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PENN: WHY SO CHEAP?

PENN isn’t the cheapest stock we’ve ever seen but on a relative basis, the valuation doesn’t seem to make much sense. So what’s the explanation?

 

 

In an era when debt is considered a liability (no pun intended), one would think that PENN’s low leverage would be rewarded.  Looking at its EV/EBITDA multiple, it is clearly not.  PENN trades at under 7x 2011 EBITDA, slightly below the peer group average.  We’ve seen regional gaming stocks trade down to 6x EBITDA, so there is precedent for downside.  However, EBITDA is depressed and PENN’s story is much more compelling than the stocks we’ve seen trade at 6x.  Moreover, compared with other regional gaming operators, PENN maintains much more positive investment attributes:

  • Best management among the regionals and maybe all of gaming – history and commitment to ROI
  • Best balance sheet among all operators
  • More growth – more development opportunities
  • Self-funded growth – leverage stays around 2x during the construction phase of Columbus, Toledo, and Cecil County
  • Growth mostly in new markets – much higher ROI than building in an existing market

So what gives?  I guess PENN is not the most exciting story over the near term but neither are any of the other regionals.  Unless you are expecting a sharp recovery in regional gaming revenue which would benefit the earnings of highly leveraged companies disproportionately.  In this uncertain environment, investors seem afraid of capital driven growth and the perception is that PENN will be levering up to drive investments in risky projects.  Other than PNK and its Baton Rouge project, PENN is the only company investing in new casinos.  There is also acquisition risk.  PENN maintains a ton of liquidity to buy assets or companies and, again, investors may not want to see capital put at risk. 

  • Growth fueled by investment spend - people may want to play recovery growth
  • Exposure to additional supply – Lawrenceburg will be hit hard by a new casino in Cincinnati but the net Columbus/Toledo/Lawrenceburg should still be high ROI
  • Acquisition risk

We recognize PENN isn’t the most non-consensus call on the sell side.  Most analysts have buy ratings.  However, even a broken clock is right twice a day.  Downside appears limited – numbers look better than they did when the stock fell through $23 – and we think the sell side may have this one right.


The Week Ahead

The Economic Data calendar for the week of the 7th of May through the 11th 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.

 

The Week Ahead - c1

The Week Ahead - c2


PSS: CompBusters

PSS: CompBusters

 

You ever see ‘MythBusters’ on Discovery Channel? We dug into the facts surrounding PSS comps, and think that the myth of management overstating its comp exposure to weak parts of the country is Busted.

 

We’ve had several requests since PSS conference call about clarity on comp store sales, and whether management overstated a) PSS’ exposure to California and the Southwest, and b) the relative weakness in those particular states. Several companies noted yesterday with same-store-sales results that the Northeast, Midwest, and Southeast were the strongest regions. Furthermore, we plugged the lats and longs of all of the Payless US stores into our mapping software, and it spit out the results below. You ever see that show ‘MythBusters’ on Discovery? It’s the one where they test myths, movie stunts and legends to see if they are plausible according to the laws of physics. Well…we can pretty safely say that the myth of management overstating its exposure in states that were particularly weak in the quarter is officially ‘Busted.’

 

PSS: CompBusters - PSS Store Dist 6 10

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

MCD MAY SALES PREVIEW

Topline trend will be difficult to sustain.

 

McDonald’s is expected to report its May sales numbers before the market open on Tuesday.  On a year-over-year basis, May 2010 has one less Friday, and one additional Monday, than May 2009.  

 

Today McDonald’s announced that it is recalling the “Shrek Forever After 3D” collectable drinking glasses due to potential cadmium risk; the impact will be felt in the June 2010 sales data. 

 

Getting past top line trends and looking at cost trends in 2Q10, the focus will be on commodity prices.  On the margin, the biggest benefit the company has seen from lower commodity prices is behind them.  In 1Q10, MCD’s basket of goods in the U.S. decreased 5% (this compares to the 6.7% increase in first quarter 2009). For the full year 2010, the outlook in is for costs to be down 2-3%.

 

Below, I am providing my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based largely on 2-year average trends.

 

 

U.S. (facing a 2.8% compare, including a calendar shift which impacted results by -0.4% to 1.4%, varying by area of the world):

 

GOOD:  Any result greater than approximately 5.5% would be perceived as a good result because it would imply that the company was able maintain U.S. 2-year average same-store sales only slightly below those of March and April but considerably above the lower levels of the preceding months.  While usually I look for 2-year average trends to be maintained or surpassed for a “GOOD” result that would demand a print of 7% for May.  In light of the current unemployment picture, and given that a 7%+ print has not been attained since February ’08, I am looking for levels clearly above the 2%-3% region that MCD’s U.S. same-store sales languished in – on a 2-year average basis – from August ’09 through February ’10. Last month’s number resulted in a 2-year average trend of 5%, which equaled that of March, the best 2-year number since February 2009.  In order for May’s number to imply a 2-year average trend that sustains the divergence from August-February’s slump, a 5.5% print will be needed. 

