Cartoon of the Day: Hike?

Cartoon of the Day: Hike?  - Fed cartoon 01.28.2015

If the Fed raised interest rates with the world slowing, and deflation doing what it's doing right now, well.... look out.

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Changes in Latitude, Changes in Attitude

After a few cold weeks in the Northeast, we’re thinking about warmer places.


Following Brinker’s earnings release this morning, we decided to make two changes to our Investment Ideas list.

  1. Remove BLMN from the Long List
  2. Bump up DFRG to the Short List


Changes in Latitude, Changes in Attitude - 1


Inflation is the common theme for both of these names.  Red meat inflation, in particular, is the one commodity we believe will limit upside to earnings – despite strong sales trends.  On the EAT call, management cited “unfavorable commodity pricing stemming from a greater than anticipated increase in the price of burger meat, cheese and avocados,” as a significant headwind to EPS during the quarter.  We suspect that won't change anytime soon.  Next quarter, EAT will be rolling a difficult comp, when cost of sales were down 93 bps y/y in 3Q14.


BLMN: All Good Things Must Come to an End

BLMN has enjoyed a nice run since the end September of last year, when we added it to our Long List.  The stock is up 6% and 31% over the past one and three months, respectively.  Unfortunately, we believe the stock has a lot of good news baked into it ahead of the quarter.  Given the recent stock move and earnings estimates that have remained flat, the stock is finally trading in-line with the group.  If we thought there was significant upside to earnings, we’d stay long the name – but we don’t believe that to be the case.  There has never been a significant amount of leverage in the BLMN business model, which has traditionally relied on pricing and productivity, to offset commodity inflation, to protect margins.  In addition to the aforementioned, the overwhelmingly positive sentiment gives us incremental cause for concern.


Recent Notes

11/04/14 BLMN: Notable Progress, Still Bullish

10/02/14 BLMN: Bullish on Bloomin’

09/25/14 BLMN: Same As It Ever Was


Changes in Latitude, Changes in Attitude - 2

Source: FactSet


DFRG: Hello Darkness, My Old Friend

The bottom line on DFRG is a little more sinister, because the business model is broken.  In our view, DFRG should not open another Del Frisco’s Grille for the foreseeable future – never mind six this year!  Please refer to the Black Book we published back in July 2014 for additional details.  Perhaps more importantly, however, is the fact that the company will not grow EPS 17% in 2015 and it certainly won’t accelerate to 23% in FY16. 


Trading at 20x an inflated NTM EPS estimate, the stock looks like a good value.  Alas, consensus reflects a recovery that will not happen.  The optimism in DFRG’s earnings estimates is a direct reflection of the 100% buy rating on the stock.  The target price of $27.60 suggests 37% upside from current levels.  If we set price targets here at Hedgeye (we don't), ours would be closer to $10 (~50% downside).


Recent Notes

10/16/14 DFRG: Timing is Critical

10/09/14 DFRG, EAT: Covering Our Shorts Given Strong Knapp Sales

07/22/14 DFRG: Inflated Multiple Deflating

07/21/14 DFRG: Thoughts into the Print

07/02/14 DFRG: A Castle-in-the-Air

06/16/14 DFRG: Running Through Our Thesis

06/05/14 New Best Idea: Short DFRG


Changes in Latitude, Changes in Attitude - 3

Source: FactSet


Takeaway: The hotel transactions market heated up further in Q4, dovetailing nicely with what was surely a strong revenue quarter for the industry.

The M&A market heated up dramatically in Q4 2014 with the publicly traded C-corp involved with the usual REIT/PE suspects. An active transaction market at higher prices dovetails nicely with what was likely a strong top line Q4 for the hotel stocks.


Please see our detailed note:

LEISURE LETTER (01/28/2015)




  • Jan 28:
    • Hedgeye Cruise Call with Mike Driscoll (11am)
    • LVS 4Q CC at 4:30pm
      • , Passcode: 61558874
  • Jan 29:  
    • PENN 4Q CC
    • RCL 4Q CC
  • Feb 2: Cod Manila Grand Opening
  • Feb 3:  GLPI 4Q CC

headline story

IGT FQ1 earnings:

  • Revenue $450.6M vs Street $489.7M
    • First quarter results included an extra week due to the Company's 52/53-week fiscal year, where fiscal 2015 will contain 53 weeks versus the normal 52 weeks in fiscal 2014. Therefore the current year quarter was 14 weeks in length from September 28, 2014 to January 3, 2015, as compared to 13 weeks in the prior year quarter.
    • The extra week of operations during the quarter contributed approximately $22 million in revenue and $2 million in operating income.
  • Adj EPS: $0.19 vs Street $0.25
  • Gaming ops
    • Yield up 3% YoY to $46.36
    • Installed base declined 16% to 45.4
      • Driven largely by declines in International, primarily due to lease operation unit conversions in the prior year, and declines in North America MegaJackpots® ("MJP"), most significantly in the standalone category.
  • Product Sales
    • Revs dropped 39% YoY
      • Primarily due to lower machine unit volume, as the prior year quarter benefited from 2,800 video poker units under a large contract and 825 additional Illinois VLT units.
    • ASP gained 5% to $13,900
  • Interactive
    • Revs increased 23% YoY to $79 million, driven by increases in both average DAU and bookings per DAU. 
      • Average DAU were 1.9 million (+11% YoY), due to improved content and enhanced player retention and engagement strategies.
      • Average MAU were 5.2 million (-16% YoY) primarily due to increased marketing efforts to procure higher-quality players.
      • Average bookings per DAU in the first quarter were $0.43, an increase of 2% over the same quarter last year.
    • Mobile revenue comprised 39% of total bookings in the first quarter and increased 68% compared to the prior year period.

