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Q3 should be a beat but that is expected. Management will be bullish on the call but big risk remains.


MGM is reporting this Thursday and we, along with everyone else, expect them to beat the quarter.  Given the pre-announced charges, we know the quarter will be messy but "adjustable".  As usual, we expect the management to be "exceptionally" bullish, but they have to be given that the opening of CityCenter "could be the most defining moment in the history of Las Vegas" and a make-or-break moment in MGM history.


We are above the Street in projecting $340MM of EBITDA (including pro-JV share) and margins just shy of 22.7%.  In any event, right now and for the next few quarters, it's really all about CityCenter and cannabalization.  In the meantime, all management can do is cut every possible expense and pray.  If CityCenter is a flop the stock is worthless, it's that simple. Given what's riding on the opening and management's fortunes it's expected that Murren and the gang will be characteristically bullish.



Below are some of our numbers:

  • Las Vegas: Revenues of $1.1BN and EBITDA of $260MM
  • MGM Grand Detriot: Revenues of $127MM and EBITDA of $33MM
  • Mississippi: Revenues of $121MM and EBITDA of $22MM
  • Macau: pro-rata EBITDA of $19MM





General market commentary & Outlook

  • The operating environment...clearly stabilized in the second quarter, but we're not out of the woods. The operating environment, we think, will remain choppy in the near-term however, we see extremely positive signs especially as we go into 2010 or even starting in the fourth quarter but into 2010 and '11
  • The operating environment remains challenging, but we have been pleased with continued signs of stabilization in this market here in Las Vegas and ongoing improvements in our revenues and our margins
  • Our high end business continues to hold up very well, and in fact Baccarat volume was up 17% in the second quarter
    with extremely strongly international play.  We expect our Gaming business will also continue to improve
    particularly as we go into 2010
  • Our FTEs decreased 14% year-over-year in the second quarter and on an absolute basis, FTEs were flat with the first quarter even with company wide revenues up 4%
  • We've achieved well over 600 million of cost savings on an annualized basis.  We still have some of that traction out in front of us, maybe about 20%, 25% of that is still in front of us from a cost saving standpoint, and we're going to continue to look at other ways, but I think we've accomplished quite a bit on that front already
  • EBITDA margins should remain relatively consistent. We believe we continue in the 25% area in Q3


Hotel & RevPAR commentary

  • "Nonetheless, second quarter was better than the first quarter and the first quarter was better than the fourth. We think we'll see that trend continue here in the third quarter and beyond where our RevPAR declines will be minimized as we move forward into next year"
    • It's called easier comps....
  • "We are very encouraged that the meeting planners who seemed invisible for the first part of the year are now being
    much more active and we're seeing signs of recovery in their business, which therefore translates into business into Las Vegas.  And that means we're booking more business in 2010, 2011 and beyond"
  • "As it relates to our room strategy, we do have a clear plan to maximize our occupancy.  But we also are trying to generate rate premiums compared to the market and we have been able to accomplish that.  In the near term, our goal is to occupy our resorts in the mid-90s and we are succeeding on that front"
    • They are maximizing occupancy by chopping rate, and since there are no other public companies that report room rates for anything but the "luxury" end of the market there is no way to really verify the "premium" comment.  In any event, given that so many of the rooms are "comped" the reported rate is "adjustable"
  • "For the remainder of this year, pressure obviously remains on room rates so once again, we'll be down year-over-year but we expect the year-over-year percentage decline to be lower in the third and fourth quarter than we saw in Q2."
  • For every $5 increase in our average daily room rate, we will generate over 50 million in annual cash flows.  And for every 100 basis points improvement in occupancy, we generate nearly 40 million in annualized cash flows.


CityCenter Quotes

  • "The introduction of CityCenter with its unprecedented scale and amenities ... could be the most defining moment in the history of Las Vegas"
  • "As the most highly anticipated development in the Las Vegas history, CityCenter is poised and positioned to secure a disproportionate share of the market from our competitors and drive overall growth in the Las Vegas market"
  • "I want to reiterate our belief that CityCenter, in our minds, would drive growth not only at our surrounding properties, but in the Las Vegas market as a whole"
  • "It's sophisticated and will draw customers from other premium properties, as well as draw new high-end national and international customers into the market from other parts of the world. It will profoundly increase foot traffic to the south side of the strip, which of course benefits MGM Mirage"
  • "At ARIA, we continue to see a steady pace of room bookings with over 132,000 room nights on the books.  We also have over 61,000 room nights on the books for Vdara"
  • "We anticipate 48% of the square footage to be opened in December, and have 84% of the square footage available opened at least by April of 2010"
  • "6.9 billion has been funded to date and we have about 1.6 billion left to complete CityCenter, based on the budget of 8.5 billion.  We have approximately 950 million remaining withdrawn on our CityCenter credit facility, an additional 400 million from prefunded sponsor equity and the remaining funds will come from closing proceeds from condo sales of about $250 million"

Hyatt’s $1.14 Billion IPO Pricing Moved Up to Today

Nationalization Continued...