 

NEUTRAL:  Roughly 4.5% to 5.5% implies 2-year average trends that are not reverting to the pre-March slump, but are still below those seen in March/April.

 

BAD:  Any comparable store sales number below 4.5% would imply a significant sequential slowing from the 2-year average numbers of March and April and would also indicate business trends declining towards the level seen during the difficult months at the end of 2009 and beginning of 2010. This would be a meaningful disappointment and would likely be received negatively by investors.

 

 

Europe (facing a 7.6% compare, including a calendar shift which impacted results by -0.4% to 1.4%, varying by area of the world):

 

GOOD:  Above +6% would signal a 2-year average trend equal to that seen in April; this would solidify the significant sequential jump in 2-year average sales numbers seen from March to April.  For Europe I am maintaining the usual standard because 6% comparable store sales results have occurred as recently as March 2010.

 

NEUTRAL: +5% to +6% would signal that 2-year trends are slightly below April levels but still above the +6%.  

 

BAD:  Below +5% would indicate that trends have sequentially deteriorated from April levels. 

 

 

APMEA (facing a 6.4% compare, including a calendar shift which impacted results by -0.4% to 1.4%, varying by area of the world):

 

GOOD: Better than 5.0% would signal that 2-year average trends have improved sequentially from last month’s rebound from the dip seen in March (adjusting for the calendar impact).  This would instill further confidence that March was an anomaly and that the strong performance seen at the start of the year is sustainable.

 

NEUTRAL:  Roughly 3% to 5% would indicate that 2 year-trends were level on a sequential basis from April.

 

BAD: Below 3% would imply 2-year average trends that have slowed further from the level seen in April.  Below 1% would point to trends in line with the trough 2-year average trends indicated in December.

 

 

Howard Penney

Managing Director

 

 

 


An Employment Gong Show

Conclusion: Employment “growth” is anemic and looks weak going forward, which will be a negative catalyst for equities.

 

Today’s underwhelming Employment report was no doubt made worse by Goldman Sachs Chief Economist Jan Hatzius’ lofty forecast of +600,000 payrolls for the month of May (a +100,000 increase from his previous estimate). While being “a little low on the census contribution” was his chief reason for upping his forecast far above the median consensus estimate of a 536,000 gain, our Hedgeye estimate was that he (and consensus) was “a little too high” on the private contribution. Jan’s estimate was for an incremental 150,000 private payrolls to be added in May vs. 180,000 consensus.

 

Private payrolls added for the month of May was reported at an anemic 41,000 – first marginal deceleration since December of 2009. After a 9% drop in the S&P throughout the month, and a near 11% drop from the highs of April to the end of May, it was proactively predictable that the rate of job growth would slow on the margin. For clarification, the S&P 500 and Net Private Payrolls have a 0.72 positive correlation over the last three years. That’s an r-squared of 0.53, which suggests some level of statistical significance.

 

Interestingly, if we normalize for the birth-death adjustment, which we admit is the fodder of conspiracy theorists, and exclude the 215,000 birth-death adjustment, the economy actually lost 226,000 jobs.  Even if you aren’t willing to accept that dire of a claim, those unemployed longer than 27 weeks hit a new record coincident with this report at 46%.  The likelihood that people just give up hope and drop out of the workforce increases every week with that statistic.

 

We shorted the QQQs into the close yesterday based on the view that this payroll number was going to be worse than expected.  While Hatzuis’ took the shot, and we admire him for that at least, by inflating the whisper consensus number, he actually increased the probability that we would be right on our short call and that payroll additions would be worse than expected by implicitly increasing consensus expectations.

 

While consensus hiring is boosting over all payroll additions and, temporarily, decreasing the unemployment rate, this payroll report should be framed for exactly what it is . . . a disaster.  As we’ve highlighted in the chart below, this is a sequential decline in the addition of private sector jobs and highlights two critical points: a) this is a jobless recovery at best and b) the stimulus package has failed to stimulate any real sustainable jobs additions. 

 

With the stimulus behind us and census hiring also primarily in the rear view mirror, it is likely that the payroll additions will continue to be anemic, and that the actual unemployment rate ticks back up.  And that, as they say, is not good.

 

Daryl G. Jones

Managing Director

 

Darius Dale

Analyst

 

An Employment Gong Show - US Net Payroll Addtions


R3: M&A Batting 0.455

R3: REQUIRED RETAIL READING

June 4, 2010

 

11 notable items this morning. 5 are about M&A. Buckle up folks…

 

 

 LEVINE’S LOW DOWN 

 

- In the past we’ve mentioned social media and the internet as a tool for further democratization of the fashion world. Now it appears companies, such as Levi’s, are using Facebook as an open casting call for it’s next “Levi’s Girl”. The company is accepting short video submissions via a Facebook app to find someone to interact with the company’s female consumer, via social media.

 

- The plastic bag continues to fade into history with the latest legislation from California attempting to ban the distribution of plastic bags at pharmacies, grocers, c-stores, and liquor stores. If passed by the state Senate, the bill would be the first, but likely not the last state to ban the distribution of disposable plastic bags. Score one for the environment.

