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GS: Risk Management Update

I had a solid exchange with Bernstein’s Brad Hintz on GS this morning on Bloomberg. You can watch the YouTube of that discussion and tell me whether you think he agrees with me on the misunderstood risks associated with regulating Goldman’s fixed income and derivatives businesses. For now, Mr. Market says lower lows for the stock.

 

Our intermediate term TREND line of support (prior to last Friday’s news) is now significant resistance and our updated immediate term TRADE line of support (dotted green line in the chart below) is registering as a lower-low ($147.89) versus the prior YTD lows established in February.

KM

 

Keith R. McCullough
Chief Executive Officer

 

GS: Risk Management Update - gman


MAR 1Q2010 CONF CALL "NOTES"

MAR 1Q2010 CONF CALL "NOTES"

 

 

“In the first quarter we welcomed increasing numbers of business guests to our hotels as travelers got back to work in most markets around the world. While first quarter room rates were generally lower than last year, as occupancy levels continue to improve, we see higher room rates on the horizon. With stronger demand and meaningful unit growth, fee revenue and earnings per share exceeded our expectations. 2010 is shaping up to be a good year."

- J.W. Marriott, Jr., chairman and chief executive officer of Marriott International

 

 

HIGHLIGHTS FROM THE RELEASE

  • Corporate room nights for the Marriott brand in North America rose 16% in 1Q2010 as business demand strengthened dramatically. 
  • 23% of company-managed hotels earned incentive management fees compared to 25% in 1Q09. Approximately 60% of incentive management fees came from hotels outside North America compared to 54% a year ago.
  • Owned, leased, corporate housing and other revenue, net of direct expenses, declined $1 million in the 2010 first quarter to $12 million, primarily reflecting the impact of lower operating results in owned and leased hotels partially offset by $4 million of termination fees.  
  • Timeshare development revenue, net of expense, benefited from stronger demand, higher closing efficiency, favorable reportability and lower marketing and sales costs.

 

CONF CALL

  • RevPAR for MAR branded was -8.5%, -3.1% and 7.1% in Jan, Feb, and March, respectively.  Ritz results were even better.
  • In March (Period 3) corporate room nights rose 21% and premium room nights increased 28%
  • Weekend room nights increased over 6%
  • Room rates declined only 3% in the 3rd period - due to better mix of premium product and more corporate travel
  • Internationally March results increased 10% (included in their 2Q results)
  • Stronger RevPAR results in China reflected maturing of their hotels and strong domestic demand
  • Middle East constant dollar RevPAR fell 8% in March.  Egypt RevPAR grew 12% in the quarter. Caribbean, like NA, had a stronger March. 
  • Ritz Carlton RevPAR was up 17% in March
  • Last year's cancellation fees negatively impacted margin comparisons on the owned/leased side
  • Booking window is still very short and projecting is very difficult
  • Expect average rates to start showing positive growth soon
  • Contract sales in timeshare - excluding cancellation - showed 10% growth. Closing efficiency rose to nearly 11% from 7% last year.  Rental business RevPAR rose meaningfully as well.
  • Timeshare is benefiting from stronger rental revenue, contract sales, and lower G&A
  • Signed 6,000 rooms in the quarter and 1,000 where canceled from the pipeline.  Autograph has 5 more open projects now.  They have another half a dozen that are in conversion talks.
  • Little debt is available for new construction and they don't expect to see meaningful credit availability.  Supply growth should continue to slow
  • Expect their pipeline to be slightly higher at year end then YE 2009
  • In Period 3, group booking rose for the first time in a while as attendance expectations continued to rise. Improved mix should also help pricing.  They are increasing rates in select markets.
  • G&A for 2Q2010 should total $150MM - a 10% increase y-o-y
  • 2010 securitization will likely be smaller than present years given that 50% of customers are paying cash.  Only 1 sale is expected in 2010
  • Expect higher than normal stock exercises this year given that $5MM options are expiring so there should be more form 4 filings (ie share count will rise)
  • For next quarter, they will publish their earnings release on July 15th and hold their call on the 16th to allow more time to digest the results. Will also hold an analyst day on Oct 27th in NY at the Marriott Marquis

 

