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PNK should beat the consensus Q1 estimate and 2010 probably needs to go higher. The stock has had a great run but management seems to be making all the right moves.



Q1 should look much better than Q4’s kitchen sink.  We have our own theories on why Q4 was so ugly but that’s yesterday’s news.  Top line in Q1 will not look strong but margins should be much improved.  This is not exactly ground breaking commentary, however.  The stock is up 66% since we highlighted the potentially strong quarter and positive catalysts in our 3/1/10 note, “PNK: Is the Worst Over?”  However, 2010 consensus EBITDA of $179 million looks low, so there still might be some gas in the tank.


For Q1, we are projecting $45.8 million of EBITDA, about $5 million ahead of the Street.  We think the main risk to our number will be if the company wants to be conservative with a new CEO at the helm.  For the year, we are at $188 million versus the Street at $179 million.  On the conference call, look for some important commentary on the cost side.  Here is our analysis:


How much can PNK really save?

  • In 2009, PNK spent $12.1MM maintaining the AC land
    • “In late 2008, we decided to suspend substantially all development activities in Atlantic City indefinitely.  The continuing pre-opening and development costs include property taxes and other costs associated with ownership of the land.” 
  • Getting rid of the airplane and consolidating the 3 offices will save them another $2.5MM/year 
  • They renegotiated their insurance policy – saving another $1MM 
  • Marketing expenses may be the largest saving for PNK, particularly in Louisiana – another benefit from jettisoning Dan Lee 

If we are right on the cost savings (without factoring in marketing cost reductions), PNK would have up to $15 million in potential cost savings this year plus marketing reductions.  We are not sure if the AC costs will be shown in discontinued operations until they sell the property.  If you add $22 millilon in net River City contribution (net of Lumiere Place cannibalization) plus the cost savings to the $173 million in EBITDA from last year, it's easy to see why we think the Street's 2010 estimate of $179 million looks conservative to us, even with degredation at the other properties.



Q2 2010 Themes: Sovereign Debt Dichotomy

As we look at the macroeconomic environment ahead what’s certain is that investor fears associated with sovereign debt default (globally) will persist. Greece, a poster child of years of government budget mismanagement and excesses, has been the obsession of the media, yet even countries with historically top credit ratings (US, UK, and Japan) are beginning to feel the spotlight as they too are among the proverbial debt bloated “PIIGS”. We’d point you to Reinhart and Rogoff’s book “This Time is Different”, for a thorough analysis of eight centuries of global sovereign default, and note that the current cycle of sovereign default is just ramping up, and we believe will last far longer than most expect. What’s clear is that certain countries are “sitting” better than others from a fiscal balance sheet perspective, countries we’d also expect to outperform their deeper debt-laden peers as we look out to 2010, a theme we’ve named the Sovereign Debt Dichotomy.


Q2 2010 Themes: Sovereign Debt Dichotomy - m1


With this dichotomy to play out across asset classes, in summation we’ve positioned ourselves in our model portfolio to take advantage of owning High Grade versus High Yield. We’ve represented this conviction through owning low beta sectors like Healthcare (XLV) to countries with more fiscally conservative balance sheets like Germany (EWG). Conversely we’ve shorted Municipal Bonds (MUB) and High Yield Corporate Bonds (HYG) - to take advantage of yields pushing higher as obligations mount- to shorting countries like Spain (EWP) with looming sovereign debt issues and glaring negative fundamentals that could stretch over the TAIL (3 years or less) duration. We’ve also seen carry-over to a weakness in the Euro versus the USD, which we’ve taken advantage of by shorting the Euro via the etf FXE.


As an example of our Sovereign Debt Dichotomy theme and the divergence of economic performance across countries, below we lay out our case for investing long in Germany and short in Spain.





Position: we initiated a long position in Germany via the etf EWG in our model portfolio on 4/7/10.


The anchor of our bullish case for Germany remains the fiscal conservatism of German Chancellor Angela Merkel and her government, and improving trends across fundamentals, especially exports. 



Fiscal Conservatism


Germany’s budget deficit stands at 3.5% of GDP, a clear differentiating factor compared to the low double digit budget deficit figures witnessed in countries like Greece, Spain, Ireland, and the UK (chart). We see this as an extreme advantage, especially as the cost of capital looks to rise for European states over the medium term. 


