PENN reports Q3 tomorrow morning. It shouldn’t be that bad despite the regional softness.  We’re still worried about the duration of this downturn.



We’re projecting EBITDA of $160 million which is in-line with the Street, although our revenue projection of $629 million is a little below the Street at $641 million.  Our EPS estimate is $0.36, above the Street consensus of $0.34 due primarily to lower interest expense.


Q3 should not be a make-or-break quarter for PENN.  The stock is appropriately off its recent high of $33.67 (July 28th) due to sluggish regional revenues, despite the up move in the market.  Rather than focus on the Q3 results, we see two main catalysts:

  1. The duration of the downturn – we think well into 2010.  We’ve proven gas prices to be a statistically significant variable in explaining regional gaming revenues.  The easy gas comparison reverses in late November then is quite ugly through the first half of 2010.  Assuming the current price holds, YoY monthly gas prices will show a decline ranging from +50% in December down to +13% YoY in May 2010.
  2. Using their dry powder – PENN has over $1.5 billion in excess cash and credit availability that it could put to work.  Fontainebleau is obviously the odds on favorite.  The good news is that levering up this underleveraged balance sheet probably creates equity value over the near term.  The bad news is that acquisition multiples may be higher than the Street is anticipating and, in the case of Fontainebleau, realized cash flow may be a ways off.

For those of you interested in “YouTubing” management from Q2 please note the following:






  • “So, July is looking pretty nice and we feel comfortable with that, but who the heck knows what August is going to look like. We are in that kind of a mode. So, if we are a little mushy on that kind of question it is because that is all we can do.”
  • “I don’t think we are seeing any rebound on consumer spending anywhere. It is still the same kind of trends. Overall as you look at the first six months of 2009 there are ups and downs through that period and July is more of the same.”
  • “While the current economic environment continues to impact the overall gaming industry, regional market revenue trends remain largely stable…while visitation levels at our facilities remain similar to prior periods, spend-per-visit is lower, reflecting the challenges presented to consumers by current macro-economic conditions."
  • “We are very pleased with their [Lawrenceburg and Joliet] performance and look forward to a good third and fourth quarter there as the July results, as bill highlighted, continue to be online with our expectations.”
  • “It is going to take three or four quarters for Lawrenceburg to get fully ramped up and stabilized. We also have some additional work that we want to do to upgrade the amenities in the pavilion that is going to occur over the next three or four quarters as well. Nothing significant, but we certainly have some restaurants that need upgraded and that is going to be occurring over the next 12 to 15 months, but in terms of when we think Lawrenceburg will be running on all cylinders, it is going to take a few quarters out there for us to expose the new product to as many new consumers as we possibly can and then get all of our marketing programs in place that support the new facility.”
  • “To give you some color on Penn National, I do want to say it appears now, after about two months of operation, that we are not seeing any material impact from Bethlehem in the numbers there. When you add back the 1x catch up regulatory fees we are running at EBITDA margins that are around 20%. I think we can do a little bit better than that going forward as we continue to grow the business. The revenue growth there continues to be good; it is still showing double-digit growth.”
  • Peter Carlino [on the impact of oil in Zia’s market]:  “Last year… In Hobbs, New Mexico we saw the hotels there running 100% occupancies with ADRs above $100.00 because of all of the workers that were coming in there that were correlated to the oil industry. This has been a trend we saw late in the first quarter, continuing in the second quarter, where we are seeing the local market and our feeder markets not nearly as robust as it was a year ago. Things won’t get better until we see oil above $70.00 a barrel. That is an unusual circumstance, because in our other businesses we obviously want to see gasoline prices low and consumers not being faced with that hurdle to get in their car and come visit us, but when the oil industry and the price of a barrel of oil is high it does help us there.”




