Takeaway: We're expecting mgmt to fall on its sword, but the buy side may be too. The latter is a mild risk, but not enough to consider covering.
Let us know if you have questions, or would like to discuss further.
Hesham Shaaban, CFA
YELP: The New Major Red Flag (1Q15)
04/30/15 08:53 AM EDT
Takeaway: Our visit to PENN’s new Plainridge casino has only enhanced our already high enthusiasm for its contribution to PENN’s equity value
Following Friday’s site visit to PENN’s new slot facility in Plainville, we’re raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.
After raising the win per slot per day assumption from $400 to $500 going forward ($525 for Q3), our Plainridge EBITDA run rate forecast rises to $69 million. PENN owns the real estate in Plainville so EBITDA=EBITDAR.
On Friday, we attended PENN’s analyst day at the Plainridge Casino in Massachusetts. We struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. Here are some takeaways:
PENN has a done a nice job with the new casino (clean bathrooms and ample parking) and it’s showing in the early results. We believe Street estimates for PENN will need to move higher as early as Q3 and certainly for 2016, due in part to the strength of Plainridge. We’re now projecting $340 and $383 million in company EBITDA for 2015 and 2016. Our EPS estimates are $0.66 and $1.10 for 2015 and 2016, respectively - 12% and 16% above the Street, respectively.
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Takeaway: U.S. cash equity volume is vaulting higher by +16% Y/Y with U.S. equity option volume not far behind at +10 Y/Y.
We recently presented our investment thesis on the Exchanges. To summarize,
We think CME has $5 per share in earnings power in the out year and the stock will revisit near $140. As outlined in our presentation deck and replay below, a CME long position can also be paired with a short ICE position, with favorable fundamental exposures on each side of the trade.
Separately, recent IPO Virtu (VIRT) is being valued incorrectly by the market. Our main qualm is that the company takes intraday prop risk, but has no tangible equity capital to cover any potential trading losses. Shares of VIRT are currently on our Best Ideas list as a short with a fair value in the mid-teens (30-40% downside).
Hedgeye Exchange Black Book Replay HERE
Hedgeye Exchanges Black Book Materials HERE
Weekly Activity Wrap Up: U.S. equity options are putting up the best quarter-over-quarter growth so far. The running quarter-to-date average for options is currently 17.3 million contracts, up +10% year-over-year and better by 15% sequentially from 2Q15. Futures activity hit 14.2 million contracts this week, lower than the running 3Q15 average of 17.2 million contracts quarter-to-date, which is down -5% year-over-year. U.S. cash equity trading is showing the largest year-over-year growth, running higher by +16% Y/Y thus far in the new 3rd quarter.
U.S. Cash Equity Detail: U.S. cash equity trading finished the week at 6.6 billion shares traded which is also blending to a 6.6 billion daily average thus far for the 3rd quarter of 2015. This is +16% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed, with the New York Stock Exchange/ICE standing pat at 24% market share and NASDAQ continuing to cede share to competitors. NASDAQ thus far this quarter has taken just 18% share of all U.S. stock trading, down 200 basis points year-over-year or a -6% decline.
U.S. Options Detail: U.S. options activity continues to churn higher with 18.0 million contracts traded this week which is blending 3Q15 activity to 17.3 million contracts per day, up +10% year-over-year. The market share battle amongst venues continues to be one of losses at both the NYSE/ICE and NASDAQ. NYSE has lost 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ has also shed 400 basis points of share, good for a -16% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.
U.S. Futures Detail: CME Group volume has been relatively low the last couple weeks. In the most recent 5-day period ending July 23rd, activity levels were 10.5 million contracts at the big futures exchange. 3Q15 volumes are blending to a 12.9 million average level which is a -4% year-over-year decline. CME open interest continues in strong fashion with the latest count this week showing 100.1 million contracts pending, good for +17% year-over-year growth. Activity levels on the futures side at ICE hit 3.7 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That amounts to a -6% year-over-year decline. ICE open interest this week tallied 72.6 million contracts, continuing a -4% year-over-year contraction.
