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THE M3: 1ST WEEK JUNE GGR; SINGAPORE SLOTS OUTLOOK; MOP 20BN IN OCT?

The Macau Metro Monitor, June 11th, 2010

 

MACAU CASINO SALES RISE 70% IN JUNE ON MORE GAMBLING JUNKETS BusinessWeek

According to DB analyst, Karen Tang, casino gambling revenue in Macau soared 70% in the first week of June. Seeing no sign of a slowdown she raised her forecast of 50% growth in 2010. 

 

SLOT MACHINE MAKERS SEE BIG WINS FROM ASIA AsiaOne News

Susan Macke, IGT's chief marketing officer,  believes the growth in slot machine uptake will be similar to that of Las Vegas.  Macke said only 1/2 of the 2,500 slot machines allowed for each casino in Singapore have been installed.  Macke is also bullish on South Korea and the Philippines.  For the US market, Macke does not see replacement rate for slot machines rising to the 10% level any time soon as cautious consumer spending will crimp operators' spending on slot capex; however, Macke does see an uptick in sales before the end of the year.


REVENUE GROWTH TO SLOW? WE DON'T BUY IT Intelligence Macau

IM still believes the MOP 20 billion-a-month mark will be broken by October unless Beijing sends a strong signal that mainland asset prices must come down and strong capital flow into Macau is cut off.  Until that happens, junkets will continue to have plentiful working capital and credit to extend to keep the party going.






US STRATEGY - JUST CHARTS

US STRATEGY - JUST CHARTS - S P

 

US STRATEGY - JUST CHARTS - DOLLAR

 

US STRATEGY - JUST CHARTS - VIX

 

US STRATEGY - JUST CHARTS - OIL

 

US STRATEGY - JUST CHARTS - GOLD

 

US STRATEGY - JUST CHARTS - COPPER


SUPPLIER RISK MANAGEMENT

US gaming revenues still haven’t reached a definitive recovery phase and investors are worried. That worry spreads to suppliers and their gaming ops segments. BYI looks the most protected.

 

 

Which supplier should you own given the current casino environment?  Well, that depends on your outlook.  If you are looking for a V-shaped recovery in gaming spend, then WMS or IGT is your best bet.  Close to 100% of WMS gaming operations revenue is on a variable revenue share basis, while for IGT it is 75%.  However, IGT generates approximately 57% of its revenue from gaming operations and WMS only 40%.  Thus, on a net basis, IGT has a higher exposure to casino variability at 43% versus 38%.

 

If you think casino revenue growth will stay sluggish/negative and potentially take a turn for the worse, then you short the operators and stay away from the suppliers.  If you must own a supplier stock, then BYI is for you.  BYI generates approximately 50% of its gaming operations revenue from fixed daily fee structures and 50% variable.  Moreover, only 36% of its total revenues is derived from gaming operations so net exposure to casino revenue variability is only 18%.

 

Of course, should US gaming revenues take the plunge, the recent acceleration in replacement demand will be short-lived and operators will cut back.  That will not benefit any equipment supplier.  BYI would be relatively better off in that scenario and is probably the lower risk slot play.

 

SUPPLIER RISK MANAGEMENT - gaming ops2


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Austerity’s Bite

“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”

-Marcus Aurelius

 

Austerity is the new buzz word in Europe; from newly elected UK Prime Minister David Cameron in the north to Italian PM Silvio Berlusconi in the south, the issuance of austerity measures from European governments to combat bloated fiscal imbalances seems like a near daily occurrence.

 

The word austerity comes from the Latin austerus meaning “dry, harsh, sour, tart” and was originally used to describe fruit and wine, however in economics refers to a government’s reduction in spending and/or increases in taxes to reduce a budget deficit.  Over the last weeks, European austerity packages have included such provisions as civil servant wage freezes, extensions on the age of retirement, and levies on alcohol and tobacco to an additional tax on the price of an airplane ticket. In short, governments are trimming obvious “fat” and creating revenue streams to rein in over-extended budgets.

