Cruise stocks were down 2% again today as Hurricane Maria makes landfall in Puerto Rico. Cruise stocks are now down 8% month-to-date versus the market up 1% following the series of hurricanes. Booking activity has presumably slowed in recent weeks, as we’ve previously highlighted, and there will also be a financial impact to C3Q for canceled sailings. But the main concern we’ve heard from investors is about future demand, into YE and 2018 given lasting destruction to some of these islands as well as potential aversion to cruising during 2018 hurricane season.
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CCL will report F3Q earnings later this month, with 9/26 reserved as the tentative date. We expect to hear/see the following: 1) a small negative impact to earnings from Hurricane Irma and an even smaller impact from Hurricane Harvey (we assume ~$0.05/share in total, and most of this should hit in F4Q for CCL); 2) a positive $0.06 fuel/FX impact to FY17 EPS since the last guide, as the USD has weakened and Brent crude (how CCL hedges) has moved faster than bunker prices, 3) booking activity likely slowed in September from the hurricanes, as is usual, but has likely since improved, and this could cause the forward booked position to be slightly less positive than when last disclosed but probably not by much; 4) a very strong F3Q and strong close-in bookings; 5) continued solid commentary on F18, but no formal guidance; 6) reason for the changes in China deployments; 7) an update on the RM systems and the impact to yields; 8) buyback activity, as CCL hasn’t done much in recent quarters; 9) early impact to pricing from Princess ships with the new Ocean Medallion; and 10) whether CCL has revisited its hedging policy now that the futures strip is in backwardation.
We compared MAR and HLT to a large basket of stocks on two measures: capital returns and growth. The results show MAR and HLT among the very best in a broad universe. Few companies can do both well because normally growth has to be funded with capital that otherwise would be returned to shareholders. The beauty of these business models is that growth is funded by third party developers, allowing free cash flow to be returned to shareholders. And by the way, MAR and HLT have the best brands and therefore receive the most developer interest leading to outsized unit growth and market share gains.
Wolfe Research's Leisure, Lodging, and Gaming analyst, Jared Shojaian, provides a video overview of his note "Cruise Lines Top 15 Charts."
In this note we created 15 charts that we think are top of mind at the moment for many investors – whether bullish or bearish – though most of the charts tell a bullish story, in our view.
After the market closed (9/5) MGM announced the sale of National Harbor to MGP plus a new $1B buyback authorization. These have both been positive catalysts for the stock that investors have been awaiting.
Cruise stocks are down ~5% today (9/5) for a collection of reasons, we think mostly because of Hurricane Irma, but also to a lesser extent from developments in North Korea, rising fuel prices, and a weaker stock market. CCL/RCL hit all-time highs last Friday despite recent weakness in other travel stocks (i.e. airlines, lodging, OTAs, Vegas gaming), and a pullback seemed inevitable at some point. Pullbacks have been scarce all year, and we would take advantage of this one, especially since it seems driven by a transient weather event. This group typically performs well this time of the year, analyst day catalysts are ahead, consensus estimates need to come up, and the stocks are not expensive. We like all three stocks, but our best idea is NCLH where we see the most upside potential. NCLH is down the most today and they have the least amount of Caribbean exposure in 3Q!
CZR’s stock has been under pressure, with the stock down 13% since the July peak compared to only -4% for MGM. We think arbitrage noise is a big reason, and CZR equity is very thinly traded compared to MGM with only $21M/day in volume (8% of MGM). Our math implies that the arbitrage trade has already been made, and that should be relieving for the stock. Now to be fair, the debt has been somewhat weaker of late too, which we think is more about broad market weakness (as seen by MGM’s weakness, too).
We’re upgrading shares of MAR to Outperform and establishing a $109 YE17 target, based on 14x our 2018E EV/EBITDA. We’ve been waiting for a pullback and this might be the most we see. Although the stock has run since the election, we see potential for >20% upside by the end of next year. Tax reform could create even more upside, and doesn’t seem priced in. This is a 17 page note where we dig into reasons for the upgrade. Our estimates are unchanged. MAR and HLT are now our two favorite ideas in lodging.
August Macau GGR increased 20.4% y/y, above the 18% average we think investors were expecting. We assume GGR was tracking around 25% prior to the typhoon which caused disruption to many properties primarily on the peninsula, so we’ll assume Hato caused a 500bp impact in the month. We believe operations have largely returned to normal levels and some of that 500bp impact may shift into September as mass consumers postponed August trips. August was surprisingly strong to us and underlying fundamentals in the Macau gaming market still appear robust despite recent policy actions and some modest concerns on the macro side.
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