TODAY’S S&P 500 SET-UP – October 3, 2014
As we look at today's setup for the S&P 500, the range is 25 points or 0.42% downside to 1938 and 0.86% upside to 1963.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Tickers: H, IGT, CCL
H - announced it sold the Park Hyatt Washington for $100 million to Westmont Hospitality Group and Thomas Tan, a member of the Bestford Hospitality Group. The sale price also equates to ~$463,000 per key and 15.0x on last 12-month EBITDA.
TAKEAWAY: We view this as a very favorable pricing on an asset sale for Hyatt.
GENT:MK – has filed suit against Phil Ivey in London’s High Court alleging Mr. Ivey “edge-sorted” cards in August 2012 while playing a form of baccarat called Punto Banco at Genting’s Crockfords casino in London. Genting refused to pay up, saying the practice is unfair. Ivey, who sued Genting last year, says edge sorting isn’t dishonest and he should be paid the money. Both sides agree that Ivey was in the casino in August 2012 and that he won the money. “The issue is whether it amounted to cheating,” Christopher Pymont, Genting’s lawyer, said in documents filed at London’s High Court.
TAKEAWAY: Another legitimate suit or simply “piling on” given the similar edge sorting lawsuit by the Borgata Casino.
IGT -- has reached an agreement after an in-depth RFP process with Mille Lacs Corporate Ventures, which has elected to continue with IGT and upgrade IGT Advantage systems solutions at Grand Casino Mille Lacs and Grand Casino Hinckley, located in Minnesota.
TAKEAWAY: A good systems win/renewal for IGT covering two Minnesota Native American casinos.
CCL – Carnival Miracle will be the first cruise ship to call at Cabo San Lucas since Hurricane Odile hit the Mexican state on September 15th. Loaded with relief supplies provided by Carnival, the ship will depart from Long Beach, California, on October 4th , arrive in Cabo San Lucas on October 6th. During her visit, the crew will off-load several pallets of bottled water, canned food, cereal, sanitary supplies, paper products, personal items and other supplies for local resident
TAKEAWAY: Carnival leading the way back to Cabo San Lucas with an aide sailing.
Golden Week Visitation – Visitation to Macau on October 2, 2014 totaled 151,667 an increase of 9.1% year-over-year while Mainland China arrivals totaled 122,925 an increase of +6.2% year-over-year. The total visitation thus far during Golden Week, Oct 1 and Oct 2, total 288,575 for 9.5% rise year-over-year while Mainland China visitation was 227,494 for an increase of 4.3% year-over-year.
TAKEAWAY: Mainland visitation is particularly disappointing and overall visitation not posting the strong double-digit results forecasted by some sell-side analysts.
Macau Labor Protests – (GGRAsia) Some dealers of MGM China Holdings Ltd and SJM Holdings Ltd in Macau are striking and/or protesting against the casino operators over salaries and benefits. The action started at noon on Friday and will continue on Saturday. The plan includes some staff working to rule, some reporting late and some calling in sick, according to secretary general of labor, Cloee Chao, activist group Forefront of the Macao Gaming. Reuters earlier reported that up to 300 dealers at MGM Macau based on information provided by Ieong Man Teng, head of Forefront of the Macao Gaming.
TAKEAWAY: Labor discord reaching a peak just prior to the busiest visitation periods Saturday afternoon and Sunday morning.
Neptune Limited Reports Results – (GGRAsia) an investor in casino VIP promoters in Macau, reported net profit of HKD148.8 million (US$19.2 million) for the year ended June 30, 2014, down 93.8% from a year earlier, according to a filing with the HKSE. The firm said the significant decline was due to an “impairment loss of available-for-sale investments of HKD111.1 million” caused by the recent slowdown in Macau’s gaming market. That led to a drop in value of an investment made in October 2013 in the profit stream of a junket operator in Galaxy Macau casino. The same reasons required the company to write down HKD88.6 million from an investment made in February 2014 in the profit stream of a junket operator in City of Dreams casino, it added. The firm recorded a 23% increase year-over-year in turnover to HKD710.4 million, but it saw its earnings before interest, taxation, depreciation and amortization (EBITDA) slide 8.7% to HKD517.6 million.