Research Edge Position: Short the British Pound (FXB), Short UK via EWU


Our bearish conviction on the UK economy has held steady this year. Even with the UK reporting a sizable jump in its October Manufacturing PMI survey number (to 53.7 from 49.5 in the previous month) and a marginal increase in home prices over the last three months (Hometrack), broader fundamentals remain shaky: government debt continues to expand, leadership in critical positions lacks (think PM Gordon Brown and BOE Governor Mervyn King), and the country’s leverage to the banking sector remains glaringly negative for recovery. We’re comfortable with our short call on the Pound for a TRADE and today we shorted the UK via EWU in our model portfolio as we expect the FTSE to underperform major global equity markets.


The UK Treasury announced today it will inject another 25.5 Billion Pounds of capital into RBS, increasing the government’s ownership stake of the bank to 84% from 70%, while Lloyds Banking Group also received a boost of some 5.8 Billion Pounds. The bailouts continue to call into question the strength of the UK’s banking sector and suggest future handcuffs associated with acceptance of state aid. 


Today’s decisions comes on the heels of a contracting Q3 GDP print of -0.4% in the UK, shocking forecasters that expected a mildly expansionary number after significant government stimulus expenditures over the last year.  Discussion has now intensified over increasing the Bank of England’s current bond purchasing program of 175 Billion Pounds, a topic we should get more color on tomorrow when the BOE meets to discuss rates. We expect no movement in rates from the current level of 0.5%, as monetary tightening would be imprudent given the country’s negative GDP.


We hold that throwing additional tax payer’s money into the banks won’t end well for an economy suffering from ballooning government debt, lack of leadership, and waning investor appetite with rates at historic lows.  The chart below of FXB shows that the Pound is trading just below its shark line, an important line of momentum in our models.


Matthew Hedrick



Nationalization Continued... - Pound a


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DG/FDO: Know Thy Customer

As you prepare for the DG/KKR one-two punch of why the dollar store business model is worth your hard-earned capital, turn to Google for a reality check on 'Knowing your Customer."


We're all over this Dollar General IPO for several reasons, not the least of which is that it epitomizes our "Banker Bonanza" theme, where mediocre businesses that went private in the recent LBO wave are now coming to market in a last ditch effort for bankers to get a paycheck.


I can almost guarantee that half of the people who are looking at this deal have never shopped in a Dollar General store. Aside from stating the obvious...that you should get out there and see what you're buying. I'd also recommend checking out non-conventional venues for becoming familiar with the business -- like Google.  Come to think of it, do yourself a favor and see the store first. Otherwise a Google search might scare you away. See our simple search over the past few days below speks for itself.


The fundamental outlook for FDO is not rosy, nor is the stock. DG's bankers better hurry.  The good news for KKR, DG's owner, is that its parent registered as a broker/dealer in 2007, so now it can benefit from selling its own deals. No joke... 


Let us now if you'd like to see our Dollar General Blackbook for more analysis on the issue.


Eric Levine


DG/FDO: Know Thy Customer - 11 3 2009 3 16 09 PM





Position: Long gold via the etf GLD


“The dynamics of the gold market differ greatly from other traditional commodity markets.  Gold is accumulated, not consumed, and acts as the ultimate store of value.”

-Paul Tudor Jones, October 15th, 2009


As part of his third quarter letter to investors, Paul Tudor Jones and his team added an appendix outlining their bullish case on gold.  In hedge fund parlance, this is called “pushing your book”.   That said, Jones’ long term record in trading global macro markets is an enviable one and when “he pushes his book” it is likely worth listening, even if we disagree.  In this instance, we too are long gold and it is currently a major position in our asset allocation model.


In fact, we have been long gold most of the year and for most of the last two years.  In our last detailed gold note, on May 13, 2009, we wrote:


“Keith and I have been readers of Dennis Gartman's (aka Garty) in the past and have enjoyed his ability to uncover interesting data points, even if his timing is sometimes suspect.  This morning, though, we are drawing the line in the sand, while Garty may be short of gold, we are long of the glittery metal.”


A lot has changed since early May, including the fact that Garty is now long gold.  A trend follower is as a trend follower does it seems.


Coincident with our reading of Jones’ thesis on gold today was of course the announcement from the IMF that they had sold 200MM metric tonnes to India’s Central Bank for $6.7BN.  The transaction was no surprise to gold markets as the plan of the IMF to diversify from their gold position to solidify their finances has been in the works for a year, and this is roughly half of their 400 ton estimated allotment.  The purchase by India, of course, is also part of a continuing trend of nations diversifying away from U.S. dollar based reserves.