 

- The funding spigot continues for online “flash sale” start-ups, with HauteLook scoring $31 million from Insight Venture Partners. With excess inventories dwindling across the luxury space, we see how it makes sense for the company to use some of its beefed up balance sheet to venture into additional categories. However, we do wonder how all these sites can survive having been founded on luxury apparel and accessories, only to venture into sales of Omaha Steaks and discounted hotel rooms.

 

- Interesting how on the same day Wal-Mart gets flack on greater depth on its gender-discrimination issues than previously disclosed, it also gets some welcomed press on opening banking operations in Canada and looking at acquisitions in Asia. Nice deflection!

 

- WMT Clarification: Some newswires are noting that WMT has an analyst day today. Note that October is the real analyst day.  This event is the annual shareholder meeting in which they have a q&a with analysts at the end of the day. Historically been a non-event, as annual forecasts related to store growth, capex, and other initiatives take place in the Fall.

 

 

 

MORNING NEWS 

 

LaHockey: Owner of Bauer Hockey Acquires Lacrosse Manufacturer - Kohlberg Sports Group Inc., the owner of Bauer Hockey, has acquired Maverik Lacrosse, the manufacturer of lacrosse equipment, apparel and accessories. John Gagliardi will remain CEO of Maverik Lacrosse. <sportsonesource.com>

Hedgeye Retail’s Take: One low-margin product plus another low-margin product = yes, you guessed it…a company selling two low margin products.

 

Remington Arms Co Takes 75% Stake in Mountain Lifestyle Clothing Company - Remington Arms Company, Inc. has bought a 75% stake in Mountain Khakis, LLC in a deal that will accelerate product development at the Charlotte, NC-based maker of mountain lifestyle clothing while expand Remington's foothold in the outdoor lifestyle market.  <sportsonesource.com>

Hedgeye Retail’s Take: This makes  a little bit of sense. A hard goods manufacturer moving into apparel tends to be best done when it is acquired – if history is any example. But then again, gun sales are in a cyclical slump right now. Acquiring from a position of weakness is never good.

 

UK Indie Department Store Acquires Bankrupt Company - Indie department store group Beales has acquired Robbs of Hexham from MCR, the administrator for beleaguered indie department store group Vergo Retail, for £250,000. <drapersonline.com>

Hedgeye Retail’s Take: I’ve never heard of either of these companies. M&A is really gaining steam – especially with smaller companies in consumer.

 

Foot Locker Bid Speculation Drives Shares at JJB Sports - Shares surged in JJB Sports yesterday after speculation that US sports footwear giant Footlocker could make a play for the sportswear retailer. <drapersonline.com>

Hedgeye Retail’s Take: Huh? This would really shock me if it came to fruition. There’s a whole lot of wood to chop in the base business here with Foot Locker. Also, its presence in Europe is that of a Pan-European retailer with an American feel. It’s expertise is certainly not in micromanaging markets like JJB tries to (and stinks at). If FL did this deal – which we don’t think it will – then we’d be very concerned.

  

WSJ Anti ANF: WSJ recommends against Abercrombie & Fitch - A "Heard on the Street" column notes the brand is doing well in Europe, but warns that since it runs its own stores, history would suggest that Europe won't become a gold mine for it. And even if Europe does become a gold mine, it is not clear that the gold will fill the sinkhole that the US is set to be for the next few years. At 21 times EPS, the column recommends against holding the shares in hopes of an eventual recovery in US sales. <Wall Street Journal>

Hedgeye Retail’s Take: The WSJ is actually sniffing down the right path.

  

Retailers in California Make Settlement - The Center for Environmental Health has reached a $1.7 mm settlement with more than 40 retailers, including Macy’s Inc., J.C. Penney Co. Inc. and Saks Inc., and distributors in a lawsuit that sought to reduce the amount of lead in handbags and other accessories. Payments from each defendant average $45,500 to $48,000, with the bulk consisting of legal fees in the $30,000-plus range. <wwd.com/business-news>

Hedgeye Retail’s Take: Not financially meaningful, but definitely interesting from a consumer vantage point.

 

Zappos Founder Talks Business, New Book, and Amazon - Hsieh, 36, talks about his new book being released Monday, titled “Delivering Happiness: A Path to Profits, Passion and Purpose.” Discussing the Amazon deal, "We think of Amazon as being the replacement to our board of directors and as a giant consulting company with free access for us. It’s up to each [Zappos] department to decide how much to tap into that." Hsieh say Zappos is moving faster than ever with better warehouse capabilities. According to Hsieh, Amazon has kept their promises. Most of Zappos's business is still concentrated on footwear (80% to 85%), but they are making a big push in other categories, especially apparel which is 10% to 15% now. Apparel was up almost 50% in 2009. <http://www.wwd.com/retail-news/?module=tn>

Hedgeye Retail’s Take: This dude is one of the few CEOs I follow on Twitter. Sometimes a loose cannon…but always interesting perspective on the evolution of the business.

 


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