While Q4 consensus has come down, it may not be enough. The stock has fared poorly (down almost 30% since late November) so a miss is probably discounted to some extent.



PNK reports Q4 EPS tomorrow morning.  In projecting an Adjusted EPS loss of $0.13, we are below the Street consensus at ($0.08). Our Adjusted EBITDA estimate of $37.1 million compares to the Street at $40.3 million.  Louisiana, which has held up so well during most of this downturn, has been in a tailspin.  Total EBITDA from the state could fall over 30% from last year.  Recovery here is likely to take longer than the rest of the regional markets and will depress PNK’s profits for much of 2010.  Remember that 60-70% of PNK’s property EBITDA is generated in Louisiana.


The following “Youtube” highlights management’s forward looking commentary from the Q3 earnings release and conference call.





Property specific

  • “Residents from New Orleans have seen a significant increase in marketing from casinos along the Mississippi Gulf Coast, and that has in turn affected our business at Boomtown. The good news is that with October now largely complete, it appears that revenues have stabilized at Boomtown New Orleans. With revenues now stable, we'll use the remainder of the year to focus on bringing margins back up at the property.”
    • I assume he meant stabile relative to 3Q trends because in the 4th quarter state reported gross gaming revenues for the property declined 13.4% vs. an 11.6% decline in Q3
  • “In Reno, according to the monthly revenue statistics put out by the state, the entire Reno market continued to see declines in gaming revenues during the 2009 third quarter, caused by both additional Native American casinos in Northern California and general economic conditions. We were not immune to that trend. Based on recent trends, however, it does appear that gaming revenues are starting to stabilize for Boomtown Reno.  We hope to get profitable over the next, let's say 12 months going forward and hopefully improve from there.”
  • “I think the major single factor other than the economy that affected New Orleans was competition from the Mississippi Gulf Coast, which is not very far away. As they try to figure out how to keep their hotels built, since they weren't getting people from Florida or Atlanta anymore, they just reached out for people that are in our way.”
  • “What did happen in Lake Charles was Delta Downs got very aggressive with their promotions earlier this year. They took some market share from us. We got more aggressive in the recent quarter and I think we've got our market share back,that hurt our margins a little bit. So we've had a little bit of a promotions battle going on between us Delta Downs, we're twice their size, more than twice their size. And I think we'll continue to show good results at L'Auberge as we have.”
  • “If we never open River City, I think you continue to see strong growth with Lumière Place but obviously, River City will take a bite out of that. And we think between the two, we'll do at maturity, $120 million, $130 million a year EBITDA and maturity might be a couple of years away because of some disruption when we first opened.”
  • L’Auberge margins:  “I think it may take a couple of quarters for us to get the margins back up. We'll eventually get up there, I don't know if it will be the fourth quarter or not.”
  • L’Auberge: “so October was at a pace of third quarter, but we're more optimistic on November and December.”
    • Unfortunately, Nov & Dec gross gaming numbers were down 22% and 24% y-o-y, respectively
  • “I think we're on a positive trend in New Orleans. I think we're just starting a positive trend now at L'Auberge.”


Development update

  • “River City continues to move along on time and the same basis of budget that we previously outlined, the cash portion of that budget continues to be $357 million, of which we spent to date, $228 million approximately. And the timing of the project is expected to open in the spring of 2010 and we feel very good about the prospects of that property upon opening next year.”
    • On December 14th, PNK announced that the opening would be accelerated to March 2010
  • “Sugarcane Bay, we started driving piles earlier this month to put in the foundation for the project. The project that actually started last year when we started doing the road that expanded. The visibility of our property and access at L'Auberge and that would also be the road to Sugarcane Bay. With the project budget is the cash basis at $391 million, we expect to be on that pace and progress on that project as we move on through the fourth quarter and into next year.”
    • On Nov 24th the project's budget was updated to “approximately $305 million, excluding capitalized interest, and includes approximately $54 million spent to date” and noted that  completion is expected “ in late 2010 and open the hotel and related amenities in the first half of 2011”
  • Baton Rouge: “We will start construction of that project promptly after the approval of the contracts, which we would expect will happen in May of next year.”
    • On Nov 24th PNK announced that it “is proceeding with plans for its casino project in Baton Rouge, Louisiana, which represents an investment of approximately $260 million, excluding capitalized interest. As announced previously, the Baton Rouge project will include a new, single-level riverboat with an expansive casino; a 100-room hotel; an exciting mix of restaurants and lounges; and an entertainment venue.”
  • “Regards to CapEx, we expect Sugarcane Bay next year to grow somewhere around $225 million in a cash basis, excluding cap interest. And go through the rest, Baton Rouge, that number is somewhere near $60 million and you have 40 or so maintenance CapEx across the portfolio.”  I assume this will change with the revised budgets
  • “We hope both Sugarcane Bay and Baton Rouge do about a 15% cash-on-cash return.  That's 15% on the $400 million investment. And so that'd be an incremental $60 million of EBITDA above the 80 or 90 is doing now. The run rate I think is about 85, so...”

