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RTA Live: July 29, 2015

Below is the replay for today's edition of RTA Live.

 


LEISURE LETTER (07/29/2015) - IHG, HOT, UBER

TICKERS: IHG, HOT, UBER


 EVENTS   

 

July 28 8:30am: WYN 2Q CC ; PW: WYNDHAM

July 29 10:00am: HLT 2Q CC ; PW: 74328196

July 30 9:00am: HST 2Q CC

July 30 10:00am: MAR 2Q CC ; PW: 66506287

July 30 1:00pm: HOT 2Q CC ; PW: 69941686

July 30 8:30am: STAY 2Q CC (1877)

July 31 10:00am: RCL 2Q CC 

August 1

  • Wild Rose Jefferson opens
  • St Regis Macau opens

August 3: 8:00pm: CTRIP 2Q CC ; PW: 40828276

August 4: 11:00am: MGM 2Q CC ; PW: 0575269

August 4: 10:00am: NCLH 2Q CC Webcast Link Here

August 4: 5:00pm: AWAY 2Q CC

August 6: 8:30am: MPEL 2Q CC ; PW: MPEL

August 6: 8:30-1pm: RCL INVESTOR DAY (NYSE)

COMPANY NEWS      

IHG/HOT - via Twitter and other news outlets, merger talks between IHG and HOT continue. 

 

UBER - In London, Uber faces legal action over cab drivers' rights.  The GMB union (a British Trade Union) will challenge the company's claim that its workers are partners rather than employees. 

  • The union says Uber is breaching its duty on pay, holidays, and health and safety.  

  • The firm says making drivers employees would mean losing their flexibility, which makes the job appealing.

  • The GMB's Steve Garelick said: "Operators like Uber must understand that they have an ethical and social policy that matches society's expectations of fair and honest treatment."

  • In May, Transport for London reported the number of private hire vehicle licences had risen from 52,000 to 77,000 over the previous 12 months, and most of that increase down to new Uber drivers.

ARTICLE HERE

Takeaway: Not the first time UBER has encountered regulatory/union driven headwinds, but London is a crucial market for them.

INDUSTRY NEWS 

Macau Government Spending - Macau’s Chief Executive, Fernando Chui Sai On, has stressed that the city’s public finances “remain sound” despite the ongoing slump in casino GGR.  Mr Chui however confirmed that if Macau’s GGR tally for July comes in at around MOP18 billion ($2.25 billion), his government would introduce austerity measures to control spending, according to an official statement on Tuesday.  

 

ARTICLE HERE

Takeaway: We do not anticipate the government to use austerity measures.  

 

Macau Migrant Labor Force - Macau had 180,523 migrant workers at the end of last month, 16.2 per cent more than a year earlier, official data indicate.  The construction industry employed 48,692 of them, hotels and restaurants employed 45,680 and 22,555 were domestic servants.

ARTICLE HERE

Takeaway: A more detailed view of migrant labor in Macau versus yesterday's commentary. Construction hiring is good news for the casino operators. 

 

Nevada Gaming - Steep decline across the board for Nevada GGR. 

  • NV GGR (8.37%) YoY
  • Las Vegas Strip GGR (16.31%) YoY
  • Downtown Las Vegas GGR +2.25%
  • Boulder Strip GGR +6.28%
  • Balance of County GGR (1.15%)
  •  Breakdown of major segments on the Las Vegas Strip
    • Blackjack +0.27% YoY
    • Baccarat (57.00%) YoY
    • Total games (27.84%) YoY

 

Las Vegas Visitation - In June, there were 3.55 million visitors, +2.40% YoY.

  • Hotel Room Inventory - 149,071 rooms - (0.2%) YoY
  • Hotel Occupancy - 93% - +0.4% YoY   
  • ADR - $114.34 - (0.7%) YoY
  • RevPAR - 

Takeaway: Slots and Baccarat were particularly weak on the Strip. Combined with disappointing RevPAR we ask, where is the recovery? 

 

Pennsylvania Lottery - The Pennsylvania Lottery achieved a new sales record of $3.82 billion for the 2014-15 fiscal year and again generated more than $1.06 billion in net revenue.  Lottery sales in fiscal year 2014-15 surpassed the prior year's all-time sales record by $20.1 million, or 0.53%.  Instant games sales for the fiscal year totaled $2.59 billion, which was $146.7 million, or 6%, higher than the previous year. Instant games accounted 67.84 percent of fiscal year 2014-15 sales, up from 64.34% of total sales in the previous year.   

ARTICLE HERE

Takeaway: Lotteries remain white hot. 

MACRO 

Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.


TWTR: Déjà Vu (2Q15)

Takeaway: Keeping this brief. TWTR’s conflicting growth drivers can’t appease the bulls, so TWTR remains a short until it grabs them by the horns.

