This is a 35 page note we write each quarter where we update our thesis with new charts and preview each company into earnings. In this note we’re examining estimates and multiples during prior recessions as guides for possible downside scenarios. For our coverage we see binary outcomes: either a brewing recession or meaningful outperformance. The risk/reward setup to us seems more favorable for the latter, as our stocks seem to have already discounted a recession with over 50% likelihood, in our view, which we’ll show in the note.
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CCL’s CEO, Arnold Donald, recently bought $1M of stock per a Form 4 filed mid-day today, with a purchase date of 12/26 after the Christmas Eve selloff for his trust. This follows a large purchase by RCL’s CEO, Richard Fain, about two weeks ago. It also follows a poorly received earnings report last week, and a stock that is now down 12% since the earnings print, and down 33% from the highs early this year.
We have three charts to highlight this week from some of our observations: 1) MAR’s EV/EBITDA premium to HLT has now been wiped out for the first time since the HLT spinoffs, 2) crude oil is down 38% from the highs and yet cruise stocks have also declined 26% over the same time, and surprisingly even underperformed other consumer discretionary names, 3) European PMIs have been soft and there are now incremental concerns about Europe following poor commentary from a few companies this week, so we show European sourcing for each company we cover.
CCL reported F4Q EPS this morning (12/20/18) (initial take here). The stock closed down 9% on poor yield guidance, exacerbated by a bad tape. Oddly, we are taking 2019 estimates up slightly because fuel continues to collapse, and CCL is unhedged. This is really the purpose of not hedging – revenue and oil are natural offsets – but right now the top line matters more than anything.
Before the market opened (12/20/18) CCL reported F4Q EPS. We thought the quarter was fine but the initial guidance for F1Q19 and F2019 was disappointing, both on the yield side. The stock is initially trading down over 6% right now, which seems understandable, and this is now the third straight quarter in a row CCL has disappointed the Street. RCL and NCLH are only down less than 3%, we think in part because the last three quarters have felt more idiosyncratic to CCL. If the soft yield guidance is indicative of softer trends (we don’t know yet), that would likely be driven by foreign sourced demand, not U.S. sourced demand, of which CCL has more exposure than peers.
RCL’s CEO, Richard Fain, just bought $2M of stock per a Form 4 filed this afternoon (12/13/18). Recall he terminated his 10b5-1 plan on 6/14 with his last sale occurring one day before. The SEC’s short-swing profit rule says that insiders cannot book profits within a six-month period. Today was technically the first day Mr. Fain was allowed to purchase shares, and he didn’t waste any time, which we think is bullish. Mr. Fain previously had a 10b5-1 plan to diversify his assets as he’s gotten older, so we think it’s probably even more bullish that he’s now coming back to buy more with a $2M purchase today, given his prior tendency was to sell down.
We are raising our cruise estimates for lower fuel prices as bunker prices are now down 18% from the highs in mid-October, offset some by weaker FX. However, we decide to lower target multiples to account for late cycle factors as well as lower quality earnings revisions driven by fuel, and as a result our target prices come down. Our target P/E multiples now range from 11x-14x, which is below where we think the stocks can ultimately trade, and yet we still see 36% average upside for the group through YE19.
Throughout 2018 cruise, gaming, and lodging stocks have been tightly correlated with the Chinese equity market, despite the fact that many of these companies have little to no direct exposure to China. So far YTD the y/y change in the S&P 500 has had a +0.61 correlation to the y/y change in the China CSI 300 index. This compares to the average of cruise stocks at +0.85, the average of timeshare stocks at +0.92, the average of hotel C-Corp stocks at +0.85, the average of Vegas gaming stocks at +0.90, and the average of Macau gaming stocks at +0.95.
We’re currently sailing on RCL’s newest ship, Celebrity Edge, for the U.S. pre-inaugural cruise event. This note highlights the key takeaways from our meetings with executives onboard the ship.
Gaming, lodging, and cruise stocks have performed poorly in 2018, with the average stock down 21% YTD. A few of these stocks we cover are down over 40% YTD, and down even more if we use the highs from earlier in the year. The weakness this year has been most pronounced in gaming and in timeshare, two sectors generally with more debt (even though much of timeshare debt is non-recourse). In many cases the overall fundamental trends have been strong (i.e. cruise lines and timeshare), and it seems to us that the market is pricing in a meaningful change to the macro environment for many of these stocks. We compared these YTD returns to all U.S. listed consumer discretionary stocks with a market cap above $500M entering the year, and we found that on average gaming, lodging, and cruise stocks are in the 34th percentile for YTD performance among consumer discretionary. The weakness has also been driven by multiple contraction, with the average stock in gaming, lodging, and cruise lines experiencing 19% forward EV/EBITDA multiple contraction YTD. When compared to the same consumer discretionary group we find that gaming, lodging, and cruise stocks on average are in the 33rd percentile for YTD forward EV/EBITDA multiple change.
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