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MGM: ESTIMATES ARE STARTING TO LOOK AGGRESSIVE

MGM may have trouble making consensus Q2 EBITDA estimates. A Q2 miss may mean more to investors than the Q1 miss.

 

 

Paulson & Company took a big stake in three gaming companies:  MGM, BYD, and HET.  In each case, the successful hedge fund manager took on significant exposure to the three worst performing casino markets:  Las Vegas Strip, Las Vegas Locals, and Atlantic City.  What is he thinking?

 

We don’t have a line in to John Paulson but he is clearly making a recovery bet.  Those three markets were hit the hardest, so a trough to peak recovery would be the greatest.  Moreover, these markets have not begun to recover.  We won’t take issue with the BYD bet on the LV locals market other than the timing. 

 

The problem with the MGM bet is two-fold.  First, the likelihood of MGM missing the Q2 consensus estimate is high which means forward estimates will have to come down.  So much for a V-shaped recovery.  Second, MGM’s valuation seems to already reflect expectations of a V-shaped recovery.  Granted, our estimates are below the Street, but MGM’s enterprise value multiple of 2011 EBITDA is right at 12.6x.  I’ve covered this sector since 1996 (I’m old) and double digit multiples for Las Vegas assets have been generally confined to periods of cheap money and sub 4x leverage.  MGM currently has a leverage ratio of around 9x.  Bulls better hope for a V-shaped recovery, although hope is not an investment process.

 

The following chart shows our estimates relative to the Street's for MGM’s Las Vegas Strip EBITDA.  We present this comparison because this is where we really differ from the Street.  On a consolidated, as reported, basis, our 2011 EBITDA estimate is $1.15 billion versus the Street at $1.40 billion.  We think the Street will come down in 2010 and 2011, closer to our estimates following the Q2 release.

 

MGM: ESTIMATES ARE STARTING TO LOOK AGGRESSIVE   - mgm

 

Macau is the one strong market for MGM.  However, they continue to underperform in that market following a surge in share late last year.  Investors expecting a Macau IPO catalyst for MGM may be disappointed.  We think MGM will generate significantly below the $500 million that some expect.


The Week Ahead

The Economic Data calendar for the week of the 14th of June through the 18th 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


Forecasts Revisited: Germany vs USA

Position: Short France (EWQ)

 

Germany’s Bundesbank raised growth forecasts for the country in its bi-annual economic outlook report today, calling for +1.9% this year (versus a previous estimate of +1.6%) and +1.4% in 2011 (versus +1.2%). For comparison, Bloomberg’s average GDP forecast for Germany is +1.8% in 2010 Y/Y and 1.7% in 2011.

 

We agree with the report that inflation levels will likely be moderate over the medium term, despite the Euro’s depreciation, and that exports may get a boost from a weak Euro and improving global demand.

 

However, we’re cautious on the contagion threats from sovereign debt default across Europe. As we’ve pointed out in our Q2 quarterly theme work, 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 significantly higher levels of debt exposure to European banks, especially in Germany.  

 

Flipping to the other side of the pond, we think that growth estimates for the US, like Germany, may be lofty.

 

At the Federal Budget Committee hearing on Wednesday, Fed Chairman Ben Bernanke forecast 3.5-4% GDP growth in 2011. For comparison, Bloomberg’s average GDP forecast for the US is +3.2% in 2010 Y/Y and 3.0% in 2011.

 

Keith wrote the following comments in response:

 

“So Ben Bernanke is not only forecasting a higher level of US growth than the Bloomberg consensus for 2011 but now more than a DOUBLE of the Bundesbank’s forecast for Germany in 2011!

 

With both pending US deficits and debt maturities demonstrably higher than Germany’s, we have a very hard time comprehending the world Bernanke sees coming in 2011. Much like our differences in forecasts versus Bernanke’s in 2008 this, unfortunately, remains a consistent divergence of analytical opinion.”

 

Tack on a jobless recovery that could run out of stem in 2H10 and headwinds facing the consumer coming down the pike – including housing – and it’s easy to see why Bernanke’s Bet might be a bit too aggressive.

 

Matthew Hedrick
Analyst


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1-Day: SP500 Risk Management Levels, Refreshed...

It’s certainly been an interesting week for the SP500:

  1. Monday – lowest-closing-low for the YTD at 1050 (down -13.7% from the 1217 peak)
  2. Tuesday – bear market rally of +1.1% to 1062
  3. Wednesday – failure to follow through on Tuesday’s lift, closing down -0.6% at 1055
  4. Thursday – massive +3% price squeeze on low volume to 1086

And after another 1-Day rally, the US stock market sells off once again to 1081 as of 230PM EST…

 

What do we do from here?

 

Stay short, watch, and wait.

 

The long term TAIL line for the SP500 is 1081. This line deserves the bearish benefit of the doubt until it doesn’t. There is significant immediate term downside to this Buy-And-Hope market simply because consensus is not yet Bearish Enough.

 

When 1-Day rallies stop empowering the perma-CNBC-bulls to actually cheer themselves on, this will change. Until then, 1-Day rallies should be taken as selling opportunities, not opportunities to hope-up a mini-bull market that is freshly broken.

