PENN: Removing Penn National Gaming from Investing Ideas

Takeaway: We are removing PENN from Investing Ideas.

Please note that we are removing Penn National Gaming (PENN) from Investing Ideas today. PENN was added on 2/24/15 and is up 1.4% versus a 2.2% decline in the S&P 500.


According to Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan: 


"We continue to like PENN over the intermediate and long term but negative same store revs in March could pressure regional gaming stocks."


In addition: 

  • We’re forecasting a return to negative same store revenue in the regional gaming markets following 3 straight months of gains.  A monthly downturn would counter the recent regional gaming narrative and could hurt sentiment and the stocks: BYD, PENN, PNK, and GLPI
  • We are removing PENN even though the company’s return to growth in beginning in 2H 2015 should drive a higher stock price.  Our concern rests with the potential reversal in sentiment as March gaming revenues are released by the states in early April.
  • Early weekly revenue read from a few markets is mixed as a much weaker Pennsylvania was offset by a stronger Missouri. 

PENN: Removing Penn National Gaming from Investing Ideas - zj



Presentation HERE




  • DoubleDown: highest rate of monetization per social user
  • Will continue to invest in R&D (IGT: ~$200m, GTECH: ~$100m)
  • Growing market share in instant ticket printing: currently 12%
  • Partnered with MGM with interactive sports-betting and gaming opportunity
  • Interactive business: skewed towards B2C, compared with B2B
  • Atronic/Spielo:  in the early years, had negative EBITDA. Big turnaround.
  • Consumers want content across different platforms
  • iLottery UK: 70% of offering
  • Combined company LTM ending Dec 2014
    • $6.048bn revs
    • $2.039 BN EBITDA
  • 2015/2016 Capex: will not include Lotto.  When it is stable in 2017, they will include it. 
  • Synergy chart - opportunities in SG&A


  • Revenue synergies of $50m is 'low hanging fruit'
  • Want IGT to have a presence in Italy
  • Net debt/adjusted EBITDA: <4x 
  • Dividend policy: transition to quarterly dividends.  Advise Board to issue stable dividend in dollars, in-line with historical GTECH #s
  • Sustained pressure on IGT.  
  • Expect some headwinds from currency as they move euros to dollars.
  • Combined 2015 guidance no later than Q2 15 results
  • Maintenance capex historically €170-€220 million for GTECH 
  • IGT capex historically $60-$100 million 
  • 2015 / 2016 / 2017 also impacted by Italian Lotto renewal (€350m / €250m / remainder)

Q & A

  • Being outbid in Turkey - GTECH thinks their competitors were too aggressive. 
  • B2C:  sees opportunity to become lottery operator
  • $300m capex:  most of it will be gaming operations and a little bit of interactive. Lottery don't need much capex.
  • Will assess IGT's team and get the best talent

RTA Live: March 18, 2015

Hedgeye CEO Keith McCullough breaks down the current Real-Time Alerts positions and answers viewer questions.


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REPLAY | Fed Coverage Hosted By Hedgeye CEO Keith McCullough



Keith provided unobstructed, real-time commentary regarding the impact today’s FOMC decision and language have on markets with 10yr yields retesting 2% this morning, USD strength, oil crashing (WTI -21% YTD), and other key factors.




Oil Crashing

Client Talking Points


Never mind oils epic crash of 2014, now it’s crashing (again) in 2015 – with today’s #deflation of -2.9%, WTI Oil is now -21% for 2015 year-to-date and they’re going after Saudi stocks (-4.3% this morning); Greek stocks back in crash mode, -21% since FEB.


The VIX remains in what we’ve called a bullish phase transition since July of 2014 (see our #VolatilityAsymmetry Macro Themes deck); no matter what the Fed does today, we expect cross asset volatility to remain bullish.


We’ve liked the IWM (iShares Russell 2000 ETF) but we don’t like chasing things at their all-time closing highs (the Russell 2000 hit that again yesterday at 1242) – ahead of this Fed circus of mismanaged expectations, we say book some profits, raise cash.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We’ve liked the IWM (iShares Russell 2000 ETF) but we don’t like chasing things at their all-time closing highs (the Russell 2000 hit that again yesterday at 1242) – ahead of this Fed circus of mismanaged expectations, we say book some profits, raise cash.


Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road


Big Day for @HedgeyeTV - tune into The Macro Show 830AM and Fed Show 150PM EST



They sleep, we grind.

-Erykah Badu


Foot Locker estimates that 90% of their online traffic will come from phone/tablet in 2018. 

