Takeaway: For those of you looking for an entry point on the short side, you found it today
This is hardly worth a note, so we'll keep it short. The market is driving YELP up 12% on the OPEN acquisition. YELP isn't a viable acquisition target; there are two simple reasons why.
- YELP IS NOT OPEN: YELP's business model is predicated on driving new account growth in excess of the absurd attrition it experiences on an annual basis; it does so through aggressive salesforce expansion (there is no leverage in the model). YELP trades at almost 3x OPEN's market cap, so there aren't that many potential acquirers that can afford to pay a premium on top of YELP's bloated $4.7 billion market cap. OPEN on the otherhand, has a corner on the Electronic Reservation Book (ERB) Market with 99% customer retention, and found a buyer who operates the same model in a different industry.
- BANKER SUICIDE: Remember that in any M&A deal, the advisors to the potential acquirer will get an in depth look at YELP's financials. That means a detailed look at YELP's customer profile, including who they are, and how long they have been doing business with the company. Management can dodge our collective questions all they want on its customer retention issues, but it will not have that luxury if its in discussions to be acquired. If a banker and/or advisor somehow successfully pitches YELP to an acquirer (by not disclosing its attrition issues), that will likely be the last deal they do together. Given there are only so many companies that could afford to do a deal of this size, that would be one very large M&A client to lose.
If you have any questions, or would like to discuss in more detail, let us know.
Hesham Shaaban, CFA
We added BOBE to the Hedgeye Best Ideas list as a long on 05/02/2014 at 47.21/share. We continue to believe there is a significant opportunity for value creation at the company that activist investor Sandell Asset Management is working hard to unlock. This is our highest conviction long idea.
All told, we aren’t expecting much good news when BOBE reports next Tuesday and highly recommend buying into any weakness. If you missed our Best Idea call, we encourage you to review our thesis in the deck below.
Presentation – Best Idea: Long BOBE
The Bob Evans story has flown under the radar for quite a while, but is beginning to generate some well-deserved attention. Earlier this week, Tyson Foods (TSN) won a bidding war to acquire Hillshire Brands (HSH), the maker of Jimmy Dean sausage and Ball Park hot dogs, at a substantial premium valuation. But that’s not all. Last night, BOBE was featured on Jim Cramer’s “Mad Money” during which he recommended the stock as a long for reasons similar to ours. We believe this heightened attention will help Sandell build considerable momentum in its pursuit to unlock significant shareholder value.
Considering the robust demand for protein companies, we believe now is the appropriate time to spinoff BEF Foods in what would be a value enhancing breakup. We also see opportunities for significant SG&A reductions and believe the restaurants business would be best served by transitioning to an asset light model.
If Sandell is successful in their efforts to effect change, we see at least +45% upside to BOBE shares. Please view our presentation for specific scenario analyses. Interestingly enough, the market is currently betting against Sandell (which we believe is a mistake), making it an opportune time to get into the name.
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Takeaway: The Great American Economic Muddle continues...
The big rip in oil prices all but ensures a big U.S. #ConsumerTax hike this summer. At $106.90/barrel this morning, WTI Crude is up +9% for the year-to-date now. This very much augments our U.S. #ConsumerSlowing Macro Theme.
Meanwhile, CRB Commodities Index (19 commodities) are up +1.6% for the week and +10.3% year-to-date.
In other words, it’s almost mathematically impossible to get to Consensus Macro GDP estimates for Q314 if the Deflator reflects #InflationAccelerating.
Tickers: IGT, PENN, GLPI
- Tues-Thur June 17-19: Todd in Singapore & Macau for meetings
- Wed-Thurs June 18-19: Hedgeye Cruise survey (pre-CCL F2Q)
- Thurs June 19: LA May revs released
IGT – S&P announced Cimarex will replace IGT in the S&P 500 after the close on June 20, 2014.
Takeaway: This event was entirely expected by the Hedgeye team as on March 28, 2014 in our "IGT: Another Shoe to Drop?" we highlighted IGT's likely removal from the S&P 500 Index due to a market cap shortfall.
PENN / GLPI – A federal bankruptcy judge denied PENN's request to stop the Iowa Racing and Gaming Commission from closing Argosy Sioux City on July 1. PENN is expected to file motions in Iowa requesting an emergency stay of the July 1 closing.
