Takeaway: Q3 beat, conservative guidance, and Oct looks stronger

A more positive tone than recent calls



Introductory Remarks

  • Despite challenging environment, solid results prudent variable cost mgmt delivered margins
  • Key events in Q3: opening of Zia Park Hotel and Dayton Racino and opened Mahoning Valley
  • Both Ohio Operations off to solid starts
  • Upstate NY: Decision shortly after election day
  • Proceeding with Jamul Indian Village - mid 2016 opening

General Trends & Results during Q2 2014

  • Challenging consumer environment but solid margins
  • Less negative trends evident in database: visitation and spend improved slightly sequentially at mid, low and unrated segments
  • Horseshoe opening on Aug 22 no material impact to Charlestown to date
  • Slight margin improvement in all regions (excluding 1x expenses)
  • Reduced corporate overhead by 20% YoY
  • Strong opening at 3 new assets, pleased with aggregate results though composition different as Mahoning stronger, Dayton slower ramp
  • Dayton 1x promotional error - impacted net slot by -10% 
  • $2.3 million of MA lobbying expense not contemplated in guidance
  • Q4 guidance - conservative stance due to openings

Q4 2014 Guidance

  • Includes no spend for MA campaign
  • Unchanged but for "beat"
  • Process unchanged and consistent with trends for 2014
  • Dayton and Mahoning - original estimates remain valid
  • $10m+ revenue beat = $6.5m EBITDA beat 
  • Cash $237m at end of Q3
  • Maintenance $21.4m, $78.3 for year
  • Cash tax rate 38%
  • Pre-opening expenses $5.7m in Q3

MA Campaign Update:

  • Current Boston Globe survey 53% NO and 39% YES for repeal
  • Fire & Police Unions support PENN and gaming association
  • Remain hopeful for positive outcome


Q: Modest improvement in lower end of database, color/why/where?

  • Slight improvement, down YoY, but less negative than Q2 and Q1, not bottomed out, not stabilizing, but sequential improvement

Q: Traffic vs. ticket of lower rated play?

  • Not seeing growth in non-rated or lower rated in both spend and visitation but seeing less decline.  October is shaping up like Q3 - Hedgeye is seeing better results thus far in October

Q: What see at M Resort and Zia Park hotel?

  • Strong visitation at Zia and spend per trip is +50% from typical trip value, strong cash market, weekends very strong. Zia depends on feeder markets from Western Texas, strong slot play from Western Texas markets
  • M Resort: LV locals stable, more rationale on reinvestment, improvement in couple database metrics in Q3

Q: in 2015, easy comps in Q1 - increased confidence?

  • Hope 2015 weather impact less impactful, especially beginning in December. 
  • Not see + or - impact from gasoline prices - Should be positive if sustained
  • Hope Q1 show some improvement vs. 2014, beyond Q1 weather difficult to assess and predict.
  • 2015 hopeful due to maturity of recent openings.

Q: MA opening - how long expect to operate without competition?

  • Expect June 2015 opening and 2.5 to 3 year operations without competition from either MGM or WYNN

Q: How much of EBITDA out performance came from new racinos vs. mature properties?

  • Charlestown and Penn National solid and drove beat, Mahoning Valley stronger especially end of September and early October.  As much large property out performance as racinos.

Q: Underlying trends at Columbus and Columbus vs. Dayton cannibalization

  • Columbus a deep market, similar to Kansas City.  Believe in Columbus, long runway for growth.  Database trends encouraging across all segments.
  • Some Columbus customers from Dayton.

Q: Southern Plains segment - how control costs given moving parts

  • States MO and IL report on gross revenues = 5 properties, on net-revenue declines less. Cost controls focus on labor, marketing and facilities to less extent. 

Q: What the promotional environment

  • Steady across markets except for Missouri which was elevated in Q3

Q: Capital allocation

  • Fund acquisitions with debt, need to look at all opportunities to grow and grow beyond current development pipeline.

Q: When does a share repurchase become a more material consideration

  • Consider on a regular basis and have discussed over past year with the Board, but still see growth of asset base as best opportunity

Q: Cost reductions, operational/overhead, for add'l margin improvement and flow through

  • More challenging if revenue declines continue, always focused, if Q1 revenue improves then should see strong flow through give tight cost controls

Q: Sum total of 2104 one-time costs not recurring in 2015 such as MA spend

  • Address off line, separately.

