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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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.
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.
October Las Vegas data was released today(11/27/2018) (GGR in the AM and all other LVCVA data just came out after the market closed), which showed Strip GGR up 12.2% y/y and Strip RevPAR up 3.7% y/y. Adjusting for luck, we think Strip GGR was up roughly 13.6% y/y in the month. October faced an easier comparison due to last year’s tragedy at Mandalay Bay. Ultimately the data for October was strong and better than we expected, as we were assuming Strip RevPAR would be up ~3% and Strip GGR would be up ~6%. We’re surprised shares of CZR and MGM didn’t respond much today to the GGR report, but perhaps the market was waiting for the RevPAR data, which came out later than normal after the close. Our summary file is included with a link to this email with historical data.
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.
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