In this week’s piece we discuss several topics from the week with charts, including 1) our near-term view on MGM following recent monetization, which we think will allow them to return 17% of the market cap to shareholders in 2020; 2) PENN’s rumored acquisition of Barstool Sports; 3) updates on the ERI/CZR merger; 4) read-throughs from airline earnings; and 5) leading indicators for Macau GGR.
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The coronavirus in China has been spreading, and has been confirmed to be transferable between humans, which has caused new concerns. In the most recent update on Monday (1/20/20) the number of coronavirus cases had risen above 200, up from 41 since early January, and it appears to have spread to some other Asian countries. It’s also resulted in at least three deaths currently. This scare seems to have caused Hong Kong listed Macau gaming stocks to decline ~6% overnight. The timing is unfortunate because the Chinese New Year week-long holiday period begins January 24, which is a key travel period. This could be nothing, or it could be something, but at the least there could be an impact to Chinese New Year travel.
In this 35-page note we discuss our views on our coverage after the 2019 rally and how we see 2020 playing out; we discuss key themes and update our thesis with new charts; we preview each company into earnings; and we also change ratings for WYNN, BYD, and CHH.
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.
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.
We see 10 key themes to watch in 2020, and in this note we’ll expand with several charts. The themes include, 1) the U.S. presidential election impact; 2) how market factors will impact our coverage; 3) continued timeshare (VAC) outperformance, led by solid trends and a possible HGV buyout; 4) continued soft RevPAR, but some potential improvement on the horizon; 5) cruise lines looking for a clean year into peak capacity growth to disprove the bear narrative; 6) CCL decoupling and whether they can right the ship; 7) regional gaming strength and a potentially better setup; 8) Vegas Strip revenue performance likely to remain strong and accelerate; 9) more Vegas Strip asset sales; and 10) still soft Macau GGR but likely better y/y performance.
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.
In this week’s piece we discuss our thoughts on 1) H’s reported interest in Xenia’s Kimpton properties, and how that could tie into a potential Grand Hyatt Seoul sale; 2) MGM’s reported interest in selling MGM Grand packaged with MGP’s Mandalay Bay; and 3) our view on NCLH following its Encore event this week. Lastly, if you missed our webcast this week please check out the replay or the slides. In the webcast we touched on several important factors for our group coming out of earnings season with 35 slides.
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.
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