 

Here’s a quick recap of budget deficits (as a percentage of GDP) and the notable austerity packages issued in Europe over the last months:

 

Greece – (13.6%); plans to cut €30 Billion in spending over the next three years

UK – (11.5%); £6.2 Billion (or €7 Billion) in spending cuts this year

Spain – (11.2%); €15 Billion in spending cuts and 5% reduction in public worker wage this year

Portugal – (9.4%); plans to issue measures to save €2 billion this year

Italy – (5.3%); €25 Billion in cuts over two years (*strike planned for June 25th)

Germany – (3.3%); €11.2 Billion in spending cuts for next year, or ~€85 Billion by 2014.

 

The most obvious question to ask is will these measures be enough to reduce deficits and return “health” to Europe?

 

In both the immediate and longer term the answer to this question appears to be No and a qualified No. In the near term, Europeans are taking to the streets, with strikes over austerity measures already held in Greece and Spain. While the estimated 2.5MM strikers in Spain appeared mostly harmless (a colleague likened the visual displays on TV to a pre-game World Cup party), strikes in Greece had a very ugly undertone with the death of 3 protestors.  As Keith has noted recently, austerity will equate to civil unrest:  the confluence of a government’s need to tax its people versus the public’s cry that they aren’t responsible for the government’s fiscal mismanagement, and therefore refusal to bear the brunt of the measures. We believe that deficit reduction alone won’t solve Europe’s fiscal problems.

 

In the longer term there are numerous structural and fundamental concerns related to the Eurozone. We’ve pointed out in our quarterly theme work that the investment risk related to sovereign debt default or restructuring is not limited to Greece, but will spread to Spain, France, and Italy, much larger economies than Greece with debt exposure to European banks far greater than Greece’s obligations by a factor of 4-5 times. The outcome could cause further (and greater) downward pressure on markets. 

 

Importantly, it’s worth noting that the European and IMF-led €750 trillion “loan” facility to buy up toxic debt from European countries “in need” (and return investor confidence) has failed to buoy European markets largely because ECB President Jean-Claude Trichet has not outlined just how the facility works! As a result, we’ve tracked increases in government bond yields, sovereign CDS, and equity underperformance, along with the Euro-USD that broke through our immediate term support line of $1.20-1.21 earlier this week to a low of $1.1876 on 6/7 and is down 15% YTD.

 

Further, what we have seen since the facility was announced on May 10th is strong headline risk (think comments from a Hungarian official last week of a Greece-like debt crisis in his country that sent markets plunging) and continued day-to-day volatility. Also, the separate European/IMF funded €110 Billion aid package to Greece hasn’t made a dent in performance or sentiment: the Athex is down 33% YTD and the worst performing major index in the world.

 

Could it be that the experiment of uniting disparate economies is a losing effort?

 

As we see it, there are two main threads of questions that still need to be worked through to determine the path of the Eurozone:

  1. Should European officials revise the standards of the Stability and Growth Pact, which limits members to a budget deficit no greater than 3% of the country’s GDP?  Could more malleable standards be devised (alongside an oversight body) to limit fiscal imbalances across countries, to benefit both the individual country and the Union as a whole? Conversely, is there any merit in imposing harsh budget reduction mandates (that governments may likely fail to meet) at the expense of growth?
  2. Can the Eurozone, a union of 16 disparate countries that share the Euro as a common currency and are tied to the European Central Bank for monetary policy, exist at all, if countries cannot manipulate (devalue) their currency to inflate their way out of debt or independently adjust interest rates to spur or quell growth? 

Clearly these are big questions, all of which we don’t have the answer for.  What we can count on is the continued lack of political solidarity from European leaders to proactively address the region’s ails, which is risk we’re focused on managing around. Statements yesterday from EU President Herman Van Rompuy are case in point: “And if the plan [€750 Billion loan facility] were to prove insufficient, my answer is simple: in this case, we’ll do more.” This is not leadership! 

 

If austerity is the first start to something better, we caution that weaker growth prospects are ahead for much of Europe. In the longer term, it just may be that despite the Eurozone’s intention for the whole to be stronger than the individual parts, disparate parts may remain just that, or conversely, and to quote a line from William Butler Yeats’ poem “The Second Coming”: Things fall apart; the center cannot hold.

 

We’re currently short France in our virtual portfolio via the etf EWQ and have been short Spain (EWP) this year as a way to play the weakness we see in Europe.

 

Matthew Hedrick
Analyst

 

Austerity’s Bite - EL CDS


WEN - SUM OF THE PARTS

 

On 5/19 we published a note titled, “WEN - Undervalued Yes, Where is the Opportunity?” that discussed WEN’s stock and provided a sum-of-the-parts analysis that suggested that the company’s stock was trading below its intrinsic value.

