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H 1Q2010 THOUGHTS

H 1Q2010 THOUGHTS

 

 

Hyatt reported very strong numbers this morning.  The biggest upside surprise came from the huge owned RevPAR number- which of course carried through to better EBITDA on the owned portfolio.  Below are some of our thoughts on the less obvious stuff in the quarter.

  • Hyatt reported $112MM "Adjusted" EBITDA which included an $8MM settlement related to a vacation ownership property.  We would argue that this should be deducted from "Adjusted" EBITDA as it's not recurring in nature. 
  • Hyatt's Adjusted EBITDA also includes $16MM of "other income" which is comprised of "below the line stuff" which is simply not "core" to their business and in our opinion "noise"
    • "below the line stuff ": Interest income, gains on marketable securities, income from cost method investments (not JV's), FX gains/losses, debt settlement costs, provisions for hotels loans, etc
  • Owned EBITDA of $82MM includes $14MM of JV EBITDA, which implies that clean EBITDA from Owned and Leased hotels was $68MM in 1Q2010 compared to $54MM in the 1Q2009 - an impressive improvement
    • EBITDA margins on owned and leased increased 2.1% on a 9.8% increase in RevPAR that was completely occupancy driven
    • CostPAR decreased 5.3% y-o-y after declining 2.1% y-o-y in 1Q09.   The comparisons become more difficult going forward as 2Q09-4Q09 had 6.0%, 7.8%, and 5.4% declines in CostPAR
    • Looks like F&B and other revenues grew about 6% y-o-y
  • At current rates, currency will continue to positively impact Hyatt's results until 4Q
  • Management & franchise fees were actually a little below our expectations
    • North American Full Service RevPAR was a bit lower then we estimated, while Select Service & International were better 
    • Base fees were as expected, but they were a bit lower as a % of estimated mgmt revenues
    • Incentive fees were $2MM light of our estimate and were flat y-o-y after being up 4.2% last quarter
    • The implied costs associated with the global management and franchise business were flat y-o-y at $12MM. Margins were up to 79%. 
  • SG&A was up a lot more than inflation.  As a reminder, adjusting out the Rabbi Trust numbers, clean SG&A was $246MM last year.

Trichet: He Who Sees Inflation

No surprise with Jean-Claude Trichet keeping rates unchanged this morning, but definitely a surprise to some of the US economic doves who are living in the myopia of the moment that there are no global inflation pressures.

 

Trichet said 3 things on inflation:

  1. Inflation is higher than he expected (oil prices cited as leading indicator)
  2. Global inflation pressures continue to mount and “may increase”
  3. “Price risks tilted to the upside.”

Now this view is an easy one to have. All you need are live Bloomberg quotes on your analytical machines. Its also a view that can and will change – because prices do. Our views on deflation in 2009 supporting a bullish stock market environment and our current bearish views on US stocks due to inflation are direct outputs of the direction of one factor – price. As prices change, we will.

 

Piling Debt upon Debt upon Debt to solve for these European liquidity issues will also end in long term inflation. See chapter 12 of Reinhart/Rogoff for empirical data supporting the view that accelerating long term inflation will continue to be the result of a world that’s resorted to printing fiat currencies.

 

Keith R. McCullough
Chief Executive Officer

 

Trichet: He Who Sees Inflation - 1


GC 4Q09 "YOUTUBE"

GC 4Q09 "YouTube"

 

 

TRENDS & OUTLOOK:

  • "February 2010 revenues in BC declin[ed] by 7.6%, when compared to last year.  In January 2010 for comparison, BC revenues were essentially flat, when compared to January 2009."
  • "In the most recent fourth quarter, weather was fair and construction disruption was minor, yet consolidated revenues were basically at the same level as last year.  So the burden of the weakened economy continues to weigh upon our markets."
  • River Rock Commentary:
    • "Since it commenced operation last August, the Canada Line has grown River Rock’s average visitation by approximately 20% with a commensurate increase in slot coin-in of approximately 10%."
    • "Table drop, slot coin-in and visitation witnessed double-digit improvements when compared to February 2009.  Unfortunately though, the benefit of these increases was offset by a table hold percentage of 14.9%, well below River Rock’s historical average."
  • "The results produced since View Royal’s redevelopment last year have been disappointing to-date, we believe it has mitigated what would otherwise have been a more significant decline."
  • Vancouver Island margin sustainability at 61.8%?
    • "With the expansion that we had at View Royal, we were actually disappointed with that to be quite honest...we feel comfortable with that EBITDA margin that’s there and hopefully can continue to sustain that going forward."
  • "The expansion at Georgian Downs has also been less successful than anticipated."
  • "We anticipate that our development CapEx for 2010 will be approximately $15 million while an initial $10 million will be devoted to maintenance."
  • "Revenue growth would enhance the EBITDA margin and incremental revenues at the margin are fantastic for us.  And on slots, they have 80% margin, on table games, which has some labor, they’re going to be 55%, 60% margin"

