Why Toyota may cause higher interest rates

Nike (NKE): Black Book - Call Tomorrow


   Conference Call TOMORROW, Friday February 26th. 11 a.m. EST


We've been vocal over the last year about warming up to Nike as a key idea for 2010. Specifically, there are several developments masking the magnitude and duration of an earnings recovery.

Since we announced this conference call last week, Nike is now seeing an intermediate term TREND (3 months or more) breakout at $64.18, not to mention Goldman Sachs playing follow-the-Hedgeye and adding NKE to their sooper-dooper conviction buy list this morning.
We'll be releasing a Black Book and hosting a conference call for subscribers of Hedgeye's Institutional Retail vertical -- and for qualified prospective institutional subscribers -- tomorrow, Friday February 26, at 11 a.m. EST.
We will go through why, in detail, we think Nike deserves a closer look, focusing on the severe lack of context in how actions over the past three years are coming together today to re-accelerate earnings growth, specifically:


  • A strong catalyst calendar (analyst day in May, World Cup in June/July)
  • Increased product flow - as a result of enhanced productivity after last year's re-organization
  • Magnitude and duration of an earnings recovery - after 2 years of flattish earnings

Contact or reply to this email to request access to the conference call.




Nike (NKE): Black Book - Call Tomorrow - NKE BB 2 10 Cover









We'll have more commentary in a separate note but we saw good and bad in the release. Wynn's Q1 Macau commentary, although well known, was positive. Wynn's Mass volume market share decline is troubling.




  • Profitability and efficiency of their tables in Macau has continued to increase despite more competition
  • Tracking substantially ahead of 2009 in 2010, and that's even before the opening of Encore, which will give them another boost. Encore opening April 24th
    • Yes well the market is tracking up 54% y-o-y in the first 2 months... so there's nothing new here
  • Unfortunately, Las Vegas doesn't look so rosy.  Doesn't see things getting worse, but doesn't see any improvement either


  • Net hold impact in Macau and in Vegas
    • Vegas, $15MM of EBITDA if they held 22%
    • In Macau held a little lower on VIP
    • Of course they didn't mention the high hold in Mass in Macau & higher then the run - rate hold on slots in Vegas. In Macau, Mass drop was pretty weak, only up 5% but better hold helped them by $15MM on gross revenues. Assuming 2.8% hold on RC they would have had $18MM more of gross table win.  Regarding slot hold in Vegas - 5.4% is their highest hold since 2005... the average has been about 4.7%, so higher hold helped them by $4.5MM in Vegas
  • 2009 corporate expenses would have been flat with 2008 if not for some unusual items
  • They have very good and tough credit assessment, have never had a charge. They are 45% reserved in Vegas and 65% in Macau - which is way more conservative than industry
    • That's true...
  • Philadelphia opportunity?
    • "Cutest casino" that we've ever seen - not slots in a box. No hotel rooms
    • Building 3,000 slot machines, Italian restaurant, Asian restaurant, and some poker tables.  The location is fantastic
    • Through an unrestricted subsidiary, not at the Wynn Las Vegas level. 
    • They know the region - they were in AC for seven years and dominated that market. Love the location of the Phily casino
    • 3 story structure including parking
  • Strategy in Las Vegas?
    • Capital structure is their salvation - they have the luxury to wait it out.  All he can do is do the basics better
    • They are opening Encore Beach Club, new night club, and improving Switch.  Beach Club opens May 21rst... will take the nightclub mentality into the daytime.  Nightclubs have 65% margins.
    • About to refurbish the rooms at Wynn because they are 5 yrs old
    • There's nothing that he can do with regard to customers getting used to lower ADRs - he can't have empty rooms
  • Think they will have a good 2010.  They are not holding high the first two months, they are at 2.8%
    • In Jan they did $174MM of gross VIP win, $42MM of Mass, and $16MM of slot win (In Jan 08, table revenues were $170MM).  We estimate that table revenue in Feb will be roughly $200MM (vs. $150MM last year)
  • In Macau 48% of their EBITDA comes from their general customer & slots (but their "general" customer is a lot better than just Mass- it includes a lot of direct play and their Mass is fairly "premium")
  • If another regional opportunity presents itself they will jump on it because they have the resources to do so
  • Macau is "maturing" ... said it in the sense of the facilities present
  • "We're more of a Chinese company" than US company at this point
  • Very keen about their Cotai project, "could be the  most beautiful project in the world after Encore".  They are constrained by the approval and their own planning process.  It will cost several billion. Will not have thousands of rooms.  "We raise our money before we break ground"...Ouch shot at Sheldon...
  • Is it too early to say that 2011 will be better?
    • Strictly convention booking - yes 2010 is better than 2009 and 2011 is better than 2010. But its complete BS to extrapolate that into total market results. It's crazy to extrapolate what 2011 will look like based on a few bookings on the books... thank you Steve for being honest. 
  • Are they worried about Singapore? Well, LVS designed the FS to steal their business 25 minutes away and that didn't happen
  • Southeast Asian customers are less than 5% of their base
  • Doesn't think that the Singapore market will be a threat to Macau - it will be primarily a Southeast Asian gaming market - people within a 1-2 hour drive.  However, that part of the world also has a large muslim population which doesn't really gamble
  • No, Encore is not what they thought it would be.  Thought that it would generate $250MM of EBITDA- clearly it didn't do it.  It was conceived in a different market. Don't know if they would have made even less without it, but would have an extra couple billion of cash... obviously would not have built it today if he knew what he knows today

