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.
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.
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.
This week we had RCL, HLT, and LVS report 3Q earnings. We have one key takeaway with one key chart for each to highlight below.
HLT beat consensus slightly but missed on RevPAR. 4Q guidance was a bit lighter due to timing/FX, but FY19 guidance was better than most expected. We won’t rehash anymore details, just check out our initial take here. The stock is currently down ~6% in late-day trading we think because of the tape and continued negative sentiment on the cycle. Although HLT isn’t seeing any demand softness, they did basically acknowledge that we’re later in the cycle and rising inflation/rates will likely cause new construction growth to continue to slow in the U.S.
HLT reported earnings this AM (10/24/18). The quarter beat consensus EPS and EBITDA slightly, though HLT missed on RevPAR. 4Q guidance was a little lower than expectations we think driven by timing and FX. HLT sounded upbeat in the press release and provided initial 2019 RevPAR guidance that we think was above what most were expecting. We’ll classify the report as better than feared given the stock is now down 22% from the 52-week high.
Last week our coverage universe sold off with the broad market, we assume mostly due to rising rates and trade tension. We have five observations with five related charts to highlight, which we think have relevance for our group.
This is a 30 page note we write each quarter where we update our thesis for each industry and company prior to earnings season with new charts. We’re also upgrading WH to Peer Perform.
Many believe and have expressed to us that we are late in the cycle, so our charts this week dig into three questions: 1) what level of pipeline cancellations did we see during 08/09, 2) what has RevPAR done in prior recessions, and 3) what is the earnings sensitivity to declining RevPAR.
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