The broader dynamic at work here is comparable to the GDP chart we showed yesterday. There are a number of countries that are global share takers below the G7 and therefore their reserves are growing at a dramatic pace.  According to some estimates, non-G7 nations have seen their reserves grow by $2.2 trillion over the last five years, which is roughly half of all global reserve growth.  In contrast to the G7 countries that have roughly 35% of their reserves in gold, the remaining countries that make up the G20 have only 3.5% of their reserves assets in gold.  Obviously, and especially in context of the weakening U.S. dollar, there will be additional transactions like the one announced by India today as the G20 nations below the G7 continue to broaden their reserves diversity into a more normal allocation to gold.


Another important point that Jones’ makes in his letter is related to production of gold.  His idea here is similar to our thesis on oil, which is that despite massive investment in oil exploration, overall production has remained largely stagnant.  According to Jones, “despite a three-fold increase in worldwide metal exploration expenditures, new mine production has remained stagnant at 80 million troy ounces over the last decade.”  Jones’ statement is corroborated by many independent studies and supports the idea that there are constraints on gold production, which in a world where demand for gold, either from emerging markets consumers or from nations looking to diversify their reserves, will increasingly lead to upwardly trending prices as supply and demand are tight.


The other incremental point of demand is coming from exchange traded funds.   According to Jones’ analysis, there is only $50BN of total gold assets in listed funds.  The implication is that there is potential for massive inflows when, and if, investors continue to want to own gold as an asset class, particularly in the private wealth world.  As one example, one of the largest gold etf’s is GLD, which is sold by State Street and has a total asset value of ~$37BN.  This fund did not exist five years ago, so its creation has led to massive incremental demand for the metal.  In the last 12-months inflows into gold etfs have varied between 20 and 30% of production over that time period.


So, where could gold go? Obviously assigning a value to a commodity, or a reserve metal, such as gold is very difficult and can be done based on various econometric or quantitative methodologies.  Longer term, though, one way to think about the upside is where it has been in the past on an inflation adjusted basis.  The inflation-adjusted all time high for gold was January 21st, 1980, which was $2,422 versus $1,085 today.  Therefore, and this is obviously nothing more than a benchmark, there is more than 100% upside from gold’s current price to its inflation adjusted high.  Now a lot would have to happen to drive gold back to those parabolic highs, but many also said the same about oil in mid-2008 . . .


Below we’ve outlined our risk management levels on gold.


Daryl G. Jones
Managing Director


Goldilocks  - GOLD a



Cheaper than the peer group? Depends on which metric.  Don't forget about the JV debt.


Lodging stocks have been pounded over the last 2 weeks so the "discount valuation" thesis is not as compelling as it once was.  There is another issue with that thesis.  Whisper valuations around the Street pegged the EV/EBITDA multiple at 10-11x.  "You gotta include the JV EBITDA".  Fair enough - we do - but you also have to include the JV debt of $500 million, the amount of which is disclosed only in a footnote.


At the stated range of $23‐26, we estimate the EV multiple on 2010 EBITDA is 11.8x‐13.4x.  That doesn’t sound cheap unless you compare it to the lofty peer group multiples.  The midpoint of the Hyatt offering range is at a slight discount to the peer group average multiple of 13.2x.  The chart below details the valuation comparisons.


HYATT IPO VALUATION - hyatt valuation 2


A bull may argue that given Hyatt’s positive net cash position, it should be valued at a premium to HOT (4x leveraged) and MAR (3x leveraged).  On the other hand, Hyatt’s complicated and shareholder‐unfriendly voting structure should punish the valuation.  If you think your Class A shares (worth 1 vote per share versus 10 votes for a Class B share) will ever influence management I've got a bridge to sell you.  One only needs to look at Orient Express (OEH) for an example of investor disdain with complex voting structures.  


On a free cash flow basis, Hyatt’s valuation looks expensive with a 2010 yield of only 4%, as shown in the chart below.  However, Hyatt has the financial resources to make accretive acquisitions.  We estimate that for every $1 billion in acquisitions, Hyatt could generate 10-18% free cash flow per share accretion. 




If one is a lodging bull, the Hyatt deal could make sense, particularly at the low end of the range.  Hyatt will generate approximately 60% of its gross profit from hotel ownership, much larger than the HOT/MAR peer group, which gives the company higher operating leverage to a recovery.  Moreover, Hyatt's balance sheet can absorb a lot more debt to acquire assets and further lever the company to the recovery.  However, If you share our view that the duration of this downtown will be longer than expected, Hyatt is probably not the best stock play.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%