Q3 2009 Earnings Call

October 29, 2009 1:00 pm ET

On September 22, we used AFG's equity research and investment tools to Identify Large Cap investment opportunities. Today, we will address Small Cap stocks for those investors who benchmark themselves against the Russell 2000.

Using its proprietary valuation metric, The Applied Finance Group has a measured approach for identifying companies that will under or over perform their chosen benchmarks. AFG’s analysis spans across growth and value universes, as well as all sectors, industries, and market caps; in all, nearly 4,500 domestic companies are covered and over 17,000 companies globally.

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Today we're covering Thomas Steyer's hedge fund Farallon Capital Management. Founded by Steyer in 1986, Farallon employs risk arbitrage strategies. Previously, he was an analyst in Morgan Stanley's (MS) Mergers & Acquisitions department and also an associate on Goldman Sachs' (GS) risk arbitrage desk. Farallon typically invests in equities, debt (public & private), private investments, and real estate. Steyer graduated Summa Cum Laude from Yale University and went on to receive his MBA from Stanford.

The US gaming industry may have hit bottom, according to Standard & Poor’s:

The U.S. gaming industry continues to be affected by the ongoing economic downturn, and while the worst of the year-over-year gaming revenue declines appear to be over for many of the riverboat markets, the country’s largest gaming markets, Las Vegas and Atlantic City, continue to experience significant difficulties.

This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.

Next up, we have Thomas Steyer's Farallon Capital Management. Steyer founded the firm in 1986 and still manages it today. Steyer graduated from Summa Cum Laude from Yale University and received his MBA from Stanford's Graduate School of Business. Prior to founding Farallon, Steyer worked as an analyst in Morgan Stanley's Mergers & Acquisitions department and then as an associate in the risk arbitrage department of Goldman Sachs. Being so well versed in the area of risk arbitrage, Steyer employs similar strategies at Farallon. Farallon invests in both public and private debt, equities, private investments, and real estate.

Q4 2008 Earnings Call Transcript

March 6, 2009 11:00 am ET

As an investor or trader who suffered through a true crash like in 2008, it is very hard to be optimistic going into 2009. However, if you still have your capital and can look out twelve to sixteen months, America and some of its best American brands are truly on sale right now.

If you choose to invest, it will take a leap of faith, the courage to do what others can’t and the mental strength to ignore the daily volatility. For those who can, stocks are now approaching valuations as low as in 1991 and the 2002 bear market low. There are many negatives and positives to review before making calculated investment decisions about 2009. However, the main risk of the stock market in 2008 was that it had been ignoring bad news and was ready to tumble. I think that has already happened now and while we might not have seen the ultimate low in the market, we’re very near it. That has reversed the reward-to-risk ratio in the investor’s favor to the most positive it has been in years. The opportunities here lie in buying good companies at discounted prices to their private market value. It will likely be one of the best years for individual stock picking, versus owning the major market indexes since 2004.

