prev

Copper In A Box, Too

Copper production in China hit record levels in 2009.  According to the Chinese Statistics Bureau, output of refined copper gained 9.6% y-o-y to 4.25 million metric tons.  Clearly, a large driver of this increase was China’s stimulus program in 2009. 

 

China accounts for ~40% of global copper demand.  As our thesis on China continues to play out in Q1, Chinese Ox In A Box, and China slows sequentially in Q1, it will have a negative impact on copper demand.  We are seeing some follow through on this today with copper futures currently down ~1.2% based on the Chinese economic data released last night and comments from the Chinese government regarding fiscal policy.

 

Mining stocks echoed concerns over this potential slow down from China yesterday.  The world’s largest mining company BHP Billiton reported results yesterday  According to BHP:

 

“Government stimulus measures appear to have supported a gradual return to normalized trade levels, albeit from a low base."

 

Clearly, to the extent that government stimulus is not repeatable year-over-year, demand for copper should slow sequentially from Q4 2009.

 

In fact, concern over a potential slowdown in copper demand due to a slowing of government stimulus from China appears very justified.  Over the past couple of days, based on both a statement from Premier Wen Jiabao and a statement from the Chinese Statistics Bureau that removed reference to a “moderately loose” fiscal  and monetary policy.  This, of course, suggests that China will be tightening policy.  Reports from China suggest that the new policy will be finalized by the time the National People’s Congress meets in March.  This is on the back of China’s attempt to slow loan growth.

 

On this point, BHP also stated in their earnings release:

 

“In China, the impact of measures to control loan-growth will add another future variable. Consequently, we expect some degree of volatility in the short term outlook for our commodities.”

 

Clearly, the world’s mining companies have and are proactively preparing for the Chinese Ox In A Box, which is critical for managing their businesses.  According to a recent report by the Copper Study Group:

 

“Through October, Chinese production of refined copper grew by 43% to 1.8 million metric tons to account for 40% of world use-and nearly offset and 18% decline in the rest of the world.  Use decreased by 21% in the European Union, by 31% in Japan, and by 21% in U.S.”

 

In effect, China contributed all of the world’s incremental demand last year, which is why the global mining community have their Hedgeyes focused on China.

 

We are also starting to see a mismatch in supply and demand in global inventories.  Yesterday, copper inventories on the LME were reported up 8,000 tonnes to reach 534,650 tonnes, which is the highest level since March of 2009.

 

Currently, copper appears to be a leading indicator for the Q1 slow down in China.  Additionally, copper supply and demand fundamentals are lined up bearishly in the intermediate term.  Below, we’ve outlined our current levels on copper as of this morning.

 

Daryl G. Jones
Managing Director

 

Copper In A Box, Too - copper6

 


OCE”AINT”US

SJM’s Oceanus appears to be off to a slow start. Escalators and better signage in Immigration will help. Sands Macau catches a temporary break.

 

 

It looks like the easy access from Immigration at the Macau Ferry Terminal into the new Oceanus property is proving not so easy.  Ferry patrons are in the habit of going forward toward the buses when they exit the Terminal.  Oceanus is behind the Terminal so customers need to be led to covered walkways connecting the property to the Terminal.  Poor signage and limited advertising are not helping and Oceanus is not getting the visitation early on that was expected.    Help is on the way as escalators that lead to the property directly from Immigration have already been approved. 

 

 

We remain worried about the impact of Oceanus on Sands since both are heavily weighted toward Mass, located next to each other, but Sands is not connected to the Terminal.  In the meantime, Sands Macau seems to be holding its own.


Reining in on Greece

As speculation abounds today that the European Union could offer Greece a rescue package to address its budget deficit issues, the reality remains that the lack of credibility in PM George Papandreou’s government is a serious one that looks far from over.

 

While a rescue package is at best a rumor right now, we’re of the camp that the fiscally conservative Germans, represented by Bundesbank President and ECB member Axel Weber, will attempt to own the debate and force Greece to clean up its own mess before the international community considers floating a deal.