 

I said at the time, “Over the years, Trian Partners has been extremely successful at creating value from mispriced securities.  In the almost two years since creating the Wendy’s/Arby’s Group, it has now created one of those mispriced equities.  Can Trian and senior management fix WEN again?”

 

After the close yesterday, Train said in a 13D/A filing that it recently received an oral inquiry from a third party expressing interest on a preliminary basis in a potential acquisition involving WEN.  Our sum of the parts analysis from 5/19 values the WEN at $7.70.  We value the Wendy’s business at $6.30 per share and the Arby’s business at $1.40 per share.  Send me an email if you would like additional details.

 

Thus far WEN is the third company to announce some sort of value enhancing initiative.  Fist it was CKE, then CPKI and now WEN.  If you are looking for the next possible candidate I would bet on EAT...

 

Howard Penney

Managing Director


EAT – HOLDING FIRM

Despite Keith’s selling of EAT in the firm’s virtual portfolio, we remain confident in the long-term opportunities for Brinker shares. 

 

By now, many of our subscribers are aware of our unique process at Hedgeye that marries Keith’s macro and quantitative views with our company-focused fundamental perspective.  While Keith’s move here is primarily predicated on his broader view of the market, we want to reiterate that our fundamental, long-term view on Brinker shares and the company’s turnaround efforts at Chili’s remain unchanged. 

 

Specifically, Keith provided the following perspective on his move to sell EAT in the portfolio, “I'm going to take the loss here and sell the stock on an up day. Penney remains bullish for the long term here but is becoming increasingly negative on competitor balance sheets like DIN.”

 

I would agree with Keith that the MACRO environment will remain challenging in the near-term and overleveraged balance sheets will only magnify those challenges for certain restaurant companies, like DIN, but I would actually point to DIN’s balance sheet issues as a positive for Brinker.  As I outlined in my EAT Black Book, Brinker has a strong balance sheet and one primary reason I think the company will outperform in these challenging times, in the more challenging Bar and Grill segment, is that its largest competitor (DIN’s Applebee’s) does not have the financial capability to compete.  And, as I said earlier this week, I continue to believe it will be important to focus on those companies that are being proactive and creating leaner, more efficient cost structures as they will be better positioned to mitigate margin erosion in a tough sales environment.  To that end, EAT is one name that is pursuing a proactive strategy and remains a core focus name. 

 

To be clear, when I became more vocal on the reasons to own EAT, I stated that sales trends through the end of fiscal 2010 would be choppy as Chili’s attempts to decrease its reliance on aggressive discounting (and move away from “3 Courses for $20) and as customers adjust to the significant menu changes at the concept.  That being said, management’s efforts to revitalize the brand from both the retail and manufacturing sides puts the company on track to post significant margin growth at about the same time top-line trends should begin to recover, beginning in FY11; though I think the margin story will materialize even without a significant tick up in trends.

 

There seems to be a lot of confusion among investors about the timing of implementation for POS, KDS and kitchen retrofits and the subsequent 500 bp margin benefit (net 400 bps after depreciation) forecast to materialize by the end fiscal 2013, but management said very specifically at an investor conference this week, “So we do think more than half of the 500 basis points of margin improvement will be in place by the end of fiscal 2011.”  I do not think most investors were forecasting this level of growth in FY11 and management’s comment only strengthens my conviction that the street’s FY11 EPS estimate is too low.

 

Management seems confident about its potential earnings growth in the next two years.  EAT’s 5-year target to double EPS by FY15, off of the $1.40-$1.44 base, with 10%-12% EPS growth in FY13-FY15 implies 40% to 50% EPS growth from FY10 to FY12. This two-year target assumes 1% to 2% same-store sales growth, which seems achievable; though it does it rely on sequentially better 2-year trends going forward.

 

I am comfortable saying again what I wrote on April 20th, following Brinker’s fiscal 3Q10 earnings call, “I know things don’t happen in a straight line and there will be bumps in the road, but I want to be a little early on this one.  Once it gets going, it’s gone…”

 

Howard Penney

Managing Director


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 80.33%
  • SHORT SIGNALS 78.49%
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