quarter, if PENN performs in line with their guidance, then the 2% rent escalator would be at risk.

New York

  • GLPI may look to backstop or support an (upstate gaming) applicant from a financing perspective, but there is 60 days (application deadline) until those issues will clarify.

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Economist and CNBC senior contributor Larry Kudlow squares off with Hedgeye CEO Keith McCullough on inflation and whether market signals like gold and TIPs are forecasting higher prices.


Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.




  • Total revenues:  $798 million
  • EPS $0.57






  1. Visitation into Hawaii has declined in 2014. Any worries about Pride of America?

  2. Has the Caribbean pricing environment gotten worse since your Q1 earnings call?  We've been hearing a pickup in NCL promotional deals being delivered via email.

  3. Is the Caribbean weakness mainly attributed to lack of demand from North American source markets? Are international source markets for Caribbean itineraries doing better?

  4. How confident are you that Breakway will be able to maintain double digit premiums in the NY/NJ market as Quantum makes its arrival in November?

  5. As your biggest competitors look to new destination markets in 2015 and beyond, at what point would you be comfortable in deploying ships outside of North America and Europe?  

  6. Is onboard and other revenue yield reaching a peak?  It declined for the 1st time in 8 quarters in Q1.

  7. ECA impact in 2015

  8. Update on pending Genting share sell 

  9. Industry capacity growth in Europe in 2015





  • Caribbean still has opportunities to improve on booking, but that is the major focus for the NY and Miami markets
  • Across the Baltic, the Canaries and the Med, all of which are significantly booked better than last year.
  • On par pretty much with Hawaii
  • Are heavily booked in the Canada and New England,
  • Had significant positive bookings every week for the last 10 weeks, which has put NCLH into a very good book position 

Onboard spend

  • Pretty solid with onboard as NCLH moves through the rest of the year.


  • Pricing across Europe is very healthy double-digits.
  • Seeing the benefits of our strategy of consistent deployment and commitment for the European markets in the form of improved pricing and occupancy as we go into the third consecutive year of our four ship seasonal deployment from Europe.


  • Alaska is in the zone of being low single-digit positive.
  • Norwegian Sun has found its footing and is showing stronger pricing and booked position versus last year demonstrating that our strategy of keeping consistent offerings while it may include some time for awareness to grow during their introduction, results in these products being successfully absorbed by the marketplace and contributing to overall yield growth.


  • Hawaii is doing well


  • Pricing still a little behind 
  • Minimal incremental capacity in 2015

Capital Allocation

  • 3-yr $500m share repurchase program

Genting ownership sale

  • Genting is seeing that the stock prices are not where they would like it to be and are NCLH suspects, will take wait-and-see attitude on selling their shares.

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