CCL reported F1Q this morning (3/26/19). Our initial take with more detail can be found here. The quarter was generally OK, but not great, but the guidance was worse than expected. The stock is trading down 10% we think mostly because CCL did not raise yield guidance as many expected given what appeared to be a strong wave season, and given what many thought to have been initially conservative guidance. The earnings call didn’t flash any warning signs on demand, in our view, but we also didn’t feel any sense of urgency from the company in a year where earnings are projected to grow only 4% y/y and ROIC still remains over a point below peers.
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Before the market opened CCL reported F1Q EPS. We thought the quarter was OK, but not great, as CCL beat by less than they normally do on yield growth. The FY guidance was disappointing, and the booking commentary decelerated some from last quarter. This is now the fourth quarter in a row where CCL has disappointed and the stock has traded down, while peers have been executing, so again we would not extrapolate this disappointment to RCL and NCLH. In our note last week, we explained several reasons why we think CCL has been underperforming on yield growth.
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.
MAR hosted a well-attended analyst day in NYC today (3/18/2019). Overall the day seemed mostly constructive to us and our three key takeaways are 1) positive EBITDA targets from net unit growth, 2) the business seems more resilient in the event of declining RevPAR than we think many perceived, but 3) cash conversion on the EBITDA targets was weaker than normal.
Since CCL’s last earnings report and subsequent earnings reports from RCL and NCLH earlier this year, many investors have asked what’s driving CCL’s yield underperformance. We think there are four main explanations, which we’ll explore, and we think there are solutions.
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.
Late last night (03/14/19) the Macau government extended the concessions – that is, the right to operate casino gaming – for SJM (not covered) and MGM from March 2020 to June 2022, which now puts them in line with their four other peers in Macau. The extension required minimal/immaterial payments and labor terms, in our view, with MGM paying the government ~$25M, paying SJM ~$2M, and establishing a labor-related bank guarantee of ~$101M.
This is a recurring piece we write monthly where we track several key monthly indicators, which have historically led Macau GGR growth. The data points for the most recent month show 10 of the 19 y/y indicators are better than the prior month versus 12 of 19 last month. We chart all 19 of the indicators, and we show a summary table in Exhibit 2.
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 downgrade shares of HST from Peer Perform to Underperform and establish a YE19 target price of $17, based on 10x our now lower 2020E EBITDA. Our thesis is largely based on the idea that we are later in the cycle with muted U.S. RevPAR growth and mounting margin pressures, factors that have a disproportionate impact for lodging REITs over C-Corps.
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