Guidance again disappointing especially after factoring in the property tax benefit. And the real flow through on higher YoY Borgata revenues was actually not good




  • Clearly did not meet expectations.  Weak spending among casual customers.
  • Q2 results not acceptable
  • Revenue shortfall:  Regional properties weakness accounted for $23m of $25m shortfall
  • LV Locals:  top line trends similar to 1Q; excluding low hold and higher utility expenses, EBITDA would have been on par with prior year
  • Southern NV economy still recovering
  • Borgata continues to outperform competition.  For 3 out of last 4 quarters, Borgata has gained share in greater Atlantic market (DE, PA, NJ, NY)
  • Lowered FY 2014 EBITDA guidance:  assumes 3Q/4Q will be similar to 2013
  • Orleans and Gold Coast:  Higher rates and expanding audience
  • Updating room products at Orleans and IP.
  • Updating F&B products (new restaurants) at LV Locals properties
  • B-Connected:  opportunity to enhance topline results.  Near completion of rollout at 5 Peninsula properties.  Still early but results have shown progress.
  • Online gaming:  early results from NJ have fallen short of expectations.  75% of accounts created were not active customers at Borgata.  Seasonality accounted flatness in online gaming trends.  As colder weather returns, online gaming visitation will increase.
  • Online gaming business in 2Q:  $1.8m loss; in July, they broke even
  • Will launch a mobile sports gaming app in Nevada
  • Remain on track for $200m debt reduction in 2014
  • Continue to benefit from $1.1bn in tax carryforwards
  • LV Locals:  lower hold reduced EBITDA by $1m.  Absent low hold, revs would have been flat.  Two utility cost hikes resulted in $1m.  Orleans had rev and EBITDA growth.
  • Downtown:  May/June was slow but recovered in July.  Market share grew by 40bps.  Optimistic on long-term outlook.  
  • Room upgrade at SunCoast in coming months
  • Midwest/South:  Biloxi/Shreveport/Central Illinois (2/3 of EBITDA shortfall).  At other properties, performance was flat YoY.  Delta Downs set new EBITDA/revenue records.
  • Blue Chip:  grew 40bps in market share.  
  • Kansas Star EBITDA grew YoY.  Kansas Star hotel expansion on schedule...will double room count
  • Borgata:  market share grew by 240bps.  2Q share- highest in 2Q record history.  Lower property taxes will benefit EBITDA by $6m per quarter.
  • Borgata:  holds 10% share lead over nearest competitors
  • YTD, total debt reduction has been $100m
  • 2Q capex:  $35m ($8m Peninsula, $7m Borgata); YTD capex:  $54m;  for 2014, $120m capex btw Boyd and Peninsula, $25m Borgata 
  • 2H Guidance:  
    • LV Locals/Downtown:  will be even with 2H 2013
    • Midwest/South:  excluding Blue Chip benefit, EBITDA would be higher
    • Borgata:  EBITDA even or slightly better than 2H 2013
    • Corp expense:  $27m
    • Borgata:  2 tax appeals pending
      • One-time cash payment of $88m; no concerns here; timeline:  probably year-end
      • 2009/2010 tax refunds:  currently being appealed by City of Atlantic City

Q & A

  • Shareholder activism:  nothing to report
  • AC Online gaming:  over time, will see consolidation in online gaming business
  • Suncoast:  no impact from upcoming hotel renovations
  • Borgata:  land-based EBITDA increased by 17% YoY 
    • Yeah, but don't forget they had a $4.3m impairment in Q2 2013 so EBITDA was actually down YoY and flat after excluding the loss from online gaming. There was very little flow through on the YoY increase in land based revenues
  • Closure of competitor casino closures in AC:  capacity goes out in a overcapacity market.  Promotional market should settle down.  No pickup in business from Atlantic Club closing. 
  • Northern NJ possible casino:  not overly concerned in next year or two
  • Not much increase in 2015 capex to complete their many projects
  • 2014 EBITDA guidance includes $11.8m Borgata tax benefit and includes  the lower $6m in property taxes per quarter
  • Borgata promotional allowances: higher because of online gaming; ex online gaming, promotional allowances would have been lower YoY
  • LV:  bigger players have done well but casual players struggle
  • Prior EBITDA guidance did not include property tax credits
  • Increased capacity in Midwest/South: Margaritaville in Shreveport (Q3 will be an apples-to-apples comparison); Biloxi competition- significant casino expansion in Alabama (Native American);  Peoria- IL VGTs affecting performance
  • Continuation of 2Q trends would put them in lower end of FY guidance
  • Regional EBITDA in 2013:  - 20% in September and -25% in December
  • Core player trends:  frequency and spend per visit are flat YoY
  • Lower property taxes going forward at other properties are possible:  Kansas appeals in process (not in guidance this year)


We booked a fifth consecutive gain on the long-side this week in livestock (ETF: COW) after buying on the oversold signal late last week. 


