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GAMING REGIONALS: NOT YET IN THE RECOVERY ROOM

“Bad” to “less bad” to “stability” to “recovery”, the progression of sentiment encompassed a 155% trough-to-peak move in regional gaming stocks this year.  Unfortunately, the stocks may still be reflecting “recovery” sentiment without a supporting fundamental backdrop.

 

 

We think the trough to peak move of 155% in regional gaming stocks was driven by three distinct phases of investor sentiment.  First, the perception that business trends were turning “less bad” explained the first big move up off of the March 9th low.  Following some consolidation, the upward trajectory resumed in early April for more than a month, reflecting a “stabilization” view, in our opinion.  Finally, the largest and steepest move began in late April and peaked only a week later on May 5th.  We call this the “recovery” phase.

 

GAMING REGIONALS: NOT YET IN THE RECOVERY ROOM - Regional Index

 

So are the regional gaming fundamentals actually in a recovery phase and, more importantly, will they be over the next quarter or two?  The price level of stocks indicates that they should be as the index is squarely in the middle of the “recovery” bounds.  Unfortunately, the fundamentals likely have not caught up to the stock moves, nor will they do so any time soon.

 

We think the best indicator of marginal business trends is our delta chart.  The delta chart below clearly shows negative year-over-year gaming revenue trends.  Not much of a recovery there.  Furthermore, the 3 month moving average line does little to alleviate concerns.  In a recovery mode, we would expect a steep, upward trajectory of the line.  Yet, despite a favorable July calendar and an easy comp, the line is well below the recent peak in March, and barely off the June low.

 

GAMING REGIONALS: NOT YET IN THE RECOVERY ROOM - Regional SSS Delta July

 

Right now, the best indicator of upcoming gaming revenues may be gas prices.  The less-than-stellar monthly data occurred despite a pretty massive gas tailwind.  This is a pretty scary thought:  negative revenues for 6 out of the 7 months in 2009, with gas prices down between 50% and 75% all year long.  Remember that in our 6/22/09 post “REGIONALS COULD RUN OUT OF GAS", we showed that every 10% move in the price gas inversely impacts regional gaming revenues by 1.5%.   As can be seen in the following chart, the gas tailwind reverses into a major headwind beginning in November assuming current prices continue, climbing to over a 50% increase by the end of the year.  If the historical statistical relationship holds, December revenues face roughly a 7.5% hurdle from gas alone.  Ouch.

 

GAMING REGIONALS: NOT YET IN THE RECOVERY ROOM - US Gas Prices Aug Mnthly


THE WEEK AHEAD

The week of the 24th through the 28th will be eventful. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on. Germany and Japan, two economies that we follow closely, will have a particularly heavy calendar of releases next week.  

 

Saturday/Sunday/Monday August 24

 

US: The Jackson Hole Fed event concludes over the weekend with Bank of Canada Governor Carney presenting on Saturday.  

 

Europe: The Eurostat Eurozone Industrial Orders figures for June will be released on Monday morning.

 

Asia: Thailand releases Q2 GDP on Sunday evening. Singapore CPI data for July will be released on Monday morning, as will Taiwanese Export Orders and Industrial output figures for July. With all eyes on potential declines in new credit facilities in China, any indication of weakening demand from the mainland in these rear view Taiwanese order figures will be scrutinized intensely.  

 

Tuesday August 25

 

US: Case-Shiller data for June and Q2 will be released at 9 AM on Monday. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released that day. The treasury will hold a 2 year note auction at 1PM.

 

Europe: Germany releases a slew of critical Q2 data points on the 25th, including 2nd release GDP figures, Trade data, Private Consumption, Construction Investment and Government Spending. In the UK, BBA Mortgage data for July will be released on Monday morning.

 

Asia: Monday will be full of critical data points for Asia with both Hong Kong and Japan releasing Trade data for July (HK in the morning, Japan in the evening) as well as Taiwanese M2.

 

Wednesday August 26

 

US:  July Durable Orders and Shipments data, as well as July New Home Sales, will be released by the Census Bureau on Wednesday morning. Weekly MBA Mortgage application data will be released on Wednesday morning, as will EIA oil gas and distillate stock levels. At 1 PM the Treasury will auction 5 year notes.

 

Europe: German Import price Index figures for July and IFO business sentiment indices for August are due on the 26th.   

 

Asia:  Singapore releases Manufacturing Production figures for July on Wednesday morning while Australian Private New Capital figures for Q2 will be announced in the evening. Two Asian economies that we follow but do not report on –Malaysia and Philippines, will be announcing Q2 GDP on the 26th as well.

 

Thursday August 27

 

US:  Q2 second report GDP and Corporate Profits will be published at 8:30 AM, while weekly Initial Claims, EIA Natural Gas Stock and Fed M2 figures will be also be released through the day at their normal times. At 1 PM, the Treasury will auction 7 year notes.

 

Europe: German GFK Consumer Confidence and CPI for August will be released on Thursday morning. Italian and UK Consumer Confidence measures for August will also be released that morning, as will UK Business Investment for Q2 and final Spanish Q2 GDP.