TAKEAWAY: The VIP slowdown negatively impacting the financial results of the junkets.
Steve Wynn to So Cal – Variety.com is reporting Steve Wynn has allegedly gone into escrow to purchase the lower East Gate Bel Air acres Lionsgate Estate compassing approximately 24,000 square foot, 11 bedroom, 17 bathroom (and all furnishings). Mister Wynn’s children, not to mention his ex-wife, Elaine, live in Los Angeles
TAKEAWAY: Mr. Wynn continues to build his personal real estate empire.
CMBS Delinquencies - during September improved (declined) by seven basis points to 6.03%. The September late-pay rate is 211 bps lower than a year ago, and thus far in 2014 delinquencies have fallen 140 bps. September saw nearly $1.4 billion in newly delinquent loans, putting 26 bps of upward pressure on the delinquency rate. Loans that cured totaled over $600 million in September, which helped push the delinquency rate down by additional 13 bps. There are currently $31.8 billion in delinquent loans, which is down from $32.5 billion in the previous month, according to Trepp. The figure includes loans that are past their balloon date but are current on their interest payments. During September, the lodging delinquency rate dipped 31 bps and is now 5.06%. Lodging remains the best performing major property type, although a year ago that distinction was held by retail.
TAKEAWAY: Good news and positive developments for the real estate finance sector.
China Macro Readings – September official services PMI 54.0 vs 54.4 in August (weakest official result in 8 months) while New Orders 49.5 vs 50 prior and weakest since December 2008, and Employment 49.5 vs 49.6 prior
TAKEAWAY: Mainland macro-economic data remains anemic.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye
Macro/Financials team is turning decidedly less positive.
TAKEAWAY: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Takeaway: The value destruction since the print has far overshot any change in the trajectory of the business – which otherwise is excellent.
Conclusion: We’re adding Kate Spade (KATE) to our Best Ideas list as a long. We’ve actually been very positive on KATE since the stock was struggling to break the $5 barrier when the Street thought that (the former) Liz Claiborne was going bankrupt. However, with sentiment turning overwhelmingly bullish, the stock recently flirting with $40 on a non-existent earnings base, and virtually no contention around the story, it was tough to remain as vocal. But all of that has changed dramatically on August 12 when the company printed an outstanding quarter, but botched its messaging around long-term margin targets. Since then, the stock simply can’t seem to catch a bid, and is down 33%. The amount of controversy around this name today (down $1.8bn in equity value) absolutely dwarfs the diminimous change we’ve seen to the economic reality of its growth trajectory and cash flow. The reality is that the core value drivers are in place, and are very much in-tact. We think that the company will earn $1.40 in 2016, which is 40% above the consensus. The company reports earnings around Nov 6, and we’re comfortable getting ahead of that event. We’ll be hosting a call in the coming weeks to outline our thesis in full detail.
Stock Roadmap. This is a company that should grow earnings at a 60% CAGR over 5-years. The stock might look expensive at 40x next year’s earnings. But keep in mind the following. 1) The consensus is wrong. We’re 15% above consensus next year, and are probably conservative. It’s trading at less than 30x the real number. 2) Earnings should ramp by between $0.50 and $0.80 per year off a base of only $0.28 – for every single year through 2018. That’s a CAGR of 60%. What kind of multiple does that growth deserve? Even if you want to argue that it deserves a higher risk premium to account for fashion risk, we think that at least a 40x multiple is extremely fair. If our model is right, that equates to a stock of $38, $65 and $87, and $120 in years’ 1 through 4 of our model (50x in year 1 giving way to 40x as it matures).
Still Huge Runway. And while we talk about ‘maturity’, let’s keep in mind that Kate might have been around for a while, but it is still in its early adolescence from a global branding perspective. Kate Spade only did $743mm in sales last year. That compares to $4.8bn for Coach, and $3.6 for KORS. KATE does not exactly want to aspire to be Coach. But the reality is that KATE can double in size and still be only 50% as big as KORS. It’s even smaller than Tory Burch, which is likely to go public over the next 12-18 months. Our point is that fashion risk in this space matters most at two points; 1) when a brand is tiny and is trying to gain consumer acceptance. Kate has already done that. 2) When the brand becomes ubiquitous, margins are stretched, and the company needs to find non-core areas to grow. Kate is nowhere close to that point.