Q2 2010 Themes: Sovereign Debt Dichotomy - m2


A recent example of Germany’s fiscal conservatism can be seen in Merkel’s initial decision to support a unilateral IMF-led campaign to aid Greece. Although the position was heavily chastised by the European community, it was really a pragmatic decision born out of her fiscally conservatism:  not only did she not want to reach into German coffers to fund Greece’s debts, but also by suggesting that Greece continue to work to clean up its own “house” (budget deficit) before monies were placed on the table, Merkel attempted to not diminish the incentive of the Greek government to issue austerity measures to shave its imbalances. 


As we now know, Europe has agreed to provide a three year €30 Billion loan to Greece at favorable rates (estimated at 5% or 200bps below current market prices for Greek debt) and the IMF guaranteed to kicked in an additional €15 Billion should Greece need (or request) the loan. In our opinion, we believe the loan is imminent.  In any case, Germany’s position on Greece—which differed from her European colleagues such as French President Sarkozy and ECB President Trichet—is representative of a cultural aversion to debt, from personal consumption at the individual level up to spending at the governmental level. We believe it is this conservatism which will benefit the country’s growth prospects over this year and beyond.


First and foremost, the German economy offers competitive growth and safety.  And as Germany differentiates itself from the sovereign debt crisis brewing across certain states in Europe, and globally, we believe Germany is in a favorable position as it will not have to sacrifice growth to correct a leveraged balance sheet (or default), as the credit market remains relatively stable despite Germany’s pending contribution to Greece. Below we offer some of the fundamentals we track that confirm an improving economic trend that we expect to continue.



Fundamental Strength


  • Exports rose +5.1% in February month-over-month. The chart below shows an improving trend in exports, up +9.4% in February Y/Y, with favorable comparisons for the months ahead as global demand melts higher. Additionally, carry-over weakness in the Euro versus the USD should be a net positive for the export-led economy. We guide to trading the Euro between $1.33 - $1.35 with TREND (3 months or more) resistance at $1.39 and TAIL (3 years or less) resistance at $1.42.

Q2 2010 Themes: Sovereign Debt Dichotomy - m3


  • German Factory Orders rose +24.5% in Feb. Y/Y; while certainly a moonshot of a number, we note the comparison was off the trough a year earlier of -38.0%. January also saw a sizable annual improvement (+20.6%) versus -36.8% in Feb. ‘09.  Orders are confirming an intermediate positive trend.
  • A stable inflationary environment for consumers and producers continues with CPI at +1.1% in Mar. Y/Y and PPI at -1.5% in Mar. Y/Y. Additionally German Manufacturing and Services PMI surveys shows improvement over recent months.
  • Unemployment currently stands at 8.0% and the unemployment rate has held steady for the last months.  Despite the persistent fear of rising unemployment that we’re seeing across many European countries, the stability in the number has helped to boost consumer and business confidence; credit should be given to the successes of the short-term work agreements (Kurzarbeit) subsidized by Merkel’s government.

Q2 2010 Themes: Sovereign Debt Dichotomy - m4





Position: we initiated a short position in Spain via the etf EWP on 4/9/10 and covered it on 4/21 for a trade. Our negative bias continues.


In contrast to Germany we see significant downside risk for Spain over the medium to longer term, including such structural and fundamental issues as: 1.) the aftermath of the housing bubble and high unemployment, 2.) the banking situation, especially its savings and loan banks, or Cajas, and 3.) its debt payment schedule ahead.



Housing: From Boom to Bust


Our bearish outlook on Spain is heavily underpinned by the structural weakness in the housing market and the rise in the country’s unemployment rate. With the bursting of a decade-long housing bubble beginning in 2007, Spain has lost a main driver of the country’s previous economic growth and sent many of the same people that were employed by the construction industry to fuel the housing boom into unemployment. At just shy of 20%, Spain’s unemployment rate alone is astronomical compared to the Eurozone average of 10%. The carry-over effects of a high unemployment rate (more generally) have and will lead to reduced government revenue and erosion of personal consumption, coupled with the severe wealth destruction caused by the depreciation of housing prices, are all factors we believe will provide a headwind to economic growth.


A recent report from Morgan Stanley suggests that housing prices have declined by 11% from their peak in 1Q08 and the construction sector is down 32% from its peak in 4Q07. Interestingly, the report cites that house prices fell some 20% peak to trough in the UK and -25% in Ireland, inferring that downside potential of another 10% from here remains, an assessment that we’d largely agree with. Further, it’s clear that inventory of unsold homes remains extraordinarily high.  MS tags the number of unsold homes at 1.5 million (or half the number of homes built over the last 5 years) and Banco Santander notes that repossessed properties are currently selling at 20%- to-30% discount to market prices.


