In this week’s piece we discuss five ideas with five charts, including probably way-too-early hurricane forecasts for the upcoming Atlantic hurricane season as it relates to cruise lines; NCLH’s recent consistent beat and raise execution, and what that hasn’t meant for the equity multiple; why VAC’s planned analyst day later this Fall seems positive; RevPAR index gains for brands, who seemingly took RevPAR share from independents in 1Q, which we believe is positive for the long-term model; and softer Chinese credit data in April, and what that might mean for Macau GGR. Please click the link above for the full report.
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Last week was a busy week filled with cruise, gaming, and lodging earnings reports. In this week’s piece we highlight ten key themes with several charts. Please click the link above for the full report.
For our weekly charts this week we provide an update on IMO 2020 given on-going fluctuating fuel prices as well as some recent and potentially overlooked news on scrubber policy, which could become problematic for CCL. We’ll discuss and later in Exhibit 1 and Exhibit 2 we’ll quantify the potential impact to fuel expense. Please click the link above for the full report.
Last week we lowered our Lodging sector rating to Market Weight and downgraded HST to Underperform. Our view is we seem late in the lodging cycle and we think U.S. RevPAR faces risks. See our notes with our complete thesis here and here. To be clear we aren’t making a negative call on all lodging. We’re still bullish on timeshare (VAC and HGV), which is our favorite sub-group, and RevPAR isn’t a KPI for timeshare. We also think the hotel C-Corps can still work in a tepid U.S. RevPAR environment because the asset-light business models are powerful, and efforts by China/Europe to re-stimulate could start to favor names with international exposure like the C-Corps, but admittedly we now see less exciting upside to the C-Corps as reflected by our target prices. Given the move in lodging stocks as well as slowing U.S. RevPAR the risk/reward of the space seems less compelling. Owned real estate in the U.S. seems most exposed to our view, which is the reason for our downgrade of HST to Underperform. Investor feedback on our call has generally been receptive, and it feels like sentiment is definitely biased negative. From our conversations we even sense some bearishness towards the high-quality C-Corps.
Timeshare stocks have rallied hard since the Christmas Eve bottom, with VAC up 61%, HGV up 33%, and WYND up 39% versus the S&P 500 up 19%. However, the stocks still remain well off their 2018 highs. For example, VAC remains 35% below its prior high and HGV remains 31% below its prior high, and it’s been entirely a function of multiple contraction. Interestingly, the S&P 500 is now only 5% below its prior high and credit spreads have narrowed considerably.
Last Thursday (08/16/18) we sent out a video update with slides (located here) on our space highlighting the magnitude of the sell-off in gaming, lodging, and cruise line stocks and why we think our names present buying opportunities within the consumer space. The market continues to hover around all time highs, but the average of the stocks we cover are currently down 19% from recent highs, and it’s been driven by multiple contraction. There are various reasons for the weakness whether it’s fuel/FX related, hurricane related, Vegas group demand related, China macro related, or just overall cycle related, but we also think the stocks of our sectors are saying something different about the cycle and future risk versus what the broad market is saying and we think one is probably right and one is probably wrong. Now, we think re-positioning and just an overall rotation on mean reversion is another key factor, as retail names sensitive to the Amazon effect which underperformed last year are now outperforming this year. It’s likely that trade has been funded from the experiential travel names – the ones we cover – which materially outperformed in 2017.
MAR’s stock is now down 19% from its high in January, and the stock had a particularly tough week this past week after what appears to be some minor merger integration issues in the form of higher room terminations than expected. Sentiment on this stock has gotten poor, and we feel the need to reiterate and defend the bull thesis on this stock with five key charts. While admittedly there aren’t many identifiable “near-term catalysts,” we think MAR is too good of a company at this valuation, and these charts are meant for investors looking for quality on a pullback. Our thesis on MAR really applies to HLT, too, another stock we like for quality on a pullback. We’ll run through five charts and we’ll start with room terminations.
We see potential upside to travel and tourism-related spending as individual tax reform savings continue to ramp. So far in 2018 core personal consumption expenditures (gross) are up 4.3% y/y, which is actually decelerated from 4.5% y/y in 2017, despite individual tax reform resulting in higher paychecks. When looking at total PCE to account for higher energy prices the growth rates are the same in 2017 and YTD at 4.5% y/y. Within our coverage universe we see similar trends, as we show below in the first chart. Total travel spending on outbound travel and personal spending on outbound travel reported by BEA and NTTO have also decelerated as has casino gambling PCE reported by BEA. Hotel/motel PCE has accelerated slightly from 2017 as corporate RevPAR has improved we think in part because of corporate tax reform. Still, the implication to us is that individual tax savings have still not had a noticeable impact on consumer spending.
Cruise stocks declined 9% this week, on average, following CCL’s earnings report. CCL did not raise 2H yield guidance, and we think the most concerning comment for investors was the pacing commentary since March. That is, CCL said since March bookings volumes for the next three quarters have been running slightly ahead of the prior year at prices that are in line with the prior year. That’s worse than the commentary provided during the earnings report from the prior quarter. In the first chart below we’ve aggregated CCL’s pacing commentary in each quarter over the last several years. To make the table easier to visualize and plot on a graph we assigned values for each comment: “in line” gets a value of 0, “slightly ahead/behind” gets a value of +/-2, “ahead/behind” gets a value of +/-4, and “well or significantly ahead/behind” gets a value of +/-6. This is graphed in the second chart below. Notice that there have been prior periods where pacing has softened q/q, only to quickly improve q/q.
Shares of RCL are down 23% since the peak back in January, and its forward P/E multiple has contracted by 28% from 15.2x to 10.9x mostly due to rising oil/USD and concerns about future supply growth. RCL has undeservedly been hit the hardest in the group, in our view, which we attribute to more exposure to the Caribbean. We think RCL’s valuation has created a very attractive risk/reward and we have three charts to illustrate our view.
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