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.
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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.
We spoke with two different owners of several WH properties to learn more about the economics and the value proposition of using the brand, particularly at the lower end of the chain scale. We’re calling this week’s “Charts of the Week” our “Conversations of the Week,” and below we include a paraphrased Q&A dialogue we had with these two separate owners. Note we rate shares of WH as Peer Perform despite a lower-end valuation because of high owner exits (~7% of rooms annually) limiting net unit growth relative to peers, and our belief that branding is less relevant for owners at the low end of the chain scale, particularly the very low end budget segment. We still believe the latter to be true, but we walked away from our conversations feeling marginally more constructive. Note, the two owners we spoke to are seemingly higher quality owners who own higher quality and newer/fresher properties than the domestic system average, in our view.
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.
WH reported 4Q earnings this morning (2/13/2019). The quarter was OK – further adjusted EBITDA of $134M vs. guidance of $127M-$138M, and excluding not-yet-realized synergies and the corporate cost adjustment the pro forma adjusted EBITDA was $125M compared to consensus and our $124M estimate, and guidance of $117M-$127M. However, the initial 2019 guidance was soft and missed consensus, which is why we think the stock closed down <1% today in an overall strong lodging tape.
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.
Earnings season has really just begun for our coverage, with only three companies reporting thus far (LVS, WYNN, and RCL). We have 10 observations to highlight with 10 charts, including takeaways from our earnings, read-throughs from other industries, and other non-earnings developments within our coverage.
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.
This morning (10/30/2018) WH reported 3Q further adjusted EBITDA of $177M, compared to guidance of $166M-$176M. Excluding not-yet-realized synergies the pro forma adjusted EBITDA would have been $169M compared to our $163M estimate, and guidance of $158-$166M. Despite the beat, the midpoint of FY guidance was essentially unchanged due to timing and weaker FX hitting in 4Q. There were no changes to FY rooms growth or RevPAR growth guidance, though WH did cite today on the call that the low end of the room growth range is more likely. The stock is trading up 5% today we think because it was oversold coming into today, and the report didn’t contain any new concerns to us.
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