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.
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.
This is a recurring piece we write monthly where we track several key monthly indicators, which have historically led Macau GGR growth. The key takeaway is the forward-looking Chinese macro data mostly remains soft. The most recent data points for the most recent month show only 5 of the 18 indicators are better than the prior month versus 9 of 18 last month. We chart all 18 of the indicators in the note, and in Exhibit 2 we show a summary table.
Shares of CZR and MGM have performed poorly YTD, along with many other leisure and travel-oriented consumer discretionary stocks, which is not surprising in this market. However, we’ve been surprised at how the stocks have traded since the October gaming and visitation data was released in late November, on what seemed like strong results that were ahead of expectations. Since that time CZR is down 13% and MGM is down 4%, while the broad market is down 3%. October was positive, with Strip RevPAR up nearly 4% y/y and GGR up over 12% y/y. Now, MGM guided 4Q Strip RevPAR up 1%-2% and total Strip revenue up slightly, and CZR guided total Strip revenue up mid-single digits, but on a hold adjusted basis CZR’s total Strip revenue is likely only up low-single digits. In the first table below we show how November could be an even better month than October, and the comps aren’t difficult in December, either. Given this dynamic it appears that there is upside to Las Vegas guidance, but the stocks haven’t reacted positively.
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.
Macau November GGR was released overnight (11/29/18), showing growth of 8.5% y/y, versus a consensus estimate of we think around +6% y/y – though with the usual wide range – and our initial estimate of +4% y/y. We think normal seasonality would have implied y/y growth of about 5%, but better hold rates may have helped in the latter half of the month, especially since WYNN sounded downbeat on demand trends during their earnings call earlier in the month on 11/7. Our gaming summary file with all monthly GGR data is updated and included in this link.
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