Today we downgrade shares of CHH from Peer Perform to Underperform and establish a YE20 downside target price of $87, which is based on 14x our 2021E EV/EBITDA.
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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.
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.
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.
Adjusted EBITDA was $111M, which beat consensus of $109M and was in line with our $111M. RevPAR in the quarter was down 0.7%, missing previous guidance by ~170bp, however CHH was able to offset the RevPAR miss through outperformance on other line items such as better procurement revenue and lower SG&A expenses.
About half of our coverage has now reported earnings, and in this week’s piece we discuss some read-throughs for those set to report this week. Specifically, we’ll discuss five points: 1) our group is generally responding well to reports that haven’t been great; 2) read-throughs to NCLH from RCL’s report; 3) read-throughs to VAC from HGV and WYND reports; 4) we back into implied Vegas results for CZR and WYNN now that we have industry data and competitor reports, and it appears CZR had a strong quarter in Vegas; and 5) we back into implied Macau results for WYNN and Galaxy now that we have industry data and competitor reports.
In this week’s piece we highlight work from Wolfe’s Technical Analyst Team. Our technical team provided us their technical outlook for the stocks under our gaming, lodging, and cruise coverage, and we share their results along with how it ties to our fundamental views.
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