For our weekly charts this week we provide an update on IMO 2020 given on-going fluctuating fuel prices as well as some recent and potentially overlooked news on scrubber policy, which could become problematic for CCL. We’ll discuss and later in Exhibit 1 and Exhibit 2 we’ll quantify the potential impact to fuel expense. Please click the link above for the full report.
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Since the cruise lines reported 4Q earnings, bunker fuel prices have risen and FX hasn’t been helpful, either. We believe this is one key reason why the momentum in the group has cooled. Historically movements in fuel and FX have worked as a natural offset, so the unusual double headwind, or lack of offset, is not helpful for earnings or sentiment.
Last week we were on the road for two days with RCL management, including CFO and IR. The meetings were positive, we thought, and our main takeaway is the investment thesis on RCL feels like a multi-year story beyond just the strength in 2019.
Timeshare stocks have rallied hard since the Christmas Eve bottom, with VAC up 61%, HGV up 33%, and WYND up 39% versus the S&P 500 up 19%. However, the stocks still remain well off their 2018 highs. For example, VAC remains 35% below its prior high and HGV remains 31% below its prior high, and it’s been entirely a function of multiple contraction. Interestingly, the S&P 500 is now only 5% below its prior high and credit spreads have narrowed considerably.
We aggregated pricing trends across multiple vacation options/destinations including cruise lines, Las Vegas casinos, hotels in multiple global markets, airline fares, Disney resorts, ski resorts, and rental cars. The purpose of our analysis was to compare pricing trends for cruises and Las Vegas casinos to alternative vacation options to understand if recent years of pricing strength may begin to make substitute vacation options more attractive, which some investors have expressed to us.
In the last five years the cruise industry has doubled ROIC through several initiatives. We believe one of the biggest factors responsible for this improvement has been a more disciplined mindset to pricing, as cruise lines have extended the booking curve and meaningfully reduced last minute discounting. We see opportunity to continue this evolution of improved pricing behavior through continued modifications to the deposit structure.
Earnings season has really just begun for our coverage, with only three companies reporting thus far (LVS, WYNN, and RCL). We have 10 observations to highlight with 10 charts, including takeaways from our earnings, read-throughs from other industries, and other non-earnings developments within our coverage.
RCL reported 4Q EPS this morning (1/30/19). See our initial take here with more details from the quarter. The stock was up 8% in late day trading we think largely because of strong yield guidance and demand commentary. Interestingly, we don’t expect consensus EPS estimates to move much, which we think illustrates 1) the market cares about top line growth, 2) cruise and market-wide sentiment has improved in the past month, and 3) the bar was lower probably after CCL’s soft guide back in late December.
RCL reported 4Q EPS ex-items of $1.53, vs. the prior guide of $1.45-$1.50, consensus of $1.51, and our $1.53 estimate. RCL beat the midpoint of constant currency net yield guidance by only 5bp versus an average beat of 125bp in the last four quarters. RCL also beat on cost timing and other factors like D&A and JVs.
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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