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MGM: HOLD WASN’T THAT BAD

Better hold you say? We had heard all quarter long that MGM held very poorly, but it wasn’t that bad – within their “normal” range. That didn’t stop management from mentioning hold 7x in one press release.

 

 

An astute client emailed me this morning that MGM used the word “hold” seven times in its earnings release.  After getting over my disappointment that I didn’t realize that first, I had a good chuckle.  This is, after all, the management team that decided a few years ago to provide a wide normalized hold range of 18-22% and get out of the quarterly hold blame game.  That strategy is no longer convenient, I guess, as management offered up that low hold impacted them by $20 million in EBITDA for the quarter.  Yet hold was still in the normal range, albeit at the low end.  Would management have been so transparent if hold had been at the high end of the range?

 

Probably not.  In fact, VIP hold percentage in Macau was about 70bps higher than that of Q2 2009.  Using the same hold VIP percentage as last year would’ve translated into $18 million less of EBITDA for the property, half of which would’ve accrued to MGM.  We didn’t see that discussion in the release.

 

So how were the numbers?  Well, despite the better than expected table hold in Las Vegas – we had expected hold well below the 18-19% actual - they slightly missed our EBITDA estimate which was below the Street.  So volumes were lower than we expected.  We aren’t even going to spend a lot of time talking about RevPAR since they can pretty much report whatever they want given the large number of comped room nights.  However, we will note that despite reporting higher RevPAR at almost every property that we projected, they still managed to report slightly lower revenue.  Put another way, higher "room revenues" were offset by lower "casino & other revenues."  We continue to believe that 2011 Street estimates need to come down.


DIAL-IN INSTRUCTIONS: HEDGEYE'S AUGUST MACRO THEME CALL

HEDGEYE

 

HEDGEYE'S AUGUST MACRO THEME CALL
SHOULD U.S. GOVERNMENT DEBT BE RATED JUNK STATUS?

 

DIAL-IN AND MATERIALS
TODAY 11 AM EDT 

HEDGEYE'S AUGUST MACRO THEME CALL: SHOULD U.S. GOVERNMENT DEBT BE RATED JUNK STATUS?

 

5-10 minutes prior to the 11 AM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 387895#

To access the presentation materials, please click here.

 

******************************************************************************

 

The Hedgeye Macro Team, led by CEO Keith McCullough and Managing Director Daryl Jones, will be hosting our August Macro Theme Call focused on one of the most timely economic questions facing investors:

 

"Should U.S. Government Debt Be Rated Junk Status?"

 

Key topics to be discussed: 

  • The implications for the U.S. economy of the massive build up of debt
  • Various federal budget scenarios and their key drivers
  • GDP growth implications based on accelerating debt balances
  • Implications to the deficit under different interest rate regimes
  • Comparison of the U.S. to the PIIGS on key ratios
  • Appropriate investment vehicles for this long-term TAIL theme

Sincerely,

Hedgeye Sales Team
Hedgeye Risk Management, LLC
www.hedgeye.com


ASCA YOUTUBE

In preparation for the ASCA Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from ASCA's Q1 earnings release/call.

 

 

Post Q1 Conference Commentary

  • “At this point, we’re not seeing anything in St. Louis that we weren’t expecting and actually the percentage of revenue we lost has declined, as it is not at the same level that we thought it would be, so we’re actually better off.”
  • “The goal is to retire debt and make the best use of free cash flow.”

 

