A down low to mid single digit month is in the cards for July
Table revenue averaged HK$885 million per day in the 4th week of the month, down 11% from the comparable week of 2013. We are hearing that some properties (Galaxy, MGM, MPEL) may have experienced lower than normal hold over the past 7-14 days. Peninsula properties was hit particularly hard by low hold. Mass remains strong although we think June's deceleration was not an anomaly.
With 4 days left in the month, we expect July GGR to fall low to mid-single digits YoY.
In terms of market share, Wynn, LVS, and Galaxy are leading the way when compared to recent trend. Indeed, Galaxy is the only Macau stock we like on the long side currently. MPEL and MGM are both tracking below recent trend.
As for the upcoming Cotai projects, we continue to believe Galaxy's Phase 2 expansion may be the only new property to open in 2015. Parisian (LVS) construction remains stalled while Macau Studio City's (MPEL) construction timetable may also suggest an early 2016 opening. Parisian remains stalled while Sand China Limited awaits a full construction permit. Historically, we understand operators began construction after filing for permits but prior to actual award of such permits.
The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list). We intend to update this table regularly and will provide detail on any material changes.
EVENTS THIS WEEK
7/28/14 TSN Earnings Call 8am EST
7/29/14 RAI Earnings Call 9am EST
7/29/14 HLF Earnings Call 11am EST
7/30/14 SODA Earnings Call 8:30am EST
7/30/14 REV Earnings Call 9:30am EST
7/30/14 ENR Earnings Call 10am EST
7/30/14 KRFT Earnings Call 5pm EST
7/30/14 SAM Earnings Call 5pm EST
7/31/14 NWL Earnings Call 8am EST
7/31/14 AVP Earnings Call 9am EST
7/31/14 K Earnings Call 9:30am EST
7/31/14 CL Earnings Call 11am EST
8/1/14 PG Earnings Call 8:30am EST
8/1/14 CHD Earnings Call 10am EST
8/1/14 CLX Earnings Call 1:15pm EST
Consumer Staples fell -0.9% week-over-week versus the broader market (S&P500) flat. XLP is up 4.2% year-to-date versus the SPX at 7.0%.
Positive Divergence: HLF 8.6%; SODA 7.1%; DPS 3.5%; HAIN 3.1%; MJN 2.2%
Negative Divergence: TUP -11.6%; DF -8.0%; KMB -4.2%; RAI -3.1%; CLX -3.0%
- HSY – Beware C-Store and Commodity Headwinds in 2H
- MO – Price Taking Negates Steep Volume Declines
- Just Charts – Kicking Off Earnings Season
From a quantitative set-up XLP broke its immediate term TRADE duration last week and is now bearish, while the intermediate term TREND duration remains bullish.
The Hedgeye U.S. Consumption Model shows 7 of the 12 U.S. Economic Indicators flashing green.
Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:
- U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, Q2 2014 theme of #ConsumerSlowing, and Q3 2014 theme of #Q3 Slowing
- The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
- The sector is loaded with a premium valuation (P/E of 19.3x)
- Less sector Yield Chasing as Fed continues its tapering program
- The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 37.6 versus 37.5 in the prior week
In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.
BUD – bullish TREND support = 110.07
DEO – bearish TREND resistance = 126.32
KO – bullish TREND support = 40.88
PEP – bullish TREND support = 88.15
GIS – bullish TREND support = 52.44
MDLZ – bullish TREND support = 36.99
KMB – bearish TREND resistance = 110.91
PG – bearish TREND resistance = 80.31
MO – bullish TREND support = 40.41
PM – bearish TREND resistance = 86.11
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Takeaway: Bond market investors continue to seek higher ground, as treasury yields compress and junk bond yields rise.
Current Best Ideas:
Areas of intermediate-term stress remain rising Sovereign CDS (+9 bps m/m to +82 bps), rising junk bond yields (+34 bps m/m to 5.66%), compressing US yield spreads (2-10 spread -9 bps m/m to 198 bps), and rising Chinese interbank rates (+34 bps m/m to 3.31%).