KEY POINTS

  1. CAN’T MAKE ANYONE HAPPY: TWTR produced upside to estimates off its subdued 2Q15 guidance, with the high end of 3Q guidance edging above consensus.  But TWTR lost the crowd when it tempered MAU expectations during its call.  This remains a recurring theme given its conflicting growth drivers; any upside to revenues comes at the expense of MAU growth since its monetization strategy is driven off surging ad load, which has historically pushed its users away.  Since the streets demands upside on both, TWTR can’t make anyone happy (see note below). 
  2. ACCELERATION IN THE WRONG SPOT: Even as bears, we were very encouraged by TWTR’s new-found CPE tailwind on its 1Q15 print, which speaks volumes to advertiser demand (product mix and/or advertiser counts).  That reversed course in 2Q15, with CPE yielding in favor of a reacceleration in ad engagements, which we believe is synonymous with a spike in ad load (see note below).  Our bearish thesis has centered on this monetization strategy; there is only so much ad load its users are willing to absorb, especially since the bulk of its revenues comes from mobile.
  3. GRAB THE BULL BY THE HORNS: While we remain short, we were uneasy into the print since it all came down to how management addressed the street.  TWTR’s problem throughout its short public history has been that mgmt has been too scared to manage the lofty expectations that have crippled its stock to date.  While we are encouraged that TWTR didn't overextend itself on 2015 guidance, consensus 2016 advertising revenue estimates remain a stretch.  TWTR will need to rebase expectations again, so we remain short.  But if TWTR can get to the point where it doesn't make questionable near-term business decisions in attempts to appease shortsighted sell-side expectations (see point 2), then there could eventually be a long here.  

 

TWTR: Rock and a Hard Place (1Q15)

04/29/15 08:15 AM EDT

[click here]

 

TWTR: Déjà Vu (2Q15) - TWTR   Ad engage vs. MAU 2Q15

TWTR: Déjà Vu (2Q15) - TWTR   Ad eng vs. Price y y 2Q15

TWTR: Déjà Vu (2Q15) - TWTR   FC Ad Revenue 2Q15

 

Let us know if you have questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet


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YELP: Seppuku (2Q15)

Takeaway: Mgmt finally fell on its sword and cut guidance (among other things). This is just the beginning, and there is no fix w/o a hard landing

KEY POINTS

  1. 2Q15 PRINT = DISASTER: YELP missed 2Q Local Advertising estimates, guided light for 3Q, and cut 2015 guidance.  Interestingly, management decided to shutter its Brand Advertising segment, which is a questionable move given that this is segment is likely one of its only profit centers (even if it is declining)…maybe management hoped that by burning the cornfield, the street wouldn’t realize that the chickens (LAAs) are flying the coop. 
  2. JUST THE BEGINNING If YELP can’t grow its salesforce to plan, it’s basically game over.  YELP’s business model is predicated on driving new account growth in excess of its rampant attrition, which it achieves through aggressively ramping its salesforce every quarter.  YELP cut 2015 salesforce growth target after failing to grow to plan again in 2Q15.  The sell-side is going to blame the “unicorns”, but the more likely culprit is YELP’s TAM; it can’t support its model, which means it can't feed its salesforce either.
  3. NO FIX WITHOUT HARD LANDING: YELP’s model is broken, and mgmt can’t fix it unless it is willing to take a hard landing (down revenues).  YELP’s attrition can be attributed to poor ROI (note below); the easiest way to fix that is by introducing lower-tiered ad packages.  But the risk there is that it would need that many more brand new customers to offset its attrition (e.g. at half the price, it needs double new accounts).  In short, this is a secular short until mgmt is willing to go that route.      

 

2Q15 PRINT = DISASTER

YELP reported inline 2Q15 revenues, with Local Advertising falling short of estimates.  Account churn remained elevated at 17.1% of LAAs, with new account growth once struggling to keep pace with the rate that YELP is hiring sales reps.

 

YELP also issued light 3Q15 revenue guidance (off by $10M at the high end), and cut its 2015 guidance by ~$30M, which is naturally concentrated in 2H15 given that 2Q15 revenues were in line with guidance.  For context, YELP’s new guidance suggests 2H15 revenue growth of 39% vs. 53% previously.  YELP attributed its lower outlook to slower than expected salesforce increases and the shuttering of its Brand Advertising segment.

 

Management also decided to do a mid-year segment reorganization, parsing out its Other Services segment Transactions and Other Revenue (partnerships).  The big concern is that YELP is shuttering its Brand Advertising segment, which is a very questionable move given that this is segment is likely one of its only profit centers.  The revenue/sales rep is substantially higher than its Local segment; it doesn’t make sense to shutter the operation, even it is declining .  Maybe management hoped that by burning the cornfield, the street wouldn’t realize the chickens (LAAs) are flying the coop.

