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Bear Market Macro: SP500 Levels, Refreshed...

We are in the 6th day here of a bear market bounce. At 1096 in the SP500 this easily makes me feel as uneasy as I have felt… well… in 6 days.

 

From an intermediate term TREND perspective, unless the SP500 closes above 1131, this will remain a bear market by Hedgeye’s definition. That doesn’t mean that the bulls can’t annoy me and/or test the validity of either of our American Austerity of Housing Headwind Q3 Macro Themes in the meantime.

 

Quantified, a close above 1096 puts the probability of a move to 1131 in play. That’s why I have been doing a lot of waiting and watching today. The long term TAIL line of resistance for the SP500 is 1096 and the long term TAIL line of support for the Volatility Index (VIX) is 23.69. As of 3PM EST, we are trading right at these lines.

 

What was TRADE line resistance is now immediate term TRADE support at 1074. While the 1004 level of downside support is still what we would consider probable on a 3-day probability model basis, its also what we would call less probable than what we called it yesterday.

 

As the markets change we will continue to, but we need these SP500 and VIX levels to confirm for at least 3 days on a closing basis to change our positioning.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed...  - S P


PENN: ANY MARGIN GAS LEFT IN THE TANK?

With the exception of a couple of properties, top line trends have been less than inspiring. PENN needs to pull the cost cutting lever to make the quarter.

 

 

Same store sales (SSS) be damned.  2010 was supposed to be a year of recovery for US gaming markets following an awful 2009.  Easy comparisons have become not so easy.  PENN’s Q2 SSS fell 10% in 2008 and another 3% in 2009.  Still, we project Q2 SSS will decline 7% further in 2010. 

 

For Q2, we expect that EBITDA and EPS will fall slightly short of management’s guidance of $0.26 and $141.5 million, respectively.  For the year, our EPS and EBITDA projections of $1.12 and $575 million, respectively, are close to management’s guidance of $1.13 and $578 million.  At the time of management’s last update, we thought they were padding guidance.  However, casino revenues have remained sluggish and their previous guidance looks reasonable.

 

Lawrenceburg and the Hollywood Casino in PA are the only two properties showing year over year growth.  However, Lawrenceburg will have lapped the Q2 2009 expansion by the start of Q3 2010, thus impeding further growth.  PA should continue to grow with the advent of table games later this year. 

 

We remain positive on the long-term prospects for PENN.  Management is strong and the company does maintain a growth pipeline consisting of projects in NEW markets.  Thus, investment returns will be significantly higher and exceed PENN’s cost of capital.  The Ohio projects should contribute up to 25-30% CAGR in EPS from 2010 to 2013.  Our hang up remains domestic gaming trends and the macro environment.  Gaming revenues are tied to housing and GDP and the Hedgeye macro call is fairly negative on these important metrics.  Still, the valuation of 7x 2011 EV/EBITDA is reasonable for the growth and certainly attractive on a relative basis for patient investors.


American Austerity: Leading Indicator or Buy-And-Hope?

Conclusion: Short the US Dollar (UUP)

 

Our call 6 months ago was the same for the Euro as it is for the US Dollar now. The currencies of countries with burgeoning deficit and debt to GDP ratios are leading indicators for their domestic stock markets.

 

The US Dollar is getting smoked to lower-intermediate-term-lows today and the US equity market is cheering it on as “reflation” because that’s exactly what Dollar Down equated to during the 2009 phase of what we called Burning The Buck.

 

Unfortunately, inverse correlations and r-squares aren’t perpetual. There are always multi-factor and multi-durations to consider. As chaos theorists, it is our job to recognize these risks and intermediate term TRENDs as they emerge from immediate term TRADEs.

 

If the week were to end today, the US Dollar will be down for a 6th consecutive week. Not only is the immediate term TRADE line for the US Dollar broken, but the long term TAIL and intermediate term TREND lines are broken as well (see chart).

 

This time we don’t think the “reflation” TREND will recur because global equity and commodity prices don’t have the tailwind of accelerating global and domestic growth. Our outlook on US growth in particular for the next 3-6 months is actually for quite the opposite. The US stock market is sucking some people into the long side today, much like early 2010 rallies in European equities suckered people in as the Euro started to break down.