 

DEVELOPMENT & INITIATIVES UPDATE:  

  • "Georgian Downs added 400 new machines with a further 150 to follow by the second quarter".
  • "In Nova Scotia, we’ll refresh approximately 500 games by the end of April, replacing more than 50% of those properties’ offerings.  The refresh product will both assist in attracting new patrons and better satisfy existing ones."
  • "In February....we reengineered River Rock’s main gaming floor both to better present the Canada Line facing entrance and create 8,000 square feet of additional gaming space within the property’s existing footprint.  This allowed River Rock to increase its slot and table capacities by more than 15 and 10% respectively."
  • "Across our portfolio, we are beginning to develop more structured and effective patron tracking and rewards
    programs.
    • "River Rock recently introduced patron gaming funds.  These accounts allow players to electronically transfer funds directly to the property and are one of several privileges we are now extending to River Rock’s VIP patrons."
    • "We’ve also established a dedicated area of the property for slot VIPs and introduced a slot VIP program."
    • "At Boulevard, we have recently augmented our VIP table business."
    • "In order to publicize all three of our improvement initiatives, Great Canadian will amplify its marketing efforts throughout the year.  Although this will generate minor increases in operating expenses, we will utilize the targeted approach and communicate with our patrons in a way that they see value."

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INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED

We take the data on its merits as it comes in. Initial claims fell 7k last week to 444k from 451k (revised up 3k). This brought the rolling four-week average down by 5k to 458.5k. While this marks the third consecutive week of improvement the fact remains that at 444k, claims are still where they were in late 2009, 4-5 months ago. We've been highlighting for the last few weeks the fact that a divergence has emerged between claims and XLF performance. For now that remains the case, although XLF has given back 6.6% in the last 15 trading days, so the divergence appears to have narrowed (albeit for unrelated reasons, i.e. Greece/EU concerns).

 

We remain concerned that without significant improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 45-70k above that level - roughly where we've been for five months now.

 

As a reminder around the census, we had been bullish on the lift the census would add going into its peak employment months.  However, now that we're into May, it's time to start focusing on the drag it will create on the backside.  

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - rolling

 

The following chart shows the raw claims data.

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - reported

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment.

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED

We take the data on its merits as it comes in. Initial claims fell 7k last week to 444k from 451k (revised up 3k). This brought the rolling four-week average down by 5k to 458.5k. While this marks the third consecutive week of improvement the fact remains that at 444k, claims are still where they were in late 2009, 4-5 months ago. We've been highlighting for the last few weeks the fact that a divergence has emerged between claims and XLF performance. For now that remains the case, although XLF has given back 6.6% in the last 15 trading days, so the divergence appears to have narrowed (albeit for unrelated reasons, i.e. Greece/EU concerns).

 

We remain concerned that without significant improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 45-70k above that level - roughly where we've been for five months now.

 

As a reminder around the census, we had been bullish on the lift the census would add going into its peak employment months.  However, now that we're into May, it's time to start focusing on the drag it will create on the backside.  

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - rolling

 

The following chart shows the raw claims data.

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - reported

 

The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move into June, creating a headwind for employment.   

 

INITIAL CLAIMS IMPROVE SEQUENTIALLY, BUT REMAIN ELEVATED - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


Catching the Contagion

“Prediction is very difficult, especially when it is about the future.”