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


CKR reported period 13 and fiscal 4Q10 blended same-store sales today of -6.4% and -6.0%, respectively.  The biggest challenge continues to be at Carl’s Jr., which reported a 9.0% comparable store sales decline for period 13.  Although this -9% number is a 65 bp improvement from period 12 on a 2-year average basis, the full fourth quarter result of -8.7% implies 230 bps of deterioration from 3Q10.  Hardee’s same-store sales decreased 2.8% during period 13, which marked a significant fall off from the prior period with 2-year average trends declining more than 100 bps on a sequential basis. 


The company attributed weakness at both concepts to continued high levels of unemployment, “deep-discount burger wars” and weather.  Specifically, CKR’s CEO Andrew Puzder said, “Both brands' sales results were also significantly impacted by worse weather this year than in the prior year. Carl's Jr., experienced severe rain in its core West Coast markets for most of the final week of the period and Hardee's experienced severe winter weather in several of its core mid-west and southeast markets.”


Despite the impact of weather, CKR’s full year 2010 3.9% blended same-store sales decline came in at the lower end of management's guidance of -3.5% to -4.0%.  Management also reiterated its prior full-year outlook for a 20 to 40 bp decline in restaurant level margin, but provided 4Q10 guidance of 16% to 16.3%, which implies full year numbers will come in toward the lower end of the range.  Relative to fiscal 4Q09’s 18% restaurant margin, this guidance assumes that margins will decline 170 to 200 bps YOY, reversing the prior three quarters of margin growth despite the decline in top-line trends.  We have been saying that it was only a matter of time before gravity would set in. 


During the fourth quarter, management expects about 40 to 50 bps of YOY food and packaging cost favorability to be offset by sales deleveraging on both the labor and occupancy expense lines.  Food cost favorability has helped to stave off margin declines earlier in the year despite the significant demand headwinds with food and packaging costs as a percentage of sales declining 60 bps YOY in Q1, 140 bps in Q2 and 180 bps in Q3.  CKR will begin to lap this benefit in the first quarter of fiscal 2011, making it increasingly more difficult to hold the line on margins.  And as 4Q10 guidance makes clear, even with food costs providing a tailwind in the quarter, margins cannot continue to move higher with blended same-store sales  down 6%.



Howard Penney

Managing Director







Capital Markets Risk Management: Biotech IPO's

While Healthcare and Biotech Capital Raises have had a historic run through the back half of 2009, the IPO calendar, particularly for speculative biotech, has been notably light.


In yesterday’s morning note we suggested you keep the pricing of the Ironwood Pharmaceuticals IPO on your radar as a potential lead indicator for CRO’s and measure of remaining risk appetite as market momentum & sentiment have rolled in the past couple weeks.  The offering, which was expected to price 16.7M shares at $14-16, ended up pricing at $11.25/share – a 30% haircut and the biggest reduction for a U.S. IPO YTD.


The pricing of IRWD is an extension of the 2009 trend in U.S. Healthcare IPO’s which were both infrequent and uninspiring.  Of the nine Healthcare IPO’s debuting in 2009, six have turned in negative absolute performance while underperforming both the XLV and the S&P500. 