Q2 2010 Themes: Sovereign Debt Dichotomy - m5


While an environment of low interest rates has push down mortgage rates and helped to alleviate the collapse in the housing market, and a weaker Euro (for now) has favored exports, we believe further downward pressure remains as Spain works through its high unemployment and negative drag of housing prices. 



Banks: Hostage to the Cajas


The cajas, or the nearly 50 savings and loan banks across Spain, remain a critical puzzle piece to the future direction of Spain. You’ll note that the cajas, which control about half the deposits and loans in the Spanish banking system, were the main lenders to real-estate developers and the construction industry, contributing some €175 Billion to fuel the housing boom. Therefore with the pop of the bubble, the mainly municipally controlled cajas saw their bad loans rise at an unprecedented speed and level.


Now the Bank of Spain is pushing through measures to clean up these bad loans, a process in which some cajas will be recapitalized, merged, or allowed to fail.  Morgan Stanley suggested that the cajas need “€43 Billion in new capital to plug the hole in their balance sheets from a quickly growing pool of defaults.” Further MS estimates that €76 Billion will be needed over the next 3 years.


If we take these numbers as in the area code of capital required, Spain will have to issue more debt this year. Already Spain has sold €28.2 Billion in bonds this year, one-third of its planned issuance according to the government. While Spain did set up a bailout fund last June, known as the Fund for Orderly Bank Restructuring (FROB), to prop up the banking sector, the FROB with reserves of €12 billion is set to expire in June when the restructuring of the banks was meant to be completed by the government. It’s worth note however, that due to the strict conditions set on the FROB by the EU, there have only been 11 mergers and only 1 caja has drawn on the FROB.


So the limitations of the FROB and the delay from the Spanish government to restructure its banks and cajas are a negative; the road ahead, which could possibly include working with the EU for assistance, is unclear and therefore will likely be interpreted negatively by the market. In any case, the success of the government’s bond issuances to fund the banks (and budget deficit) this year will be crucial. As debt obligations mount, and more attention is cast on the other PIIGS, we could foresee bond yields moving higher. (Note in the chart below that yields spiked for most of the PIIGS in January and February as uncertainty over Greece escalated).    


Considering the headwinds for Spain’s financial industry, we’re comfortable on the short side of Spain via EWP, an etf composed 40% of financials. Of total holdings, 22% is composed of Banco Santander and 6% in Banco Bilbao Vizcaya Argenta, Spain’s largest and second largest banks, respectively.


Q2 2010 Themes: Sovereign Debt Dichotomy - m6



Budget: Delaying Reality


While Spain’s government debt to GDP ratio of 55% looks healthy compared to Greece’s at over 100%, Spain’s hefty Federal budget deficit remains an outstanding risk.  At 11.2% of GDP as of 2009, the government has said it plans to reduce its budget deficit to 9.5% this year and is on track to meet demands by the European Commission to reduce the deficit to 3% by 2013, a level stipulated for all members of the Eurozone according to the European Growth and Stability Pact.


While Spain is not an anomaly in violating the 3% threshold this year and last, it stands only in the company of Greece, Ireland, and the UK in reaching double digit budget deficit numbers. To reduce the deficit, Spain has called for belt tightening in the form of an increase to the value added tax of 200bps to 18% in July, the end to its €400 tax rebate to low-income households, and higher tax rates to dividend, interest and capital gains that began this year.


Still, the risk remains that while these measures are positive, Spain does not plan to issue its Austerity Package (that aims at cutting spending by more than 2.5% of GDP) until next year, which may be too late. Further, in the near term similar fears as those associated with Greece’s balance sheet problems could domino to Spain (and other peripheral countries) which would cause severe downward pressure on its capital markets.





As we look at potential investment risks of the Sovereign Debt Dichotomy in 2010, we want to own High Grade versus High Debt. We believe owning Germany and shorting Spain is one way to express this theme. While median predictions for Spain’s GDP is +0.4% this year and 1.1% next, we wouldn’t be surprised to see Spain underperform based on the structural and fundamental headwinds, the main being: further downward pressure in housing prices, high unemployment, the challenges of restructuring and capitalizing its banks, in particular the cajas, and debt risk associated with an extended budget balance.


Conversely, we believe the fiscal conservatism of the German balance sheet will help propel the economy as its exports gains steam from a weaker Euro and global demand picks up. The chart below shows our intermediate term TREND (3 months or more) lines for the German DAX and Spanish IBEX 35, and the dichotomy embedded therein. 