-Niels Bohr

 

Keith has taken his young lad, wife, and daughter up to his ancestral home of Thunder Bay, Ontario, so I’ve been handed the baton on the Early Look.  In a similar spirit, I thought I’d quote someone from the land of my ancestors, Denmark.

 

One would think that Niels Bohr was a Danish version of Yogi Berra given the quote above.  In fact, Niels Bohr was a physicist.  Well, much more than a physicist really, Bohr was the Nobel Prize winner in Physics in 1922 for developing the Bohr model of the atom.  

 

The man basically discovered how the most discrete parts of life work, and for such fine work his home country put him on a postage stamp, put him on the 500 kroner bill, had two elements named after him, and, get this, he even has an asteroid named after him.  (As an aside, I’m starting  to think my good friend and 12-time Olympic medalist in swimming, Jenny Thompson, got the raw end of the deal when she only got a swimming pool in her hometown named after her.)

 

Bohr also developed the principle of complementary, which states that “items could be separately analyzed as having several contradictory properties.”  As we stare at our screens this morning trying to predict the future, this might have been his most valuable contribution.

 

While Europe is up small this morning, Asian got pounded over night.  China is down more than 4% to a 8-month low and the Nikkei in Japan is down almost 3.5% (after a holiday earlier this week), its largest single day decline in over a year. 

 

Yes, friends, the world is starting to have a freak out moment about sovereign debt.  Global markets are getting pounded, Spain is seeing its cost of debt rise to levels not seen since the global financial crises of 2008, and Moody’s has piled on this morning saying contagion could threaten banks in “Portugal, Spain, Italy, Ireland and the U.K.”.  While I woke up with a cold, the world, it seems, has Caught the Contagion.

 

When the world is freaking out though, it’s best to go back to science and facts when trying to predict the future.  As it relates to the immediate term future, I’m going to focus on Bohr’s principle of complementary.  These freak outs usually create the best buying opportunities, and within the European Union our favorite set up of long Germany and short Spain is one to focus on as they have “very contradictory properties”.

 

I’ve asked our European Analyst Matt Hedrick to provide a brief overview of some key economic metrics for these two countries, which are outlined below.

 

On Spain:

  1. Spain’s unemployment rate is north of 20%, which is almost 2x the EU average.  The unemployed consists largely of recent immigrants (unemployment rate closer to 35%) and construction workers, which will be difficult to re-employ, and thus will keep unemployment high for some time.
  2. Spain’s budget deficit-to-GDP was 11.2% at the end of last year and has expanded this year.  This is well beyond the danger zone of 10%, which typically highlights the increased potential for a debt default and increased borrowing costs.
  3. Spain’s economy at its peak was more than 20% driven by construction and real estate, which will not rebound any time soon.  As a result, growth in the “recovery” has been anemic and GDP is expected to decline -0.4% in 2010.

On Germany:

  1. German unemployment has held steady in the low 8% level over the past 12 months, with recent improvement coming in last two months, falling to 8.0% in March and 7.8% in April. This outperformance over the Eurozone average (currently at 10%) is due to the success of the government’s short-time work program (Kurzarbeit), which buffered the impact of the economic downturn on unemployment.
  2. Germany’s budget deficit stands at 3.5% of GDP.  We see this low figure as an extreme advantage, especially as the cost of capital rises for European states over the medium term. 
  3. The decline of the Euro versus the USD stands to boost Germany’s large export base. Year-to-date the Euro is down 10.8% versus the USD. While GDP is forecast to grow under 2% this year, we expect Europe’s largest economy to outperform, especially as many of its peers are mired in sovereign debt.  

While the points above are somewhat of a science in and of themselves, we’ve also represented this Sovereign Dichotomy in our Chart of the Day attached below.  This chart outlines the divergences of unemployment in the two countries.  Spain’s unemployment parallels that of economic leaders like Sudan and the West Bank, while German unemployment is amongst the lowest in the industrialized world and improving.

 

When the world Catches the Contagion, volatility will spike (as it has) and investors sell stocks, assets classes and countries indiscriminately.  A quick application of Bohr’s principle of complementary tells the science-fearing team at Hedgeye one thing, not all members of the European Union are created equal.

 

“Prediction is very difficult” . . . especially when we make it so.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

Catching the Contagion - Spain v Germany Unemployment

 


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