POSITIONS: Long Healthcare (XLV) and Apple (AAPL); Short Industrials (XLI)
Our core fundamental themes have not changed (#GrowthSlowing and #DeflatingTheInflation), but prices have. With the SP500 100 points lower (and AAPL $100 lower), plenty are selling low now. That’s not what we do.
Across risk management durations, here are the lines that matter most:
- Intermediate-term TREND resistance = 1369
- Immediate-term TRADE resistance = 1346
- Immediate-term TRADE oversold = 1317
In other words, we don’t get paid to freak-out and sell on moves under 1320. We get paid to book gains on the short side and, slowly, take up gross invested long positions. On the bounce to lower highs, there are no rules against re-shorting what we cover.
Keith R. McCullough
Chief Executive Officer
IGT the big winner
In terms of ship share, we believe IGT was the only winner in 1Q 2012, on a sequential basis. The slot market remains super competitive with WMS and Konami particularly aggressive on pricing. Q1 replacements were down slightly YoY to an estimated 14,900 units but used units are accounting for a bigger % of sales. In Ohio, for example, ~15% of the units are used/participation. Casinos are increasingly putting caps on participation units and showing a preference for preferring fixed fee and 80/20 deals vs. % coin in (WAP) type games in an effort to improve margins in a low growth environment.
Here are the estimated CQ1 2012 market shares (based on shipped units):
- IGT: 33%, up from 30% in CQ1 2011
- WMS: 19%, down from 21% in CQ1 2011 despite aggressive pricing
- BYI: 14%, unchanged YoY
- KNM: 17%, down from 20% in CQ1 2011
- Konami was admittedly very aggressive on pricing in Q1
- We believe Konami growth is stalling and they will likely be a share donor this year
- MGAM: 2%, double the 1% in CQ1 2011
- ALL: 11%, unchanged YoY (our guess until the company reports next quarter)
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Initial Claims - Uneventful Print
Initial jobless claims rose 3k last week to 370k, though was flat after the 3k upward revision to last week's data. Rolling claims fell 4.75k to 375k. On a non-seasonally adjusted basis, claims fell 18.3k to 323k. Last week we profiled the year-over-year trend in rolling NSA claims as a barometer for avoiding the inherent seasonal distortions. That analysis showed that claims were still improving at roughly at 10% YoY rate. This morning's data point continues that trend.
2-10 Spread Breaks Down Further
The 2-10 spread tightened another 8 bps versus last week to 148 bps as of yesterday. The ten-year bond yield fell 6 bps to 177 bps.
Financial Subsector Performance
The table below shows the stock performance of each Financial subsector over four durations.
Joshua Steiner, CFA
BYD pulls the trigger on a very accretive acquisition.
Could this be the deal that finally gets this stock its due? Numbers were already going higher but BYD is adding a huge amount of EPS and cash flow without adding to leverage. The acquisition of Peninsula Gaming is a big positive on many fronts with limited downside. Shocking, really, that there was this good of a deal out there.
Here is what we like:
- Huge accretion: There are a lot of unknowns (borrowing rate and allocation of excess purchase price to goodwill) but we estimate the deal could be accretive to BYD’s 2013 EPS to the tune of $0.30-0.40 or 50-70%. On a free cash flow basis, we calculate accretion of around $0.90-1.00 per share or 30-33% accretion. As a percent of normalized free cash flow (BYD is under-spending on maintenance capex for a few years), the accretion climbs to 50-55%. Maybe it’s not management hyperbole when they call the acquisition “a transformative transaction”.
- Acquiring stable cash flow: All four of Peninsula’s mature properties have been generating stable EBITDA. Moreover, gaming revenues at each property have been up since January and market shares are all on a stable to upward trend (see charts below).
- Protected markets: While there is always potential for new competition, there are no new properties anywhere on the horizon that could materially impact any of the Peninsula properties.
- Acquiring growthy cash flow: Kansas Star, the new property in the portfolio, significantly exceeded expectations in its first full quarter of operations, generating almost $27 million in EBITDA. That’s a 60% annualized ROI on a temporary facility. The permanent facility (Phase II) will open in January 2013 at a cost of $83 million (funded by Peninsula and not BYD) which could add another $10-20 million in EBITDA.
- Assets are in good shape: The properties in the aggregate are newer than BYD’s existing properties so there are no deferred capex issues.
- Financing: We don’t calculate any increase to BYD’s leverage as a result of this deal. Moreover, setting Peninsula as a subsidiary and putting the debt on the sub provides BYD with a lot of financial flexibility (read: Borgata). That flexibility is probably worth the additional interest cost of subsidiary financing. Nice risk management move by BYD management. They also secured a $144 million seller financed note with no interest in the first year. Look for BYD to buy this out after year 1 or 2.
The not as good (there’s not much not to like):
- Potential for an equity raise: Management didn’t rule out raising equity to fund the $200 million cash piece of the acquisition. With the stock where it is, we would not like to see dilution.
- Little in the way of synergies: While this is not a huge issue since the price is right, we don’t see any cost cutting opportunities and are not optimistic that B-Connected will provide a lot of revenue synergies.
- Expensive Earn-out provision: 7.5x EBITDA exceeding $105 million in 2015 at Kansas Star. This takes away a lot of the upside but it is understandable given the growth trajectory of the property.