Q: MA indication of Plainridge carve out of Appeal passes

  • Focused on getting vote out

Q: Upstate NY, if awarded license, how think about competitive license - scenario to reconsider

  • Depends on where licenses get allocated, believe Catskills will get two licenses one in Orange County and one Sullivan County.  If fortunate to receive Orange County will proceed with development.

Q: By the time MGM National opens, Baltimore casinos open for four years, what incremental impact to Charlestown from MGM opening

  • Given past openings, not expect significant. Database is Maryland focused, expect some portion of impact.

Q: Historical racing opportunity and legislative outlook in Texas

  • Gubernatorial race could turn Texas more conservative politically.
  • Historic wagering is separate from Class 3 efforts
  • Pending litigation on historic wager and waiting for the legal process to conclude.

Q: When look at Baltimore what seeing in promotional activity

  • Difficult to predict due to two months of activity from Horseshoe but not seeing high level of reinvestment at Horseshoe as saw at prior openings. Maryland tax rate higher, so more difficult to reinvest.

Q: Leverage considerations vs. other capital projects/acquisitions

  • Long term lease at 8x multiple.  Leverage ratio well within comfort levels as well as bank agreements at 6x with long-term lease.  Current situation is comfortable and expect to maintain.

Q: If a large scale acquisition presented, would use equity?

  • Not likely, historically use debt to finance historic acquisitions or green field developments.


CAT: 2015 Estimates Going Lower? (pre-call review)



The next major data point for CAT shareholders is the January 2015 EPS guidance with the 4Q 2014 report.  The 2015 sales guidance and other details in today’s release suggest we should see downward 2015 revisions.  The drivers of the 3Q beat are unlikely to be sustainable. 


A pre-buy in E&T ahead of 2015 emissions regulation on very large engines (e.g. gensets and locomotives) and a sizeable year-on-year inventory swing appear to have been major contributors.  As for the E&T pre-buy, a 33% sales gain in North America, where the emissions regulations are pending, sticks out.  Backlog was sequentially higher, but on an “early order” incentive program and reciprocating engines orders.  Neither of those would be positive for 2015, as early order programs usually involve discounting and reciprocating engine orders may relate to the pre-buy, which pulls demand forward. 


While the headlines for 3Q 2014 are positive and management has done a good job of delivering results this year, we expect CAT shares to trade on what happens with the 2015 outlook going forward.  Management may be starting to nudge 2015 expectations lower.



Key Takeaways

  • E&T Pre-Buy Seems Pretty Obvious:  Should investors extrapolate Energy & Transportation (E&T) segment’s performance into 2015?  We think it is partly related to a pre-buy ahead of 2015 Tier 4 Final emissions regulations.  North America’s rapid sales growth is a noteworthy hint, since that is the geographic region with new emissions regulations in 2015.  Record margins also match a pre-buy, and are unlikely to be sustained in 2015.  2015 looks set to have a post pre-buy bust in North America, potentially amid weaker oil & gas demand.  


CAT: 2015 Estimates Going Lower? (pre-call review) - ga1


CAT: 2015 Estimates Going Lower? (pre-call review) - ga2


  • Sequential CAT Inventory Build:  At the company level, CAT built inventory from 2Q 2014 to 3Q 2014 ($13,055 mil in 2Q 2014 to $13,328 mil in 3Q 2014) vs. a destock in the year ago period ($13,889 mil at 2Q 2013 to $13,392 mil in 3Q 2013).  The comparison adds to the lower dealer destock, which was $200 million less of a draw vs. the year ago period.  In total, dealer and company inventories had a combined swing of nearly $1 billion vs. 3Q 2013, by our estimates, which likely had a meaningful impact on production costs. 
  • Resource Industries Competitive Pricing:  RI continued to struggle in 3Q 2014, largely consistent with expectations.  Two comments in the release are worth noting, however.  First, CAT noted that “Price realization was unfavorable primarily due to an increasingly competitive pricing environment.”  The language suggests pricing pressure is ongoing, which is consistent with our understanding.  Second, we would also note that dealer inventory was a “less significant” headwind that in the year-ago period.  Combined with what may have been CAT level inventory gains, underproduction may have been less of a headwind.  The cessation of underproduction has been expected to improve RI margins, but didn’t seem to matter this quarter.