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Levels chartvF2


Between the cattle shortage in the United States, scandal in China, and PedV virus affecting some 4,700 farms nationwide, both markets have skyrocketed to all-time highs this year amid a longer-term trend of much higher meat prices:


Five year changes:

  • USD Index: +5%
  • Live Cattle: +88%
  • Lean Hogs: +115%

While both have run significantly this year, a price divergence has emerged between the two over the last month. Basis between front and 4th,5th,6th contract months suggest the market expects much lower prices for both by next summer:

  • Lean Hogs: +38% YTD but down -11% over the last month. Spot-Feb basis is implying -25% lower prices by February
  • Live Cattle: +19% YTD and up +5% over the last month. The basis between the two months is not quite as high. The Spot-Jun 15’ basis is implying a -5% price decline by next summer

The USDA extended a conditional license to utilize a vaccine for the PedV virus that usually kills 100% of the baby pigs in an infected farm. Harrisvaccines in Ames, Iowa is responsible for developing the vaccine and will be allowed to test its effectiveness. The market has reacted to its positive outlook. Lean Hogs spot contracts are down -12% since the news broke on the 15th of July, and the forward curve flattened. The vaccine is expected to be tested on the sows with the hope that they build the anti-body to disinfect the milk passed along to piglets. Despite the sell-off in hogs:

  • Put implied volatility right at the money is priced relatively flat vs. its 1 and 3 month averages and 15% above its 6-month averages. As expected the upside skew was immediately flatter on the PedV vaccination news (implied vols for the far out of the money call options were selling about 3-5 vol points lower). Sentiment as measured by the net length of futures and options contracts has remained flat on back of the news. 

ALL-TIME HIGHS IN JULY: Hogs and Cattle - Basis Graph in Hogs 


Supply disruptions in livestock year-to-date have led to a divergence from some of the more observable correlations in the commodity complex our team has flagged to support our big-picture macro themes. The negative correlation to the dollar is not AS pronounced in Hogs and Cattle, but the strength of the dollar is always a catalyst for the consumer (and thus everything priced in dollars).


With a seemingly improving labor market, a pull-back in commodity inflation, and the increase in revolving consumer credit, we need to continue seeing sequential improvement in these three areas for evidence of material improvement in the consumer spending picture. The livestock market is certainly expecting a pullback....   


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Lean Hogs Futures Curve


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Live Cattle Futures Curve


ALL-TIME HIGHS IN JULY: Hogs and Cattle - USD Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 1 Month Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 3 Month Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 6 month correls


Hog prices have outpaced cattle YTD, +38% YTD and +19% respectively, but as mentioned, the market has converged over the last month. Lean Hog spot reached a high of $133.80 USD/lb. on July 15th and has since pulled back over -10%.


Yesterday marked a YTD and all-time high in cattle prices ($159.85 USD/lb.) A few of the outliers potentially fueling the move are included below. (Note: We’re looking to the market for buy signals in these commodities without edge on a fundamental call moving into the fall at this point):

  • July 23rd: OSI Group’s Husi Food Scandal
    • After a Shanghai reporter secretly filmed the packaging practices of a  Shanghai processing plant, the Shanghai Municipal Food and Drug Administration (China’s FDA) investigated and uncovered a number of alarming practices including:
      • Repackaging expired food (at least 4,300 cases)
      • Unsanitary packaging practices
      • The brands affected include McDonalds, Starbucks, and YUM Brands. Most chicken and beef products served at McDonalds in northern and central China are now unavailable. All companies have severed ties with Husi
  • January2014: The USDA reported a cattle herd at a 61 year low, possibly due to a number of factors:
    • Increased demand for organic meat
    • Biggest drought on record in California (spread from to Texas)
    • Supporting younger calves through a major drought and extremely cold winter in the Midwest makes having cattle uneconomical for farmers
  • April 2013: The USDA reported the PEDv virus was now in the U.S. It also estimates over 7M pigs have been killed in the past year, affecting 4,700 farms in 30 states. The mortality rates among young pigs is nearly 100%. Year-over-year, consumers are paying nearly 13% more per year at the super market     


Ben Ryan




Volatility Rips 26% Higher, Just as Hedgeye Has Been Heralding $VIX

Takeaway: We warned you.