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Why we bought Turkey (TUR) yesterday

Position: Long Turkey via the etf TUR


The Turkish stock market flashed a negative divergence versus many European indices over the last days and we couldn’t explain the WHY behind the move. Then, yesterday, we got the rest of the story with news of the arrest of dozens of high-ranking Turkish military figures in what has been an ongoing investigation of suspects alleged to have plotted a coup against the government in 2003. The market had priced this in!


Taking a step back for context, 2003 marked the election year of current Prime Minister Recep Tayyip Erdogan and his Justice and Development Party, and his expedient end to the army’s control over the National Security Council. The latter point is an important and complex one to understand regarding the role of Turkey’s military in political rule, and it has significant precedence since the new Turkish state was founded by Mustafa Kemal Atatuerk in 1923. In fact, the military has ousted four governments since 1960, with the alleged 2003 coup meant to overthrow Erdogan’s government.


Certainly the political issues and tensions between a historically secular military and Erdogan’s current Islam-rooted government are complex. We’ll be grinding out more research on Turkey in the coming weeks, but our bullish take on Turkey is born out of a few positive catalysts: 


(1.)  The Istanbul Stock Exchange’s (ISE 100) recent tumble allowed us to buy Turkey via the etf TUR at a discount with TAIL line support down at 42,392 (see chart below).


(2.)  There’s huge upside to this emerging market economy with an improving GDP trend (see chart below). Annual Q1 GDP at -14.7% was a bottom and now in the rear view; we see favorable comps in 2010, and the government expects the economy to expand 3.5% this year, while the IMF forecast the EU and US to grow 1% and 2.7%, respectively, this year.


(3.) Turkey avoided an international bailout during the global recession after reducing its public debt to 47% of GDP last year from 67% in 2003 (Bloomberg). 


On the TAIL (3 years or less), bullish catalysts include: (1.) EU entry and increased trade; (2.) its powerful army—Turkey has the second largest standing army in NATO after the US Armed Forces; and, (3.) geographic benefit and influence resulting from its location between Europe and Asia, including energy transit. We’ll be writing on these topics in the coming weeks. Stay tuned.



Matthew Hedrick


Why we bought Turkey (TUR) yesterday - t1


Why we bought Turkey (TUR) yesterday - t2


Why we bought Turkey (TUR) yesterday - t3


US Consumer, Steiner and Plutocracy

Per Josh Steiner (Hedgeye's Financials Analyst): "My word of the day is Plutocracy. The high end consumer is bouncing back much stronger than the low end.  The following is a chart from JPMorgan’s investor day (going on now) that shows the different levels of recovery in spending volume based on household income levels."