Q3 2008 Earnings Call

November 6, 2008 11:00 am ET

• Post-election selloff. U.S. stocks plunged to finish with their worst losses in two weeks. With the election settled, traders focused on more mundane matters like weak job numbers and deep declines in goods and services industries. A weak outlook from tech bellwether Cisco (CSCO) sent stocks futures down further in overnight trade. Sellers unloaded financial stocks like Citigroup (C) and Bank of America (BAC) in the last hour of trading, which likely represents heavy mutual-fund selling. "People have accepted that even with a new president and new policies perhaps in play, it's going to take a while before [the economy] can turn around," broker Trenton Kimminau said.
• BoE announces major rate cut. Bank of England cuts its benchmark interest rate by 1.5%, well beyond expectations of a 50-100 basis point cut, to 3.0%. It is the largest reduction since the U.K.'s last recession in 1993. With the U.K. once again facing steep recession, some economists predict the rate will have to go as low as zero for the economy to recover. Read the Bank's official statement. Update: ECB cuts its key rate by 0.5% to 3.25%, in line with expectations. However, after the BoE's 1.5% cut many thought a cut greater than 0.5% was coming.
• Cisco sounds a cheerless note. Shares of Cisco (CSCO) are down 11% premarket after CEO John Chambers told analysts sales will decline as much as 10% in the company's fiscal Q2; in August he predicted a gain of 8.5%. The credit crunch hit Cisco's order stream, pushing October orders down 9%. Perhaps even more gloomy, Chambers said his comfort level with the forecast was the lowest since the dot-com crash in 2000. "He's normally a very optimistic guy, so when you hear him talk about the tone of business being what it is now, I don't even know what to say," UMB's Chuck Heath said. "It just makes you want to throw up your hands and give up." Futures moved lower during and after Cisco's conference call (transcript).
• Toyota trims outlook, earnings. Toyota (TM) reported FQ2 net profit fell a worse-than-expected 69% to ¥139.8B ($1.43B), missing consensus estimates of ¥235.98B, on a strong yen and falling demand. Sales were down 8% to ¥5.975T. Operating profit fell 72% to ¥169.5B. Toyota also cuts its full-year outlook by 56%, revising estimated net income to ¥550B ($5.6B), its smallest profit since 1999 and a 68% discount from last fiscal year's ¥1.72T net profit. Shares -10.6% in Japan.
• Profit estimates go down, down, down. Analysts are cutting their estimates for S&P 500 companies as Q3 projections miss their mark at the highest rate in nearly 11 years. Revised earnings for Q4 have been cut to 15% growth from 42%, while 2009 profit has been cut to 13% growth from 24%. The now-outdated growth figures were predicted just two months ago but as the financial crisis worsens, and the S&P 500 faces possibly its worst annual performance since 1937, "estimates have been coming down with a vengeance." According to one analyst, "it's just plain ugly out there."
• Automakers plead with Pelosi. CEOs from GM (GM), Ford (F) and Chrysler will meet with House Speaker Nancy Pelosi today in Washington, sources say, hoping to secure support in their bid for government aid for the ailing auto industry. UAW President Ronald Gettelfinger will also attend. The next 100 days are critical for the industry, GM North America President Troy Clarke said yesterday: "We certainly intend to make sure the new Obama administration understands and appreciates the immense significance of our industry and the issues facing our business. "And that the cost of support to the auto industry is cheap when you consider the potential ramifications and future benefits." Yesterday the Department of Energy said it completed the interim rules for automakers to borrow up to $25B, doing so in half the two months it was given. Fancy that.
• Citi, Goldman launch layoffs. Citigroup (C) and Goldman Sachs (GS) began firing workers as they move toward implementing more than 12,000 planned job cuts, sources say. "We haven't hit bottom yet," Henry Hidgon of Hidgon partners said. "They have to adjust the size of their businesses to the realities, not only today, but what it's going to look like in the next two or three years." Citigroup will shed 9,100 jobs, while Goldman is seen trimming 3,200.
• Yahoo, Google not meant to be. Will Microsoft return? Yahoo's (YHOO) and Google's (GOOG) web-ad deal is over. "It's clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners," Google said on its blog. Yahoo responded by saying it "continues to believe in the benefits" of the pact, "and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court." Following the break-up, rumors of an imminent Yahoo/Microsoft (MSFT) deal sent Yahoo's shares up by as much as 10%, but were later denied. Rumors began after a broker cited an internal Yahoo memo which referred to a "major & historical announcement."
• Fed boosts deposit interest. The Fed increased the interest rate it pays to depositors. Required reserves will now receive the average fed funds target (previously avg. -10 BPs) over the period of the deposit. Excess reserves receive the lowest fed funds target (previously lowest -35 BPs). The interest rate change will "help foster trading in the funds market at rates closer to the FOMC's target federal funds rate," it says.
• Job market weakens, again. Nonfarm employment fell by 157K in October, ADP said, evidence of a labor market that continues to weaken. Consensus was for -100K. The loss was driven by the goods-producing sector, which declined by 126K, its 23rd consecutive decline. Manufacturing marked its 26th straight decline with a 85K loss. Small business shed 25K jobs, the first monthly loss since Nov. 2002. Assuming a monthly 20K addition of government jobs, ADP's employment data suggests Friday's nonfarm payroll number will be about -137K - not as severe as the Street consensus of about -200K.
• Service sector activity disappoints. Economic activity in the non-manufacturing sector decreased by 5.8% in October to 44.4%, ISM says, worse than the 47.5% consensus. Following two months of growth, the sub-50% reading indicates sector contraction. Companies are having difficulty making payroll, ISM's Anthony Nieves remarked. "The biggest impact has been on available lines of credit. Everyone's trying to spend less and reduce expenses across the board."
• Layoffs leap. October layoff announcements soared 19% M/M and 79% Y/Y to 112,884, the highest level in nearly five years, Challenger said. Hard hit sectors included industrial goods manufacturing, consumer products, pharmaceutical, food and electronics. "Job cuts are now rising across the board," John A. Challenger said. "Companies not only have been hit hard by this downturn, but they do not see a rebound any time in the near future."

