Changes in gas prices and retail sales are both statistically significant variables in explaining the change in regional gaming revenues over the last 7 years and over the last 14 years. I identify regional gaming markets as those that derive the dominant majority of customers from drive-in traffic. These markets include all of the riverboat gaming markets plus New Jersey and Michigan.
T stats for each variable for each period was over 4 (T stat over 2 is generally considered significant). As the following chart shows, changes in gas and retail explained 19% and 34%, respectively, of the change in regional gaming revenues over the two periods. Clearly, the relationship has been stronger in recent years.
So what does all this mean? Since the industry is not as defensive as we once thought, any investment decisions must be accompanied by a macro view. I don't think it means you cannot own any of the regionals. Free cash flow yields are very high and probably discount a lot of the macro issues. While gas is universally high, some economies are better than others. Pinnacle Entertainment (PNK) maintains significant exposure to the oil dependent states of Texas and Louisiana which are performing well, all things considered.
- 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
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