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.
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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.
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.
In this week’s piece we discuss a few topics, including 1) October regional gaming trends, which have been strong; 2) cheap hotel rates we observed at Encore Boston Harbor, which ties into reports of on-going promotional activity in other areas; 3) some thoughts on recent cruise line price action; and 4) more thoughts on MGM given the likely upcoming reduction to its MGP stake disclosed last week.
Our coverage wrapped up 3Q earnings season last week, and later this week we plan to host a webcast discussing key themes, top ideas, and catalysts coming out of earnings (more details to come). For now, in this week’s piece we provide a summary of earnings, including consensus estimate changes post reports, stock reactions, and our view on each stock and whether we are more constructive or less constructive coming out of earnings.
About half of our coverage has now reported earnings, and in this week’s piece we discuss some read-throughs for those set to report this week. Specifically, we’ll discuss five points: 1) our group is generally responding well to reports that haven’t been great; 2) read-throughs to NCLH from RCL’s report; 3) read-throughs to VAC from HGV and WYND reports; 4) we back into implied Vegas results for CZR and WYNN now that we have industry data and competitor reports, and it appears CZR had a strong quarter in Vegas; and 5) we back into implied Macau results for WYNN and Galaxy now that we have industry data and competitor reports.
In recent weeks bunker spot fuel prices have meaningfully declined, specifically for the high-sulfur fuel, while forward prices have not declined as much over this time. The decline seems likely due to IMO 2020. Meanwhile, FX has also strengthened. Lower fuel and stronger FX are positives for cruise lines. Despite these positive developments, cruise stocks still have not performed great. In this week’s piece we discuss, and we also raise our cruise line estimates on this dynamic, which has the biggest impact for CCL.
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