 

We see no support for the SP500 down to the dotted green line in the chart below at 1039. That’s -4% downside from here versus immediate term upside to 1103 (2% upside). When risk outruns reward 2:1 and we have a bearish fundamental macro view, we’ll remain short the SPY.

 

Enjoy France vs. Uruguay.

KM

 

Keith R. McCullough
Chief Executive Officer

 

1-Day: SP500 Risk Management Levels, Refreshed...  - S P


DISPOSABLE INCOME, OBAMA GETTING HAWKISH?

The role of Disposable Income in elections is considered by some the only reliable predictor of elections.  If people are hurting, they take their anger out on incumbants.  Compared to 1994, President Obama is lagging what was then an unthinkable Republican House takeover. 

 

Not that Obama needs any more trouble but the opposition effort to turn the Sestack Jobsgate failed.  I think they will try again.  Scandal typically hunts a President in his second year in office.  I guess it takes that much time to dig something up by the opposition.  Maybe the Elliot Spitzer scandal was just Republican legislators good fortune, butt does seem odd that the "steamroller" Governor was caught in March of 2008, in his second year in office. 

 

The turn to Deficit Hawkishness that seems to be bubbling up from the White House is maybe a pre-emptive move toward support.  That is not a good turn for healthcare.  A tougher stance on deficits and healthcare spending is not a good scenario.  Particularly, if the cost savings initiatives I heard about yesterday are being widely adopted.

 

The conclusion appears to be that while cost savings are already being sought in this difficult operating environment, expect more if the Obama's move toward the Deficit Hawks.  Given what Disposable Income is suggesting, he'll have to get very hawkish.

 

Thomas Tobin

Managing Director

 

DISPOSABLE INCOME, OBAMA GETTING HAWKISH? - 1

 

DISPOSABLE INCOME, OBAMA GETTING HAWKISH? - 2


R3: Blackhawks Exposure Revealed

R3: REQUIRED RETAIL READING

June 11, 2010

 

In light of the city’s first Stanley Cup in 50-years, we decided to take a quick look at which retailers are over-indexed to the Chicago market.

 

 

TODAY’S CALL OUT

 

While hockey merchandise sales are not typically a key driver for athletic and sporting goods retailers, we decided to take a quick look at which retailers are over-indexed to the Chicago market in light of the city’s first Stanley Cup in 50-years. Using the population of Illinois relative to the total U.S. at 4.2%, we can see which retailers are over and under indexed to the Windy City. As the chart illustrates, the primary beneficiaries are Athlete’s Foot, The Sports Authority, Finish Line and Dick’s. While Wednesday night’s victory is likely to impact the sale of jerseys and t-shirts, we don’t expect the Blackhawks victory to have a meaningful impact on public company sales in Q2.  However, the Cup could be and added bonus for TSA’s forthcoming IPO. 

 

R3: Blackhawks Exposure Revealed - 1

 

 

LEVINE’S LOW DOWN 

 

- Lululemon noted that its class of stores opened in new markets toward the tail end of 2008 were real stand-outs when compared to the overall average comps for the quarter. These stores outperformed the reported 35% increase on a constant dollar basis. Management attributes the outperformance to traffic, which is in part driven by growth in brand awareness over the past 18 months.

 

- A survey from Compete suggests online coupon usage has a meaningful impact on retailers’ results. About 57% of consumers who used a coupon code on their last online purchase indicated they would not have made the purchase if the coupon was not used. Coupons also seem to have meaningful ROI impact, with those using coupons spending an average of $216 vs. $122 for those without coupons. Bottom line, keep the coupons coming.

 

- Add Radio Shack to the list of retailers this go around that will be selling the iPhone 4 at launch. Recall that the prior release of the 3GS was confined to Best Buy, Apple, and AT&T. To sweeten the deal, The Shack will also give consumers a trade-in credit for their old iPhone. Score one for the Shack!

 

 

MORNING NEWS 

 

UK Branded Market Bouncing Back While Independents Lose Share - The branded market could be ripe for a resurgence after figures showed the 2.5 year trend for declining sales in the sector has come to an end. Independents have borne the brunt of the decline in the branded fashion sector, notching up the biggest market share declines in the clothing and footwear markets so far this year. <drapersonline.com>

Hedgeye Retail’s Take:  Not surprisingly the larger, better capitalized companies are taking share while the little guy loses.  Nothing new here except that bounce of the bottom seems to be following a pattern similar to recovery we’ve seen stateside. 

 

Rating Agencies Upgrade Neiman Marcus, Hold Barneys New York - Neiman Marcus Inc. got a thumbs-up from one ratings agency Thursday, while Barneys New York Inc. received a less flattering assessment from another. Moody’s Investors Service upgraded Neiman’s corporate family rating to “B3” from “Caa1” based on a “solid recovery in credit metrics,” while Standard & Poor’s Ratings Service took Barneys off CreditWatch without changing its “CCC” rating. However, S&P lowered its issue-level rating on Barneys to “CCC-minus” from “CCC” and lowered its recovery rating to 5 from 3 “based on our view that the company’s valuation has diminished over the past few years.” Barneys was placed on CreditWatch with positive implications on April 22. <wwd.com/business-news>

Hedgeye Retail’s Take:  Nothing like a rearview ratings change for the luxury leaders, both of which are showing signs of life against easy compares. 