Earnings: Thursday Before Open

• AbitibiBowater (ABH): Q3 EPS of -$1.81 misses by $0.01. Revenue of $1.73B (+112.3%) in-line. "Based on customer input, we expect a further decline in North American newsprint consumption," it says. (PR)
• AutoNation (AN): Q3 EPS of $0.25 misses by $0.04. Revenue of $3.54B (-21.5%) vs. $3.88B. "We expect the rest of 2008 will continue to be challenging and foresee U.S. industry new vehicle sales for 2008 in the low 13-million unit level, an 18-year low," company says. It sees 2009 sales at 12M. (PR)
• Cott (COT): Q3 EPS of -$1.25 vs. consensus of $0.03. Revenue of $420.5M (-9.5%) vs. $443M. (PR)
• Dynegy (DYN): Q3 EPS of $0.72 beats by $0.62. Revenue of $1.89B (+80.3%) vs. $1.25B. (PR)
• Lamar Advertising (LAMR): Q3 EPS of $0.04 misses by $0.01. Revenue of $312M (-0.6%) vs. $306M. (PR)
• Huntsman (HUN): Q3 EPS of -$0.01 misses by $0.11. Revenue of $2.73B (+12.7%) in-line. (PR)
• IAMGOLD Corp. (IAG): Q3 EPS of $0.06 misses by $0.01. Revenue of $227M (+33.4%) vs. $189M. (PR)
• James River Coal (JRCC): Q3 EPS of -$0.86 misses by $0.48. Revenue of $152M (+16.7%) vs. $160M. "We believe that the volatility in financially traded coal contracts has been greatly influenced by factors other than the underlying supply and demand for coal," including tight credit conditions on several large traders. Expects the impact of these factors will be reduced during the next several months. Shares -22%. (PR)
• King Pharmaceuticals (KG): Q3 EPS of $0.33 beats by $0.07. Revenue of $388M (-28.7%) vs. $362M. (PR)
• Nasdaq OMX (NDAQ): Q3 EPS of $0.52 in-line. Revenue of $411M (+6.9%) vs. $420M. (PR)
• OfficeMax (OMX): Q3 EPS of $0.36 beats by $0.03. Revenue of $2.1B (-9.5%) in-line. Sees "significant sales declines as a result of both the existing difficult economic environment and a weaker 2008 holiday selling season than last year." (PR)
• Pinnacle Airlines (PNCL): Q3 EPS of $0.43 beats by $0.05. Revenue of $222M (+7.8%) in-line. (PR)
• Pinnacle Entertainment (PNK): Q3 EPS of -$0.14 misses by $0.07. Revenue of $263M (+10.5%) in-line. (PR)
• Perrigo Company (PRGO): FQ1 EPS of $0.41 misses by $0.02. Revenue of $480M (+25.4%) vs. $496M. Shares -3.2%. (PR)
• Smith & Nephew (SNN): Q3 EPS of $0.61 misses by $0.07. Revenue of $930M (+10.1%) vs. $950M. Shares -12%. (PR)
• Toyota (TM): FQ2 net profit fell 69% to ¥139.8B. "We are in a difficult economic climate facing a variety of risks and uncertainties, including higher energy and raw material prices," it said. Shares -7.3%. (PR)
• Tyco Electronics (TEL): FQ4 EPS of $0.69 beats by $0.04. Revenue of $3.71B (+6.3%) in-line. Sees FQ1 EPS of $0.24-0.28 vs. $0.54. (PR)
• Virgin Media (VMED): Q3 EPS of £0.37 misses by £0.13. Revenue of £991M (-1.5%) vs. £1.12B. (PR)
• Warnaco Group (WRC): Q3 EPS of $0.62 misses by $0.10. Revenue of $549M (+16%) vs. $520M. Sees full-year EPS of $2.50-2.65 vs. $2.87. Shares -7.1%. (PR)

