- New Jersey, Illinois, and Nevada lead the way in total dollar deficits projected for 2009. In terms of per capita deficit though, Nevada looks to be in the worst shape, followed closely by New Jersey, then Illinois and surprisingly, Iowa. Considering the recent floods Iowa (and Missouri) might be in even worse shape. Indiana and Louisiana are actually projecting surpluses.
- Throughout the history of legalized casinos, the states have raised gaming taxes nine times including three times by Illinois. No other state raised taxes more than once. A closer look at the timing of these tax hikes reveals that 7 out of the 9 increases occurred during the last state budgetary crises of 2002-2003. That piece of history doesn't bode well for the industry currently. Whether legislators wish to tackle this issue during an election year or wait until next year will be an interesting follow. In any event, we've got our eyes on this developing trend.
Week Ended 6/27/08:
Dow Jones (4.2%), SP500 (3.0%), Nasdaq (3.8%), Russell 2000 (3.8%)
June 2008 To Date:
Dow Jones (10.2%), SP500 (8.7%), Nasdaq (8.2%), Russell 2000 (6.7%)
Q208' To Date:
Dow Jones (7.4%), SP500 (3.3%), Nasdaq +1.6%, Russell 2000 +1.5%
2008 Year To Date:
Dow Jones (14.4%), SP500 (12.9%), Nasdaq (12.7%), Russell 2000 (8.9%)
- Labor Costs - up Commodity Costs - up Energy Costs - up Airfares - up Airline Capacity - down Leisure Travel - down Domestic Economic Growth - stagnant World Economic Growth - slowing With these unhealthy trends where is the Street math? Lodging Analysts' 2009 EBITDA projections - up Lodging Analysts' 2009 EBITDA margins - flat
- What are you, on dope? Whatever these analysts are smoking should be banned. Sorry for the Fast Times at Ridgemont High reference but it was a good movie. The analysis from my posting last week showed that peak to trough EBITDA margins fell 850 bps during the last cycle. Sure we don't have 9/11 this time but most of the factors above were in much better shape back in 2002. I'm not suggesting we'll see that kind of drop next year but even a 3% drop in margins would be devastating to EBITDA and earnings.
- Per Reuters, consensus EBITDA projections for HOT, MAR, HST, and OEH show 2009 EBITDA and EPS growing at an average of 9% and 17%, respectively. Despite the factors listed above, these analysts are essentially projecting flat EBITDA margins. In a more likely scenario of a 3% drop in EBITDA margin, EBITDA and EPS would decline an average of 10% and 30%, respectively. These are big deltas from consensus. Look for some new Street math in the coming months.
- The PlanIn mid-2006 new CEO Jeff Katz outlined his strategy for turning around this once powerful educational toy company. Mr. Katz was founding Chairman and CEO of Orbitz which was built from scratch and in four years generated $300m in revenues. Orbitz was sold to Cendant for $1.25bn. Not bad. Mr. Katz's plan for LF involved streamlining costs and SKU's and cleaning up inventories (phase 1) then implementing a comprehensive effort to develop new platforms and products while phasing out old product lines (phase 2).
- The ProgressManagement's phase 1 and 2 strategy and execution is quite evident from the first chart. Gross margin began its upward move by 2006 end, only 2Qs following the beginning of Mr. Katz's tenure. SGA ratio, on the contrary, continued to move higher as the LF reinvested heavily in its brand and new products. Both metrics are now moving in the right direction but still allow for significant improvement potential as the second chart displays.
- The ProductsLF reloaded with a significant arsenal of new products within its core competency of reading solutions, educational gaming and grade school products, and learning toys. The product output is impressive and initial feedback and reviews are positive. Some of products were introduced last year and performed well. Most, however, were released in June. Purchase orders representing 50% of expected new product revenue have already been received. While purchase orders are not necessarily an exact indicator of ultimate revenue, this is clearly a good start. New products could provide half of 2008 revenues.
- The PotentialThe Potential
Two questions on these estimates:
1. How much higher than reality will these 08' estimates look 6 months from now?
2. How much lower are the 09' numbers going to be revised as a result?
Inflation is finally consensus. Global Stagflation is not, yet...
(click on table to manify)
Unfortunately, time on this strategy may be running out. Access to capital continues to tighten and Cost of Capital continues to increase.
This is the cycle, and its global this time, indeed.
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