Takeaway:  IGT printed an awful FQ1 2015 #, driven by much lower product sales and major shrinkage in its installed base.  Did IGT lose NA ship share again?  On a trailing 4Q basis (ending 3Q 2014), we estimate IGT's NA ship share was only 33%.  Social gaming was a mixed picture as a higher DAU count offset slower bookings/DAU.




IGT - won the replacement bid to install its Advantage 9.1 System with Media Manager and Service Window at Snoqualmie Casino. The comprehensive systems solution includes IGT's Point Play and Xtra Credit bonusing applications, Media Manager, and IGT's Service Window, connecting 1700 slot machines floor-wide. 


Sun City – raises employee pay by 7% despite gaming slump.

Article HERE

Takeaway:  Wage pressures remain despite lower revenues. We're hearing some employees were still not happy with a 7% raise.


CCL – Costa Cruises North America is turning March Madness into 'March Medness' with offers on spring Mediterranean cruises. Fares start as low as $499 per person, and up to $400 in on-board credits per cabin are available, along with reduced rates for third and fourth guests in a room. The offers apply to seven-night cruises aboard Costa Fascinosa and the new Costa Diadema.

'Reduced rates and high on-board credit offers make the Mediterranean the best deal available this spring,' said Scott Knutson, VP Sales and Marketing for Costa Cruises North America. 'Throw in the current affordability of international airfare and how strong the dollar is against the euro, and Americans have a chance to get more bang for their buck than ever before on a Costa cruise.'

Takeaway:  With the tremendous affordability of a European trip, why is Costa offering pricing/onboard promotions?

industry news

Macau - Macau’s largest labor group is launching a campaign to press the government to implement a full smoking ban in the casino industry. The influential Macau Federation of Trade Unions will start collecting signatures to petition the government to ban smoking from VIP rooms and end smoking lounges on mass casino floors. Under rule changes enacted on October 6 by the Macau government, smoking on casino main floors is now only allowed in enclosed smoking lounges that do not contain any gaming tables or slot machines.

Article HERE

Takeaway:   A full ban on casino smoking is a real risk

Macau Gaming Revenue - Secretary for Economics and Finance Lionel Leong said local casinos’ revenue could drop to somewhere between 23 billion patacas a month, the lowest figure in the last seven months, and 28 billion patacas, the highest, in the first six months of the year.
He also said he hoped there would be “adjustments” during the Chinese New Year holiday period and the mainland’s Golden Week holidays in May and October, adding he remained optimistic about Macau’s economy in the long run.

Article HERE

Takeaway:   Using a midpoint of MOP25.5 bn for the 1st 6 months of 2015 would suggest -21% YoY in 1H 2015 GGR vs 1H 2014 GGR.  If we use the $25.5bn for the entire year of 2015, this results in -13% YoY for 2015 GGR.


S. Korea - A provincial government in South Korea says it too wants to attract foreign investors to build a foreign players-only casino resort.  North Jeolla province on the country’s southwest coast comes less than two weeks after the central government said it would consider bids for two new foreign-players only casino projects in the country – each with a minimum investment of KRW1 trillion (US$925 million). The neighboring city of Gunsan has an international airport of its own that currently provides direct flights to Jeju, a Korean island popular with Chinese holidaymakers and that also has casinos.

Article HERE

Takeaway:  More interest in Korea recently.  Could benefit from junkets moving Macau business overseas.


Nevada - Nevada’s unemployment rate fell to 6.8% in December, the lowest since June 2008. Additionally, according to Case-Shiller.

Takeaway:  Macro has looked better in Vegas.  Locals revenue is up slightly YoY on a trailing 3-mth basis.


Singapore cruising - Singaporeans comprise anything from between 40-60% of passengers onboard international cruise lines sailing out of the island republic, according to the Singapore Tourism Board.  Annie Chang, STB’s deputy director said Christmas and the Chinese Lunar New Year sailings on Royal Caribbean International’s Mariner of the Seas out of Singapore were well subscribed. ‘Cruises are increasingly gaining traction,’ says Chang.


A Singapore's National Association of Travel Agents (NATAS) spokesperson told Seatrade Insider that popular destinations are mostly regional. Malaysia and Thailand have the biggest appeal, with ports of call like Redang, Tioman, Penang, Langkawi, Malacca, Kuala Lumpur, Port Klang, Phuket and Bangkok, according to NATAS. Other regional destinations that are popular include Vietnam and China. Interest in fly cruising is showing healthy growth, says NATAS with particular interest in cruising in Alaska, Hawaii, the Mediterranean, Europe and Japan, the spokesperson added.

Article HERE


Monetary Authority of Singapore (MAS) lowers slope of $-SGD policy band.

Article HERE

Takeaway:  This surprise move by the MAS will result in a slower appreciation for the SGD.  The lower SGD has already been a currency headwind for MBS/Genting.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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