Earnings: Wednesday After Close

• Activision Blizzard (ATVI): FQ2 EPS of $0.07 beats by $0.03. Revenue of $711M (+118.1%) vs. $632M. Shares +9.3%. (PR)
• Cisco Systems (CSCO): FQ1 EPS of $0.42 beats by $0.03. Revenue of $10.3B (+7.8%) in-line. Gross margin of 64.7% vs. 65.1% consensus. Shares -11%. (PR)
• Hertz Global (HTZ): Q3 EPS of $0.33 misses by $0.19. Revenue of $2.42B (-1.1%) in-line. Hertz says it will not meet its previous outlook, and suspends further guidance. Shares -11%. (PR)
• News Corp. (NWS): FQ1 EPS of $0.20 misses by $0.03. Revenue of $7.51B (+6.3%) in-line. Shares -11.4%. (PR)
• Teva Pharmaceutical (TEVA): Q3 EPS of $0.72 beats by $0.02. Revenue of $2.84B (+20.1%) in-line. Shares -6.1%. (PR)
• THQ Inc. (THQI): FQ2 EPS of -$0.46 misses by $0.08. Revenue of $165M (-28.1%) vs. $160M. Sees FQ3 EPS of $0.05-0.15 vs. $1.09 and revenue of $400-420M vs. $566M. Announces restructuring plan to focus on fewer, higher quality titles. (PR)
• Whole Foods Market (WFMI): FQ4 EPS of $0.13 in-line. Revenue of $1.79B (+2.6%) in-line. Announces $425M equity investment by Leonard Green & Partners. Shares +19.3%. (PR)

Today's Markets

• Asia finishes deep in the red. Nikkei -6.53% to 8,899. Hang Seng -7.08% to 13,790. Shanghai -2.44% to 1,718. BSE Sensex -3.81% to 9,734.
• In Europe, London -2.1%. Paris -2.7%. Frankfurt -2.7%.
• U.S. futures are sharply lower, but up quite a bit from their overnight lows. Dow -0.97% to 9091. S&P -1.28% to 946. Nasdaq -1.93%. Crude -2.6% to $63.60. Gold +0.3% to $744.70.

Thursday's Economic Calendar

• 6:00 Retail Same-Store Sales
  6:00 Monster Employment Index
  7:00 BoE Announcement
  7:45 ECB Announcement
  8:30 Productivity and Costs
  8:30 Jobless Claims
  10:35 EIA Natural Gas
  4:30 PM Money Supply
• Notable earnings before Thursday's open: ABH, ABV, AN, ANSS, ARD, BRL, BX, BZH, CCOI, CDL, CEG, CHTR, CLR, CXW, DPTR, DTV, DYN, EP, FLO, FTO, GOL, HK, HUN, IAG, INCY, JRCC, KG, LAMR, LINE, NDAQ, NRF, OMG, OMX, PCG, PNK, PRGO, SE, SFY, SNH, SONS, TEL, TEVA, TM, VCI, VRX, WEN, WMB, WNR, WRC
• Notable earnings after Thursday's close: AGO, ALKS, ANH, BBI, BYI, CAR, CBG, CEGE, CVTX, DAR, DIS, FLR, FTI, GNW, HANS, HGSI, IRF, MVSN, NDN, NKTR, NVDA, ONXX, PCLN, PDLI, PSA, PXP, QCOM, SAPE, SD, SWKS, TS, UTSI, VRSN

Seeking Alpha editor Rachael Granby contributed to this post.

Q2 2008 Earnings Call

August 6, 2008 11:00 am ET

Jake Fuller of Thomas Weisel Partners agrees with me on choosing Pinnacle Entertainment (PNK) over the Vegas casinos. See CNBC's article entitled "Casino Stocks: Don't Bet On the Biggies." Of course, I made the same call weeks ago, only to see Pinnacle Entertainment become a victim of the overall market decline.