 CAT: 2015 Estimates Going Lower? (pre-call review) - ga3


  • Construction Industries (CI) Margins Trending Lower From Record Levels:  While we expect CI to remain a relatively strong performer for CAT in 2015, margins have trended lower without large dealer inventory builds.  We suspect margins vs. the year ago period benefited from CAT’s own sequential inventory build.

CAT: 2015 Estimates Going Lower? (pre-call review) - ga4





CAT investors should increasingly focus on 2015 expectations, which management seems to be pushing lower.  Initial 2015 sales guidance and evidence of a Tier 4 pre-buy is not a favorable set-up, 3Q 2014 beat or not.  


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Takeaway: Labor continues to impress. We're waiting patiently for the Fed's Senior Loan Officer Survey which is the other piece of the puzzle.

Labor and Credit, Together, Tell the Whole Story

The improvement in the jobless claims series continues unabated. This week rolling SA claims dropped to a new low of 281k - for perspective that's now lower than at any point in the peak of the economic expansion in 2005/2006. Meanwhile, our gauge of rate of change looks at the y/y change in the rolling NSA claims, which also accelerated to its fastest rate YTD at -19.6%.


While there are many macro-level factors that have us cautious, labor is the one thing steadying the ship in the storm. The credit cycle and the labor market are reflexive meaning that they interactively affect each other simultaneously. Labor remains strong, and we should receive the next quarterly installment of the Fed's senior loan officer survey in the coming weeks, which will give us the latest update on the outlook for credit. With that in hand, we should be able to move forward with greater confidence, one way or the other. We've found that the C&I survey has effectively predicted every major downturn well in advance going back to the inception of the survey.   


The Data

Prior to revision, initial jobless claims rose 19k to 283k from 264k WoW, as the prior week's number was revised up by 2k to 266k.


The headline (unrevised) number shows claims were higher by 17k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3k WoW to 281k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -19.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -17.1%






















Yield Spreads

The 2-10 spread rose 2 basis points WoW to 185 bps. 4Q14TD, the 2-10 spread is averaging 186 bps, which is lower by -14 bps relative to 3Q14.






Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT


LEISURE LETTER (10/23/2014)

Tickers: LVS, MGM, LHO


  • Oct 23:
    • RCL Q3 earnings 10 am
    • PENN Q3 earnings 10 am
    • LHO Q3 earnings 10 am "LaSalle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am
  • Oct 28:
    • GLPI Q3 earnings 10 am
    • HOT Q3 earnings 11:30 am , code "10325720"
    • MAR Q3 earnings 5 pm , ID "59390131"
  • Oct 29: H Q3 earnings 11:30 am code "95150754"
  • Oct 30:
    • HST Q3 earnings 10 am
    • MGM Q3 earnings 11 am , pw "6307991"
    • BYD Q3 earnings 5 pm , pw "8021592"


27:HK Galaxy (Macau Business) Galaxy Entertainment Group Ltd has scrapped its plan for a four-star apartment hotel to form part of its expanded Galaxy Macau casino-resort. The Official Gazette indicates that the company will use the land once allotted for the apartment hotel for a bigger five-star hotel. Galaxy Entertainment has said it intends to open the second phase of the Galaxy Macau in the first half of next year.

Takeaway: Opting for five-star, more luxury programming - likely to support the gaming operations.


LVS & 1928:HK(Macau Daily Times) Sands new integrated resort, The Parisian Macao, is set to open in late 2015, and tenancy commitments for the new property have reached 85% of its retail area, according to the casino operator.

Takeaway: We'll take the over on that opening date. 


MGM – Newly installed photovoltaic (solar) panels on 20 acres of Mandalay Bay convention center rooftop will generate 5 megawatts of electricity, enough to supply Mandalay Bay with about 20% of its electricity load. The array is owned by energy company NRG, which built it using federal grants that paid for about 20% of the panels.

Takeaway: With water levels on the Colorado River falling, both fresh water for consumption and electricity from Hoover Dam will likely become more expensive. MGM seeking other means of lowering it's operational expenses.


