The Economic Data calendar for the week of the 19th of April through the 23rd of April is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
I hope you had a great weekend!
Since Brinker’s announcement over six months ago about a new direction for Chili’s, we have wanted to see where they are going. After the recent analyst meeting, and a little digging of our own, the timing is upon us. There is a real, credible opportunity for management to create value and grow EBIT over the next 1-3 years.
The EAT Conference Call marks the publication of our EAT Black Book. The call is open to qualified institutional clients of Hedgeye's Restaurants vertical -- and for qualified prospective institutional clients.
The call, on Monday April 19th, at 11 a.m. EST, will cover in detail why we think EAT deserves a closer look, with real opportunity to invest free cash flow into an improving core business. Although we anticipate choppy near-term sales at EAT, we think menu changes and margin enhancement initiatives will lead to marked improvement across customer satisfaction and traffic, better execution and higher margins. We see EAT's potential corporate actions, alongside anticipated improved trends, as being beneficial to the stock.
Contact <mailto:> or reply to this email to request access to the conference call, or to request access/pricing on the EAT Black Book.
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Sober and realistic have typically been good words to describe PENN management commentary. We’d say they apply to CFO Bill Clifford’s recent thoughts on MGM.
PENN CFO recently spoke at a conference and the commentary turned to Las Vegas and MGM. Bill Clifford’s comments were enlightening and not just because we agree with them. Here are a few:
Bill Clifford on Las Vegas and CityCenter
“I mean 63% occupancy for a CityCenter is a good thing? I don’t know, I mean. And I’m not trying to be – I mean obviously, it’s a new property and they’re going to grow into it and it’s a property that’s very focused on group business or it’s a property designed significantly for group business. And obviously that market’s got to come back, et cetera, et cetera. But – so I don’t want to downplay the CityCenter results as necessarily bad. I think that’s just a natural process and it’s an enormous facility. I mean it’s – I mean thousands and thousands of rooms that are – that they’ve got to fill. You’ve got Cosmopolitan coming. But all of a sudden the stock market’s basically saying, well, everything is great in Las Vegas. So valuations are up. I saw somebody’s report this morning. It wasn’t this guy. But 14 times is a good number. Okay, 12 times for next year, great. We can’t buy a facility at 14 times and make it work. We just can’t”
Basically, 12x is a ridiculous multiple for Las Vegas assets; unworkable from a buyout perspective. The public equity multiple is higher than a private multiple, so what gives? Investors must really be expecting a v-shaped recovery. Our view is that there are too many structural issues with the consumer and the economy. The LV of 2005-2007 was housing fueled more than anything else. We are not getting back to those levels anytime soon. We think PENN management probably agrees.
Clifford was being fair when it came to CityCenter. The property will get better but there are still a lot of hurdles including new capacity. As of now, it is pretty much a disaster.
Bill Clifford on Borgata
“We’ve got 95 million for Perryville, I don’t how much Borgata can I get for [that much]...I don’t think it’s very much either. I mean buying Borgata, I just can’t imagine a situation where given that Boyd has a right for first refusal, I just can’t imagine there’s a price we would pay that Boyd wouldn’t match. So – and I don’t know anything about Boyd’s strategic objectives. But just given that they’re a controlling partner and our views on Atlantic City, the price that we’d offer is just not going to be something that I think Boyd would sit there… I actually very much expect Boyd would be 100% owner of Borgata”
Clifford’s Borgata comments followed a trashing of Atlantic City’s prospects. The question really is how much would you pay for half of a good asset in a horrible market with no operating control from a forced seller. The answer is not much which pretty much guarantees BYD will end up with 100% ownership at a very good price. This is not good for MGM.
Of course, Clifford’s comments must be taken with a grain of salt. It’s no secret that PENN maintains some dry powder and has expressed an interest in acquiring a Strip property. From this perspective, management is probably not happy that Las Vegas valuations have gotten so high. However, I’ve always known this management team to be straight shooters and Clifford’s assessment makes a lot of sense.
Our sense is that people want to own this group. BYI already let the cat out of the bag for the March and June quarters. Numbers would have to be awful for IGT to disappoint.
IGT is reporting its FQ2 this Thursday and we are expecting a miss. In fact, we’ve been at $0.17 since IGT reported its FQ1. Despite the Street’s current $0.20 estimate, real expectations are lower and therein lies the problem for any would be shorts. Anyone who’s been listening to the company’s commentary and extrapolated from BYI’s pre-announcement knows that the near term earnings picture is cloudy at best. Replacement demand is still sluggish, weak casino results negatively impacted gaming operations, and Alabama units have been offline for almost a whole quarter and will likely to remain so for the next few quarters.
Not only is IGT probably not a great short into Thursday, it may actually see a relief rally. Investors seem to want to own the slot guys. The bad news for the group is short term and well known. Judging from the muted reaction to a pretty nasty earnings revision by BYI, IGT will probably get another pass. Forward commentary – beyond the June quarter – may be positive and discussion of a new Server Based Gaming contract with Cosmopolitan (See “IGT BAGS THE ELEPHANT?” from 4/14/10) could actually provide a positive catalyst.
Don’t get us wrong, we still think there are lots of booby traps with this name - primarily as it relates to share loss on the participation side, but that doesn’t mean that the name may not work for a trade – given the exuberance and momentum that is prevalent in this space.
We’re at $0.17 cents vs. the Street at $0.20 and are projecting FY2010 EPS of $0.84 vs. consensus of $0.91 (despite company guidance of $0.77-$0.87). Below are some details behind our estimates.
We are forecasting product revenue of $205.7MM and 52% gross margins
Gaming operations revenue of $277.5MM with a 61% gross margin
Here are just some of the comments about YUM’s quarter that have been printed in the past 24 hours:
Yet the company says this….
“We are particularly pleased with our business in China, which reported robust profit growth of 37% driven by both strong unit development and same-store sales growth.”
“Same-store sales grew by 4% and units expanded 14%, while restaurant margins were at a record level of nearly 27%. All combined to generate robust profit growth of 37%.”
“As we review a few of our highlights, let’s start with China. We had a very strong Chinese New Year holiday. This led the first quarter system sales growth of 15% including same-store sales growth of 4%. Sales were solid across the country including the high export regions.”
“We expect moderate same-store sales growth in China in the second quarter.”
“We do not expect China’s exceptional margin performance in the first quarter to continue”
Granted, the numbers from China were very strong and provided an upside to the quarter despite the lackluster performance in the U.S. business. Other than printing a 4% same-store sales figure, what leads you to believe that Yum issues in China are behind them?
As I wrote yesterday, we have been short YUM, which has been the wrong call, particularly into first quarter numbers, which came in better than both sales and earnings expectations. That being said, I continue to have my concerns, largely related to what I recognize as overly aggressive unit growth in China and profitability issues in the U.S.
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