PNK is Pinnacle Entertainment Inc. Although their HQ is in Las Vegas, they don't own casinos there. The six casinos they own are in Louisiana, Indiana, Missouri and Reno, NV; in addition, they operate casinos in the Bahamas and Argentina. This is a fairly small company--its market cap is still under 1 billion. So why choose this stock over WYNN, LVS, or MGM?

Q1 2008 Earnings Call

May 7, 2008 11:00 am ET

So far in 2008, gaming stocks have been negative across the board. The stock prices of many top quality U.S. hotel & casino operators have dropped significantly. In hindsight, we can understand the reasons for this year’s declines and I believe, can spot great opportunities to buy. Gaming is a heavily regulated and very transparent business. The detailed gaming revenue numbers released each month provide great information.

The Nevada Gaming Control Board just released official March numbers showing a statewide decrease of 1.5% in gaming revenues. Any decrease makes for powerful negative headlines. But looking a little deeper, we see that the calendar was unfavorable in March with 9 weekend days in 2008 versus 10 in 2007. While the numbers certainly aren’t rosy, with a year-over-year decline of only 1.5% and an unfavorable calendar, I wouldn’t exactly say the sky is falling. Many in the mainstream press would lead you to believe that it is.

First of all, I say “casino stocks” rather than “gaming stocks”, because the stocks of manufacturers and the stocks of casino operators may act quite differently in this economy.

The stock prices of large hotel & casino operators have dropped significantly. While gaming stocks have a significant past history of being somewhat “recession resistant”, a history that I’ve quoted many times, casinos have behaved much differently in the past year. Although it’s easy to see that short term casino stock prices are not recession-resistant, a question remains as to if gaming revenues are recession-resistant. The answer is “sort-of” or “maybe”. It depends on your timeframe and where you look. We have seen decreases.

Q4 2007 Earnings Call

February 26, 2008 11:00 am ET

Company Overview

Pinnacle Entertainment (PNK) is a high growth gaming company with a deep pipeline of development, which should allow PNK to see strong growth for the next 3-4 years. It has new properties coming online in St. Louis, Missouri, and Lake Charles, Louisiana. It also is adding two hotel towers to existing properties, which should open over the next year. In addition, PNK expects to begin construction in Atlantic City, New Jersey in 2008, with an opening sometime in late 2011.

The following article by Cornell University School of Hotel Administration student Alex Casey was originally submitted as a paper for a class entitled "Investment Analysis and Portfolio Management," in which students wrote a 'mock' analyst note about a publicly traded company. In no way should its contents be construed as conveying professional investment advice.

Pinnacle Entertainment (PNK) is a casino operator, operating domestic and international casinos. In the last ten years it has managed to grow its operations tremendously. It is constructing or planning to construct several casinos in various regional gaming markets. However, the market has mostly priced in this growth and Pinnacle is only slightly under priced currently. Therefore we rate Pinnacle as a Hold and suggest investors wait to sell at $30.69.

TWST: I guess the key issue is, where do we go from here? What are you looking at for 2008?

Pinnacle characterizes itself as a mix between an operating company and a development company. In reading through its annual report, it is clear the company prides itself on growth as it builds new casinos and adds to properties it already owns. Management does a good job of preparing investors for the long road ahead, stating that development costs and interest expense will pose a drag on earnings for some time to come as they ratchet up capacity.

Hurricane Katrina hurt many casino operators that had property damaged in New Orleans. While PNK wasn’t immune to this damage [the company is still settling with insurance companies to collect on damages], the company was able to be opportunistic and collect increased revenue at its boomtown property. This property was one of the few left operating, and revenues skyrocketed for a few quarters until competition was able to bring other properties back online.

As you can see, the gambling stocks (or ‘gaming stocks’ as the ‘politically correct’ reference that the companies prefer to be called) can be extremely volatile, yet very profitable opportunities abound. There are rumors on the street of additional gambling (I mean gaming) stock takeovers. (By the way, the reason I don’t like to refer to these stocks as ‘gaming stocks’ is because I consider Electronic Arts (ERTS) and Activision (ATVI), companies which make electronic games, as gaming stocks.)