Takeaway: Is this really the highest and best use of shareholder capital? Given the mounting legal costs, we expect a one-time charge related to the closing of Argosy Sioux City. Recall, it is illegal for a casino to operate without a valid gaming license and were the casino to operate without a license, such an event would set-off events leading to forced property closures in other jurisdictions.
H - Director Pamela M. Nicholson purchased 1,600 shares of Hyatt stock on Tuesday, June 10th at $60.97/share and now owns 3,010 shares.
Iowa Gaming Expansion – The Iowa Racing & Gaming Commission voted 3-2 to approve a 19th commercial casino license for the development of a 525 slot, 14 table casino and adjoining 71-room hotel by Wild Rose Entertainment (WRE) in Jefferson, Iowa. WRE owns and operates two other properties in Iowa, the 527 slot, 14 tables games WRE Emmetsburg as well as the 544 slot, 12 table WRE Clinton.
Takeaway: Getting crowded in Iowa but a few more slots for the suppliers. We found the 3-2 decision interesting in that the IRGC voted 4-1 two months ago to decline the license application for the 840 slot, 30 table games Cedar Crossing Casino in Cedar Rapids, Iowa on the basis of cannibalization of neighboring casinos.
Macau Ferry Accident – a high-speed ferry carrying 220 people crashed into a breakwater in the Macau harbor earlier today injuring 22 people. The Shun Tak Holdings operated ferry departed Hong Kong and hit the breakwater at about 9:30 am Macau time. This was the second accident involving a Turbo-Jet ferry over the past month - the prior Turbo-Jet accident occurred on May 22 when a Macau-bound ferry collided with a cargo ship injuring more than 30 passengers.
Takeaway: This second accident may result in increase government oversight.
Illegal World Cup Betting – Police seized more than HK$20 million in illegal World Cup bets during the first day of the World Cup across the Hong Kong SAR on Thursday.
Takeaway: The first of many headlines, we expect.
Cyprus Gaming Expansion – Nicosia, the capital of Cyprus, yesterday launched its big push to secure the license for the island’s first-ever casino resort, and like each of the other main districts, says the capital is the only location that makes the most business sense. The Cypriot government announced last month the gaming licenses would be awarded in Spring 2015 would include an integrated resort in one district plus two more branches, or satellite casinos in two other districts.
Takeaway: The political and public relations sparring begins.
Russia Gaming Expansion – (GGR Asia) Russian President Vladimir Putin did a U-turn and he now supports the creation of a gambling zone in Sochi, which in February hosted the 2014 Winter Olympics. Mr Putin had previously talked against the idea saying the Black Sea city would lose its traditional holidaymakers if it had casinos. Recall, in April, Mr Putin submitted a draft law to the Russian parliament to establish a gambling zone in Crimea, which would be the fifth in the country.
Takeaway: A potential new jurisdiction and large integrated resort...would be incremental slot equipment demand.
Australian cruise market – (Cruise Currents) In 2013, the number of Australians setting sail increased by a record 20%, a larger increase in cruise passengers than any other market in the world. In addition to a 20% growth rate, a record number of 3.6% of Australians chose a cruise vacation last year, beating North America’s 3.3%.
Recently, Carnival Cruise Lines deployed their first ship to the region, the Carnival Spirit, which will soon be joined by sister ship Carnival Legend this coming September. Both ships will sail year round from Sydney, offering sailings to the South Pacific. RCL also recently announced it will begin sailing from Brisbane, offering a variety of Australia and South Pacific sailings aboard Legend of the Seas beginning in 2015. The line is also opting to increase capacity in the region, replacing the smaller Rhapsody of the Seas in Sydney with the larger, newer Explorer of the Seas in 2015.
Takeaway: Bodes well for a potential growth market
China May Home Sales - (Bloomberg) China's home sales fell 11% y/y in May amid slowing demand. The value of homes sold declined to 446B yuan ($72B) from 503B yuan in the same month last year. The value of sales from Jan to May fell 10.2% y/y to 1.97T yuan.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye
Macro/Financials team is turning 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.
The consensus sell-side call: buy the stocks of the Macau gaming operators on weakness due to strong mass growth. What happens when mass decelerates?