 

Keith R. McCullough
Chief Executive Officer

 

American Austerity: Leading Indicator or Buy-And-Hope? - DXY


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RESTAURANT INDUSTRY – SHORT INTEREST, CPKI, AND MORE

The restaurant space is seeing a rise in short interest despite activism and buyout rumors.

 

With a group of investment bankers working overtime to sell the company, CPKI’s second preannounced results for 2Q10 were a little better than the first.  The recent release detailing 2Q10 results showed improved EPS in a range of $0.15 to $0.17 (vs. prior guidance of $0.10 to $0.15 given on 6/21/10 - down from the original guidance of $0.24 to $0.26 communicated on 5/6/10).

 

2Q10 same-store sales came in at -5.9% (vs. prior guidance of -6.0% to -7.0%) and 3Q10 same-store sales through July 11th improved to -0.6%, according to management.  This significant sequential improvement is partly attributable to the fact that the company’s 2Q10 results were negatively impacted from lapping the strong results from last year’s Thank You Card Program which ran during 2Q09 and benefited comps by about 1.4%.  CPKI will be launching the program again during the third quarter on July 28.

 

Notably, CPKI was one of the restaurant stocks with the biggest increases in short interest over the past month.  Other notable increases in short interest ahead of earnings season are BWLD, EAT and RRGB. 

 

RRGB is being pressured by an “activist” as the fundamentals continue to be severely challenged for the company.  Pressing the short here is not a good bet from a risk/reward perspective. 

 

JMBA has seen short interest accelerate to the upside ahead of news detailed in The Wall Street Journal today.  An article titled, “McDonald’s Smoothie Launch May Juice Up Entire Category” discusses the launch of McDonald’s smoothies nationwide and the impact on the smoothie category.  Jamba Juice Chairman and CEO James White said, “their advertising will expand interest in the category”.

 

We will be releasing our restaurant Industry “sigma” positioning by the end of the day, but BWLD is currently operating in the quadrant we call “Trouble Brewing.”  I continue to believe that there are several issues that will plague the company for some time.

 

Over the past month, EAT saw the third biggest increase in short interest at 31.9%.  As a percentage of the float the absolute short is still low at 7%, but it’s up 1.68% in the last month.  Over the weekend, Barron’s described the CEO of DIN as a canny operator, but she is doing nothing of consequence to alter the operation within the four walls of the Applebee’s concept.  The company’s ability to do anything other than sell off stores is limited by the leveraged balance sheet.  This offers an ongoing market share opportunity for EAT.

 

Brinker is on the other side of the table with enough liquidity to buy back 20% of the equity value of the company and is making big strides to improve restaurant level margins and the overall guest experience.  Apparently, the market likes leverage more than cash!  Over the past month EAT is down 5.8% and DIN is up 2.6%.

 

RESTAURANT INDUSTRY – SHORT INTEREST, CPKI, AND MORE - short interest

 

Howard Penney

Managing Director


MAR YOUTUBE

In preparation for MAR's Q2 earnings release we've put together some forward looking commentary from the company's Q1 and subsequent conferences.

 

 

POST 1Q2010 CONFERENCE QUOTES 

  • “Well, we’ve just closed our period 5, which is largely coincident with the month of May, where we saw RevPAR up for our managed portfolio in the United States by about 9%, and for the first time in two years, we saw rate growth of one point.” 
  • “Now for our second quarter, which would include that period 5, but also period 4, which was largely the month of April; I apologize for the complexity around our calendar, which is historic. But also then one more period after that, we’ve now got two quarters in the books and our North American managed RevPAR is plus 7.3% and rate is zero. So the fourth period would have been down a little and the fifth period up. Those are good numbers, and obviously to us, give confirmation that the recovery is well underway in the lodging space and it sure feels a lot better than it did a year ago.”
  • “Well, right now we earn about 25% of our fees from outside the U.S. with Asia probably being about a third of that.”
  • “I’ve never bragged in the past about market concentration because I’ve never had it before with the dramatic decline in incentive fees that we’ve had in the last three years, but today we have a lot of market concentration in both New York, Washington and the Florida resorts. They probably account for two-thirds of our incentive fees. So the incentive fees today are very much driven by international hotels, international RevPAR, international unit additions, and then RevPAR growth in those particular markets.”