PENN: A YOUTUBE PREVIEW - penn guidance Q3


  • Excludes expected gain from insurance proceeds related to Empress Casino Hotel fire;
  • Excludes any future Ohio lobbying expense;
  • Depreciation and amortization charges in 2009 of $195.5 million, with $51.2 million projected to be incurred in the third quarter of 2009;
  • Estimated non-cash stock compensation expenses of $31.4 million for 2009, with $8.2 million of the cost incurred in the third quarter of 2009;
  • Excludes potential impact of Company modifying debt obligations;
  • A diluted share count of approximately 107.1 million shares; and,
  • There will be no material changes in applicable legislation or regulation, world events, weather, economic conditions, or other circumstances beyond our control that may adversely affect the Company’s results of operations.
  • “For the year we expect total maintenance CapEx to be roughly $90.5 million and project CapEx will be roughly $216.7 for a total of $307.4. [doesn’t include any spending in Kansas, Ohio, or Maryland.  Also it doesn’t include reimbursements from insurance related to the Joliet fire as we work through replacing the pavilion]
  • Tax rate should be in the 43% range and it shouldn’t pick up in 4Q vs 3Q – it should remain flat.

TIP: Selling Some Inflation Protection

My cost basis in TIP dates back to buying it on 4/3/09 at $100.27. Since this summer I have been carrying a double digit percentage exposure to TIP (Treasury Inflation Protected bond ETF) in the Asset Allocation Model.


Today, with inflation expectations coming my way (see chart), I am selling that exposure to TIPs down to 3%.


Obviously the narrative fallacy shopped by the Depressionistas has been decimated, and so have perpetual expectations of deflation alongside that.


Expectations dominate these returns, not lagging CPI or PPI data. The two positions that I have taken to protect against inflation expectations are long Gold (GLD) and long TIP. I remain long of both… just less of both, as prices melt higher.


I’ll buy TIP back on pullbacks to the following TRADE and TREND lines in the chart below. TRADE line support = $102.89 and TREND line support (intermediate term) = $101.43.



Keith R. McCullough
Chief Executive Officer


TIP: Selling Some Inflation Protection - a1



On EAT’s 1Q conference call, management just stated that California continues to be weak.


Last week, CKR and CPKI reported worse than expected sales results, which suggested that sales trends in California are not getting any better.  The divergence in gas prices between the west coast and the national average, which is illustrated in the first two charts below, might help to explain the regional weakness.  Although there is a normal seasonal divergence in the price of gasoline geographically within the U.S., the current divergence is the most pronounced in more than 15 years. 


CKR’s CEO Andrew Puzder continues to attribute weakness in sales trends to the current unemployment rates in California and stated just last week that “In particular, record levels of California’s unemployment exceeding 12%, and 18% for the broader unofficial statistic, have negatively influenced consumers’ buying habits.”  Higher unemployment rates combined with this growing spread between regional gas prices, which has been accelerating since mid May, does not bode well for California-centric concepts, such as CPKI, CAKE, RRGB, MSSR, PFCB, JACK and CKR.  On a more favorable note, the third chart also highlights the regions of the country, which benefit from relatively lower gas prices, most notably Texas. 


Overall, gas prices have been extremely favorable on a YOY basis for restaurant companies this year.  During the first half of the year, national average gas prices were down 38% on average.  This YOY favorability continued into 3Q with gas prices down 33% on average.  Looking at the final chart below, this YOY cost benefit has already started to moderate and based on current prices should reverse come the end of October. 


RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - Gas price.west cost recent


RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - Gas price.west cost historical


RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - gas prices regional difference



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TJX: Inside the Debate

Our internal process is one that openly encourages debate when we disagree. That’s when our hit ratio goes up… Here’s our take on TJX.  The bottom line is that big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts -- at least at this price.



Keith: Stock looking to be way overbought now fyi… on the news… I like shorting these for a TRADE.


Brian: Yes, TJX gets put in the ‘quality’ bucket in retail. But let’s not forget that margins are at peak, and we’re coming off an 18-month period that helped off-price retailers like TJX and ROST materially. The preannounced comp was a definite positive, but in looking at the 2 and 3-year trend, there is really no change in trend. If anything, it is slightly negative. The gross margin story here will be short-lived, with one more quarter before the financial profile looks less favorable. I’m not going to get too excited about the company’s announcement about an increase in long term unit growth to 4-5% as we’re already looking at a mature company with 2,700 big box stores.  There are other names I’d short before this one, but there will be a time over the next 1-2 quarters where this will make a lot of sense. If it is overbought on this news, then I won’t argue to stay away.


