As we look at today’s set up for the S&P 500, the range is 11 points or 0.3% (1,117) downside and 0.7% (1,128) upside.
The Macau Metro Monitor, August 4th, 2010
MGM RESORTS PLANS NEW MACAU CASINOS AFTER 'TURNING POINT' IN JUNE REVENUE Bloomberg
CEO Murren said on Bloomberg that MGM plans to build multiple properties in Macau and more properties in Asia over time. "We are starting to assert ourselves in Macau," added Murren. Aggressive new terms have been negotiated with junket consolidators and the company has just raised US$950m for refinancing of existing debt and added liquidity.
SJM IS STILL INTERESTED IN THE COTAI DEVELOPMENT PROJECT Macau Daily News
SJM CEO Shu Fai So said they had already expressed their interest in the Cotai development project to the local government. SJM has not received any official notification from the government with regards to the land grant application but So believes a announcement will come shortly. So also said that if China does not tighten its macroeconomics policy any further this year, GGR will grow at least 30% YoY.
As expected, WMS made the quarter and provided revenue guidance slightly below the Street but in-line with us. The only surprise to us was higher R&D guidance which may not be a bad thing.
The quarter was largely in line with our expectations, not the highest quality we’ve seen, but not bad given the environment. Top line guidance for FY2011 was also healthy with our $834 million estimate toward the lower end of the guidance range of $830-850 million. The only material surprise is management’s R&D push in FY2011 which will cost them an additional $0.10 to $0.12 in diluted EPS. Implied guidance for FY2011 appears to be around $2 in EPS.
The news of the R&D acceleration initially brought about a high level of consternation on our part. Is this catch up/maintenance R&D spend? However, taking management at its word, we don’t believe that to be the case but we will do some serious digging. CEO Brian Gamache indicated that they had showed customers some forward looking products that were in test and the response was positive enough that management decided to pull the development forward. This is the definition of investing in the business and is the right long-term move if it is incremental and not maintenance.
While we don’t think investors get as excited about share repurchases – a bear market and credit crisis will do that –, in this case, they should. Free cash flow is accelerating and the company announced a $300m share repurchase. WMS is in a positive net cash position so share repurchases will be more accretive than if they had to borrow.
WMS generated $51 million in operating cash flow, a number that will grow substantially next year due to net income growth and a stable customer financing environment. After ratcheting up the use of its balance sheet to finance customer slot purchases in FY2010, WMS indicated that the company does not expect to be any more aggressive in this area. A relatively constant accounts receivable balance will boost working capital and cash flow generation in FY2011 relative to FY2010. Higher investment spend will eat into the operating cash increase somewhat but this is due primarily to Italy. For now, the only comment we will make is that $40m seems like a high number for the 2.0-2.5k machines we were projecting. Could management be expecting a larger market for them in Italy? We will find out.
Product sales of $135MM were $4MM above our estimate with weaker new unit sales revenue offset by stronger used gaming machine sales. Gross profit margins were 20 bps above our estimate.
Gaming operations revenues of $78MM were $2MM below our estimate and gross margins of $63.5MM were $3MM below our estimate.
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“And remember, no matter where you go, there you are.”
I’ve learned, un-learned, a re-learned this lesson in trading markets many times in the last decade - Don’t Do Dogma. The larger your risk management and research team becomes, the harder it gets to adhere to that discipline. The more research edge you have, the more confident you tend to become. This breeds confirmation bias and risk.
A disciplined risk management approach to allocating capital is a process best learned by doing. I don’t learn much when my team is right on the research - I work with winners who wakeup expecting to be right. I learn the most when our positioning to express that research is wrong.
This gets to the heart of a structural problem with our industry. There is a huge difference between being right on the research and right on your timing, sizing, and positioning. Our industry pays a “star” premium for conviction in best research “ideas”, but pays much less for the risk managed expression of those ideas. This is good. It provides a tremendous opportunity for us to evolve our profession.
“No matter where you go” this morning, “there you are.” I have my coffee and my notebook, and markets are trading for and against my positioning. Without a repeatable risk management plan, I’m not sure what you do when you login every morning. Different strokes for different folks, I guess, but when it comes to grinding through the morning’s macro data, my research process has a very low standard deviation.
Conversely, as you may have noticed, my decision making process has a very high standard deviation. Sometimes I make too many Hedgeye Virtual Portfolio and Asset Allocation moves, sometimes I make too few. I learned this playing hockey more than anything else, but there is a time to be moving your feet, and there is a time to wait in the weeds – goals get scored when your timing is right.
Yesterday the US stock market was down, so I took that as an opportunity to cover some shorts and buy some longs. Because our macro research is bearish on both the US Dollar and the SP500 doesn’t mean I have to be bearish at every time and price on everything USA (we’re long XLU, Utilities).
In modern day risk management, it’s critical to contextualize both time and price within the framework of different investment durations. That’s why we have developed the TRADE, TREND, and TAIL process. It helps us communicate our research findings in a way that isn’t Duration Dogmatic.
The SP500 has only had 1 up day in the last 6 trading days. That 1 up day was of consequence however, because it took out the immediate term TRADE line of resistance of 1117. Whenever resistance becomes support on any of our 3 core investment durations (TRADE, TREND, and TAIL), I start moving my feet.
The setup for this morning is the same as it was as I was changing my positioning into yesterday’s close. Inactive investors dogmatically call this “trading” – I call it proactively managing risk. You trade today in order to set yourself up for tomorrow.
We went through this on our Macro Monthly Strategy conference call yesterday (if you’d like the slides and replay, please email ), but it’s worth repeating – the Bear Market Macro lines for the US Dollar Index and SP500 are $84.32 and 1144, respectively. These are my intermediate term TREND lines of resistance. These back-test with the highest success rate of any duration in my model.
Bearish TREND doesn’t always mean bearish TRADE. To the contrary, bearish TREND often insulates bullish trading inasmuch as bullish TREND formations can perpetuate bearish immediate term trading. Bull and bear markets get both overbought and oversold.
If the US stock market gets banged up today, there are no rules saying that this bullish immediate term TRADE support line of 1117 in the SP500 can’t become resistance again - and quickly, with no downside support to 1089. Don’t get frustrated with how short term that sounds. Embrace it. Managing risk doesn’t occur in a baby blue Tiffany box.
The conclusion of all this is always on the tape. Yesterday I invested 6% of the Cash position in our Asset Allocation model, taking Cash down from 79% to 73% by adding a long position in International Equities - Indonesia (IDX) – and adding another 3% to our long position in the Chinese Yuan (CYB).
The risk in all of this is that 1117 doesn’t hold, because that means anything I covered or bought yesterday will have likely been executed on too early. In real life investing, being too early means being wrong. Don’t Do Dogma – that’s for marketing presentations about investing.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Our notes from the earnings call.
“WMS’ fiscal 2010 fourth quarter operating performance including record top- and bottom-line results, improved margins, and growth in other key performance metrics were achieved despite a still-sluggish replacement market and lower spend-per-visit by casino patrons in many markets."
- Brian R. Gamache, Chairman and Chief Executive Officer
HIGHLIGHTS FROM THE RELEASE
CONF CALL NOTES
Here is a look at guidance ahead of earnings tomorrow
SAME STORE SALES
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