Q1 YouTube

  • “Stock-based compensation, we’re estimating, will be 3 to 3.5 million in the second quarter. The projected tax rate will be between 42.5% and 43.5%. Capital spending--we do think we’ll spend a little bit more in the second quarter than we did in the first quarter, which was about 12 million; we think we’ll be in the 15 to $20 million range in the second quarter. Interest expense should be 34 to 35 million. And assuming Board approval, we’ll be issuing another $0.105 quarterly dividend later this quarter.” 
  • [Department of Transportation East Chicago road improvements] “By the end of this year, they expect to complete an initial phase that will allow a portion of the freeway to be used to get to the property that’s currently shut down in advance of the bridge. It will get it about as close as they can and then drop it off to a new exit, which will significantly improve access to the property. And sometime in 2012, they expect to finish the second phase, which will further improve the access on the surface streets with some alternative routes that will significantly ameliorate the current situation.” 
  • “Subsequent to the end of the first quarter, we’ve retired an additional $12 million of debt in April.” 
  • “It’s possible based on our expectations that we will reduce interest expense in the second half of the year by about $12 million because of the expiration of the swap.”
  • “I think it may take a little bit more time for people to get the confidence under themselves to increase their gaming spend. So, we still remain optimistic that the consumer will come back. There are clearly signs that get reported every day that retailers and some other elements of consumer spending are starting to say that the bottom is hit and it’s bouncing back up.” 
  • [Have you normalized costs at East Chicago?] “The costs are in line.” 
  • “I would say still the run rate for the year for corporate is going to be about 47 million… without stock comp.”
  • [Maintenance capex for 2010] “We are probably still looking at 70 to $80 million.”
  • [Black Hawk hotel] “The hotel occupancy has been relatively stable, just above 90%.  However, we’re looking forward to the prime tourist season in the Rockies that occur in June, July and August and are hopeful that that will produce even greater occupancy, but since this will be the first summer with the hotel, we’ll have to wait and see.”

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TXRH – IN NIRVANA FOR NOW

Looking at the headlines, TXRH had a strong second quarter.  Earnings were in line with expectations but comps came in better-than-expected and were positive for the second consecutive quarter after nine negative quarters.  And, traffic was positive, +2% in the quarter.  Restaurant-level margin increased YOY and came in better than I anticipated given the expected decrease in benefit from food costs deflation.  However, cost of sales as a percentage of sales was still down about 70 bps YOY (versus -185 bps in 1Q10).  This positive margin growth, combined with positive same-store sales, put TXRH in the “Nirvana” quadrant of our sigma chart for a second consecutive quarter.  Management raised its full-year comp and EPS guidance.  The increased comp guidance of +1% is definitely achievable and the street’s FY10 EPS estimate of $0.82 implies 22% EPS growth, above management’s upwardly revised range of +16% to +20%.

 

So, that all sounds good.  When you look at the underlying trends, however, the +1.4% same-store sales growth for company-owned restaurants in the second quarter, which was better than the street’s +0.9% estimate, implies a 70 bp deceleration in two-year average trends.  The third quarter-to-date comp trend of +3%, which is lapping a -5.5% to -6% comp from the same period last year, points to a continued slowdown in two-year average trends of 10 to 40 bps from the 2Q10 level.  There were a lot of questions on the earnings call about whether management is being conservative with its full-year +1% comp guidance given that same-store sales were up more than that in 2Q10 and in the third quarter-to-date.  This deceleration in two-year average trends may be the reason for management’s conservatism; though management said its weekly trends have been pretty consistent over the last couple of months.

 

Restaurant-level margin compares get increasingly more difficult in the back half of the year on a YOY basis, but management guided to increased food cost deflation in the third and fourth quarters.  We will have to see how same-store sales trend from here but the tougher restaurant-level margin compares will make it more difficult for the company to remain in “Nirvana” for the balance of the year.  Same-store sales growth will likely remain positive during the third quarter, but comparisons get more difficult in 4Q10 and the company is expecting a slightly negative impact on comp performance from a Christmas timing shift during the quarter (falling on a Saturday in 2010 relative to a Friday in 2009).

 

Despite TXRH’s conservative comp guidance, management’s sounded optimistic and encouraged by the positive trend in new unit volumes.  To that end, management stated that it will be increasing its unit growth in FY11, above the14 to 15 units expected in FY10, and that it expects unit growth to move even higher in FY12.  Improving new unit growth is a good proxy for the health of the concept, but management also spent some time on the call yesterday talking about how trends have improved, “due in part to moderating [the company’s] development schedule over the last 12 months.”  I am interested to learn to what extent management increases its unit growth (company said it would provide more details on its 3Q10 earnings call) as it will be important that the ramped up growth does not offset the positive trends that have resulted from the slowdown in unit growth. 

 

TXRH – IN NIRVANA FOR NOW - txrh sigma

 

Howard Penney

Managing Director


THE DAILY OUTLOOK

As we look at today’s set up for the S&P 500, the range is 16 points or 0.8% (1,117) downside and 0.6% (1,133) upside.

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER


Enslaving America

"There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt."
-John Adams, US President

 

Yesterday was another great day for our short position in the US Dollar. It was a terrible day for our short position in the SP500. As perverse as this may sound, both the US stock and bond markets all of a sudden love the idea of America losing its status as the world’s reserve currency as we enslave our citizenry with debt.