Q&A

  • Looking at April - they are just slightly below on rate for Ritz - expect to be rate positive "soon" in the second quarter
  • Estimate that FY rate is still down from 09, but that occupancy is up sufficiently 
  • Their sliver investments are primarily driven by conversions.  As transactions pick up in the space, so should their sliver investments. Anticipate total investments of $300MM in "sliver/equity" investments
  • Incentive fees - in many cases hotels won't be paying fees in until 2011/2012 
  • Will they restart share repurchase or accelerate timeshare development?
    • Still rich with timeshare inventory - so there is little need to invest there in the foreseeable future
    • Will have to wait and see on share repurchasing
    • They are more excited about deploying capital to grow their business
  • Their numbers will still be down mid teens from peak in 2007
  • Generically, they are not seeing a return of cost buildup in their hotels yet
  • There was zero management executive compensation in 2009 - which will get accrued throughout the year. 
  • Openings of newly constructed hotels in the US will be down materially in US but still high internationally.  NA growth will depend on conversion activity (hence their $300MM of sliver money on the sidelines)
  • Group revenue pace is tracking down 2%: room nights are up 1.7% but ADRs are down 3%. Group revenues should be up over next few quarters - up nights down rates still.  New group business should be at higher rates - but there is a lag there. 
  • The more RevPAR moves, it will start to relieve some pressure on their partners - but there will be a number of distressed issues in their owner base either way
  • Incentive fees will grow with RevPAR growth, growth in units, and growth where hotels are already payers... only lag is getting hotels that aren't paying above the watermark
  • Timeshare - 75-80% of their sales are traditional timeshare segments. 45-50% of those customers are current owners or referrals.  Still doing some discounting but are moving prices up where the opportunities exist.  Rental programs of Villas have also moved up by 9% as well.  They are not incentivizing people to use their financing as they did in the past - currently it's in the 40-45% range
  • ROIC is what they look at a lot to measure the business. Timeshare ROIC's aren't acceptable and hence they aren't investing there - and rather they are liquidating for now.  They have a lot of time to decide what they want to do with the timeshare business from an investment standpoint
  • Impact of new healthcare legislation for MAR.  They have some young employees that choose to be uninsured - eventually they will have to get insured - and the cost of that isn't that high - 10's of MM vs. hundreds. Beyond that, there are open questions around open enrollment about double coverage for married employees and making sure that their healthiest employees don't seek healthcare coverage elsewhere
  • ADR growth is driven by mix shift and actually raising of rates in certain locations - NYC, DC, Boston, Amsterdam, London, etc (usual suspects)
  • How is occupancy impacting costs? First it's adding hours, but it will add FTE's in the future. Hope to be able to maintain hours per occupied room.  Think that there shouldn't be much management growth as they add occupancy
  • 1/3rd of the increase in fee guidance was driven by better incentive fees - they expect incentive fees to be up 5-10% for the year
  • Delta made a comment that the level of business travel is back to 2007 levels...
    • Don't think that they are back to peak but they are getting there... 
  • How much occupancy gains can they get before seeing cost creep up?
    • Assume as occupied rooms grow, so will variable labor
  • Too early to tell what the impact is of the Icelandic volcano impact?
    • Initially, it's positive as people are stuck, away from home, but new demand is usually impacted until people resume travel
    • It's typical net net negative

PENN 1Q2010 CONF CAL "NOTES"

Solid EBITDA and EPS out of PENN this morning.  Revenues were a little light but that should’ve been expected, particularly with Majestic out there recently calling for PENN to miss.  Margins were much better than we thought which drove the positive $5.5m and $0.09 EBITDA and EPS, respectively, variance from our estimate and we were higher than the Street.  As we suspected, management’s 2010  guidance of $1.00 was too low as they raised full year guidance to $1.13.  Smartly, they did not raise near term expectations too high as they guided Q2 near consensus EBITDA of $141 million.

 

 

"NOTES" FROM EARNINGS RELEASE AND CONFERENCE CALL

 

"Our $883 million planned share of investment in facilities in new markets is expected to deliver attractive EBITDA returns based on several factors, including a first mover advantage in Maryland, the lack of nearby gaming alternatives in our Ohio markets and our focus on matching capital spending to the size of the addressable adult population bases and gaming tax rates.  We believe that by prudently managing our property portfolio and competitive positions in current markets while simultaneously pursuing a range of new opportunities to significantly expand our operating platform and returns, Penn National can deliver significant growth as the economy and consumer spending rebounds which will in turn create new value for shareholders."