Levine: Recognizing that the incremental data points on TJX are likely to remain positive, I wanted to make a few points before putting the short TRADE on. 


Key factors to look out for over the next 3 months:  1) EPS guidance way too low, but the Street is obviously tuned in to this, 2) they took up the square footage growth rate for next year to 5% from 4%, which is fairly respectable for a company of this size.  I can’t knock them for investing into strength. And 3) the gross margin compares in Q4 are a joke (last year they got caught like the rest of retail with too much inventory).


On the flip side, the 2 year comp is holding steady but not accelerating.  With that said, this is still one of a few retailers with positive 2 year trends. 


Final note here, is that there may be support from other retail/apparel earnings as they begin to trickle out.  We’re now seeing a handful of positive pre-announcements as well which is likely to build momentum.  To the extent you view this is as a negative to being short, it is probably one of the biggest risk factors in the near-term.



Team Conclusion: Hold off at this price. Big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts.


TJX: Inside the Debate - TJX Comp Trends

Retail: Gas Divergence Implications

What has been a gas price tailwind vs. last year is going the other way. Further, California is posting the biggest (unfavorable) spread in recent history. There are implications for retail.



We’re in an interesting position right now as it relates to gas prices.  As consumers, we see prices going up sequentially, which has been the case for almost this whole year.  We’re now looking at prices near 12-month peak levels. But relative to last year, we’re still looking at prices nearly a buck lower. As it relates to share of wallet, that’s big. But by late November, we’re at a point where the yy positive delta goes away due to the precipitous decline in oil we saw around this time last year. In other words, this has been a tailwind for most of ’09, and it’s about to turn into a headwind.


My colleague Andrew Barber brought something to my attention that otherwise slipped right past me. That’s the relative trajectory of West Coast prices. Simply put, over the past month, we’ve seen a divergence in West Coast prices vs. the National Average that we’ve not seen in over 15 years.  In effect, National prices are rolling and California prices are going the other way.


We can speculate all day about how this will negatively impact players like Ross Stores (which is on my short bench), but the bigger impact, I think, will be on smaller (mostly private) regional players that are hanging by a thread. They have visibility on cash flow today – like the rest of retail – but as holiday approaches, that visibility goes punk. My sense is that accelerates the rate at which players like Dick’s will step up and acquire real estate as incumbents go bust.


Retail: Gas Divergence Implications - 1


Retail: Gas Divergence Implications - 2


Retail: Gas Divergence Implications - 3


The cold wet weather that has dogged the Midwest this year has caused projected harvest start and completion times to be delayed for staple grains, with Corn and Soybean harvests off to the slowest start in decades.  As of October 11, the USDA estimated that only 13% of the total corn crop had been harvested versus an average of 35% by that time in the past five harvests.  Although the harvest is seriously delayed, in absolute size it’s anticipated to be a bumper crop: The USDA estimates a 13 billion bushel season for 2009, which would make it the second largest harvest on record. 


Futures markets ultimately function as insurance markets however, and despite the size of the yield, anticipated prices have risen sharply as more time in the field creates further risk of weather damage and other unknowns. With the harvest expected to drag into late November, the price of December delivery corn has bounced back from last month’s low close of $3 per bushel on September 4th  to  almost $3.85 per bushel in today’s session.


Sanderson Farm (SAFM) is trading lower after being downgraded at KeyBanc.  The thesis is that rising corn prices make feed costs more expensive.  As the story goes corn prices will continue rising due to a declining U.S. dollar boosting exports and expectations that ethanol producers will use more corn.


Keith bought SAFM today on the downgrade.  At research edge we do not agree that corn is headed much higher.  At the current prices for crude oil, Ethanol is not a concern and the bumper crop for corn will ultimately dictate the future of corn prices, which is likely lower.   In two weeks, SAFM will be holding an analyst meeting updating the investment community on where the company is headed and the state of the industry.  Notwithstanding a slight uptick in the price of corn, the industry outlook is positive and SAFM is one of the best managed companies in the space.


Our bottom line: Corn has a broken TAIL and a bullish TREND… within an industry that’s been wrecked/consolidated, broken TAIL prices are positive for producers.


Andrew Barber



Kerry Bauman

Senior Analyst






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