In this week’s piece we discuss several topics from the week with charts, including 1) our near-term view on MGM following recent monetization, which we think will allow them to return 17% of the market cap to shareholders in 2020; 2) PENN’s rumored acquisition of Barstool Sports; 3) updates on the ERI/CZR merger; 4) read-throughs from airline earnings; and 5) leading indicators for Macau GGR.
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The coronavirus in China has been spreading, and has been confirmed to be transferable between humans, which has caused new concerns. In the most recent update on Monday (1/20/20) the number of coronavirus cases had risen above 200, up from 41 since early January, and it appears to have spread to some other Asian countries. It’s also resulted in at least three deaths currently. This scare seems to have caused Hong Kong listed Macau gaming stocks to decline ~6% overnight. The timing is unfortunate because the Chinese New Year week-long holiday period begins January 24, which is a key travel period. This could be nothing, or it could be something, but at the least there could be an impact to Chinese New Year travel.
In this 35-page note we discuss our views on our coverage after the 2019 rally and how we see 2020 playing out; we discuss key themes and update our thesis with new charts; we preview each company into earnings; and we also change ratings for WYNN, BYD, and CHH.
Our coverage has had a great 2019, with the stocks in our group up an average of 42% YTD (S&P 500 up 29%), recovering losses from 2018 when our group was down an average of 26%. The stock market seems to be suggesting that we’re shifting back to early cycle and that the U.S. ISM manufacturing PMI is set to increase off the September low of 47.8. The question is how much is already priced into the stocks and can the rally continue in 2020? In this week’s piece we try to answer this question by looking at when our stocks peaked during prior cycles in relation to peak PMI. We also show where current valuations stand relative to the peak valuations in the last couple years for some context of the recent rally.
Our cruise, gaming, and lodging coverage universe has risen sharply in recent months during this risk-on tape. Within our lodging coverage specifically, current stock prices for our Outperform-rated hotel stocks (MAR, HLT, and H) are now above or near our target prices. So, our two options are to either raise target prices or downgrade the stocks. We choose to raise our target prices via higher multiples. We understand the optics of target multiple raises may not look great, but we think it’s the right decision, and in this week’s piece we discuss with several key points and charts.
Initial FY20 EPS guidance was $4.30-$4.60, which was favorable to prior consensus of $4.37. However, the sell-side had also mostly not updated for the big fuel decline, which seemingly should have already been known, but maybe not. FY20 constant net yield guidance was -1.5%, vs. our -1%, and we think the buy-side was also around -1%. CCL reiterated 50bp of hardware mix headwinds and cited 50bp of new headwinds primarily from ship delays like the Mardi Gras (which was not known). So, the guide wasn’t shocking, but again the report was better than prior disasters, and sell-side numbers aren’t going down, even if that should have been known.
CCL reported earnings this morning and it was not as bad as it could have been, especially compared to prior disappointments. The quarter beat on EPS and yields; the initial 2020 guidance was not great, but not terrible, either; and the forward booking commentary was decent relative to prior commentary. The stock is initially trading up 7%, after being down an average of 8% in each of the last six quarterly prints. This is odd to us, but we think it’s because the stock has been so out of favor, Street estimates don’t need to come down this time, and the booking commentary was decent. The 2020 constant currency net yield guidance of -1.5% y/y was worse than the sell-side estimate of flattish y/y, but in line to maybe slightly worse than our perception of buy-side expectations. However, EPS guidance was decent driven by fuel (which frankly should have already been known, even though the Street didn’t reflect it in numbers) and non-fuel costs.
CCL is expected to report F4Q EPS likely late next week. We expect CCL to beat the quarter, as usual, but that hasn’t really been the issue in recent periods. CCL’s stock has traded down an average of 8% in each of the last six quarters due to poor guidance and/or poor demand commentary.
We see 10 key themes to watch in 2020, and in this note we’ll expand with several charts. The themes include, 1) the U.S. presidential election impact; 2) how market factors will impact our coverage; 3) continued timeshare (VAC) outperformance, led by solid trends and a possible HGV buyout; 4) continued soft RevPAR, but some potential improvement on the horizon; 5) cruise lines looking for a clean year into peak capacity growth to disprove the bear narrative; 6) CCL decoupling and whether they can right the ship; 7) regional gaming strength and a potentially better setup; 8) Vegas Strip revenue performance likely to remain strong and accelerate; 9) more Vegas Strip asset sales; and 10) still soft Macau GGR but likely better y/y performance.
One pushback we hear from cruise line bears is that the industry generates little free cash flow with excessive capex, and therefore the return of capital to shareholders is poor. In this week’s piece we’ll discuss that pushback with several charts.
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