 

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming

 

 

HIGHLIGHTS FROM THE RELEASE

  • Weather impacted several of PENN's properties
  • PENN is implementing strategies to strengthen margins in the current environment through a corporate and property level focus on effective marketing programs and spending, other cost reductions, and staffing rationalizations. However, until revenues begin growing they won't be able to attain prior level margins
  • PENN repurchased 225 shares, or $22.5MM face value, of the Series B Redeemable Preferred Stock at a substantial discount.
  • Guidance changes:
    • One less month of table games at WV
    • Addition of 4 months of table games in Pennsylvania and two months of operating results from Hollywood Casino Perryville
    • $2MM of additional pre-opening expenses
    • $3.1MM of additional D&A expense with $52MM to be incurred in 2Q2010
    • $1.2MM of additional stock comp expense, with $6.8MM to be incurred in 2Q2010
    • Higher blended tax rate of 45%
    • Lower share count
    • 2Q 2010: NET REVENUES - $588.3MM, EBITDA - $141.5MM, NET INCOME - $27.2MM, and DILUTED EARNINGS - $0.26 EPS
    • FY 2010: NET REVENUES - $2,406.4MM, EBITDA - $563.0MM, NET INCOME - $107.7MM, and DILUTED EARNINGS - $1.00 EPS

 

CONF CALL

  • CEO comments--quarterly results are "okay"
  • Focus on improving on margins and on construction/new development pipelines
  • Bad weather attributed to relatively weak performance at Lawrenceburg and Charles Town
  • Hard to say any changes in trend in consumer behavior

Q&A

  • Pennsylvania casinos--weather impact of few million dollars in February; "clean revenue quarter" for Penn National
  • Update on Ohio referendum: confident in approval of address change; May 4 election--optimistic
  • incremental EBITDA for Pennsylvania and WV
    • tables games original expectations is being met; will take some time to stabilize table games in order to see any results.
    • April weather has been decent, maybe too much sun
  • Mississippi/Louisiana--lot of softness in the region, not many signs of recovery - last year these were the strongest regions
  • Unconsolidated affiliates-- Ohio and Kansas JV arrangements
  • Station's assets--looking at it but Las Vegas locals market is still a regional opportunity.  Thinks BYD's bid is high
  • Hold High-yield bonds of other gaming companies?
    • Small amounts kept
  • Maine table games possibility--efforts have been futile at this time, hopeful for new legislation in November
  • Margin improvements in guidance?
    • discontinued marketing programs will impact revs
  • No change in LV operating environment in last 3 months yet investor sentiment driving up multiples.
  • Still believe Columbus and Toledo will open in 2H 2012.
  • Any change in slot replacement?--not much change.... 1/6 or 1/7 of core. Maryland--state will provide slot machines
  • More customers coming but spending less.  Program-specific, customer-targeting marketing tactics contribute to drive higher expected margins for FY.
  • $2.3 billion debt
  • Capitalized interest: 1.1MM in Q1
  • Cap interest guidance:  2Q - $1.8 MM cap interest.  $7.1MM for all of FY 2010
  • Corporate overhead: projecting 68 MM run rate for FY 2010
  • Tax rate was lower due to favorable 1048 ruling on Pocono sale and few non-deductible expenses (referendum costs)
  • WV/Penn Tables
    • meaningful marketing expenses uptick?  yes, higher advertising expenses. june/july/and partially august
    • media items focused on table games; doubling up existing advertising in those states.
  • Atlantic City market--continue to see oversupply, lack of stability, no interest right now
  • CapEx budget:  2Q 2010 - $85.7MM in project capex and $23.6MM in maintenance, 2010 - $439.8 MM and $94MM, respectively
  • paid $22 per share for preferreds... no buyback expected at this time.
  • Weak revenue guidance: timing of new capacity coming on or bearish view on top properties?
    • were overly optimistic on revenues, not reflection of overall business trends, instead a refinement of forecasting methodology
  • PNK in Baton Rouge project--believes $225MM market will continue to contract, probably $200MM in end of year, do not want to throw good capital in oversupplied market. $250 MM project with high interest expense, bad for PNK.
  • Maryland table games update:
    • No serious legislative proposals yet; governor wants to see the performance of existing operations (e.g. Cecil County) before acting.