 

Asia:  Japan has several major data points releases on the schedule for Thursday including August CPI, July unemployment personal Income and PCE and August PMI.  With the general election only 3 days away, these employment earnings and inflation data will be topics of intense interest. Weekly Indian Wholesale Price Index data will also be reported on Thursday. 

 

Friday August 28

 

US: July PCE and personal Income data will be released at 8:30 AM on Friday, while final Michigan Sentiment figures for August will be published at 9:55.  

 

Europe:   EC Eurozone Confidence measures for August (Consumer, Industrial, Economic, Retail and Construction) will be released on Friday morning as will Italian PPI for July and Spanish CPI for August. The UK will have a busy day for Q2 economic data points with second release GDP, Private Consumption, Fixed Capital Formation, Government Spending and Foreign Trade data on the schedule.

 

Asia: Japanese housing Starts and Construction orders for July are scheduled for release on Friday morning.

 

 

Andrew Barber

Director


The Big Get Stronger

We’ve been hitting on improved fundamentals in Europe in recent posts and today’s European PMI numbers continue the positive trend we have been watching develop.  Critically,  PMI readings for the German service and French manufacturing sectors released today for August crossed the 50 threshold, which indicates expansion.  According to Markit Economics the German service sector rose to 54.1 from 48.1 (far exceeding forecasts of 48.6) and French manufacturing rose to 50.2. German manufacturing and French services also improved sequentially but stayed in contracted territory at 49.0 and 48.9 respectively. 

 

As we’ve been reiterating in recent weeks, we believe that the improvement in Europe’s larger economies will greatly benefit other parts of the region due to the interdependent of trade within the EU. Clearly the improvement in German and French PMI as the Eurozone’s largest economies that each posted Q2 GDP growth of +0.3% quarter-on-quarter helped lift the composite Eurozone PMI to a 15-month high at 50.0.

 

Today Keith made a tactical sale of our position in Germany (EWG) in our model portfolio, with the ETF up ~3.9% as the DAX traded at ~1.8% at the time of the sale. European indices reacted positively to the PMI numbers, up 2-3% across the region. Despite the improved fundamentals we still see slow growth across Europe ahead, with relative winners and losers on a country basis. Our bullishness on Germany remains in the intermediate term; look for us to buy back Germany on a down day.

 

Matthew Hedrick
Analyst

 

The Big Get Stronger - a1

 


Early Look

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EYE ON HOUSING – IT’S SO GOOD

Today, the NAR reported that sales jumped 7.2% to an annual rate of 5.24 million homes, the highest since August 2007.  Consensus expectations were for a 5 million unit pace. Compared to July last year, sales rose 5.0%.

 

(continued after chart)

 

EYE ON HOUSING – IT’S SO GOOD - bbbbb

 

Since our 2Q housing call, all of the housing data points continue to indicate the housing market is turning after three years of continued pressure.  The one sticking point continues to be high unemployment, which continues to put real consumer demand into question.  It should not be forgotten with today’s good news that yesterday the Mortgage Bankers Association reported that LATE mortgage payments jumped to a record high in 2Q09, with almost one in eight homeowners delinquent or in the process of foreclosure.

 

Where do we go from here and can it get much better?  Here are my thoughts on that question!

 

(1)   THE PEAK SEASON - For those consumers with “need based” moves, it’s August and the kids will in school soon, if they aren’t already.

(2)   INTEREST RATES - Interest rates are headed higher in Q4.  See Keith McCullough’s note on “Bernanke Pandering” and you will get the picture.

(3)   THE GOVERNMENT - The Government home buyer stimulant is going to end.  The deadline to close a home purchase is November 30, 2009. The process of buying a new home is not quick and easy - finding a home, lining up financing and getting inspections and closing, all takes time to accomplish.

 

Howard W. Penney

Managing Director

 


Bernanke Panders, Again...

A picture is usually worth a lot more than my prose, and I have attached an important one below. The picture is from Getty Images, 4 weeks ago – FDIC Chairman, Sheila Bair, looks at Bernanke much the way that I do right now. I think that look on her face is a metaphor for how Americans feel about their Burning Bucks. The Debtors, Bankers, and Politicians are getting paid here. Americans are footing the bill.

 

Ben Bernanke’s 10AM EST comments out of Jackson Hole delivered exactly what the US Dollar bears ordered – more of the same conflicted compromise for America’s currency. Under the veil of a ridiculous narrative fallacy that this country is experiencing a “Great Depression”, Bernanke is overseeing a monetary policy that is as politicized as this fine country as ever seen. It’s sad.

 

In his speech, he seemed to be reflecting more on his personal history books about the Great Depression and how he seriously believes that he and this government prevented one. As ridiculously self serving as that is, at the same time he said we are emerging from a “deep global recession.”

 

Depression or recession? Global or local? How do you go from Great Depression to recovering from a recession?

 

China is running double digit GDP here in Q3, and Australia’s economy has barely budged to the downside. There was no global economic depression. There was a conflicted constituency of levered long financiers who were depressed. That’s why the only countries with interest rates at an “emergency rates of ZERO” are Japan and what was once the fiduciary of the world’s reserve currency – the United States of America.