Coming out of the 2001 recession, Biotech IPO’s didn’t see a meaningful, more sustained uptick until 4Q2003.  While the deluge of offerings in the 2000, pre-recession period likely exacerbated the drought in the post recession period it's at least noteworthy to point out the lag between the recovery of the market and ^NBI Index and the recovery in the IPO market.  Presently, the success or failure of Ironwood may serve as a Go or No-Go signal for the IPO market and the growing list of prospective offerings backed up in the pipeline.  


Biotech has been on a tear of late, capital raising has continued unabated, and a successful return of the IPO market would serve as an important confirmationary indicator of resurgent investor interest and pending capital investment to the industry. The outcome here holds important consequences for Drug Development Service companies who need biotech allocations to drive growth as the Large Pharma outsource story loses juice.     


IRWD shares were set to begin trading at 11am and we’d like see at least 3 days of volume & price action before vetting the result.  Our next look at the health of the IPO market may come compliments of Anthera Pharmaceuticals who, notably, amended their S-1 this morning to reduce the size of the intended offering.    


Christian B. Drake



Capital Markets Risk Management: Biotech IPO's - US HC IPO Performance


Capital Markets Risk Management: Biotech IPO's - U.S. Biotech HC IPO s



Boone’s Plan

Position: Short natural gas via the etf UNG


We recently shorted natural gas in our virtual portfolio, on the back of a supply and demand mismatch that we think will build in the intermediate term.  Longer term, though, there are some justifiable reasons to be bullish of natural gas.  T. Boone Pickens provides some interesting rationale for longer term demand for natural gas in the Pickens Plan.


Pickens prefaces the outline of his plan with the point that Americans are addicted to foreign oil, and on that point he is correct.  According to most estimates, the United States uses 25% of the world’s oil despite having only 4% of the world’s population.  Crude oil production in the U.S. peaked in 1970 (Hubbert’s Peak) at 9.7MM barrels per day, has been on steady decline ever since and is now producing less than 4.0MM barrels per day.  Clearly, the U.S. is running out of oil and is becoming increasingly dependent on foreign oil sources.


One of the primary solutions that Pickens, and many advocates of natural gas, offer for as a solution to the issue of foreign oil dependence, is an increased use of natural gas, particular for transportation use.  One on hand, Pickens is an investor who likely has a vested interest in promoting increased use of natural gas, but on the other hand there are some opportunities for natural gas to displace oil.


One example Pickens gives is that 20% of all the oil in the United States is used by 18 wheelers to transport goods around the nations.  Displacing that fleet, with a natural gas fleet, would have a meaningful impact on domestic oil demand.


In contrast to oil, the United States is rich in natural gas. In fact, both production and reserves of natural gas continue to increase in the United States.  The most recent estimates from the Potential Gas Committee, which is the authority that produces estimates every two years, suggests that the United States holds 2.1 trillion cubic feet as of the end of 2008, which is a 35% increase from 2006 (this fact is obviously bearish for price).


Globally, there are roughly ~10MM vehicles that use natural gas.  Most of the vehicles are located in five countries: Pakistan, Argentina, Brazil, Iran, and India.  In aggregate, this is a very small portion of the world’s vehicular population. There are more than ~800MM vehicles in the world currently, so natural gas is just over 1% of the market in focused regions with access to cheap natural gas.


In his recent State of the Union address, President Obama mentioned clean energy no less than 10x, and made the following statement:


“But to create more of these clean energy jobs, we need more production, more efficiency, more incentives.”


At the moment, President Obama likely has other issues to focus on, put the potential for incentives to support cleaner forms of energy are clearly being bandied about within the administration and it is likely that natural gas would be a recipient of some incentives, as it is a cleaner form of vehicular fuel than gasoline (formed from oil). Perversely more incentives for natural gas could actually mean a lower price as production should increase.


While in the longer term natural gas is a logical path for the United States to pursue to displace her dependence on oil and for clean energy purposes, the pathway to increased demand will be lengthy.  Setting aside massive government incentives, which could occur, we need to build a fleet of natural gas vehicles and an infrastructure of distribution.  Neither of which is likely to occur in the shorter term and will require massive investments and time.


While we applaud Boone’s efforts, we remain short Natty.



Daryl G. Jones
Managing Director

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