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.
This week we were on the road for two days with WYND management, including CEO, CFO, and IR. The meetings were positive and investor turnout was also positive, in our opinion.
We think both HGV and VAC could be candidates for a leveraged buyout, and in this note we’ll focus on why that could be the case specifically for HGV. Potential deterrents, however, are that any buyer would need licensor (i.e. HLT) approval; a large premium may be required to incentivize the board/shareholders; and HGV’s near-term cash flow is limited.
HGV hosted an investor day in NYC Tuesday AM (12/4/18). The day was positive until the end when HGV provided initial 2019 EBITDA guidance, which caught people by surprise due to an additional $12M of deferred EBITDA impact from new accounting rules. The stock closed down 10% in a tough tape, which we think was then exacerbated by the 2019 EBITDA guidance.
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.
Shares of MAR are trading down 5% this morning (11/30/18) after MAR issued a press release announcing a data security incident involving the Starwood guest reservation database, which could include personal information (i.e. names, addresses, phone numbers, etc.) on up to 500 million guests who made a reservation at a Starwood property. For some of these guests the information includes payment card numbers, and MAR has not been able to determine if the card numbers will be able to be decrypted. After recently learning of a security breach, MAR found unauthorized access to the Starwood network since 2014. Recall MAR didn’t announce the Starwood acquisition until November 2015 and didn’t close the acquisition until September 2016, and the legacy Starwood systems are being phased out. MAR is taking steps to address the issue such as giving guests the ability to enroll in WebWatcher free of charge for one year, who will monitor the use of information and send an alert if information is misused. Guests in the U.S. will also be provided with reimbursement coverage.
After the market closed (11/28/2018) HGV announced a $200M share repurchase authorization with an open-ended timeframe. HGV also increased its credit facility by $600M. We think the buyback could be completed by YE20 with free cash alone, because HGV could generate ~$100M in FCF in 2019, and that’s likely the first year of FCF before it begins to more materially ramp in the coming years. HGV is currently at 0.8x net recourse debt to 2019E EBITDA, compared to peers at closer to 3x. We sense HGV has little desire to lever up to return capital, but just for some perspective every 0.1x of leverage adds ~$50M of debt (~2% of the market cap). We also expect HGV to take on more debt over time as EBITDA grows, while keeping leverage unchanged. See Exhibit 1 for a cash flow analysis. HGV did not announce a dividend today.
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.
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
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