Monthly Historical View: Monthly activity levels give a broader perspective of exchange based trends. Largely, volatility levels are just starting to rise after drastic compression this cycle. Thus as the VIX, MOVE, and FX Vol starts to normalize, we expect all marketplaces to experience higher activity levels.
Sector Revenue Exposure: The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Takeaway: Current Investing Ideas: DXJ, HOLX, FL, VIRT, PENN, GIS, VNQ, EDV & TLT
Below are Hedgeye analysts’ latest updates on our nine current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.
Please note we added DXJ (Japanese Stocks) this past week. We also added Foot Locker and removed Deere (both bear side).
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
We shared the following slide during our presentation in our call for institutional clients earlier this week.
Based on our data driven model, and the simple arithmetic of s-curve growth, it looks like the consensus outlook is calling for a steady increase in 3D mammography penetration.
If the market behaves like it did when HOLX helped transition facilities from film mammography to digital, the adoption curve will look exactly as we have it modeled.
If the market adopts 3D even just a little faster (which is likely in our view) the impact to HOLX revenue, EPS, and the share price will be dramatic, as you can see in the table above.
We currently expect the fast part of the adoption curve will take 6.4 years based on our data through June 2015. If the next few months come in better, the pace will begin to fall to 6.25 years (3rd rowin the table) and below. Shortening the adoption time by 3 months at each line in the table drive more revenue, at a high incremental gross profit, and high incremental EPS.
Hologic reports July 29th and we’ll update our positive outlook after the call.
Foot Locker’s RNOA (return on net operating assets) went from 5% to 28% over six years as it pulled capital out of the model (closing stores/re-positioning banners) while boosting productivity and margins to all-time highs. At the same time, its percent of sales from Nike (traffic driver) went up by 2,500 basis points to 72% of COGS (cost of goods sold) – and near 80% of sales.
That’s not going any higher.
Foot Locker’s answer is to become a unit growth story once again and sustain a mid-single digit comp while maintaining the leanest cost structure out of any retailer around. And for all that, the stock is trading at 16.5x forward earnings – an all-time high. The ‘going private’ angle here is moot given its high Nike exposure.
Lastly, the stock is having increasingly muted reactions to good news.
CEO Keith McCullough added Japanese Stocks to Investing Ideas on Friday afternoon. Click here to read the note. Our senior macro analyst Darius Dale will provide a detailed update next week.
A major broker/dealer firm broke ranks this week and initiated research coverage of Virtu Financial with a Sell recommendation. While the rationale for the new rating didn’t highlight our main hangup with the company’s financials, it is a fairly telling sign that a major dealer that interacts with VIRT on a daily basis is also bearish on the fundamental prospects for the company.
Again, our core contention with the firm’s positioning is that with no tangible equity capital that VIRT will have to cover any trading losses in its operations with overnight credit lines which don’t leave an appropriate margin of safety for investors. The company runs its trading book with $245 million of overnight capital and $499 million in equity. However with $715 million in Goodwill, this leaves no liquidity for any mishaps.
VIRT doesn’t report 2Q earnings until August 5th however we will get the latest trading record during the past quarter then which will give investors an indication if the firm’s near flawless daily trading track record is continuing.
Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations. PENN posted revenue of $701 million in the period, which also beat forecasts.
Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500.
Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day yesterday. He will provide a detailed update next week.
General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG.
Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment.
Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.
FY16 Hedgeye Guidance ―
Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products. Below is a list of some of the biggest things that we are looking forward to this year:
Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal. We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business.
Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme, which we’ll focus on below. A positive housing outlook within a bearish rate environment should be positive for VNQ.
With the exception of another positive jobless claims report (lowest level since 1973!) which is empirically late cycle in nature, housing dominated an otherwise light week of economic data in the U.S.
Existing home sales for June reached a new post-housing crisis high:
New Home Sales for June came in weaker than expected, but the intermediate to longer term picture has been one of immense improvement:
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.