Per Wikipedia: "Plutocracy is rule by the wealthy, or power provided by wealth. In a plutocracy, the degree of economic inequality is high while the level of social mobility is low. This can apply to a multitude of government systems, as the key elements of plutocracy transcend and often occur concurrently with the features of those systems."




US Consumer, Steiner and Plutocracy - 2 25 2010 12 43 28 PM



"As to the economy and market conditions, we have started to see year-over-year increases in occupancy in a number of markets around the world. Having said this, the signs of economic recovery in the United States are mixed and our full service hotels around the world continue to face rate pressure. While these dynamics also apply in the select-service segment in the United States, Hyatt Place and Hyatt Summerfield Suites properties continue to expand their share of revenue in most of
their respective markets.”

- Mark S. Hoplamazian, President and CEO



  • "Taking into account the current cyclical downturn, we believe that this is an opportune time to commit capital to renovations in our owned hotels and we will continue to do so in 2010 as we invest for the long term.”
  • "We expect to open more than 20 properties this year"
  • "Adjusted EBITDA increased by 85.7% in the fourth quarter of 2009 compared to the same period in 2008, largely due to a $16 million reduction in bad debt expense in the fourth quarter of 2009 compared to the same period in 2008."
  • "Bad debt expenses included in selling, general, and administrative expenses decreased $18 million in the fourth quarter of 2009 compared to the fourth quarter of 2008."
  • "Hyatt opened nine properties in the fourth quarter of 2009. During the fourth quarter of 2009, no properties were removed from the portfolio. During the full-year 2009, the Company opened 30 properties. Eight properties were removed from the portfolio during 2009."
  • "The Company expects to open a significant number of new properties in the future, the majority of which will be through management or franchising on behalf of third-party owners. This effort is underpinned by executed contracts for more than 120 hotels as of December 31, 2009 across all brands. Approximately 55% of the hotels are located internationally and 45% located in North America."
  • 2010 Guidance:
    • "Capital expenditures are expected to be in the range of $270 to $290 million, inclusive of broad-scope renovation projects at five owned properties. The Company anticipates that renovations at these properties will cause displacement beginning in July 2010, resulting from a reduction in daily room inventory of approximately 400 rooms on average per day during the second half of 2010"
    • Depreciation & Amortization: $285-295MM
    • Interest expense: $55-60MM


  • Actions they take will from time to time negatively impact short term results in order to benefit the long run. Gave the 2010 renovations as an example
    • I wonder if they aren't alluding to a dilutive acquisition
  • 45% of their full service revenues comes from corporate and group business
  • Taking the Hyatt Place brand internationally starting in India
  • Started controlling and cutting costs in 3Q08, reduced comparable owned and leased hotel expenses by 4.4% y-o-y in 4Q09
  • Growth plan for management and franchise hotels
    • Most of their full service hotels will be managed
    • For international select service expansion they will do JV's where they invest equity
    • For domestic select service they will rely mostly on franchise
    • Realize that they can use their capital through financial participation of some kind or outright purchase to get into key gateway cities (for Full Service)
    • Focused on extending existing owner relationships
  • Pipeline represents 27,000 rooms, and 70% represent full service rooms
  • Capital application: Invest in new hotels, recycling capital by selling mature hotels and using the proceeds to buy new assets, investing in debt, acquiring fee simple properties and portfolio
    • Actively engaged at looking at several opportunities
  • Current trends:
    • Mixed signals in the US
    • Seeing some significant improvement in some emerging markets like China
    • Transient trends are showing improvement but rate is still under pressure
  • $1MM bad debt expense in the 4Q09 vs. $19MM in the 4Q08
  • 60% of adjusted EBITDA came from owned & leased, 15% came from international and franchising, 25% from NA mgmt & franchised
  • Demand is getting better but rates remain under pressure
  • Costs decreased at the hotel level due to lower staffing and lower food costs
    • Near the end of the runway for expense cuts
    • Recovery is expected to be occupancy driven in the 1H2010 and wages will be up - therefore margins will be under pressure
  • Transient occupancy in their management & franchised portfolio was up for the 3rd consecutive growth.  Group cancellations declined considerably though and that trend has continued into 2010
  • Starting to see a reduction in the rate of decline for group business, but there will be a lag before that translates into RevPAR growth
  • Rate of decline for RevPAR for select service has recently started to slow down materially
  • In 2009 they earned incentive fees from 35% of their full service hotels in NA
  • International business has started to show signs of recovery in local currency, 1/3 showed RevPAR growth
  • International fees increased primarily from an increase in incentive fees.  80% of their hotels paid incentive fees in 2009
  • Very focused on holding costs in line for SG&A but compensation expense will increase
  • Had $1.3BN in cash and $1.4BN of R/C capacity
  • $276MM of cash from operating activities was generated in 2009
  • 2010 Capex plans:
    • 4-5% maintenance capex as a % of owned revenues
    • Grand Hyatt NY & San Fran renovations will start in summer 2010 through 2Q 2011
  • Tax rate on US income of 38% and international income tax rate of about 20%
  • 1 pt of global RevPAR change = $10-20MM of adjusted EBITDA depending on mix of rate/occupancy and geography
  • Don't hedge FX, but don't expect a big impact for 2010