Rising global risk and fear rattled markets, body-slammed stocks and sent the VIX soaring up over 26% today.


Volatility Rips 26% Higher, Just as Hedgeye Has Been Heralding $VIX - VIX Chart


The macro team at Hedgeye has been banging the drum on volatility for weeks. As CEO Keith McCullough has said on more than one occasion recently, “volatility basically bottomed on July 7th around 10—it’s never held below 10, ever.”


In fact, this move in volatility was one of our top three quarterly macro themes. See below.


#VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.


Click below to watch the video on one of our top three quarterly themes #VolatilityAsymmetry:

Daily Trading Ranges

20 Proprietary Risk Ranges

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.

VIDEO | #VolatilityAsymmetry: An Excerpt From Hedgeye's Macro Theme Call

Hedgeye CEO Keith McCullough discusses #VolatilityAsymmetry, one of our top quarterly macro themes during our July 11th conference call with institutional subscribers. The presentation detailed what we believe are the three most important macro trends.

Cartoon of the Day: Icarus

Takeaway: We've said it before, and we'll say it again: Risk happens slowly at first, then all at once.

Cartoon of the Day: Icarus - Icarus cartoon 07.31.2014

K – Adding to Best Ideas Short

Consumer Trends Work Against Portfolio. More Than Cost Savings Needed

Kellogg’s has taken so many blows to the head that it’s curious it is still standing. Despite the leg down the stock has taken today following a disaster of a Q2 report, we’re adding Kellogg’s as a Hedgeye Best Idea on the short side.


What’s clear is the company is working against some pretty powerful consumer trends that demand healthier, protein based foods for breakfast (think Greek yogurt and Eggs & bacon) and not cereal with milk. Add on a competitive landscape in snack foods and cereal bars (GIS and MDLZ), the struggles to get cereal and breakfast food adoption across global geographies, and the economically weakened consumer (in the US and abroad), and the macro headwinds on the business are quickly apparent. 


In the quarter, K’s top-line missed consensus ($3.69B vs $3.71B) and diluted EPS of $0.82 decreased -15% Y/Y!  The company lowered its FY 2014 internal sale growth guidance to -1% to -2% (versus previous +1%); cut internal operating profit growth to -1% to -3% (vs prior 0% to +2%); and lowered its EPS guidance to $3.91-3.99 (vs prior $3.97- 4.05). Ouch!

Our greatest worry is that Kellogg’s management believes it can turn around the cereal category and consumer trends based on a new marketing message; in CEO John Bryant’s words “we need to communicate how cereal can be a better option for them.”  The cereal category is expected to be down -5% this year and K is underperforming the category – we frankly are not of the camp that cereal sees a turn around, and in fact we believe that its glory days are firmly past. 


Recent quarters have shown that Project K, a four year program design to create and enhance global efficiencies across supply chains and business units has not delivered.  The resulting costs savings to re-invested and grow its core Kellogg’s brand, global snack brands (in particular Pringles), and emerging market presence, is not working as planned. The revision to guidance this quarter and the broader underperformance we’re seeing across business units is confirmation that the strategy is off track.


We look forward to sharing with you why we think Kellogg’s will continue to underperform expectations in an upcoming Best Idea presentation.


Select commentary in the quarter:

  • U.S. Morning Foods (includes cereal) – operating profit down -20.9%, citing the underperformance of Kashi. The company announced a renewed focus on returning the message of progressive nutrition to Kashi and name a new CEO of the brand that is expect to become an autonomous business and return to its roots in La Jolla, CA.  CEO Bryant called turning around cereal a “multi-year program”.
  • U.S. Snacks – operating profit down -0.4% and underperformance in the category. Co. cited the struggle with 100 calorie packs and decision to reduce SKUs, and expectation for the “segment to be challenged for the remainder of the year”.  Reaffirms strong Pringles sales trends.
  • N. American, Other (includes US frozen and Canada) –operating profit down -20.4%. Frozen down on difficult comparisons (the launch of flatbread sandwiches last year) and the Eggo brand is below expectations (focusing on marketing in 2H behind the business). Canada – strong Pringles sales and 2H optimism on more product activity.
  • Europe –operating profit down -29.7%. Snacking strong (Pringles sales up DD) but renewed efforts on campaign called Origins, to make the connection between food and its origins.
  • Latin America –operating profit 9.5% on strong results across the region. Venezuela currency issues remain a threat to FY earnings.
  • Asia –operating profit -90.2% on weakness in Australia, only partially offset by growth in India after weakness earlier in the year.


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


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