 

Skechers Plans to Expand into Ireland - Skechers USA Inc. revealed its plans Thursday to launch Skechers-branded retail stores throughout Ireland later this year. Under a licensing deal with footwear retailer Shuz 4 U Ltd., SKX will open the first two shops (for men, women and kids) in Dublin and Cork by the end of 2010. Additional stores are planned over the next five years. “Our 10 branded Skechers stores in the United Kingdom give us a highly effective means to reach consumers," said Michael Greenberg, president of Skechers, in a written statement. “This licensing partnership with Shuz 4 U allows us to leverage strong European Skechers brand recognition into an expansion of our retail foothold and build on the strong wholesale business we currently have in Ireland and the U.K." <wwd.com/footwear-news>

Hedgeye Retail’s Take: By going the partnership route, this makes the move into Ireland less risky but also less rewardy.  Nonetheless, it’s finally time for the Irish to don their EasyTones on the way to the pub.  Something tells us Ireland is not where the real opportunity lies in Europe.

 

GSI Maintains E-Commerce Agreement with Radio Shack - GSI Commerce Inc. announced a new multiyear extension of its e-commerce agreement with RadioShack Corporation. Under the new agreement, GSI will continue to provide RadioShack® with e-commerce technology, order management, customer care and interactive marketing services. RadioShack has been a GSI partner since 2005. <internetretailer.com>

Hedgeye Retail’s Take:   GSI continues to hold its own with those retailers who are behind the curve on building out their own e-commerce infrastructure.  Given the consumer’s high propensity to buy consumer electronics online, it’s interesting to see RSH choosing to use its cash flow for other things rather than finally invest in what may be the only growth vehicle left for the retailer.  Looks they bought themselves some time on this initiative at the very least.

 

Brands Need to Capture Teen Influencers - Not all are created equal in the eyes of social media advertising.  Investing in ways to capture the attention of the most active and engaged social media teens may have a higher ROI than reaching the masses.  According to a study, the top 15% most active and engaged members of Facebook and myYearbook are more likely than other teens to recommend a variety of products to their friends. Reaching teen influencers will mean taking advantage of earned-media opportunities and word-of-mouth that comes from highly trusted friends.  <emarketer.com>

Hedgeye Retail’s Take:  Put aside the focus on “influencers” and it seems to us that social media, which facilitates real-time, honest feedback on products and brands actually means companies need to produce good product not just good marketing.  The feedback loop is only getting faster and more accurate.

R3: Blackhawks Exposure Revealed - 2

 

Footwear: What's Selling - WWD asked a few independent footwear retailers what product was selling and what's on sale.  Here are the answers:

Pegasus Shoes, Woodstock, N.Y. 1. Vibram FiveFingers, 2. Jambu Planet and Papaya, 3. Dansko Serena, On sale: “Things are always on sale,” said owner Len Sapiro. “For promotions, right now, we’re giving away a free pair of organic cotton socks with any online order, plus a $3 discount.”

When The Shoe Fits, Vancouver, Wash. 1. Brooks Adrenaline GTS 10, 2. Keen Presidio, 3. Aravon Maya, On sale: “Not a lot right now,” said owner Alan O’Hara. “The semi-annual sale will break on July 9, so right now I just have some discontinued stuff from last year, like old sandals.”

Comfort Shoe Gallery, Gig Harbor, Wash. 1. Taos Treasure, 2. Naot Believe, 3. Chaco Hipthong, On sale: “I have a sale rack of discontinued items, but as far as new products, nothing really,” said owner Lori Cain. “The sale rack is just shoes and boots left over from last winter, so it has some discontinued styles and colors. Some brands, like Dansko, never make it over there.”

Heart & Sole, O’Fallon, Mo. 1.Taos Prize, 2. Romika Maui 01, 3. Birkenstock Mayari, On sale: “Right now sandals are $10 off,” said owner Jerry Herndon. “No specific brand, just all sandals.”

Sole Food, Seattle, Wash. 1. Keen Newport, 2. Creative Recreation Cesario Lo, 3. Camper Laura, On sale: “There’s Keen, Indigo, Frye boots, a lot of sandals and closed-toe ballets,” said store manager and buyer Annie Kritsonis. “I usually put things on sale that I only have in one or two sizes left, so right now it’s a mixture of flats, sandals and pumps.”

All About Feet, Houston, Texas 1. Finn Comfort Phuket, 2. MBT Sport 2, 2. Dansko Serena, On sale: “A little bit of everything,” said associate Jackie Sabbe. “We put all the brands on sale at one point, but the big sales are at season ends. There will be a sale at the end of August and another one in January.” <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Ask a shoe store what they’re selling in June and what you get? Sandals, sandals, and more sandals.  Add in a little performance running and these comments coincide with anecdotes with the larger chains.  Strong sales of sandals of course are good for margins and limited seasonal markdown risk.


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