Bigger picture, our view remains that ongoing 2H14 macro headwinds from falling rates and decelerating home prices will continue to put pressure on the Financials complex.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged
1. U.S. Financial CDS - The large cap US banks and consumer finance companies were slightly wider on the week, rising by an average of 3 bps. The insurance complex, however, was tighter on the week where spreads compressed by an average of 2 bps.
Tightened the most WoW: MMC, ACE, AON
Widened the most WoW: GS, COF, CB
Widened the least/ tightened the most WoW: UNM, XL, AON
Widened the most MoM: MBI, MTG, AGO
2. European Financial CDS - Russian bank, Sberbank, continued to see its swaps widen (+18 bps to 283 bps). Outside of Russia, however, there was slight tightening across Europe. The average EU bank tightened 2 bps on the week.
3. Asian Financial CDS - Swaps tightened at Indian banks by an average of 11 bps, while the rest of Asia was largely unchanged.
4. Sovereign CDS – Sovereign swaps tightened an average of 3 bps over the week. Portuguese swaps tightened the most, -11 bps, with Spain next at -3 bps. Swaps in the US were unchanged at 16 bps.
5. High Yield (YTM) Monitor – High Yield rates fell 4 bps last week, ending the week at 5.66% versus 5.70% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1884.
7. TED Spread Monitor – The TED spread fell 1.3 basis points last week, ending the week at 20.6 bps this week versus last week’s print of 21.9 bps.
8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 298 versus 297 the prior week. As compared with the prior month, commodity prices have decreased -4.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 14 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 7 basis points last week, ending the week at 3.31% versus last week’s print of 3.24%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China fell 0.6% last week, or 18 yuan/ton, to 3126 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 198 bps, -3 bps tighter than a week ago and is down 9 bps month-over-month. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 0.5% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Tickers: MGM, PENN, PNK, GLPI, SNOW
- July 29:
- WYNN 2Q 8:30am ; pw: 67663320
- NCLH 2Q 11am ; pw: 63063248
- IGT 2Q release
- GLPI 2Q call 10am
- July 30:
- MGAM 2Q earnings
- MAR 2Q call 10am : , pw: 59383825
- July 31:
- HST 2Q call 10am:
- BEL (OEH) 2Q call 10am: , pw: 68627603
- H 2Q call 11:30am: , pw: 21721745.
- BYD 2Q call 5pm: , Passcode: 2654057
- Aug 1:
- HLT 2Q 10am: , pw: 67361605
GTK:IM – signed a seven-year contract with the Tennessee Lottery which it expects to yield $130 million in total revenue. Under the deal, a unit of GTECH will provide new lottery systems and related services starting from April 2015. The contract includes one seven year extension. GTK will provide a system with 5,500-terminal capacity able to expand to 7,500.
Takeaway: GTech wins another lottery contract!
MGM – MGM Hakkasan Hospitality CEO Neil Moffitt has recently been on a media tour touting the benefits of the relationship between MGM Resorts and Hakkasan Hospitality including the potential MGM Resorts to "kick start its non-gaming hotel business." MGM Hakkasan Hospitality will focus on the design, development and management of luxury non-gaming hotels, resorts and residential offerings under the Bellagio, Hakkasan, MGM Grand and Skylofts brands in key international gateway cities and prime resort destinations across the globe.
Takeaway: Another crack at the non-gaming hotel business...
PENN & GLPI – The Iowa Supreme Court late on Friday ordered the Argosy Sioux City riverboat to close by 5 p.m. on Wednesday, July 30, 2014. The very brief ruling by the Court read "After consideration of the papers filed, the court denies the application for stay. The emergency stay previously entered by this court shall be lifted at 5:00 p.m., July 30th, 2014."
