Within just the last two weeks Brent crude is down 8% and the dollar index is down 2%. It’s unusual when both decline together, but it’s been happening. Meanwhile cruise stocks haven’t really responded since 4Q earnings season despite better fuel, better FX, and a stock market that is now higher, too. Can South Korea concerns really be weighing on the stocks this much? We think it’s overdone. Even today oil is down, the dollar is getting whacked on the French elections, and the market is up big, and yet cruise stocks are only up modestly. That seems odd.
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RCL was just upgraded to investment grade credit by Moody’s (Ba1 to Baa3). Moody’s was probably looking at 4Q debt levels, and we think 1Q net debt to EBITDA will have improved from 3.9x to 3.5x when RCL reports earnings in the near future. Note S&P still maintains a BB+ rating (one notch below IG), but an upgrade could soon follow especially after the Moody’s upgrade. We wrote about this possibility and what it means for the stock back in February (see note here). Historically we found that stocks outperform into and out of upgrades to investment grade credit, and we also found that in most cases investment grade consumer discretionary stocks traded at a premium to “junk” rated peers.
Yesterday PM (4/19/17) LHO (not covered) reported 1Q earnings and then hosted their call mid-morning today (4/20/17). This is the first lodging earnings report of the quarter which has implications for our coverage. Note ~90% of LHO’s rooms are located in eight major cities in the U.S., meaning they are not necessarily the most representative of the industry at large.
Overnight DICJ reported the breakout of Macau GGR for 1Q17. GGR was up 13.0% y/y in 1Q17 which we knew, but we learned today that VIP baccarat grew 16.8% while everything else (mass market) grew 8.5%. We previously assumed VIP would be up around 15% with mass market up around 11%. Better VIP and worse mass relative to our expectation has a dilutive impact to margins given our assumption that mass margins are about 3x-4x higher than VIP margins. Like last quarter we assume that VIP strength is also benefiting from premium mass as mass tables have been reclassified to VIP to support smoking. We also wouldn’t be surprised if VIP hold was higher than normal in the quarter.
Shares of NCLH have been under a bit of pressure since rallying sharply the day of its 4Q earnings report. We believe there are three main reasons for this: 1) the obvious geopolitical concerns, and concerns about travel restrictions to South Korea; 2) the market has stalled and NCLH is the more “risk-on trade” in cruise; and 3) we’ve heard some concerns that NCLH will not raise guidance when it reports earnings later this month, and we think the buy side is modeling in somewhere around $3.90-$4.00 for EPS in 2017. However, the stock is now trading around levels prior to its 4Q earnings report, which makes no sense to us if reason number three is the motivation for selling NCLH. By the way, whether management decides to raise or not raise this early in the year, we still believe the guide is very conservative for 2H17.
After the close WYN announced a new CEO for its timeshare division, Michael Brown, who comes from HGV most recently where he was COO. Mr. Brown has 25 years of experience in the business having worked at both HGV and MAR/VAC. Recall last November WYN announced the departure of its former timeshare CEO, who officially left on March 1. Mr. Brown makes logical sense not only because of his industry experience, but because of his experience at both HGV and VAC, who source more revenue from new owners, and significantly more of their owners are tied to their loyalty programs. We think these are two areas where WYN is trying to improve.
Earlier today (4/11/17) we toured CCL’s Experience & Innovations Center with senior management including CEO, CFO, and a host of senior level innovation gurus. The presentation and tour mostly centered on the Ocean Medallion, CCL’s new wearable technology that offers “experiential intelligence” for guests. In this note we recap the day with 20 takeaways.
This morning (4/7/17) CCL raised its dividend by 14% and authorized a new $1B share repurchase program. This shouldn’t be that surprising because CCL only had $280M remaining under its prior authorization as of March 24. The dividend raise is nice to see, though, and this is now the third straight year CCL has raised its dividend. There were some concerns that CCL didn’t repurchase that much stock in 1Q ($69M vs. last year’s quarterly average of $585M), so this is good to see. It’s also good timing, because cruise stocks are under pressure today because of U.S. airstrikes in Syria, but cruise line stocks have also stalled the past month or two as we have seemingly somewhat shifted into more of a risk-off trading environment, we think. Fundamentals still remain very strong, overall, and CCL’s announcement today is more verification.
This is a 25 page note we write each quarter where we update our thesis for the industry and each company into earnings and the remainder of the year with new charts.
We initiated on gaming and the Macau focused names on 3/27 with a Market Weight rating on the sector. We’ve been out marketing and on the phone a lot over the past week and this note highlights the key points of the feedback we’ve received, both positive and negative. We sense a pretty large binary divide on the Macau space right now. There are those that are really bullish in the near-term on Macau GGR improvement, and those that want nothing to do with the risks in Macau or simply are looking for reasons or opportunities to get short. MGM is our top pick, and that call was mostly well received. It’s hard to deny the longer-term story, cash flow, Vegas, the valuation, etc. The pushback we got on MGM was more about it being a consensus call, which we understand, but we’re not sure it’s as consensus as it actually seems as investors have rotated to more Macau focused names during this Macau GGR recovery.
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