In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough explains why the upcoming jobs report is a “binary event” with important ramifications.
Takeaway: We added LVS to Investing Ideas on the long side on 8/26.
THE HEDGEYE EDGE
Las Vegas Sands (LVS) has transformed into that rare stock which should appeal to “Growth,” “Value,” and “Dividend/Cash Flow” investors alike. The stock now yields 3x that of an S&P 500 index fund making it very attractive on a relative and absolute basis. Most importantly, these future dividends will be supported by strong free cash flow generation, on the heels of a new property opening in September and improving industry fundamentals. With the tides finally turning in Macau, we see LVS as the best way to express our views that Macau is once again a sustainable, longer term investment.
After 25 months of consecutive GGR declines, Macau is finally set to snap its losing streak, being led by the more profitable mass segment. From the six Macau concessionaires, LVS has the least exposure to the shrinking VIP segment (~10% of EBITDA), while ~90% of their EBITDA is generated from Mass, Slots, and Non-Gaming Revenues (the segment of the market most apt for growth). Knowing that LVS is appropriately positioned to take full advantage of a Macau comeback, one must also consider our true Hedgeye Edge i.e. our Mass Tracker.
The Macau Government shut off the weekly and monthly data spigot – forcing most of the sell side and buy side into a guessing gaming as to where revenues may fall. Thankfully we don’t share that problem. Our Mass Tracker utilizes observational and other data that we have developed into a proprietary tracker which drives a 0.97 R-Square to Macau mass table revenues.
Heading into 2Q 2016, we anticipated Mass revenue growth of +2-4% YoY and the market bested our estimate by printing +4.6% YoY – a major surprise for the market and the true driver of stock gains this summer. Now looking to 3Q 2016 we see acceleration off this growth and project Mass revenues to be +4-6% YoY.
We know of very few stocks in consumer land which present a better risk/reward set up for 2H 2016.
INTERMEDIATE TERM (TREND)
Mass growth and the Parisian are two of the top intermediate term catalysts. Mass Tracker continues to suggest that the mass inflection is real which is a significant near-term catalyst for LVS. As the premier mass and base mass player in Macau, LVS is best positioned over the near and long term to capitalize on what should be a sustained period of mass growth that began in Q2 2016.
The Parisian opening on September 13th is a positive catalyst for base mass growth and cash flow. Unlike the premium mass focused Wynn Palace (and MGM Cotai), Parisian is directed at the base mass customer where there is more growth and less promotional pressure. Parisian should generate positive cash flow and mark the cessation of significant capital outlays.
LONG TERM (TAIL)
For the foreseeable future we choose to view the Macau recovery as volume driven. Lower hotel room rates, additional supply, and the inflow of more casino visitors are once again translating into casino revenue growth.
There’s undoubtedly a global hunt for yield at a reasonable price, and there are fewer examples where one does not have to pay up for yield. LVS presents a unique opportunity for investors. With low leverage (2x net debt/EBITDA) relative to its peer group (4x Net Debt/EBITDA), they could A) fund the dividend growth via increasing their leverage by 0.5x or even 1x and the dividend would explode (chart below) or B) they can continue to fund it via their growing FCF. Either way, we see dividend growth as sustainable and currently underappreciated.
ONE-YEAR TRAILING CHART
The breakdown in the central planning #BeliefSystem is worth studying. It's partly why, from June 2015 to today, $7 trillion has evaporated into thin air. That's the dollar amount that's been lost in total world equity market cap.
Despite the best efforts of central planners, economies in Europe, Japan and China remain mired in sub-par growth. After 673 central bank rate cuts globally, the global equity markets reflect this weakness.
1. China's Shanghai Comp...
2. Japan's Nikkei...
3. Europe's EuroStoxx...
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.46%
SHORT SIGNALS 78.35%
Takeaway: Chipotle needs to make "significant changes" before we "become more positive on the name," Penney writes.
Hedgeye Restaurants analyst Howard Penney's call on Chipotle was picked up by Bloomberg today. Penney thinks the stock has 50% downside from here.
Click here to learn more about Restaurants analyst Howard Penney's upcoming Best Idea (short) call on Chipotle.
**Send an email to firstname.lastname@example.org for access or additional information about our institutional research.
Takeaway: Our Restaurants analysts are hosting a Best Idea (short) call on Chipotle on 9/6.
CHIPOTLE MEXICAN GRILL: BEST IDEA SHORT
9/6/2016 at 11:00AM
Join the Hedgeye Restaurants Team, led by Sector Head Howard Penney, for an in-depth presentation and refresh to the SHORT case for CMG in which they see 50% of additional downside.
CMG is on their Best Ideas List as a short.
KEY TOPICS OF DISCUSSION
- Management does not appear to have a cohesive strategy to guide this ship
- Recovery is slow and the business model is impaired
- Aggressive unit growth is a leading indicator of future value destruction
- CMG consumer survey update
- The new normal P&L is vastly different from the past
- Margin analysis: What the upside is and how do they get there?
Attendance on this call is limited.
Please note if you are not a current subscriber to our Restaurants research there will be a fee associated with this research call and related material. Ping email@example.com for more information.
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