LHO – announced very strong Q3 results with FFO/share of $0.85/share exceeding consensus by $0.06/share and reported RevPAR was 11.5%, well above the high end of guidance +5.5% to +8.5% with ADR up 10.2% while occupancy increased 1.1%.  Comparable hotel margins rose 211 bps versus guidance of flat to +125 bps. New full year RevPAR guidance is now 8.75% to 9.25%, up from 6.5% to 8.0%.

Takeaway: A strong beat and raise for this lodging REIT with assets in Washington DC, Boston, Chicago, Los Angeles, San Diego and San Francisco.  The strong results bode well for Lodging C-Corps (HOT, HLT, H and MAR) and Lodging REIT HST as well as BEE, PEB and SHO.


MSC Cruises – raised commission on its shore excursions from 5% to 15%. 

Takeaway: Shore excursions are becoming more popular on the UK itineraries. MSC is trying to maintain their edge by raising commissions.


China's 4th Plenum Adjourns – The Central Committee of the Communist Party of China, elected by the National Congress of the Communist Party of China, convenes at least one plenary session every year. The fourth session concluded today with no major policy announcements.

Takeaway: Like all things in China, we await the official government commentary regarding the outcome of the 4th Plenum actions.


Macau Visitor Arrivals – During September, visitor arrivals increased 3% year-over-year with Mainland China arrivals increasing 6% to 1.6 million visitors.

LEISURE LETTER (10/23/2014) - Macau

Takeaway: A significant slowdown in total visitation as well as Mainland China visitation which are headwinds to Macau mass growth.


Mainland China Banks Tightening Credit – According to data compiled by SNL Financial, the five biggest lenders in China saw their non-performing loans (NPL) increase in the first six months of the year - a trend that is worsening and results in increased selectivity which in turn reduces credit for gamblers and junkets in Macau. The Industrial and Commercial Bank of China saw its NPL ratio increase from 0.94% in December 31 to 0.99% in June 30. Currently, China’s largest bank has 150 billion yuan at risk of never being paid. But the situation is similar throughout the Chinese financial system. Agricultural Bank of China has a NPL ratio of 1.24%, China construction Bank 1.04% and Bank of China 1.02%. The problem with NPL is also that each country has its own system of calculating them, making it harder to get the real picture

Takeaway: Another headwind for Macau gaming and GGR growth.


Taiwan Open Skies (Macau Business) Taiwan expects its open skies agreement with Macau, signed in February, to come into effect this year, according to the director-general of the Taipei Economic and Cultural Office in Macau, Lu Chang-Shui. Mr Lu says the agreement is now being considered by island’s legislature. The agreement will allow airlines to carry unlimited numbers of passengers and amounts of freight between Taiwan and Macau.

Takeaway: Potentially allowing for increased visitation, especially if a low-cost carrier flies the route which would in turn be a positive for Macau gaming.


Singapore World's Top Destination in 2015 – Lonely Planet, in its latest guidebook, Best in Travel 2015, call Singapore the World's #1 Destination for 2015 and noted that Singapore is "always celebrating something" with new attractions like the National Art Gallery and Singapore Sports Hub next year in time for its Golden Jubilee. 

Takeaway: Increased tourism to Singapore is welcomed, but will the tourists gamble at either casino?


Las Vegas Strip North Development – Jackie Robinson (cousin to the baseball player) held a groundbreaking on Wednesday at a vacant 27-acre site off Paradise Road between the SLS Las Vegas and Turnberry Towers to mark the construction start of a $1.4 billion arena, 500-room nongaming hotel, with retail outlets, a grocery store, movie theater, offices, underground parking and a plaza as parts of the project. The location can be seen here. Robinson’s privately funded arena scheduled to open in early 2017 will cost $690 million, and he has lined up an arena management heavyweight — Philadelphia-based Comcast-Spectacor — to schedule programming and manage the 22,000-seat retractable-roof arena.

Takeaway: The center of gravity on the Las Vegas strip will shift north as Resorts World Las Vegas and the Crown properties open.


Planet Hollywood Las Vegas & Jennifer Lopez – British tabloids are reporting that Jennifer Lopez will sign a contract to perform a 72 show mini-residency in Axis at Planet Hollywood.

