In this week’s piece we discuss five topics: 1) poor freight trends as it relates to our coverage; 2) softer U.S. GGR trends in June; 3) VAC’s valuation is near an all-time low versus its prior parent company MAR; 4) recently disclosed buybacks from CCL, and our analysis on why additional buybacks could be limited for at least a couple years; and 5) our thoughts on a possible sale/leaseback transaction at MGM for Bellagio and MGM Grand, and our analysis on what we think this could be worth to the stock. Please click the link above for the full report.
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For our Weekly Sho we've recorded a 20-minute video with 36 slides highlighting our current views as we head into another earnings season. The cruise line section begins at 4:03, the lodging section begins at 9:00, and the gaming section begins at 15:40. Enjoy the rest of your weekend!
Our coverage is up 24% YTD, on average, which is modestly outperforming the market. However, our coverage remains 21% below 2018 highs, on average, and also 10% below 2019 highs, on average, all while the market is near an all-time high. Our coverage mostly remains out-of-favor, in our opinion, but we see some opportunities. Within lodging our best idea is VAC. Within gaming our best idea is ERI. And within cruise our best ideas are RCL/NCLH.
In this week’s piece we discuss cruise line capacity growth into 2020. The growth rate of gross supply (i.e. total cruise ship deliveries) is accelerating modestly into 2020 and we’ll discuss with a couple charts.
We’ve fought this call for too long. We think downside from current levels is limited, but we struggle to justify meaningful upside in the next twelve months. The stock is cheap, but so are other cruise line stocks with better fundamental stories, and valuation alone feels like a weak thesis. This is a tough downgrade with the stock trading at a 52-week low, historically low valuations, and following multiple other recent sell-side downgrades, but we think this is the right decision. With this downgrade, we are lowering our sector weighting on the group to Market Weight, as we can no longer recommend buying the entire group. We do, however, remain positive on RCL and NCLH, as we think CCL’s issues are more idiosyncratic.
CCL surprisingly reported F2Q results this morning (6/20/19) and the guidance and commentary were disappointing. Our initial take is here. The stock was down 13% at one point before rallying some and closing down 8%.
CCL surprised everyone and reported earnings today instead of what was originally targeted for next week. The quarter wasn’t terrible, but the guidance was. CCL lowered FY constant currency net yield guidance by 100bp when the debate from investors was whether they would raise or not. CCL said they lowered the yield guidance primarily because of continued headwinds from the Continental European brands in 2H19. The stock seems likely to open down meaningfully again, after down 8% in each of the last four quarterly prints. We thought this could be the print where we start to see things change, but we were wrong. Fool me once, shame on you, fool me five times? Shame on us.
As our baseline assumption we expect a decent quarter; we assume CCL will reiterate prior FY constant net yield guidance despite a small headwind from the Cuba travel ban; and we assume CCL will narrow the prior EPS range. We also expect CCL to talk positively on demand, and perhaps note the potential to have raised yields without the Cuba headwind. We think this would be an ‘OK’ scenario for the stock. CCL’s stock has gone down an average of 8% in each of the last four prints, and we sense investors are hesitant to own going into this print as a result, but sentiment is poor, and the bar seems low to us.
In this week’s piece we discuss 1) our observations of investor sentiment and feedback following our regional gaming initiation, 2) our thoughts on insider selling activity in the cruise line space, 3) our thoughts on insider purchase activity at MGM, and 4) China total social financing for May, and the implications for Macau GGR. Please click the link above for the full report.
This was an eventful week for our coverage and for us as we were out meeting with investors most of the week. For this week’s piece we discuss 1) the Cuba travel ban, 2) more news flow on a potential CZR acquisition, 3) our VAC thesis with an interesting chart following our roadshow with management, and 4) our gauge of investor sentiment from our conversations. We’re also rebranding this weekly piece from our “Charts of the Week” to now “The Weekly Sho.”
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