We just published a larger industry piece reiterating our bullish views on the industry, and we also upgraded CCL. That note can be found here. We’ve been bullish on cruise lines, but we’ve favored RCL and NCLH because we believed there was more upside at those names. We still prefer RCL and NCLH for near-term upside, but the prior rating is simply inconsistent with our views on the industry, even if there is still less upside versus peers. We think CCL will work with the group as our thesis plays out, as YTD stock performance has already proved. CCL is also actually cheaper than it looks if evaluating cash flow to enterprise value.
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We’re bullish on cruise line stocks, and the thesis is evolving. Coming into the year we were very bullish because we felt like 2017 was going to be a great year partly as 2016 headwinds became 2017 tailwinds, and we didn’t feel like that was fully appreciated. It still doesn’t feel fully appreciated, but the stocks are also up nearly 50% since mid-September and people are asking if things can get better. This is a 16 page note where we update our view on the space with new charts. We’re also raising estimates slightly on the improving FX/fuel dynamic for all cruise lines, while also upgrading CCL.
We forecast that Macau GGR for May will increase about 17% y/y, when it’s released on Thursday, June 1. Note May has the same number of Fridays/Saturdays y/y, one less Labour Day holiday, but three additional Dragon Boat holidays that shift from June to May this year.
NCLH is down 14% since reporting earnings last Wednesday (5/10/17), declining in every single one of those six trading days, too. Consensus barely even moved, and the stock is now trading at 10x our 2018E EPS. The stock is also now only up 13% YTD, yet industry and market fundamentals today seem much better than they did on January 1 (minus policy fears that have percolated over the last 24 hours). We sort of understand the reaction today, as this is the risk-off name, but the stock also traded down over 4% (RCL/CCL down 3%), and cruise lines don’t benefit directly from corporate tax reform (no corporate taxes and no corporate travel), so massive underperformance for the group today (5/17/17) seemed odd even in a risk-off tape.
We are Underperform rated on WYN for two main reasons: 1) we think achieving guidance this year will be difficult; and 2) we do not agree with the valuation of the stock. We think bulls on WYN believe that WYN’s pieces deserve a similar multiple to its peers, and we think all of this spinoff talk has gotten people too excited. We do not believe that WYN’s divisions deserve peer multiples, and this note is specifically meant to explain why its hotel business deserves a discount to peers.
At 3:40 ET (on 5/15/17) it was reported by Reuters that LQ was exploring a possible sale of its business (not confirmed by LQ management). The stock closed up 13%. We’re not surprised by the news. We think that was the motivation for its planned spinoff announced back in January (note here). At the time LQ avoided every single M&A related question, probably for legal reasons. What is surprising, however, is that the stock rallied 13% today after doing nothing since announcing spinoff plans in January. It’s not hard to model in upside from a deal, but that requires a lot of assumptions, and we’re not sure a buyer is even interested. We assume Blackstone is a major driver behind LQ’s decision to sell itself, as they still own 30% of the stock.
This morning (5/10/17) NCLH reported earnings. They beat, and took up FY EPS guidance in line with the beat, while raising yield guidance and also raising cost guidance (see our initial note here). The stock initially opened down 5%, which felt like too much. The stock bounced around a lot on the call, a call that we generally thought was fine, but it also seems like 2H yield guidance might not be as conservative as some first thought. However, putting all the many pieces of data points together implies that 2H yields can still easily beat the 2H guide, holding the environment constant.
This morning (5/10/17) pre-market NCLH reported 1Q EPS ex-items of $0.40, vs. the prior guide of $0.36, and vs. consensus of $0.37 and our $0.39 estimate. NCLH beat on close-in yield and onboard strength, which isn’t surprising considering CCL and RCL did the same. NCLH took up net yield guidance more than most expected, but it was offset by other costs. We think the market should like this, though, because it seems to us that the EPS guide is conservative, and NCLH probably doesn’t want EPS estimates getting out of control again. We’d classify today’s results as good.
MAR hosted their earnings call this morning (5/9/17) after reporting yesterday. We wrote about the result and updated our estimates last night. The call today went well, and the stock is up >6% in mid-day trading. Demand commentary was good following the guidance raise yesterday. The P&L would suggest that integration is going well, and MAR confirmed that, while also citing specific tasks. Satisfaction from GMs appears strong, and synergies are trending in the right direction. The only negative takeaway today would be comments on group production.
MAR reported 1Q EPS ex-items of $1.01 beating prior guidance of $0.87 to $0.91, and consensus and our $0.91 estimate. MAR beat on RevPAR which grew 3.1% versus prior guidance of +1%-3%, which MAR attributed to better group and higher-rated business transient. MAR basically beat on everything else, too, with fee revenue, owned/leased hotels, and costs all coming in better than expected. MAR’s pipeline increased a healthy >2% sequentially from 4Q, and cash deployment was robust. MAR also raised guidance. It’s very hard to find anything in this report that wasn’t good. The stock is up 4% after hours, which feels about right.
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