Takeaway: We previously pointed out the reprogramming of Planet Hollywood with key hires in the music and entertainment department.  Furthermore, this could be harbinger of programming for Revel as Brookfield Asset Management owns both Planet Hollywood Las Vegas as well as Revel.


China Flash PMI was 50.4 vs. 50.2 in September and consensus expectation of 50.2 as well.


China Mini-Stimulus - (Xinhua) reported the National Development and Reform Commission approved feasibility reports on five airport and three railway projects, with a total investment of 150B yuan ($24.4B) in a move by the government to boost infrastructure investment in the country's less developed central and western regions to offset slowing growth.


Singapore Inflation for September 2014 increased 0.6% year-over-year reflecting higher costs of food and education & stationery which more than offset lower cost of transport. By comparison on month-over-month basis, CPI in September 2014 dropped 0.1% versus August 2014.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.

YELP: Only Gets Worse From Here (3Q14)

Takeaway: The model is broken. Moving forward, it’s going to get tougher for management and the sell-side to make up stories to the contrary

note summary

  1. 3Q14 BEAT, BUT UNIMPRESSIVE: Much of the upside came on a surprise surge in its Other Revenue Segment.  YELP’s core Local Advertising segment missed expectations on its highest attrition rate since 4Q12.  Despite some noise around some misleading metrics, 3Q14 pointed to further deterioration in its core account metrics
  2. 4Q14 GUIDANCE WORSE THAN THE MISS: Aside from guiding below street estimates, YELP provided segment-specific guidance on the smaller two of its three segments (<20% of revenue).   From there, we can estimate that guidance implies its core Local Advertising revenue growth decelerates from 66% in 3Q14 to 57% in 4Q14
  3. 2015 WILL BE A DISASTER: YELP’s business model is breaking down, which is most evident in new account growth that can’t keep pace with the growth in sales rep hires.  That means hiring more bodies can no longer sufficiently compensate for its attrition issues, and unless you understand that element of the story, you really can’t understand how bad 2015 will be. 



  1. Local Advertising Came in Light, Despite the Beat: The beat came from YELP’s Other Revenue segment, which grew over 150% y/y ($4M q/q), and was largely driven by its new partnership with  However, Other Revenues are expected to decline next quarter.  Local Advertising missed street expectations, as attrition continued to accelerate.  Absolute attrition levels continued to rise, which is to be expected simply because it has more accounts.  However, it attrition rate of 19.1% was at its highest level since 4Q12.
  2. More Noise, No Substance: The customer repeat rate was 75%, same as the prior two quarters, and a historical high.  Remember this is a measure of MIX, not retention.  Also, management stated that its non-deal account growth grew 66% y/y vs. the 51% in Active Local Business Account (ALBA) growth.   However, note that this metric includes SeatMe, which had very few accounts when YELP acquired it late in 3Q13.  The better question is what its ALBA growth was ex-SeatMe?

YELP: Only Gets Worse From Here (3Q14) - YELP   New vs. Lost Accounts 3Q14

YELP: Only Gets Worse From Here (3Q14) - YELP   Attrition Rate 3Q14

YELP: Only Gets Worse From Here (3Q14) - YELP   Customer Mix 3Q14


During the call, management provided segment-specific guidance on the smaller two of its three segments (<20% of revenue).  From there, we can estimate that guidance implies its core Local Advertising revenue growth decelerates from 66% in 3Q14 to 57% in 4Q14.  Management mentioned a challenging 4Q14 comp from the migration of int’l accounts from its Qype acquisition back in 4Q13.  While this is notable headwind for account growth, it is a disproportionally smaller headwind in terms of revenue growth since international is lower ARPU product.  In short, the weakness is much more than just Qype.



YELP’s business model is predicated on aggressive sales rep hires to offset its rampant attrition.  New account growth is failing to keep pace with its growth in sales rep hires, which means its model is broken, and it only gets worse from here.


YELP: Only Gets Worse From Here (3Q14) - YELP   Acct vs. Sales 3Q14


Consensus estimates for 2015 remain outside the realm of reason.  Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 estimates.  YELP will need to produce both accelerating new account growth and historically low attrition to hit consensus estimates, which are calling for 46% revenue growth. 


We expect estimates to come in moderately post the print, but likely not enough.  Our bull case is calling for 32%; bear case for 23%.


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


Hesham Shaaban, CFA




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