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.
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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.
We aggregated pricing trends across multiple vacation options/destinations including cruise lines, Las Vegas casinos, hotels in multiple global markets, airline fares, Disney resorts, ski resorts, and rental cars. The purpose of our analysis was to compare pricing trends for cruises and Las Vegas casinos to alternative vacation options to understand if recent years of pricing strength may begin to make substitute vacation options more attractive, which some investors have expressed to us.
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.
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
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.
Within the last couple months we’ve seen an increase in insider buying activity in our coverage universe, with seven C-level purchases spanning six different companies since the end of June. This is actually the most activity we have seen in our coverage since 2009, which obviously turned out to be a great buying opportunity during that time.
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.
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