Poor commentary from today’s HST call (4/28/17) is driving down the sector. Lodging stocks are getting hit hard today on comments from HST (not covered). HST reported earnings today and said on the call that “despite the cautious optimism we voiced on our last call, we have yet to see the special corporate transient customer return.” HST did go on to say that the rate of decline is slowing in that segment but it is still declining. HST also said that the forecast for business investment and corporate profits remains strong but they do not anticipate any material policy changes that would provide tailwinds until 2018 at the earliest. HST reaffirmed their RevPAR guidance for 2017 at 0% to 2%, and we don’t expect HLT and MAR to change guidance, either, when they report in the coming weeks. Lastly HST said group bookings weakened throughout the quarter, which actually is supported by the TravelClick data that just came out.
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This morning (4/28/17), SAIA reported 1Q EPS of $0.44 vs. Cons. of $0.41 and our estimate of $0.39. LTL tonnage beat our model by 70bp and LTL yields beat our model by 190bp, but margins missed us by 10bp. Total EBIT came in just slightly above our expectation, and SAIA benefited by $0.04 from a lower tax rate.
RCL beat the quarter on yields (initial thoughts here) and then kept the implied guide for 2Q-4Q despite concerns on Korea impacting bookings, as the rest of the world (mostly Europe) is offsetting any softness. None of that was really shocking to us, but good booking commentary is always good to hear, and RCL’s call felt pretty bullish, too, as China demand seems to be recovering again. Frankly we’re still a bit surprised the stock has rallied this much today this fast while materially outperforming peers. This is also the seventh straight cruise line earnings report where RCL’s stock has rallied. If investors are going to remain skeptical on this space and numbers are going to remain beatable then this will probably continue to happen.
Initiating shares at Outperform with a Year-End 2017 price target of $113. We initiate coverage of BURL at Outperform based on the following: 1) product breadth and assortment improvement as they execute their multi-year transformational strategy, 2) secular growth story amidst a challenged retail landscape, 3) universe-best inventory metrics, 4) consistent earnings growth with significant margin expansion potential, 5) white space in both real estate and category opportunities, and 6) sensitive EPS model with upside from share repurchases. Our YE17 price target of $113 per share suggests current upside of ~15% as BURL is one of few retail growth stories with significant potential for comp growth, square footage growth, margin expansion, and EPS upside. We acknowledge the relatively higher valuation versus peers and recent stock appreciation, but believe there is further room for ongoing EPS upside to drive shares higher.
Post CVS’ Analyst Day in New York last week (12/12/16), we have been mulling over the management presentations and the changing landscape in the PBM/retail industries in context of the company’s outlook for minimal growth in 2017 due to lost retail scripts. While we still believe that CVS is a worthy investment given its very adept management team and strong business model that returns significant amounts of cash to shareholders, we also see evidence that suggests its once-dominant vertical model has lost some of its marketplace advantage. This, coupled with the sheer size of CVS, suggests to us that growth rates are likely to be slower. However, with the equity valuation reasonable and well below historical averages, and with its significant cash flow generation and shareholder-focused management team, we remain Outperform-rated on the equity.
Johnson & Johnson (JNJ) expects the settlement of the offer for Actelion (ATLN VX) to close toward the end of Q2 2017. As previously announced, Actelion will spin out the drug discovery operations and early stage clinical development assets into a newly created Swiss biopharmaceutical company named Idorsia.
We spoke with a large chemicals shipper about recent demand, service, and pricing trends with the rails. Business overall is fairly mixed with weakness in pulp/paper end markets, but strength in agriculture and construction/industrial markets. Our contact is also seeing a pickup in drilling activity in parts of West Texas. Total rail volumes for this shipper were up modestly in 2016 as he shifted some traffic from trucks back to rails as rail service improved. Looking ahead, our contact expects volumes to stay flattish in 2017. He characterized current rail service levels as simply average and believes the rails will need to start bringing back employees. This shipper commented that his service levels improved when Hunter Harrison was at CNI and CP, so he’s hopeful for similar improvements at CSX. While train service on some routes with CNI and CP were reduced from 5 to 3 days/week, transit times improved. Our contact expects similar changes at CSX, but believes shippers have to be willing to make changes as well for the benefit of both parties. Moving to rail pricing, our contact is seeing 3%-4% rate increases on average this year, up from 2%-3% increases in 2016, and he’s seeing the largest increases this year from CSX and UNP.
While no two accounting related stock ‘blow-ups’ are perfectly identical, history rhymes and serves as guide in avoiding future blow-ups. Indeed, flexibility throughout the grey shades of accounting allows for aggressive managements to achieve desired financial results. Over the coming weeks and months, we plan to highlight various companies experiencing a financial restatement or accounting “blow-up” in recent years. To that end, we’ll explain the timeline of events, key financial statement items impacted, how investors reacted, and whether a proper financial statement review and analysis would have signaled elevated accounting risk exposure ahead of time. Previously, we reviewed the accounting issues and restatements that occurred at Hertz Global and Logitech.
This morning (4/28/17) the U.S Court of Appeals in D.C upheld the federal district court ruling in February that sided with the Department of Justice in blocking ANTM’s planned acquisition of CI. We think the mostly likely outcome is that ANTM ends its pursuit of the deal, making the 5/8 hearing between the companies on a temporary restraining order irrelevant. We expect the companies will now try to come to an agreement on the break-up fee, leaving CI free to explore its own capital deployment and strategic options including potentially a deal for HUM. Please see our recent note on CI/HUM in which we lay out why we think there could be a path forward for the companies to pursue and complete a deal.
AAL is suing Sabre, the GDS provider, over a distribution contract US Airways signed with Sabre in 2011. In December 2016 AAL (which inherited and carried forward the suit) won a district court verdict over Sabre that has the potential to truly shake up the airline-GDS model, in our view, in the long term. There have been a few recent developments, which we’ll lay out here.
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