Takeaway: With this ruling, PENN is operating without a valid gaming license in the state of Iowa for Argosy Sioux City. Barring some miraculous legal maneuver, the property will close rather than risk compromising its other properties and gaming licenses. Expect a one time charge during 3Q14 for the shuttering and removal of the boat.
PNK – despite Orange Capital's media blitz regarding PNK shares being undervalued. From June 13th through July 1st, Orange Capital sold more than 232,000 shares for nearly $6 million in proceeds. However, Orange increased their stake from 3.67% to 4.16% due to the purchase of call options, sale of put options, and an initiation of a swap contract.
Takeaway: Voting with their pocket book.
SNOW – Intrawest Resorts Holdings’ lock-up period will expire on Wednesday, July 30th. Intrawest Resorts Holdings had issued 15,625,000 shares in its public offering on January 31st. Following completion of the IPO, approximately 60.1% of our outstanding common stock will be held by the Initial Stockholders -- or about 27,049,200 share are subject to lock-up.
Takeaway: More equity coming soon.
Japan Gaming (Nikkei) – The Japanese Diet is considering levying entry fees on its citizens while foreigners would be allowed to enter for free when casinos open in Japan. According to Nikkei, the fee would be less than $100. In addition, Tokyo governor has strengthened his anti-casino rhetoric and reports say MPEL has given up on Tokyo. Nikkei also says Japan may approve 3 casinos based on the Singapore model, with Yokohama a strong candidate, given its cruise line center.
Takeaway: The Singapore Model is coming to Japan.
Revel – with the upcoming auction close at hand, local media reports indicate potential bidders include: Seminole Indian Nation which owns the Hard Rock franchise, Carl Ichan who owns Tropicana, and Caesar’s Entertainment, which is planning to close Showboat in little more than a month. If Caesar's was successful in buying Revel, it could be viewed as an asset trade up for Caesar's.
Takeaway: More soon...August 6th is the auction date.
On Line Gaming in Canada – Atlantic Lottery Corporation, operates lottery games in Atlantic Canada. It is owned jointly by the four Atlantic provincial governments: New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland and Labrador. Atlantic Lottery recently announced it will revisit the prospect of online gambling for the province.
Takeaway: An interesting development and possible internet gaming expansion.
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.
Takeaway: DLTR/FDO call the top of the cycle? TGT price-matching in Canada - bad move. NKE Parker’s not so big pay cut. WSM keeps exec team sharp.
HEDGEYE RETAIL IDEAS LIST
EVENTS TO WATCH
KER - Earnings Call: 12:00pm
WFM - Earnings Call: 5:00pm
GIL - Earnings Call: 8:30am
SHOO - Earnings Call: 8:30am
DLTR, FDO - Dollar Tree, Inc. to Acquire Family Dollar Stores, Inc. to Create North America’s Leading Discount Retailer
- "Dollar Tree, Inc., the nation's leading operator of discount variety stores selling everything for $1 or less, and Family Dollar Stores, Inc., a leading national discount retailer offering name brands and quality, private brand merchandise, today announced that they have entered into a definitive merger agreement under which Dollar Tree will acquire Family Dollar in a cash and stock transaction. The value of the consideration is $74.50 per share, a 22.8% premium over Family Dollar’s closing price as of July 25, 2014."
Takeaway: Dollar Tree is clearly a superior company to Family Dollar -- though admittedly that's the equivalent of comparing a Pug to a Bulldog. DLTR has an SG&A structure that is 3 points higher than FDO, and yet its EBIT margins are double FDO's, and it has ROE and ROIC that are both 50% higher. The deal price of 11x EBITDA is lofty, though it's fair to assume that we'll see DLTR run the FDO stores dramatically better. We'd love to stay biased on the short side with this one, but there's likely a couple of years worth of outsized EPS growth for NewCo (which is called Dollar Tree) as the merger plays out. The bottom line is this…if we're certain about one thing, it's that we've got to be near the top of the cycle when two retailers like this decide to merge at such a hefty price.