 

The sad news is that despite both America and Japan resorting to “quantitative easing” in the recent past, some professional politicians in this country have learned nothing from these mistakes. So if you have any American friends who get all amped up and cheer the stock market on when they hear “rumors of QE2”, please take a step back, take a deep breath, and tell them to be careful of what they hope for.

 

Hope, of course, is not an investment process. Hope is not going to make America’s debt and deficit problems go away. Neither will the Paul Krugman type fear-mongering that got both the US and Japan in this mess to begin with. Before the internet, dinosaurs, and YouTube, Krugman’s fear-based model provided the false premise that no one would hold him accountable to his recommendations. No matter where the Krugmanites go, here it is:

 

“So never mind those long lists of reasons for Japan’s slump. The answer to the country’s immediate problems is simple: PRINT LOTS OF MONEY.”

-Paul Krugman (1997)

 

To be balanced, it appears that by 2006 when he penned an Op-Ed titled “Debt and Denial”, Krugman showed some evolution in his thought process:

 

“But serious analysts know that America’s borrowing binge is unsustainable. Sooner or later the trade deficit will have to come down, the housing boom will have to end, and both American consumers and the US government will have to start living within their means.”

-Paul Krugman (2006)

 

Sadly, now that it’s 2010 it’s clear that Krugman has forgotten the fiscal discipline he mustered while he was Bush-bashing the double edged sword of deficits and debt. He’s right back to his 1997 form in recommending that his Princeton pal Heli-Ben Bernanke “prints lots of money.”

 

Much like Nassim Taleb did in taking the puck right to the net on another Fiat Republic alum from Princeton in the Huffington Post last night (“The Regulator Franchise – Or the Alan Blinder Problem”), at 11AM EST today, my defense partner, Daryl Jones (aka Big Alberta) will be joined by our macro team here in New Haven, CT taking the Krugmanites and monetarists alike to task.

 

As much fun as we like to have calling people out (including ourselves), this time it’s game time. We’re dropping the mitts with those debt and deficit sponsors who are putting this country’s national wealth and security at risk.

 

The primary implication from our conference call will have to do with our #1 concern versus consensus right now – US economic growth. A build-up in debt on the federal balance sheet proactively predicts a dramatically different future as it relates to the underlying growth in America.  If the last 200 years of data has shown us anything, it is simply that those nations with high debt balances either default or grow well below mean rates of economic growth as long as debt ratios remain high.

 

We’ll have 45 slides of hard data and forecasts today. We also have a 101 slide presentation titled “Housing Headwinds” that our Financials team, led by Josh Steiner, has compiled to back up the embedded conclusions we are making about US GDP growth; namely that US Housing prices could drop -15-20% from this summer’s bear market cycle-peak in the Case-Shiller Index. Here are the details for the call:

 

"Should U.S. Government Debt Be Rated Junk Status?"

 

Key topics to be discussed:

  • The implications for the U.S. economy of the massive build up of debt
  • Various federal budget scenarios and their key drivers
  • GDP growth implications based on accelerating debt balances
  • Implications to the deficit under different interest rate regimes
  • Comparison of the U.S. to the PIIGS on key ratios
  • Appropriate investment vehicles for this long-term TAIL theme

If you would like to reserve a spot on the call, please email .

 

Back to today’s risk management setup. We got a lot of questions yesterday as to when/where I was a short seller of the SP500 (SPY). Once the SP500 broke out above my immediate term TRADE line of resistance (1118) yesterday, that resistance level became very short term support – so I watched and waited. I’d like to short the SP500 from 1133 all the way up to my Bear Market Macro line of 1144. For now, that’s the plan.

 

For any modern day Risk Manager of real-time market prices, the plan needs to be that the plan is going to change. We’ve been bearish on the US stock market since April and bearish on the US Dollar since June. I may have missed half of the bear market bounce that the SP500 has had since its July 2nd low, but I don’t intend on missing this next selling opportunity as we enter the most critical stage of professional politicians Enslaving America with debt.

 

We didn’t sell everything yesterday in the Hedgeye Asset Allocation Model, but we took our cash position back up to our highest level of 2010 at 79% (up from 58% Cash on July 2nd when the SP500 bottomed at 1022).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Enslaving America - el3


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