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GIL: KM Short, Based on Post Q2 Headwinds

Keith added GIL to his list of recent shorts in retail before the close yesterday. It's less a call on the quarter (we actually expect a strong one, even without extrapolating HBI’s blowout), rather on what’s ahead thereafter. Following a great set-up in Q1, it gets even better in Q2 with favorable gross margin compares down 1300bps (mix, manufacturing, and cotton). Looking through to the next few quarters the tailwinds ease and become stiff headwinds in a hurry. With cotton prices testing new highs intraday (~$0.85), continued outperformance will require strong consumer demand to offset elevated commodity prices. As a reminder, GIL’s cotton exposure accounts for ~33% of COGS.  Recall that while Hanesbrands frequently cites its ability to increases prices as an offset to cost pressures, Gildan is in a less defensible position given its lack of branded product.

 

 

GIL: KM Short, Based on Post Q2 Headwinds - GIL S 4 10


Q2 THEME - Inflation’s V-Bottom - PPI is HOT

Today’s PPI number gives us another chance to reiterate one of our key 2Q themes - Inflation’s V-Bottom.

 

Stagnating consumer confidence figures suggest that most consumers don’t trust the direction the country is going in.  We are in agreement with that sentiment and think that most politicians lie and Washington’s free money man, Ben Bernanke, can’t see inflation.  Or, at least, he doesn’t want to -- until he has to.

 

The PPI rose 6% year-over-year in March and was up 0.7% sequentially - more that the 0.5% consensus estimate on Bloomberg.  Today’s PPI report recorded its largest annual gain since September 2008 and was up on the back of a 2.4% rise in food prices, its sixth straight monthly increase. The increase can be attributed to a 49.3% increase in prices for fresh and dry vegetables (meats and eggs also contributed to the increase in prices for finished consumer foods.)

 

As an aside, I point this out as my beloved Restaurant stocks are white hot on the back of accelerating sales trends and higher margins on lower food costs, a trend that will come to an end in 3Q10!

 

Look no further than the chart of PPI below to see Inflation’s V-Bottom.

 

Howard Penney

Managing Director

 

Q2 THEME - Inflation’s V-Bottom - PPI is HOT - bernanke


CLAIMS FLASHING WARNING SIGNALS OF TURBULENCE AHEAD FOR XLF

 

Each week we provide an update on initial jobless claims because we think it's one of the best leading indicators for the credit-sensitive names we follow and history has shown there to be a very high correlation. The reality, however, is that there has been quite a divergence that has taken place in the last four to five months.

 

Let's just get this week's data out of the way first. Claims for the most recent week, out this morning, dropped 24k to 456k from 480k (revised down 4k) in the prior week. This caused the rolling 4-week average to actually increase by 3k to 459.5k from 456.8k.

 

We hate to be the ones to take away the punchbowl, but consider this. As the charts below show, at 456,000, claims are at the same level they were at on 11/28/09 (457,000). In other words, claims have gone nowhere in almost five months. Compare this with the colossal improvement in claims from April 2009 through November 2009. In stark contrast to recent claims trends, the XLF has barreled higher some 17% over the last 4.5 months, with high-beta Financials rising by multiples of this.

 

While we've been patient in our weekly posts, waiting for claims to resume their downtrend, we think that enough data (20 weeks now) is in to begin to warrant some caution around prospective performance in the XLF. If claims continue to trend sideways at these levels, it will be difficult, and, frankly, unlikely, for Financials to continue to move higher if the backdrop of further employment gains stagnates. Because claims are a leading indicator, we treat them with greater significance than the unemployment rate. We have other reasons to be cautious heading into the seasonal summer doldrums, namely renewed housing concerns. Couple this with the blowout 1Q10 results so far, and layer on the marked increase in consensus expectations around normalized earnings, and it is starting to feel like the Financials are better positioned for correction than further gains. We don't want to be alarmist with this call, but the reality is that it was the inflection in jobless claims that marked the bottom at the March 2009 lows, and claims are now sending us a new signal so it's time to pay attention.

 

As a final word around the census, we've been bullish on the lift the census would add going into its peak employment months, but we're almost at the point now where it's time to start focusing on the drag it will create on the backside as the peak month of employment, May, is just 8 days away.

 

CLAIMS FLASHING WARNING SIGNALS OF TURBULENCE AHEAD FOR XLF - j1

 

The following chart shows the raw claims data.

 

CLAIMS FLASHING WARNING SIGNALS OF TURBULENCE AHEAD FOR XLF - j2

 

The following chart shows the census hiring timeline.

 

CLAIMS FLASHING WARNING SIGNALS OF TURBULENCE AHEAD FOR XLF - j3

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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