TGT, WMT - Target to match grocery prices from anywhere in Canada
- "Starting July 29, Target will match grocery prices from any other store in Canada. That means you can take a flyer from a grocery store in Moncton and your Halifax Target will match the produce price."
- "Coupon expert Gail Quigley says a bit of online research can save $100 a month for savvy shoppers."
Takeaway: The last thing TGT should be doing is matching prices on groceries for all other retailers. The reality is that if it wants to play the price game, WalMart, which has 3x as many stores in Canada, will crush it like a bug. This move comes just a week after TGT Canada told its vendors that it wants 2% discount on all purchases. This kind of action probably does not mean that the business is beating plan. Near-term trends aside, the strategic implications here are simply not good. Target shouldn't be competing on price. It should be competing on quality -- that's where it has a realistically defendable niche.
NKE - Mark G. Parker's Total Pay at Nike Declines
- "Mark G. Parker, the president and chief executive officer of Nike Inc., saw his total compensation for fiscal 2014 dip 4.8 percent to $14.7 million from $15.4 million in fiscal 2013."
- "Parker’s base salary slipped 3.7 percent to nearly $1.6 million."
Takeaway: We don't know where we stand on Parker…either a) the guy is one of the best CEOs in retail, or b) he is simply the best personality fit for an extremely eccentric, yet effective organizational structure. Either way, something tells us that Parker is perfectly fine making ONLY $14.7mm last year.
WSM - Williams-Sonoma, Inc. Announces Executive Promotions, New Roles Position the Company for Continued Growth
- "Williams-Sonoma, Inc. announced several strategic organizational changes to position the company for continued growth. The announcements were made by Laura Alber, President and Chief Executive Officer."
- "Chief Marketing Officer Pat Connolly will assume the position of Chief Strategy and Business Development Officer."
- "Chief Information Officer John Strain has been promoted to the position of Chief Digital and Technology Officer. In this new role, Mr. Strain will assume additional responsibility for the company’s digital and direct marketing efforts."
- "Dean Miller has been promoted to the position of Chief Operating Officer."
Takeaway: Whether you like WSM or not, it's tough to argue that it has one of the best management teams in the business. After all, its been an incubator for Restoration Hardware to source virtually all of its Executive team. Seriously, of the top six executives at RH, only one was not born out of WSM. More moving pieces at WSM means more people for RH to lure away with a bigger stock-based paycheck.
TGT - Take a Tour of the New TargetExpress
- "Store team leader, Karl Anderson, gives us a tour of the first ever TargetExpress store."
VFC, REI - United Students Against Sweatshops Organizes Protest Against REI
- "Students and community members held protests Saturday at over 30 REI locations across the country, which led to the arrest of 20 activists at a Rockville, Md., store for nonviolent, peaceful protest."
- "The protesters, organized by the United Students Against Sweatshops, were holding a national day of action in protest against REI's refusal to sever ties with The North Face. The protesters are upset that the apparel brand's parent, VF Corp., has not signed the Accord on Fire and Building Safety in Bangladesh."
RSH - RadioShack Gets Notified That It’s Out of Compliance With NYSE
- "RadioShack Corp., the struggling electronics retailer, was notified by the New York Stock Exchange that it’s out of compliance with requirements because its stock has traded below $1 for 30 straight days."
- "Under the exchange’s rules, RadioShack has six months to get back into compliance by boosting its stock price to at least $1 on the last trading day of the month and having an average closing price at that level over a 30-day period, according to a statement yesterday."
VFC - Timberland promotes Stewart Whitney as new Brand President
- "Timberland, a leading global outdoor lifestyle brand, announced that Stewart Whitney has been promoted to brand president effective October 5, 2014. Whitney, who has successfully led Timberland’s growth in the Asia Pacific region since 2008, will report to Patrik Frisk, who has held the position since the brand’s 2011 acquisition by VF Corporation."
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