Q2 2010 Themes: Sovereign Debt Dichotomy - m7


Already we’ve seen Spanish GDP contract for the past 6 consecutive quarters (Q/Q), currently at -0.15% as of Q4 Q/Q or -3.1% Y/Y, and we expect to see it continue to underperform Germany, which like its neighbor France, officially exited its recession in Q209. YTD the DAX is outperforming the IBEX by almost 1,300bps.


With sovereign default risks in Greece still not in the rear view despite the loan guarantee from the Europeans and IMF (note the chart below of Greek 5YR CDS), we’re positioning ourselves to take advantage of the existing dichotomies we see among global economies. 


Q2 2010 Themes: Sovereign Debt Dichotomy - m8


Matthew Hedrick



COLM: Turning the Corner

It shouldn’t be too much of a surprise with Outdoor Outerwear up 17% YTD according to weekly SportScan data, that this has been a key driver of Columbia’s recent uptick in top-line trends as well as a tailwind for the company’s shares.  In light of improving consumer spending, easing top-line and margin compares over the next 2 quarters, positive trends through Q1 particularly in footwear (~20% of sales – see charts below), and the anniversary of close-out sales that significantly weighed on margins (200bps+), we expect the company to come in at $0.25 – ahead of consensus at $0.21.  Both better top-line and gross margins are key sources of upside. Sources of additional strength could also come from the company’s recent efforts in its direct-to-consumer business, an effort which includes a 20% increase in retail doors since last year and the launch of ecommerce last summer.


We also note that this is one of the few names in apparel/retail that face 5 straight quarters of favorable margin compares beginning now, when most others have only one or two quarters of easy compares remaining.  With EBIT margins halved over the last 2-years, we expect to start seeing the benefit of the company’s re-investment efforts in 2010. We believe tonight’s results will mark the first quarter of margin expansion in the last 10, which may also prove to be a key turning point for company and the shares.


See below for the detailed puts and takes on the quarter:


COLM: Turning the Corner - COLM Q1 Table 1 4 10

COLM: Turning the Corner - COLM Q1 Table 2 4 10


COLM: Turning the Corner - COLM FW Trends 4 10


COLM: Turning the Corner - COLM APP Trends 4 10


COLM: Turning the Corner - COLM S 4 10



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Oracle of Omaha’s Running Insights (kind of)

We’ve been positive on the athletic footwear and apparel space for a while now, with our views primarily expressed through our focus on NKE and FL.  One of the key underlying themes to our thesis is product.  Innovation, excitement, and importantly marketing dollars being pumped into the space is a favorable dynamic, especially when it coincides with an overall pick up in consumer demand.  Importantly, we believe that it is not just the 800 lb. gorilla that will dominate the space over the next couple of years.  Instead as we have said before, we believe innovation, R&D, and marketing will be stepped up across the competitive spectrum. 


This morning we came across a telling article outlining the growth strategy for one of specialty running’s premier brands, Brooks Sports (owned by Berkshire Hathaway).  At just $200 million in global sales with goals to move toward $1 billion, this certainly adds validity to the future growth of specialty running.  Highlights below:


  • The company is taking an aggressive stance on growth after ending 2009 with $200 million in annual revenues.  Brooks’ new and aggressive strategic plan, as outlined by the CEO, calls for a five-fold increase in sales to $1 billion over the next ten years!  Underlying this growth will be a huge step up in marketing, R&D, and promotional activity.  We expect that to achieve these goals, new retail partnerships will have to be made.  RUN by Foot Locker would certainly be a start.
  • In 2010 alone, Brooks’ marketing budget will increase by 42%, R&D will increase by 33%, and promotional spending will increase by 21%.  Clearly Nike isn’t the only company investing in its growth.  Keep in mind that while public data is largely unavailable for Brooks, the company did see a mid-single digit gain in sales in 2009.  Comparisons are not what’s driving these increases.
  • The company believes that innovative product, design, materials, and aesthetics are key to growth, especially in an industry where “everybody is copying everybody.”
  • In another sign that the premium/technical running category remains robust, Brooks’ CEO indicated that U.S footwear sales are up over 25% through early April and their backlog for the remainder of the year is up double-digits. Another positive data point for techinical running, a key category for FINL and increasingly so for FL.

Eric Levine


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.



Keith R. McCullough
Chief Executive Officer


GS: Risk Management Update - gman





“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




  • 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.



  • 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



  • 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

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