 

As the uncertainty over the Greek state continues, we’re seeing the premium investors demand to hold Greek debt continue to balloon, as the chart below shows the spread between the yield on the 10YR German bund and the 10YR Greek bond continue to blow out. While the spread is just off its widest in the intermediate term, certainly the trend to the upper-right hand corner is bearish, especially if supply outstrips demand.  All the while, the country’s domestic equity market (Athex Composite) has been hit hard over the last week, as CDS prices continue to run up. 

 

We’ve had our pulse on the possible ripple effects from a shaking Greece. Note the recent depreciation of the Euro versus the US Dollar, down 3.2% since 1/13, and indication to us that while the Greek economy is around less than 10% of the German economy (or roughly the size of the German state of Bavaria), the issues surrounding Greece call into question similar stresses that may be ailing other European countries.  In our 1Q 2010 Theme call we noted that the countries of Spain, Italy and Portugal are on our watch list.

 

While we covered our short position in the Euro via the etf FXE in our model portfolio on 1/19 (regrettably a tad bit early), we remain long the USD via UUP.

 

Matthew Hedrick

Analyst

 

Reining in on Greece - GR1

 

Reining in on Greece - GR2

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

BYI: DRIVING A TRUCK THROUGH GUIDANCE RANGE

Potential for a big FQ2 but the Street looks aggressive on March and June. FY2010 Guidance range of $2.30-2.55 is not at risk.

 

 

Judging from the stock trajectory this year, most investors correctly believe that the Street’s $0.58 EPS estimate for FQ2 2010 is an easy number to beat.  We’re 18% above the “consensus” at $0.66.  However, not unlike our commentary on IGT & WMS, the Dec quarter should be the last layup quarter for BYI in FY2010.  We’re only $0.03 (1%) below the Street for FY2010 but 8% below for the back half of 2010.  Part of the issue may be that the Street is too lazy to isolate the quarters in terms of new shipments and just makes the simplified assumption of a continued recovery in replacement demand as the year progresses.

 

FQ2 2010 Details:

  • EPS of $0.66 vs the Street at $0.58 and $0.59 last year
  • Gaming equipment revenue of $87.6MM
    • 5.3k new unit sold, 4k to NA and 1.3k to international markets
    • Parts & conversion kit sales of $8.6MM
    • Gross margin of 49%
  • Gaming operations revenue of $72.4MM and margins of 72%
  • Systems revenue of $61.5MM and margins of 75%
  • Casino revenues of $9.1MM and gross margins of 58%
  • Other: SG&A $53.6MM, R&D: $21.3MM, Net interest expense: $2.4MM

 

 

FQ1 EARNINGS CALL “YOUTUBE”

 

Earnings

  • “Estimating fully diluted earnings per share of $2.30 to $2.55 for our fiscal year.” 
  • “Our 26% operating margin is the highest in the industry and we believe has the potential to increase to 28% to 30% over the next few years.” 

 

Gaming Equipment

  • “We continue to expect margin on our game sales will be in the high-40s over the next several quarters and we believe moving it into the low-50s is achievable within the next two years”
  • “We are selling more conversion kits and Gavin and his team continue to drive down the box cost. So that's one reason why we are cautiously optimistic that we keep it in the high 40s and eventually get up to the low 50s, as we sell more video and keep driving supply chain efficiencies.”
  • “I believe that Bally is underrepresented in North America and even more so internationally. There will be new and exciting international opportunities for Bally over the next 12 to 24 months. We've been building infrastructure in anticipation, and our team is ready to execute. We are excited about new opportunities for us in markets like Italy, Singapore, Australia and potentially, Brazil.”
  • “Domestically, we are focused on expansion opportunities in Illinois, Ohio, Kansas, Iowa, Maryland and Massachusetts. We are also engaged in expanding our already strong position in Mexico as it moves to Class III gaming and we are excited about opportunities in the Italian VLT market. We plan to reenter the Australian market in the next few weeks at a time when it is repositioning itself for large-scale replacements.”
  • “In Mexico, we now have over 70 casino sites running and over 14,000 games connected to Bally systems and the upcoming Class II to Class III migration there opens up very good opportunities for us. And we are negotiating significant agreements for both games and systems in Italy.”

 

Gaming Operations

  • “Our current order backlog for our newer premium product is the strongest we have seen in the past 12 months.”
  • Re: Mexico impact of Class III:  “We will sell more units down there because we haven't done a lot of that in the past. But we don't expect to see a big drop in our Gaming Operations business either.”

