The U.S. ISM manufacturing PMI has been in a downtrend for the last year, and this week it fell below the key 50 level for the first time since August 2016. In this week’s piece we examine the implications for our coverage by looking at industry stock returns over the last 25 years in relation to when PMI drops below 50 as well as when PMI eventually bottoms.
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Hurricane Dorian has continued to impact several voyages and we are lowering our estimates. For now, it seems the financial impact and potential prolonged impact may not be as bad as it could have been, but that’s still to be fully seen as the situation remains fluid. Port Miami, Everglades, and Canaveral closed on Saturday, but Miami and Everglades just re-opened. This means that cruise lines have had to extend sailings, cancel sailings, and shorten sailings, which results in refunds/credits paid out to guests, as well as compensation for other travel arrangements. The lost revenue from the cancellations and itinerary changes has the biggest negative impact to C-3Q results. We are not expecting a prolonged impact to the industry as experienced during the 2017 hurricane season because 1) Puerto Rico was a key home port, unlike the Bahamas, 2) there are other alternate destinations, if any ports/islands experienced meaningful lasting damage, and the eye of the storm also missed the Nassau port, and 3) the 2017 season also faced a series of back-to-back storms, which we can only hope doesn’t happen again.
Current reports indicate Hurricane Dorian is strengthening and could make landfall in Florida as a Category 3 storm on Sunday.
We’ve taken a fresh look at our assumptions for each company now that 2Q earnings season has been digested. Some estimates come up, some come down, and some don’t move as we just changed some of the assumptions with various offsets. Each is detailed below.
RCL traded down 2% on Thursday (07/25/19) after what we thought was a strong and reassuring earnings report. In this week’s piece we discuss our thoughts with a few charts showing 1) investor apathy on cruise stocks, we think, 2) how earnings have been resilient in prior years despite headwinds, and why that could be the case again now, and 3) why short-term investors feel the near-term setup is still tough, but why we think it could improve.
RCL reported earnings this morning, and we’d classify the report as solid. RCL beat 2Q and then lowered FY guidance by less than the prior Cuba disclosure, effectively raising yields ex-Cuba. Booking comments were also strong. We think many were assuming this scenario, but we still think this is needed reassurance for now given sentiment has been poor due to 1) poor results from CCL last month, 2) concerns about deteriorating trends in the Caribbean after losing Cuba, and 3) broad macro concerns.
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.
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