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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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.
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.
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.
Cruise line stocks have meaningfully de-rated in the last three years. At YE15 the group was trading at an average 16x forward earnings, or a 2% discount to the S&P 500. Today the group trades at an average 11x forward earnings, or a 29% discount to the S&P 500. In this note we look at the factors that determine valuation (risk, returns, rewards), and how those factors have changed during this de-rating.
Last week we saw oil prices continue to decline, we got new October data from China, and we saw insiders at VAC buying stock. We’ll discuss the impact for our coverage in four charts
NCLH reported 3Q EPS this morning. It was a good quarter and the guidance was positive. See our initial take here for a more detailed rehash.
This morning (11/08/18) NCLH reported 3Q EPS ex-items of $2.27 vs. the prior guide of $2.20, consensus of $2.21, and our $2.24 estimate. NCLH beat its constant currency net yield guide by 50bp. NCLH cited strong organic pricing across all core markets and cited particular strength in premium-priced itineraries in Alaska and Europe.
Last week our coverage universe sold off with the broad market, we assume mostly due to rising rates and trade tension. We have five observations with five related charts to highlight, which we think have relevance for our group.
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