In this week’s piece we discuss some topics from the week, including 1) poor stock performance driven by coronavirus, including many stocks who have limited exposure to China; 2) a new CFO at PENN; and 3) an update on the timing of Japan gaming and how investors don’t seem very focused on the Japan opportunity, currently.
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As we begin a new decade, we look forward with ten predictions for our coverage over the next ten years. We also look back at the top ten themes that characterized the last decade for our coverage, which resulted in meaningful change.
We last published about the rapid spread of coronavirus on Monday (1/20/20) after the first scare. The issue has escalated, and overnight China ordered travel agencies to suspend travel tours. Again, the timing is unfortunate because the Chinese New Year week-long period just began. China has seemingly been aggressive in its efforts to combat the coronavirus with travel suspensions, as they were blamed for a lack of transparency during SARS in 2003, but it also now appears that there could be a meaningful impact to 1Q earnings for those exposed to China.
In this week’s piece we discuss several topics from the week with charts, including 1) our near-term view on MGM following recent monetization, which we think will allow them to return 17% of the market cap to shareholders in 2020; 2) PENN’s rumored acquisition of Barstool Sports; 3) updates on the ERI/CZR merger; 4) read-throughs from airline earnings; and 5) leading indicators for Macau GGR.
The coronavirus in China has been spreading, and has been confirmed to be transferable between humans, which has caused new concerns. In the most recent update on Monday (1/20/20) the number of coronavirus cases had risen above 200, up from 41 since early January, and it appears to have spread to some other Asian countries. It’s also resulted in at least three deaths currently. This scare seems to have caused Hong Kong listed Macau gaming stocks to decline ~6% overnight. The timing is unfortunate because the Chinese New Year week-long holiday period begins January 24, which is a key travel period. This could be nothing, or it could be something, but at the least there could be an impact to Chinese New Year travel.
In this 35-page note we discuss our views on our coverage after the 2019 rally and how we see 2020 playing out; we discuss key themes and update our thesis with new charts; we preview each company into earnings; and we also change ratings for WYNN, BYD, and CHH.
Last August it was reported that Apollo has interest in acquiring HGV, and then additional media reports in the following weeks noted HGV is pursuing strategic alternatives. It’s now been over four months and there still has not been an announcement. In this week’s piece we discuss four thoughts: 1) sometimes deals take time, and the ILG timeline is one example, as it took over 10 months for a sale to VAC after it was reported they were exploring a merger; 2) HGV has not rallied as much as we would have expected, implying to us the market is not pricing in a deal going through; 3) the risk/reward of HGV in a deal or no deal scenario seems attractive; and 4) VAC remains our top idea within our entire coverage, and we think they should benefit from any possible HGV sale.
Our coverage has had a great 2019, with the stocks in our group up an average of 42% YTD (S&P 500 up 29%), recovering losses from 2018 when our group was down an average of 26%. The stock market seems to be suggesting that we’re shifting back to early cycle and that the U.S. ISM manufacturing PMI is set to increase off the September low of 47.8. The question is how much is already priced into the stocks and can the rally continue in 2020? In this week’s piece we try to answer this question by looking at when our stocks peaked during prior cycles in relation to peak PMI. We also show where current valuations stand relative to the peak valuations in the last couple years for some context of the recent rally.
Our cruise, gaming, and lodging coverage universe has risen sharply in recent months during this risk-on tape. Within our lodging coverage specifically, current stock prices for our Outperform-rated hotel stocks (MAR, HLT, and H) are now above or near our target prices. So, our two options are to either raise target prices or downgrade the stocks. We choose to raise our target prices via higher multiples. We understand the optics of target multiple raises may not look great, but we think it’s the right decision, and in this week’s piece we discuss with several key points and charts.
We see 10 key themes to watch in 2020, and in this note we’ll expand with several charts. The themes include, 1) the U.S. presidential election impact; 2) how market factors will impact our coverage; 3) continued timeshare (VAC) outperformance, led by solid trends and a possible HGV buyout; 4) continued soft RevPAR, but some potential improvement on the horizon; 5) cruise lines looking for a clean year into peak capacity growth to disprove the bear narrative; 6) CCL decoupling and whether they can right the ship; 7) regional gaming strength and a potentially better setup; 8) Vegas Strip revenue performance likely to remain strong and accelerate; 9) more Vegas Strip asset sales; and 10) still soft Macau GGR but likely better y/y performance.
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