 

Systems

  • “We expect systems margins to get back to the 70s in the near future”
  • “For fiscal year 2010, which we expect to be in a range of $220 million to $230 million. Of this total, we expect maintenance revenues to be in the range of $58 million to $62 million.”
  • “I would say that in terms of overall visibility of the number given a considerable majority of it, we have pretty certain visibility to us.”
  • “When we think about systems margins after those adjustments, meaning that the cost of sales of services will now be charged against systems margins, we would still see systems margins to be in the low 70s% for the balance of the year. I'm not saying we won't have variances out of that, where it could be higher or lower but that would be the target range, low 70s.”

 

Other:

  • “While we do expect SG&A to rise in the second quarter, the successful resolution of our legal matters and the elimination of all previously-reported material weaknesses in our internal controls should enable us to effectively manage our legal and accounting spend in future periods.”
  • “We are using our excess working capital to prudently assist our customers in selected financing transactions, pursuing acquisition opportunities and repurchasing stock”
  • “I think 36% is a good proxy for an effective tax rate for the year.”

1Q10 THEME: RATE RUN-UP – PPI INFLATION PRESSURES

The FED is behind the curve and the next few data points on the US economy and employment will drive interest rates higher.  The PPI is yet another data point that confirms our thesis.

 

Yesterday, the (BLS) reported that the seasonally-adjusted Producer Price Index (PPI) for finished goods rose month-to-month by 0.2% in December, following November’s 1.8% monthly gain.  Importantly year-over-year, December’s annual PPI inflation jumped sharply, again, to 4.4% (versus a 0.9% annual contraction for December 2008), the highest annual inflation rate since October 2008, following November 2009’s 2.4% annual gain. 

 

Comparing against collapsing oil prices in 4Q08, year-to-year change in PPI inflation has returned to a positive trend and should continue to increase as we move through 1H10.  Annual PPI inflation averaged a 2.5% contraction in 2009 against a 6.3% average gain in 2008. 

 

On a monthly basis, seasonally-adjusted December intermediate goods rose by 0.5% (up by 1.4% in November), with crude goods up by 1.0% (up by 5.7% in November). Year-to-year inflation was up across-the-board, with December intermediate goods up by 3.0% (down by 1.6% in November) and December crude goods up by 12.3% (up by 4.7% in November).

 

Howard Penney

Managing Director

 

1Q10 THEME: RATE RUN-UP – PPI INFLATION PRESSURES - hpPPI


SBUX – TAKING A SHOT AT GMCR

I think we might now have an idea of how SBUX is going to market VIA.

 

One of SBUX’s smaller competitors, PEET, tried to make an entry into the single-serve segment by buying Diedrich Coffee (DDRX) but lost out to a competing bid by GMCR.  In a recent meeting with PEET’s management, the company communicated its continued desire to enter the single-serve segment.  Management gave no details, but I think another attempt at an acquisition is likely.  Whether it is through an acquisition or Peet’s creates its own position within the single-serve segment, the company seems intent on staying within the business of selling coffee, however, and does not want to get into the business of manufacturing single-serve brewing equipment.  Either way, Peet’s will face competition.

 

It appears that SBUX is also making a bet on the single-serve segment, but is entering the market in a different manner.  Last night on the SBUX earnings call, management said “Our customers have told us that their most frequent usages of VIA are in their homes or at work as a single serve option they favor for its flavor and taste and because and it does not require costly proprietary brewing equipment. Building on the broad customer acceptance through our retail channels we are ramping up VIA launch efforts through our retail company-operated stores outside of North America and poised to introduce distribution of VIA through North America and international channels in the third quarter of this fiscal year.  We're also planning to introduce additional premium coffee varietals and form factors to aggressively go after the at-home and office single serve markets as well as the $21 billion global instant coffee category. VIA continues to excite and represent a major significant opportunity for the company.”

 

In addition to being sold at Starbucks locations across the U.S. and Canada, VIA is also available at Costco, Target, REI and online at amazon.com, cooking.com and officedepot.com.  SBUX has plans to sell VIA in the grocery channel but has not yet announced when it will begin to do so.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next