 

In the immediate term, it has paid to be able to proactively predict these American politicians. Buying everything based in bucks has reflated. In the intermediate to long term however, this will not end well.

 

I have been a buyer of this market’s manic behavior on down moves. Today, I am selling rather aggressively…

KM

 

Bernanke Panders, Again...  - bernanke21


CASUAL DINING - NOW AND THEN

Back in late November, I wrote a post titled “Building A Case for Casual Dining in Early 2009” in which I highlighted the following catalysts/themes that would work their way into the market in the early part of 2009:

 

(1) Currently gas prices are nearly 40% below last year’s level and likely to stay there for some time.
(2) There is a broadly accepted and recognized need for massive fiscal stimulus in early 2009.
(3) Reductions in restaurant capacity in 2009, especially in the bar and grill segment.
(4) The decline in commodity prices provides a backdrop that can help mitigate the decline in margins.
(5) Valuation

 

Outside of top-line trends, which have retreated to 4Q08 levels, these five catalysts remain the primary drivers of the casual dining group’s stock performance.  The only differences now are prices and the fact that these catalysts for the most part will become industry headwinds.

 

(1) Gas Prices


As I said earlier this week (please see post titled “Gas Prices – Q4 Inflation”), gas prices have been extremely favorable on a YOY basis for restaurant companies this year (down 38% on average in 1H09).  Looking at the chart below, this YOY cost benefit will start to moderate and could go away in the fourth quarter.  If gas prices stay at their current level (though they typically decline after the peak summer season), they will be up on a YOY basis come early November.

 

CASUAL DINING - NOW AND THEN - Gas Prices

 

 

(2) Fiscal Stimulus and Casual Dining Demand

 

The bullish case for Casual Dining and Restaurants in general is that easy same-store sales comparisons going into 4Q09 will help the stocks.  Casual dining same-store sales growth became less bad in 1Q09, but July levels are not much better than what we saw in December on a 2-year average basis.  We still need to see a pick-up in job creation before we will see a real turnaround in dining out trends, and the visibility on that happening anytime soon is murky.   And, yesterday’s job news supports this thesis.  Yesterday, initial claims rose 15K to 576K in the week-ended August 15th, marking the second straight increase and ahead of consensus expectations of 550K.  In addition, the four-week moving average rose to 570K from 566K in the prior week, the highest level since mid-July.   

 

(3) Capacity Reductions

 

New unit growth has come down in 2009 and development related costs have come out of the P&L.  By focusing more on in-store unit economics, the casual dining restaurants as an industry have created much leaner and more efficient business models, which have helped to sustain margins in this challenging sales environment.  The majority of the casual dining operators will not re-accelerate growth in 2010 so development related costs should remain low, but as they lap the implementation of these cost saving initiatives, it will become increasingly more difficult to grow margins with negative same-store sales growth. 

 

The YOY margin growth trend we saw in 1H09 is not sustainable with continuing declines in comparable sales growth, particularly 7%-plus declines as we experienced in June and July, as measured by Malcolm Knapp.

 

CASUAL DINING - NOW AND THEN - CD margins vs SSS growth 2Q09

 

(4) Commodity Prices


Looking at the chart below, lower food costs helped to mitigate casual dining margin declines during the first half of 2009.  Like gas prices, the YOY food cost benefit will moderate in Q3 and most likely go away in Q4.  The second chart below shows 2007, 2008 and 2009 food prices as measured by the Commodity Research Bureau (CRB) Foodstuffs index, an index based on the prices of hogs, steers, lard, butter, soybean oil, cocoa, corn, Kansas City wheat, Minneapolis wheat and sugar.   Food prices initially turned favorable in 4Q08 on YOY basis and remained so in 1H09.  At current levels, food prices will be up on a YOY basis come 4Q09.  Of course, not every company will be impacted immediately, due to the fact that many restaurant companies have long-term contracts.  That being said, as we head into the third and fourth quarter earnings seasons the commentary from most management teams will be to not expect the same benefits in 2010 as there were in 2009.

 

 CASUAL DINING - NOW AND THEN - CD Food costs vs CRB 2Q09

 

CASUAL DINING - NOW AND THEN - CD CRB YOY

 


(5) Valuation


The biggest delta between now and late November when I wrote “Building a Case for Casual Dining in Early 2009,” however, is price.  Year-to-date, casual dining stocks on average are up 80%.  The group on average is trading at 6.6x on an EV/NTM EBITDA basis relative to 4.4x on November 30, 2008.  The casual dining industry is not going away.  It is a cash rich business, but sales trends will remain soft in the near-term, putting increased pressure on margins.  The group's trading performance on average is flat in the last 3 months, but relative to upcoming catalysts, the risk/reward associated with these casual dining names seems to lean to the downside.

 

One more difference between now and then is my competitors’ ratings of the casual dining companies.  Overall, analysts are still more bearish than bullish, but they are marginally more bullish today than they were then.

 

Today

 

CASUAL DINING - NOW AND THEN - CD Analyst ratings Today

 

November 30, 2008

 

CASUAL DINING - NOW AND THEN - CD Analyst ratings Nov 30

 


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