  • Number of markets where they are working on expansion through mgmt & franchise arrangement and therefore don't need to apply capital.  Are more likely to apply capital in high barrier to entry markets in NA & Europe. Also remain focused on expanding their resort portfolio.
  • No target mix of owned vs managed mix
  • Dispositions?  Looking to structure transactions to support growth
  • Are focusing on conversion opportunities - and that is also where application of capital will matter
    • Potential to participate in recapitalization of a portfolio
  • How much capital is committed to the pipeline?  Only marginal bc its mostly managed and franchised
  • Other big projects in 2010?  Park Hyatt Chicago, Hyatt Regency in San Antonio and Atlanta
  • Churn commentary going forward?  Hard to predict, but historically they have been removals due to brand compliance and financial distress
  • Thinking about their capex - most of their 55 select service owned assets were conversions so they spent a lot of money on those.  The overall portfolio is in good shape
  • They did not mark up the tax basis on their assets during the IPO
  • The Waikiki asset is performing relatively well to service their loan. Don't believe that there is an impairment risk
  • They can avoid tax gains by contributing assets to a JV (may be able to do 1030 deals as well)
  • 25% of work force unionized (overall not just owned hotel work force - but its also roughly the same split for their owned portfolio)
  • Group business:
    • Group revenue in NA represents 45% of total revenue
    • Also a significant contributor to F&B
    • Have 9 hotels with over a 1,000 rooms
    • Mixed signals on group, overall business on the books for 2010 is lower than in 2009, however, the decline has began to be bridged since Oct 2009 (when bookings have begun to accelerate)
    • Rates remain down y-o-y both in the 4Q and continued into 2010
  • How is the international business really going to grow? How much of the international business is driven by domestic demand
    • It's not the only growth driver, as US recovers huge leverage there
    • Local demand for Chinese/Indian/etc is growing as a % of total business mix. Part of this is driven by the Chinese stimulis provided by the goverment
    • Most international hotel incentive fees start from a % take of the first dollar. Also margins from F&B internationally are also fairly high internationally
  • Of the 10 international hotels that they own. 1/3 of their total income comes from international.
  • Europe and the ME outperformed Asia in the 4Q09?
    • Correct - bulk of their portfolio saw RevPAR growth in Dec
    • Terrorist attacks in India caused significant disruption last year, and Chinese New Year shift also impacted them
  • Most of the opportunities they are seeing participating in recapitalization of assets and other structured transactions. Aren't seeing a pick up in fee simple transactions. They are deploying capital to development of their select service brands internationally.
  • How much of the fees are non-cash amortization of gains? Not a significant number.