Buzz surrounds takeover of 2009's best performing stock


We expect the expected:  uninspiring 4Q09 results when IGT reports this Thursday. How the stock reacts will be largely predicated on the tone and outlook given on the call.



The BYI and WMS calls confirmed what we already suspected:  North American shipments were paltry.  We expect IGT's replacement units to be down sequentially to about 1,850 units and new units to be approximately 1,650.  While CityCenter had just over 800 units on it's floor in mid September, we're pretty sure that IGT won't be recognizing much revenue on those units.  Our understanding is that since IGT implemented the systems business at CityCenter and because there is a recurring component to each game sale since all the units will have a download feature, IGT will have to defer some of the revenue.  Therefore, we don't expect much upside from CityCenter in this quarter, or even the next, since it's unclear over what period IGT will need to amortize this revenue.


International shipments are always trickier to predict since they are largely all replacement driven.  FQ4 should be better than last for IGT due to a shipment of 1,472 units to Casino Rosario in Argentina.  As an aside, IGT helped finance this facility and in return received a 72% share, plus the systems business.  From the 10Q:  "Through June 30, 2009, IGT funded $93.0 million of financing extended to a consortium of Argentina gaming operators comprised of $100.0 million for development and $40.0 million for gaming equipment financing."


For gaming operations we expect a small sequential increase in the installed base in 4Q09.  We've also heard that IGT has been dealing hard with operators to maintain their floor print.


For the quarter we are projecting in-line EPS of $0.17.  Looking forward, our estimates continue to trail the Street; EPS of $0.81 versus consensus at $0.91.  The primary driver of the lower estimate is fewer unit sales to new and expanded casinos.  We do project replacement units to pick up modestly in 2010, however, in line with the Street.  Even though we are below consensu, we are not overly concerned with a product sale shortfall.  The long-term dynamics of the slot sector are very favorable due to the potential for domestic and international new markets.






General Business environment/ Trends

  • Our business had reached a trough in the midst of very difficult markets


Gaming Operations

  • While the lower sequential unit count is disappointing, we expect that as the environment continues to stabilize, our install base should resume growth
  • The sequential reduction in units is really just more of a timing issue
  • I think you are apt to see a relatively stable install base at around 61,000, 62,000 units, in that range
  • In an environment of interest rate stability we would expect to see margins in the 57% to 59% range. Approximately 85% of our install base is comprised of variable fee games that earn a percentage of the machines play level rather than a fixed daily fee
  • We have recently reached agreements with two of the largest casino operators for the placement of over 450 MegaJackpot and Wheel of Fortune machines, over and above the existing units on their floors today

Game Sales

  • We anticipate new unit shipments will decrease for the next several quarters [from the 4,700 shipped in 3Q09] until some of the more recently approved jurisdictions, such as Maryland, Kansas, Illinois, and Ohio begin operations
  • While we continue to expect near-term improvement from trough levels, we will remain cautious until we see sustained incremental replacement demand, both domestically and internationally
  • Our international markets continue to feel the effects of the economic slowdown, most notably in Europe
  • Going forward, we expect product sales margins to be close to 50%, assisted by our cost efficiency efforts

Cost Cutting

  • Thus far, we have completed approximately $135.0 million in annualized cost savings, compared to the fourth quarter of 2008, which was the quarter right before we began these initiatives.
  • On the top of the cost reductions, we are currently working through our second $100.0 million of savings that we've made great progress
  • Portions of these savings have been, and will continue to be, offset by costs associated with the acquisition of PGIC and inflation
  • Our current low-manufacturing volumes, it is difficult to identify the full impact of manufacturing-related reductions in our reported gross margins. We would expect to see the impact of these adjustments as volumes return.
  • In the near term we would expect our SG&A, exclusive of bad debt provisions, to be approximately $100.0 million per quarter and R&D to remain in the low $50.0 million area
  • You should expect to see the R&D numbers stay relatively flat


  • Going forward, we expect our quarterly tax run rate to trend at approximately 39% to 40%, excluding discrete items
  • Capex is expected to trend in the quarterly range of $50.0 million to $75.0 million, although we continue to come in near the lower end of the ranges


Steiner makes a strategic acquisition of Bliss from HOT



Here are the points from the just ended STNR conference call discussing the Bliss acquisition:

  • WIll help STNR growth their land-based spa and retail presence
  • Will allow them to cross market Bliss & Elemis brands
  • 7 licensed locations; 3 operated locations
  • 175 distribution outlets in the US and 110 distribution outlets internationally
  • Hope to close by year end
  • Bliss is more of an urban brand, so it's complementary to their "resort" presence
  • They cannot take the brand to non-Starwood hotels, but can take Bliss into their cruise ship channel and to stand-alone spas
  • Bliss South Beach and Hollywood, completed by year end
  • They can manage the spas at Starwood hotels, or Starwood can lease the spa's from them going forward
  • Think it will be $0.05 to $0.10 accretive in 2010, hope that they can use their NOL's that they have in the US
  • Not a competitive bid process
  • They will keep most of the Bliss team in house
  • Easy plug in brand for them
  • Cost/Revenue synergies baked into the accretion guidance?
    • Fairly minimal
    • Already started the IT and HR integration
  • Bliss: $85MM of TTM revenues and $5.3MM of TTM EBITDA (net of charges)
    • Distribution 28%, spa revenue 50%, direct retail 22%
    • Bliss margins (within 4 walls) are a little better then STNR's - especially in the way in which they manage their bookings
  • What about normalized EBITDA?
    • No comment, but normalized margins are more like low teens than 6% TTM
  • Will all the W hotels in Starwood's pipeline have a BLISS spa?
    • No
  • Aloft hotels also have Bliss products
  • Bliss customers are a little younger then the Elemis customers
  • Price positioning that allows them to take the product to cruise ships

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Fed Hike?

The Prices Paid component of today’s ISM Manufacturing report came in at an inflated 65 versus last month’s elevated reading of 63.5.


We’ve been showing the sequential ramp in the chart below since deflation bottomed in July. This is not a deflation chart.


This is one of the many real-time price indicators that the Fed has been paid to be willfully blind to. Does this mean Bernanke will signal a rate hike on Wednesday? We doubt it. It’s sad, but it is what it is in our conflicted and politicized financial system.



Keith R. McCullough
Chief Executive Officer


Fed Hike? - ISM


Chart of The Week: Volatility Party

Any time we see a breakout above an intermediate term TREND line, its bullish. In this case, for US Equities at least, a TREND line breakout in the VIX is also bearish.


In the chart below, Matt Hedrick and I have outlined the context of what a +38% weekly spike in Volatility looks like. You will note that the VIX is now trading in what we call no man’s land – in between the long term TAIL (36.59) and the intermediate term TREND (24.93).


What’s most interesting about this chart is that since stocks put in their bottom in Q1, a range of 25-35 for the VIX is actually normal.


Provided that the US Government continues to sponsor ZERO percent free money policies and the blowing up and popping of price balloons, I see no reason why this New Reality of a Volatility Party shouldn’t remain.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Volatility Party - VOL11 2

The Client is Roaring

Position: Long the Chinese Yuan via etf CYB


“China has been the primary beneficiary of globalization and it has been largely insulated from the financial crisis.” –George Soros, October 30th, 2009


The Chinese Minister of Industry is on the tape this morning suggesting that China’s industrial production could grow 16% in Q4 on a year-over-year basis.  If these numbers are reached, China will see accelerating sequential and year-over-year growth.  In 2008, Chinese industrial output rose 12.9% from 2007.   In 2009 to date, through three quarters, Chinese industrial production is up 8.7%, with acceleration of 13.9% in September year-over-year.  No matter how these numbers are sliced, they are monsters.


In addition, according to both a government sponsored purchasing managers index survey and a HSBC sponsored release over the last couple of days, manufacturing expanded in China at the fastest pace in 18-months.  The Chinese government reported that its purchasing managers index rose to 55.2 in October, which was a full point above September and the eight straight month of gains. 


Clearly, the Chinese economy is accelerating, which is both a function of the recovery of the global economy and the impact of internal Chinese stimulus.  In contrast to Soros’ point above, China did see an economic deceleration this year, though obviously a slowing of double digit GDP growth to high single digit GDP growth is still a favorable outcome.  In support of Soros’ point though, China saw a continued large scale expansion this year when most, if not all, major economies were shrinking.  In the share game of global GDP, the Client has taken her share year-to-date.


In the simple table below, I’ve outlined the reported GDP’s of the globe’s three largest economies this year:


The Client is Roaring - image001


While Soros’ point may be a bit off as China did experience a deceleration  in GDP this year, China clearly has been much more insulated from the financial crisis and has taken serious share in the global economy in 2009.  Recent data points and comments from the government, as outlined above, only support this trend.  The Client continues to ROAR.


Daryl G. Jones
Managing Director