THE HEDGEYE BREAKFAST MONITOR
Corn traded sharply lower yesterday after the USDA released its projection for higher-than-expected inventories in 2012. Goldman is out this morning reducing its three-month corn forecast to $6.30 a bushel from $6.85. Goldman also reduced its forecasts for soybeans and wheat. Corn prices coming down will help future COGs margin for restaurant and food processor stocks but, in the case of restaurants, the benefit will take some time to flow through to the P&Ls as inventories and contracts are worked through.
CMG: Chipotle was upgraded to Outperform from Market Perform at William Blair.
SBUX: Starbucks named in patent infringement suit over mobile payment app.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME
DNKN: Dunkin’ traded up yesterday along with most of the coffee sector (PEET and GMCR traded lower). The official DNKN IPO lockup ends in 6 trading days.
COSI: Cosi shareholder Royce & Associates filed a 13G. Their position is unchanged. It should be noted that the new CEO was granted 1,000,000 shares. No other details appear to be available on her employment contract.
CBOU: Caribou gave a very strong presentation at the ICR conference. Along with CMG, CBOU is the only company that had the unit economics to justify growth.
DPZ: Domino’s has been trading strongly for some time but slowed yesterday. Some concerns have arisen related to FX headwinds. Barclay’s raised its Price Target from $26 to $28 following the Investor Day.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME
RUTH: Ruth’s Chris gave a preannouncement of sorts yesterday at the ICR Conference, saying that the fourth quarter was an exciting time.
BBRG: Bravo Brio also gave a fairly robust presentation at ICR.
BJRI: BJ’s did not say anything new at ICR and continues to be the darling of the small cap growth crowd
PFCB: PFCB has been trading well lately but our view is that investors will need to see solid results before buying in en masse again. The company is aware of the issues facing its brand but whether or not the company has the right strategy to remedy the problems is up for debate.
The Macau Metro Monitor, January 13, 2012
SINGAPORE ROLLS THE DICE ON NEW CASINO RAIL LINK Wall Street Journal
The Circle Line, the island nation's 4th mass rapid transit line, will open a 2.4-kilometer extension this Saturday. What the extension will do, with the opening of Bayfront station (which sits between the Circle Line’s Promenade and Marina South), is plug Singapore’s famed Marina Bay Sands directly into the public transport network – a bit of a roll of the dice on planners’ parts, given that Singapore doesn’t really want to encourage more locals to go gambling there.
John Postle, executive director of The Shoppes, MBS's lavish shopping mall, says the new station “allows our visitors to access Marina Bay Sands with ease from all parts of the island.”
MGM MACAU INCREASES SALARIES Macau Business
MGM Macau will increase the salaries of all non-management team members by 5% and give them a Chinese New Year bonus payout. However, MGM does not say when these will take place or how much the bonus payout will be.
WYNN SAYS OKADA ACTION IS 'PREPOSTEROUS AND WITHOUT MERIT' Macau Business
WYNN said Kazuo Okada's lawsuit is "preposterous and without merit" and the company will defend all claims vigorously. Kazuo Okada had filed a motion to seek access to the company’s financial records
WYNN says this action is an attempt by Okada to deflect attention from a dispute between him and the company related to Okada’s wanting to pursue a project in the Philippines “despite repeated admonishments from the board.” This would directly compete with WYNN. WYNN also said, “Mr. Okada received the same information as all directors with respect to charitable contributions made by the company.”
PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR NOVEMBER 2011 DSEC
Visitors in package tours soared by 70.3% YoY to 767,208 in November 2011. Visitors from Mainland China (574,212); Taiwan (45,522); Hong Kong (35,659) and the Republic of Korea (27,453) surged by 79.0%, 131.9%, 64.5% and 103.3% respectively.
At the end of November 2011, number of available guest rooms of hotels and guest-houses totaled 22,335, up by 2,276 rooms (+11.3%) YoY, with that of 5-star hotels accounting for 63.5% of the total. The average length of stay of guests held stable at 1.5 nights, same as in November 2010.
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CALL NOTES AND Q&A
- Price was based on comps, growth rates, management expertise, etc. They will include Double Down in their interactive division which is incorporated in their gaming operation revenue. Unclear how accretive the acquisition will be at this time.
- Rumor floating around of a $140k a day in revenue attributed to Double Down
- Allows them to reach a younger demographic with their core products. Also allows them to add a social media layer to their casino games.
- Zynga is the most recent comparable transaction
- How do you use the metric of DoubleDown's active users? Are those actual paying users?
- They need to look at their revenues net of what they pay to Facebook
- Double Down generates revenues to FB and FB then remits 70% of the revenue to DoubleDown
- Why not build the business organically?
- Issue of time to market of at least 2 years and they believe that time to market is important for first mover advantage. Land grab for liquidity = product performance over time
- Worried about the distraction from their core business if they were to build from scratch - hard to do within the core business
- From a cost standpoint, it would cost them roughly the same
- How do their clients feel about this acquisition - i.e. IGT competing with them?
- Thinks that this is positive for their existing customers since it's another service that they can offer
- Double Down has every intent to move into mobile applications. The lion's share of their expenses is R&D.
- They may break out interactive going forward
- They would think about the price paid on an EBITDA multiple basis
- Interactive is currently less than 5% of their revenues... if they fold in Double Down into their revenues they will be north of 5% but they don't need to disclose until revenues reach 10%.
- Sounds like it won't be 10% but they are still debating whether to break it out
- Think that liquidity is the number one barrier to entry. They can also quickly provide a pipeline of products into this distribution channel since they already have the games. Since it's a B to B model they rely on Facebook for customer acquisitions.