CALL TO ACTION
While the sell-side has caught up to the VIP slowing thesis, the analysts remain mostly positive on the Macau gaming stocks due to “continued strength in the mass segment”. Well friends, we again send up the warning flare – this time we call attention to the imminent deceleration in the mass segment. It’s mostly the math and the lapping of a significant rise in table minimums but also, VIP and mass revenue have historically shared a correlation coefficient of 0.56. Moreover, if recent reports are correct, premium mass may be susceptible to the upcoming smoking ban (VIP rooms will be exempt). While certainly a contrarian call, could the on the margin strategy be to stay away from the Mass centric stocks (LVS, Sands China, SJM, MPEL)?
As early as March 10, we pivoted to the sidelines when we removed LVS from our Best Ideas list, see our note “LVS: REMOVING FROM INVESTING IDEAS” and shortly thereafter warned investors about junket issues, the Dept of State request to lower the threshold for reportable financial transactions, UnionPay, money laundering scrutiny, as well as the extreme sentiment indicator with the massive “buy” rating skew on MGM, LVS, WYNN, and MPEL. (see chart below).
We were incorrect in thinking May GGR growth would be the last positive catalyst for the Macau stocks over the intermediate term. Obviously, that catalyst failed to materialize and May growth disappointed. But looking ahead, we still only see negative catalysts: continued weak VIP driving monthly GGR growth into single digits, the smoking ban impact on premium mass, and potentially most important, decelerating Mass growth.
Long-term, exposure to the mass segment will be advantageous but relative to sentiment, it may be where the risk lies over the near/intermediate term. The following table details mass revenue as a percentage of total GGR on a trailing twelve month basis as of the end of May 2014. Sands China (LVS) is the most exposed to the mass segment with more than 44% of revenues, followed by SJM with 35%, MPEL with more than 31% and Galaxy with almost 26%. The least exposed to mass is Wynn Macau (WYNN) with 22.1% and MGM China (MGM) at 23.1%. Our point here is that with all the investor concern surrounding VIP, stocks may have adjusted already for those issues, but maybe not for the upcoming mass deceleration.
The sell-side continues to reaffirm their conviction in the Macau gaming stocks based on continued growth in the Mass segment. Last week, one sell-side analyst wrote, “We believe mass market growth can continue to pace around 30% this year.” Another firm wrote, “We maintain a positive outlook on the sector, as mass, which is the key driver for EBITDA growth, remains robust.”
We believe in bold, intellectual honesty and insightful research with a focus on timing. As such we are compelled to enlighten our subscribers that growth in the Mass segment has probably peaked and the second derivative is about to go negative!
WHAT WE THINK WE KNOW
During Q1 2014 earnings conference calls, we heard a lot of talk from gaming operators regarding “yielding up” the mass segment. While visitation has increased, we believe the largest driver of the growth in the mass segment has been rising revenue per visitor. The big increase in table minimum bets and the changing mix toward tables with higher than minimum bets helped push that metric upward.
As an example, if a casino operated 500 mass tables but 400 tables had a HK$25 minimum bet while 100 tables had a HK$250 minimum bet, the effective yielded minimum was HK$70. Fast forward, this casino now “yields up” (increases minimum bets) so that the casino floor is now 250 mass tables with a HK$300 minimum bet and 250 mass tables with a HK$500 minimum bet, the effective yielded minimum is now HK$400.
So, while not increasing the number of visitors nor the speed of play, the casino has now effectively increased volume by 5.7x assuming the same number of hands played at the same speed. Thus, the growth in the mass segment could in fact be driven entirely on “yielding up” rather than increased visitation. Obviously, casinos cannot do this forever.
When we review mass segment baccarat table minimums, we notice a significant increase (or yielding up) occurred during July and August of last year. Said differently, the mass segment is about to anniversary more difficult average table minimums, thus making year-over-year growth more difficult.
When we put all our quantitative and qualitative analysis together, we forecast a slowing of the mass segment on a market basis – from >35% growth to 19-20% by the end of the year. We don’t believe investors fully appreciate the impact of yielding up, more difficult comps, and the resulting slowing second derivative of the mass segment. As a result, we see additional negative earnings revision and valuation risk to the Macau gaming operators – beyond what is currently expected in the market.
We remain very constructive regarding the long-term outlook for Macau operators, particularly those with a well defined mass strategy and mass exposure. However, with all the focus - and rightly so - currently on the VIP issues and overwhelmingly bullish sentiment surrounding mass, we caution investors that mass deceleration is likely and could further pressure the stocks.
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