For our Weekly Sho we've recorded a 20-minute video with 36 slides highlighting our current views as we head into another earnings season. The cruise line section begins at 4:03, the lodging section begins at 9:00, and the gaming section begins at 15:40. Enjoy the rest of your weekend!
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Our coverage is up 24% YTD, on average, which is modestly outperforming the market. However, our coverage remains 21% below 2018 highs, on average, and also 10% below 2019 highs, on average, all while the market is near an all-time high. Our coverage mostly remains out-of-favor, in our opinion, but we see some opportunities. Within lodging our best idea is VAC. Within gaming our best idea is ERI. And within cruise our best ideas are RCL/NCLH.
Hotel brand loyalty is critically important because loyalty members pay higher rates, spend more while at the property, stay more frequently, and cost less (i.e. a direct booking guest without OTA commissions), which attracts developers and owners to the brand. Importantly, loyalty is growing. The combined loyalty at the major C-Corps (MAR/HOT, HLT, IHG, CHH, and WH) currently totals ~450M members. Five years ago, those same C-Corps had combined loyalty of only around ~270M members.
In recent years hotels have modified rate options within the booking process while also modifying cancellation policies, we think with a goal to reduce churn and cancellation activity. In years past, hotels offered a standard rate option – book now and pay at check-in. Now, hotels offer multiple options, including an option to pre-pay now at a lower but non-refundable rate. Hotels have also tightened cancellation policies for the standard rate (i.e. pay at check-in rate), with cancellation policies extending from 0-24 hours prior to check-in to in some cases now 72 hours before check-in. These policies have resulted in less cancellations, and on the last earnings call HLT cited cancellations are down 10% over the past several years.
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.
HST reported 1Q earnings yesterday afternoon (5/1/19) and hosted their call this morning. Adjusted EBITDAre was $406M, versus our $379M, consensus of $385M, and the implied guide of $379M-$411M. HST beat us on better total revenue and margins, despite missing on RevPAR. Following the beat, HST raised FY EBITDAre guidance by $27M after accounting for new disposition activity to $1,535M-$1,600M as comparable margins are now expected to increase 5bp at the midpoint versus a prior expectation for a decline of 20bp at the midpoint.
This is a deep dive report we write each quarter where we update our thesis with new charts and preview each company and update estimates into earnings. Since the Christmas Eve bottom the average of our coverage is up 32%. The absolute risk/reward now seems less compelling, but the S&P 500 is also up 22% since the bottom, and our coverage is higher beta and already meaningfully underperformed the market last year.
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.
Today (3/11/2019) we lower our sector weighting on Lodging from Market Overweight to Market Weight, and we also downgrade HST from Peer Perform to Underperform. The reasoning for the change is largely based on the idea that we are later in the cycle with soft U.S. RevPAR growth, which we do not expect to improve in the near-term.
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