 

YELP: Seppuku (2Q15) - YELP   Acct vs. Sales 2Q15

YELP: Seppuku (2Q15) - YELP   LAA Attrition

 

JUST THE BEGINNING 

If YELP can’t grow its salesforce to plan, it’s basically game over.  YELP’s business model is predicated on driving new account growth in excess of its rampant attrition, which is nearly all of its accounts annually.  The only reason why the street hasn’t noticed its churn is because YELP hires sales rep at an accelerated rate every quarter. 

 

YELP just took down its 2015 salesforce growth target after failing to grow to plan again in 2Q15.  The sell-side is going to blame the “unicorns”, but the more likely culprit is YELP’s TAM; it's not large enough to support its model, which means it can't feed salesforce either.

 

As a reminder, whatever YELP reports in LAAs is comprised primarily of accounts that it signed within the LTM, and the more accounts YELP enters any period with, the more accounts it will lose, and the more brand new accounts it needs to offset that churn.  With new account growth slowing into the sub-30% range, and increasing difficulty onboarding reps, YELP’s attrition will exert increasing pressure across its model moving forward.  

 

YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]

 

YELP: Seppuku (2Q15) - YELP   Current vs. TTM new

YELP: Seppuku (2Q15) - YELP   Prior vs. TTM lost 

 

 

NO FIX WITHOUT HARD LANDING

YELP’s model is broken, and mgmt can’t fix it unless it is willing to take a hard landing (down revenues).  YELP’s attrition issues are likely due to poor ROI (note below); the easiest way to fix that is by introducing lower-tiered ad packages. 

 

But there is a reason why it hasn’t done so already (they really haven’t, the $50 package is for the enhanced profile).  If YELP introduced a lower tier, it would need that many more brand new customers to offset its attrition.  For example, a $150 package would require double the amount of brand new account to offset churn from existing customers today.    

 

In short, this is a secular short until mgmt is willing to right the ship.  But from what we've seen mgmt, that won't be happening anytime soon.

 

 

Let us know if you have questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 

YELP: Grand Tales of ROI

02/13/15 01:34 PM EST

[click here]

 


M&A, Earnings and Confidence

Client Talking Points

M&A

According to Bloomberg, $406B of M&A deals has been announced globally this quarter, including $170B in the past week alone. This puts 2015 on track for a record year with projected volumes north of $1T. Q3-to-date is on track to surpass the previous quarterly record of 3Q07, which occurred during the prior peak year of M&A activity with $933B proposed deals. The annual record prior to that? You guessed it: 2000. As we’ve said over and over again in the year-to-date, when the economic cycle slows capital markets activity peaks as management teams try either sell before it’s too late or front-run the slowdown with financial engineering. 

EARNINGS

FactSet data reports that S&P 500 earnings growth is on track to fall -0.7% year-over-year in 1H15, marking the slowest rate of change since 2009. The same data has EPS projected to fall another -2.7% year-over-year in Q3. Despite this fundamental weakness, broad market valuations in the 99th percentile of all readings and dramatically narrowed market breadth, sell-side strategists are sticking with their forecasts for the S&P 500 to rise +8% by year-end 2015. Hedgeye CEO Keith McCullough talked about how certain market participants can only get away with ignoring data for so long in today’s early look and this juxtaposition seems appropriate to highlight on the heels of that.  

CONSUMER CONFIDENCE

Lost in yesterday’s dead-cat bounce across the reflation sectors of the market was the noticeable lack of a bounce in consumer confidence. Specifically, the Conference Board’s measure plunged to 90.9 in July from 101.4 in June, marking the lowest reading since September of 2014 and confirming the slowdown on both a sequential and trending basis. All told, we reiterate our #ConsumerSlowing theme, which calls for domestic consumption growth to continue slowing from its 1H15 peak in rate-of-change terms through a likely recession in 2016.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET.

Asset Allocation

CASH 47% US EQUITIES 7%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 22% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
GIS

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.

PENN

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 on July 24th. He will provide a detailed update this week.

TLT

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. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road

TWEET OF THE DAY

Hedgeye reiterates longstanding SELL calls on both $YELP and $TWTR @MariaBartiromo

@KeithMcCullough

QUOTE OF THE DAY

It is one thing to not know, it is another thing to not know that you don’t know!

Eric Hunsader

STAT OF THE DAY

In a survey Hedegye’s Restaurants Team asked 2,000 people whether they would go to MCD more often if they could get breakfast for lunch, 33.3% of people said yes.


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