That last statement deserves some context. Kate Spade is nowhere near the point where it needs to grow outside the core. But the reality is that it is with its Kate Spade Saturday brand. Quite frankly, we couldn’t care less about Kate Space Saturday. It only has 10 stores today, and generates about $20mm. That’s only about 1.8% of sales. It simply does not matter as it relates to the growth runway in Kate Spade New York. But the reality is that the company is investing in the concept, which is likely to pressure margins (this is what largely drove the stock down after the print). So even though it’s irrelevant to our thesis, the fact that the company is backing it financially means that – to an extent – we need to care about it.
Margin Targets. Here’s the statement from the COO that sucked the oxygen out of the room on the conference call.
“With respect to our 2016 targets, which we outlined at our Investor Day last year, we expect to achieve an adjusted EBITDA margin of 25% for the former Kate Spade segment. Given the longer-than-expected Kate Spade Saturday ramp-up coupled with our revised 2014 margin rate outlook and because of our limited visibility into 2016, we feel that it is responsible to re-evaluate the timeframe of achieving this goal, which we will perform as part of our annual business planning process later this year. We will assess whether any short-term adjustment to the timeframe is warranted, and we'll update you in November during our third quarter earnings call. To be clear, if a short-term adjustment is even necessary, we expect the most likely adjustment would be a shift to 2017. This is all the commentary we will have on this topic today, and we will not address this further during the Q&A.”
This wss one of the worst commentaries on a company’s outlook that we’ve ever heard. This is a company that had just crushed the quarter with the stock up 12% pre-market. Here’s a couple of thoughts on the margin target.
1) Yes, margin targets will very likely get pushed out by a year. But we don’t care. What the company should have said is “We’re probably going to hit our 2016 revenue target two years early because of how well we’re executing on our plan. Growing the footprint of our brand(s) is our top priority, and if we have to give up 2-3 margin points in order to achieve our goal, then we’re perfectly happy to do that.” That’s good offense. They played bad defense. But we think they since got the message.
2) Consider the following math: Previous target from the company was $1.2bn in revenue at a 25% EBITDA margin. That’s $300mm. If we take down margins by 300bp and apply to where the top line is likely to come in ($1.9bn), we get to $418mm. That’s 40% higher EBITDA than previous guidance suggests. That would have been valuable information to include on that last conference call.
3) There are many people that will differ with us (the market certainly does) but we simply don’t care a whole heck of a lot about margins right now. The margin will come. For now we want pure unmitigated growth. If this was Coach, Kors or any other mature company, then margins would matter a lot more to us. But for a company that can triple its revenue base in 4-5 years, we’re a lot more inclined to focus on the top line, and will usually (within reason) support the costs that might go along with achieving those goals.
Earlier today the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 4Q14 and the associated investment implications.
We encourage you to check out the Video Replay (click on the image below); the Audio Replay and Presentation Materials can be accessed via the links underneath.
Video Replay: CLICK HERE
Audio Replay: CLICK HERE
Presentation: CLICK HERE
Q4 2014 MACRO THEMES OVERVIEW:
- Hedgeye Macro
After removing BLMN from our Best Ideas list as a short back in May, we now find ourselves turning constructive on the name, albeit for atypical reasons. The company continues to operate what we believe to be an unsustainable business model, comprised of a portfolio of five different casual dining brands. Furthermore, the fundamentals of the company – decelerating same-store sales, cost of sales inflation (beef, seafood, dairy), margin deterioration and little brand momentum – remain unattractive. The value, however, is there and we suspect management will be forced, or tempted, to unlock it one way or another. With casual dining sales improving, brand initiatives underway and an inflection point in cost of sales approaching (could become a tailwind in 2015), we believe now is an opportune time to get long the stock.
The street is bullish on BLMN for reasons we don’t necessarily agree with as 73.3% of analysts rate the stock a buy. Short interest is also fairly low at 4.67% of the float. At 7.7x EV/EBITDA (NTM), BLMN trades at a discount to its peers, reflecting structural issues, lower margins and a high debt-to-EBITDA (~3.6x).
Please note that consensus estimates are shown.
Please note that consensus estimates are shown.
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