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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Shares of CZR are down over 50% from the 52-week high, even after a rally in the last couple weeks. The stock traded particularly bad during market turmoil in the last few months, as expected, given it’s a higher beta stock with leverage. Still, over this time period there have been some positive developments like activism, M&A rumors and an offer from Tilman Fertitta, CEO change, and improving industry trends in Las Vegas. However, right now there is also still a lot of uncertainty regarding future management, given the announced CEO change with no replacement announced. The current CEO’s tenure was recently extended from February to April, and CZR has paid out cash awards to a few executives “to encourage the retention of certain key executives through the transition to a new chief executive officer,” which altogether could be viewed as somewhat concerning for the search process.
This morning (01/03/19) MGM announced a new profit program, which it’s referring to as MGM 2020. The plan seeks to improve annualized EBITDA at domestic resorts by $300M by the end of 2021, with $200M achieved by the end of 2020. MGM plans to achieve the first $200M through labor savings (50%), sourcing (25%), and revenue optimization (25%). The next $100M will be created from technology and digital improvements. We’ve long thought MGM had low hanging fruit on the labor productivity side, which seems a key part of this plan, as well as other operational efficiencies like a centralized organization.
Macau December GGR was released on Tuesday (1/1/19), showing growth of 16.6% y/y, versus a consensus estimate of we think around +10% y/y. We’re raising Macau estimates for 4Q, as the quarter came in better than initially expected. We think WYNN’s downbeat earnings call in mid-November kept estimates low, but the quarter ultimately wasn’t bad. It seems likely win rates could have been better than normal in the quarter on the VIP side, and mass trends seemingly remained firm. Macau GGR has been surprisingly strong in recent months despite deteriorating Chinese macro data we think largely because of still pent-up demand following a >40% peak to trough decline during the 2014-2016 anti-corruption driven downturn, as well as ramping new property launches. However, comps are growing tougher in 2019, new smoking rules just took effect, and the Chinese macro data has continued to deteriorate.
Our bullish thesis on VAC is primarily about free cash flow and capital deployment. Remarkably, on our estimates VAC’s four-year free cash flow yield (2019E-2022E) now stands at 65%. We expect all of that cash to be returned to shareholders. VAC’s current net recourse debt amounts to 2.6x 2019E EBITDA. VAC’s target is to be below 2.5x. Assuming the absolute level of net recourse debt stays unchanged (i.e. no additional proceeds or pay down), VAC’s leverage ratio would decline to 1.8x 2022E EBITDA, implying they would be comfortably in their range and they could deploy all of that free cash flow to shareholders. See our math in the table below.
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.
November Las Vegas data was released today (12/27/18), with GGR released this morning and all other LVCVA data released early this afternoon before the market closed. Strip GGR increased 10.0% y/y, versus our estimate of +12% y/y, but adjusting for poor hold this month we think Strip GGR would have been up ~16% y/y, which would have beat our expectation by ~4pp. Meanwhile, Strip RevPAR increased 14.1% y/y, well ahead of our estimate of at least +4% y/y. Our summary file of gaming data we track is included with a link to this email with historical data included.
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.
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