- Wouldn't necessarily think of this acquisition as the hub of their interactive division but rather a spoke in the wheel... like Entraction. This one allows them to access the social media channel.
- Retention bonuses are widely distributed - paid out over 2 years based on a number of factors.
- There is nothing that prevents DoubleDown from expanding outside of Facebook
- IGT's unbranded (unlicensed) products can move online in short order, but they are reviewing their license agreements to see if they can go online as well or if they require additional payments.
- There is also a 3rd year performance based earn out.
- Entraction is their real money wagering product.
- Unclear if online gaming becomes legal and whether that will cannibilize their virtual business.
- Monetization rate for DoubleDown is a little better than Zynga's since their gaming experience is more volatile.
- Expect their next 12 months of growth to be similar to what they have experienced so far
HIGHLIGHTS FROM THE RELEASE
- IGT reached an agreement to acquire DoubleDown Casino for "$250MM in cash, $85MM in retention payments over the next 2 years and up to $165MM million in cash payable over the next 3 years subject to Double Down meeting certain financial performance targets. IGT expects to fund the transaction from cash on hand."
- "The addition of Double Down provides IGT instant size and scale in the fast growing world of casino-style social gaming and is expected to broaden IGT's popular gaming titles beyond the physical casino to Facebook, the world's largest social network with over 800 million global users."
- "The transaction is estimated to be accretive to IGT's fiscal 2012 adjusted earnings and is projected to close within the second quarter of its current fiscal year. Greg Enell will continue to lead Double Down and the company's operations will remain inSeattle, WA after the acquisition is complete. Through the integration, IGT will operate Double Down with the appropriate level of independence needed to continue to foster exceptional growth."
- Double Down Interactive LLC:
- "Launched in April 2010, the DoubleDown Casino is the world's largest virtual casino and one of the top 4 social media games in 2011 as rated by Facebook. "
- "Currently has 4.7 million monthly active users, up from 3.3 million in October 2011."
- "Offers blackjack, slots, slot tournaments, video poker, and roulette to social gamers all around the world."
TODAY’S S&P 500 SET-UP – January 13, 2012
As we look at today’s set up for the S&P 500, the range is 21 points or -1.12% downside to 1281 and 0.50% upside to 1302.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 699 (+410)
- VOLUME: NYSE 770.06 (1.44%)
- VIX: 20.47 -2.76% YTD PERFORMANCE: -12.52%
- SPX PUT/CALL RATIO: 1.55 from 2.18 (-28.90%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 55.12
- 3-MONTH T-BILL YIELD: 0.02%
- 10-Year: 1.90 from 1.92
- YIELD CURVE: 1.68 from 1.69
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Import Price Index, M/m, Dec., est. -0.1% (prior 0.7%)
- 8:30am: Trade Balance, Nov., est. -$45.0b (prior -$43.5b)
- 9:55am: UMich Confidence, Jan. P, est. 71.5 (prior 69.9)
- 11:10am: Fed’s Duke speaks on regulation in Santa Barbara, Calif.
- 12:45pm: Fed’s Lacker speaks on economy in Richmond
- 1pm: Fed’s Evans speaks in Indianapolis
- 1pm: Baker Hughes Rig Count
- 1:15pm: Fed’s Bullard Speaks on Monetary Policy in St. Louis
WHAT TO WATCH:
- Trade deficit may have widened in Nov. to $45b as oil imports rose, economists est.
- J.P. Morgan is first of the large banks to release earnings; watch commentary on capital/regulatory outlook
- Google, LG said to be in talks to collaborate on new TV service
- Nestle, Danone said to make first-round bids for Pfizer’s baby-formula unit
- Eastman Kodak said to be in advanced discussions with Citigroup to provide bankruptcy financing
- Dow Chemical CEO Andrew Liveris, Alcoa CEO Klaus Kleinfeld speak on job creation, innovation at Brookings, 8:30am
- Lufthansa, Boeing officials to speak at National Press Club on how use of biofuels will impact transportation industry, 9am
- No IPOs scheduled: Bloomberg data
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- China Gold Hoarding Turns More Traders Into Bulls: Commodities
- Oil Heads for Weekly Decline on Plans to Delay Iranian Embargo
- Cocoa Falls After European Bean Processing Report; Coffee Climbs
- Gold Drops as Some Investors Sell After Rally to One-Month High
- Copper Advances on Optimism Euro-Area Economy Is Stabilizing
- Copper, Oil, Gold May Drive Commodities Rally, Goldman Says
- Gold May Gain to $1,670 as Average Breached: Technical Analysis
- Soybeans Gain First Time in Four Days as USDA Trims Forecast
- China’s Wen to Juggle Iran Oil Need With Saudi Ties on Gulf Trip
- Evraz Debt Costs Diverge on Lowest U.S. Loan Rate: Russia Credit
- Copper Tax Pushing KGHM to Debt to Keep Growing: Poland Credit
- Rubber Drops, Paring Weekly Gain, as Oil Under $100 Cuts Appeal
- Palm Oil Drops as USDA Forecasts Bigger U.S. Soybean Supplies
- COMMODITIES DAYBOOK: Oil Trims Weekly Drop on Europe Optimism
- Corn Drops After USDA Unexpectedly Lifts Global Supply Outlook
- Uranium Returning From Brink on China Demand: Energy Markets
- EU’s Iran Oil Embargo Said Likely to Be Delayed for Six Months
The Hedgeye Macro Team
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