 

1Q2010 CONF CALL

  • “In January and February, North American REVPAR demonstrated solid improvement from recent trends, but March was even better.  For example, for the Marriott brand in North America, company-operated hotel REVPAR declined 8.5% in the first period, declined 3.1% in the second period, and rose 7.1% in the third period.  And Ritz-Carlton is ramping even better with their January down 2.4%, February up 7.6% and March, which is in our second fiscal quarter, up 15.7%.”
  • “For the Marriott brand, group business also showed dramatic improvement late in the quarter, largely due to better attendance. Group room nights increased 1% in the first quarter, but then increased 10% in period three. While corporate business remains soft, association meeting attendance took off. Association room nights increased 15% for the quarter and rose 50% in our third period.”
  • “Hotels are benefiting from stronger corporate transient business, increasing sales of suites, club level and other premium rooms and rising pricings at a few hotels. The recovery is clearly occurring faster than we anticipated.”
  • “Our booking window is extremely short, which makes forecasting particularly difficult. Hotel demand is highly correlated to the economy, albeit with some delay, and we still have concern about the economy as unemployment is high.”
  • “This year, I think the incentive management fee growth that we anticipate is going to largely be from hotels that are paying incentive fees now and we'll grow in what we earn from them with strengthening REVPAR, and house profits and the international growth, particularly including the unit growth that we've added outside the United States over the last number of years. The hotels that are not paying and are materially short of their owner’s priority in the U.S., again, that's going to be a little stickier. It’ll be a little longer coming back, but ultimately, we look forward to all of those rooms getting back to their fee contribution that they saw at the last peak.”
  • “We are not incentivizing people to take the financing. Thus our financing propensity is down in the low 40s, I believe, for the quarter. And that compares to a couple of years ago with as high as 75% to 80% when we did incentivize people.”
  • [Comment on guidance] “Year-over-year, it puts you at about, with incentive fees, up modestly say 5% to 10%.”

2Q 2010 Guidance:

  • “We expect REVPAR to remain strong. We believe system-wide hotels in North America will increase REVPAR by 4% to 6%. International hotels should increase system-wide REVPAR by 8% to 10% on a constant dollar basis. And worldwide REVPAR should grow by 5% to 7%.”
  • Total fee revenue of $275 million to $285 million”
  • “For the Timeshare business…, we expect …contract sales to total $175 million to $185 million and anticipate Timeshare sales and services, net of direct expenses, to total roughly $40 million to $45 million. Given this, Timeshare segment earnings should total $20 million to $25 million.”
  • “G&A expenses are expected to total approximately $150 million, a 10% increase over adjusted 2009 levels. In last year's second quarter, G&A benefited from a reversal of $8 million dollars in incentive compensation as we eliminated bonuses for executives for the year.
  • We expect …EPS at about $0.25 to $0.29 per share.”