LEISURE LETTER (03/18/2015)



  • March 16-19: Cruise Shipping Miami Conference
  • March 18: 9am IGT Investor Day: (1877) ; pw: 1325073
  • March 19: 5am Galaxy FY 2014 results
    • (), Passcode: 712943


RCL/CCL/NCLH: Cruise shipping Miami Day 1 tidbits and other news 

  • Pricing remains a top challenge. Cruise companies have yet to achieve double digit ROIC growth, the US-based execs concurred.
  • Europe
    • 6,387,000 European passengers in 2014 (+0.5% YoY)
    • In 2014, Germany overtook the UK to become Europe’s first source country with 1.77m passengers (+5% YoY), while France consolidated itself as the fourth largest source market in Europe, with an impressive growth of 13.7%.
      • UK/Ireland passengers dropped 4.8% due to ‘reduced capacity’ in the region
      • Number of UK and Irish passengers taking fly cruises increased 3% in 2014
      • German growth had been driven by capacity increases from German cruise lines AIDA and TUI Cruises.
    • Italy remains the third largest source market, despite a 3.1% decrease that is explained by the decrease of capacity deployment in the Med.
    • Spain has continued to decline (–4.5%), due to the decrease in capacity in the Med and the closed operations of Iberocruceros, although this year’s decrease was much softer than the previous two years.
    • The Scandinavian market has increased by 5.6% this year.
  • China
    • With China’s potential as the world’s largest ‘nation of tourists’, annual industry growth should be double-, rather than single-digit, Donald indicated.
    • Cruise lines hosted nearly 1.4m Asian vacationers in 2014, a 34% compound annual growth rate since 2012.
    • Since 2013, passenger capacity grew at a 20% compound annual growth rate and is expected to reach almost 2.2m in 2015. The Asia region has quickly progressed to fourth in passenger capacity deployment, tied with Australasia.
    • This year, 52 cruise ships will operate in Asia, a 10% compound annual growth rate since 2013. 
    • In 2014, 697,000 passengers were from mainland China which is almost as many passengers as all other Asian markets combined (701,000).
    • In four of the largest cruise markets – China, Malaysia, Indonesia and Philippines – more than 4 out of 10 passengers were under 40.
    • More than nine out of ten Asian passengers (91%) cruised within Asia. The remaining 9% flew to cruise destinations outside the region, primarily in Europe, followed by Alaska and Caribbean.
    • 48% of Asian passengers choosing 4 to 6 day cruises in 2014, 38% choosing cruises of 2 to 3 nights, and only 12% opting for 7 to 13 night cruises.
  • Bookings for Alaska are strong. The CEOs for Holland America andCelebrity said they are adding capacity in the region for 2015.
  • South America - because of chaotic politics and economies and labor issues that impact logistics -remains a challenge  
  • Costa
    • In 2014, five out of ten guests in the major Continental European markets spent their vacation on board a cruise ship operated by the Costa Group, says Michael Thamm, ceo of the Costa Group (Costa Cruises and AIDA Cruises).

    • The Costa Group claims to be the market leader in Italy, Germany, France and Spain in 2014.

    • Last year German passengers booked every second cruise with the Costa Group brands, in France it claims a market share of around 45% and 40% in Spain.

    • In China around four out of ten bookings in the rapidly growing market are made for Costa ships, the group says. Costa Atlantica, is currently on the first 86-day round-the-world cruise for Chinese passengers and in April 2015, Costa Serena will be the third Costa vessel offering cruises from China. 

  • MSC Cruises
    • Seaside prototype ship in 2017—with its open-to-the-water design—will be based at Miami year-round, joining MSC Divina, which is to continue seasonal Caribbean operations.
    • Seaside newbuild has a revolutionary design with the engine room positioned in the center of the ship and a 'completely novel shape' that resembles shoreside more than marine architecture
      • Water park: five water slides including 'slideboarding,' which combines racing slide features with video gaming elements.
    • A stronger presence in the world's leading cruise market, North America, is a priority for MSC
    • And though MSC will position a ship in Asia eventually, it's currently not the line's No. 1 focus.
  • CLIA chairman Adam Goldstein, citing statistics released by CLIA in February, forecast 23m people will cruise globally this year, up 4% from 22.1m in 2014. 

    Takeaway: China obviously was a key topic. CCL/RCL need to understand that the reason the average cruiser age in China is much lower than US/Europe is because the older generation there has little interest in cruising. Anemic growth in Europe last year was blamed on capacity shifts; while capacity will be higher in 2015 (e.g. Allure), we think European-sourced demand will be weaker than expected. Alaska is the hot spot in 2015 while Bermuda is also on the upswing.


    CZR - Caesars Entertainment Corp (CEC) has issued a “going concern” warning in relation to bondholder lawsuits – some of them linked to the fact of the bankruptcy proceedings of its operating unit. The casino group said in a Nasdaq filing on Monday: “We have concluded that the material uncertainty related to certain of the litigation proceeding against CEC raises substantial doubt about the company’s ability to continue as a going concern.”


    FCH - sold Embassy Suites San Antonio International Airport Hotel for $29.5m

    Takeaway: This UUP hotel changed hands at only $113k/key.


    March Forecast - Local casinos are expected to close in March with a YoY revenue drop of at least 35%, with one gaming operator even expecting a fall of over 40%.


    “We are in a new phase of adjustment, readapting to a reality where the VIP gamblers are not coming to Macau and are looking for new places [to gamble],” a SJM source told Lusa news agency. “Macau is a preferred place for the Chinese gamblers. The money transferences must be controlled, but we can’t scare the gamblers as if all of them were doing something illegal. We must bet in a sustainable market and growth, which should also benefit the local society.”


    Takeaway: On average, -40% sounds right for March GGR


    Prostitution ring - Macau police break up prostitution ring, arrest 42.  All those arrested were from the mainland, with the youngest aged 17. The syndicate was operating in a Macau hotel.


    China February new home prices (0.3%) m/m vs (0.2%) in January - MNI


    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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