2010 Guidance:

  • “We believe REVPAR for system-wide hotels in a North America will increase by 3% to 6% with higher pricing in sight. REVPAR for international hotels should increase by 4% to 7% on a constant dollar basis and global REVPAR should increase by 3% to 6% on a constant dollar basis.”
  • “With unit growth of 25,000 to 30,000 rooms in 2010… fee revenue could total $1.145 billion to $1.175 billion. This fee outlook is $55 million to $65 million higher than the guidance we provided in February.”
  • “Our Timeshare business is also expected to improve year-over-year, with stronger contract sales and higher closing efficiency. Realized prices of our North America one-week intervals are expected to move modestly higher year-over-year.”
  • “Our overhead remains well under control and we look forward to significant operating leverage as demand continues to improve. Over half of our Timeshare customers are paying cash for their one-week interval, so our 2010 securitization will likely be smaller than in years past. We expect to sell notes in 2010, although the timing and amounts of such deals will depend on our sales pace. At present, we would expect only one note sale in 2010, probably in the fourth quarter.”
  • “We expect the Timeshare business could generate $185 million to $195 million on the Timeshare sales and services net line in 2010, and $95 million to $105 million for Timeshare segment earnings.”
  • “We expect Marriott’s general and administrative and other expenses to increase to $650 million to $660 million in 2010. Compared to last quarter’s forecast, our higher G&A estimate is largely related to higher incentive compensation associated with a stronger operating result.”
  • We believe earnings per share total $0.95 to $1.05 in 2010. Our fully diluted share count in the first quarter was 373 million shares and we've assumed 378 million shares for our full year 2010 guidance. This increase in diluted shares is largely due to the impact of a rising stock price and to a lesser extent, to an increase in anticipated stock option exercises. We expect higher than normal exercises this year, due to the expiration of options on about 5 million shares in October 2010 and February 2011. As a result, we’re likely to see more Form 4 filings in this year, more than what is typical.”
  • “Excluding the impact on consolidated timeshare securitization, we expect to reduce debt by another $400 million to $500 million in 2010.”
  • “We are focused on selecting value-added investments to accelerate our growth. We expect to invest approximately $500 million for capital spending, loans and equity slivers in 2010.”
  • “EBITDA is expected to total approximately $985 million to $1.04 billion this year. The changing Timeshare accounting rules would have increased 2010 adjusted EBITDA by about $75 million. So even adjusting for this value, we're still expecting a modest increase in EBITDA in '10.”

UA: Mgmt Change Makes More Sense Than You Think

No one likes to see a high multiple name like UA have a high profile mgmt change before the quarter (unless they’re short it). We don’t like the timing either. But the bigger picture context makes a ton of sense. McCreight did what he was charged to do. He’s getting paid big. And Plank wants back in.

 

We’re disappointed to see that Dave McCreight has left Under Armour, as a) he was a valuable part of the building and integration of new regime of management at UA, b) he was effective in his role, c) management transition in a high growth/high multiple company sparks a perception v. reality argument that I’ rather did not exist, and d) and quite frankly, we simply like the guy. 

 

But all that said, he made it no secret (nor did CEO Kevin Plank) that primary purpose was to build the right organizational structure and assemble the right team. He has achieved these goals, and is being paid very handsomely for doing so. It’s no accident that it’s been almost exactly 2-years since McCreight was hired. Per his employment agreement, 50% of his restricted stock vests after 1-year, 25% after year 2, and 12.5% each after year 3 and 4. This was valued at $4mm on grant date, and we’re now looking at a price 33% higher. As far as how the math works out, he gets his full $4mm in 2-years vs. 4. On top of that, there’s $3mm in stock options, but those vest equally over 4-years and have a ‘stay’ feature for 1-year where hurdles need to be met and kept for 1-year thereafter. Our sense is that UA likely was generous with waving many of these restrictions.  The bottom line is that the guy did his job, and is likely walking away with between $5.5 and $8mm in cash. Not bad.

 

So that explains precise timing. But what about the bigger picture?

McCreight’s departure is function of UA’s structural shift towards a business unit organization – period. Over the last 10-months, the company has brought in Gene McCarthy to spearhead Footwear (8/09), Henry Stafford to head Apparel (4/10), and John Rogers to lead the E-Commerce effort (5/10), all under David’s leadership.  The reality is that Plank saw that the organization needed more firepower and that he could not do it himself. But guess what? Now it’s there. Keep in mind that Plank is only 38 years old. I can’t even count the number of times that Phil Knight at Nike came and went (in title) throughout the course of his years at Nike. This smells to me like it’s much of the same. And No, I’m not worried about it.

 

Is this an advance warning of something bad coming down the pike? I don’t think so. Sales look good. Product flow is picking up, and the brand is hot as ever. The bottom line is that UA continues to transition through its growth curve as well as any other company I’ve seen.

 

If people assume the worst here and this punitive market takes this high growth/multiple stock out behind the barn and shoots it, then it’s setting up to be a gift.

 


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