- Worldwide passenger growth has outpaced berth growth for the last three years
- The cruise industry will see favorable supply dynamics thru 2015, which bodes well for pricing. Since 1981, the cruise industry has averaged more than 7% in capacity growth.
- We will see good yield growth in the next few years as long as passenger growth doesn't decelerate quickly
Positions in Europe: Short Spain (EWP); Short Spain (EWP); Long German Bunds (BUNL)
We don’t have a crystal ball when it comes to getting ahead of the massive political risk in Europe that will greatly weigh against the EUR/USD cross. That said, the most immediate catalyst for the cross is the Greek election this Sunday. We’re assigning a 60/40 probability of a victory for the pro-austerity party New Democracy. Anti-austerity Syriza party head Alexis Tsipras has been very vocal this week stressing that he wants to “keep Greece in the Eurozone and restore growth”, however based on recent opinion polls we’re still behind the opinion that Greeks identify their future “prosperity” bound with membership in the Eurozone, and not removed with the Drachma, and we think Greeks are uncertain Tsipras can deliver.
That said, we view the timing of Spain’s €100B banking credit line as incredibility inept. Leading up to Saturday’s announcement, Troika was playing a relatively strong hand of cards, positioning the vote in Greece along the lines: vote New Democracy and stay in the Eurozone, or vote Syriza and default and exit the Eurozone. Saturday’s Spanish bailout folded a number of those strategic cards and encouraged the view that Troika will remain an unconditional backstop, regardless of who wins. To this end, Syriza could make this a very tight race. Yet in our opinion the pop in Greek equities this week (+13.7% w/w) is baking in a ND win.
The first exit polls are likely to be published at 5pm GMT on Sunday with the first official projections due out a few hours later. However, we may have to wait until late Sunday night or Monday morning for conclusive results.
Either way, the winner will most likely need to form a coalition government and will get 3 days to get this accomplished. If that fails, it passes to the 2ndplace party for 3 days, and then to the 3rdplace party.
Ultimately we think the EUR/USD cross bounces on a New Democracy win and falls on a Syriza victory or any stumbles in coalition formation. That said, the wild card remains just how Eurocrats will responds on their Sunday conference call to the elections. Eurocrats, after all, can suspend gravity longer than you can remain solvent.
Keith shorted the EUR/USD today in the Hedgeye Virtual Portfolio. Our quantitative set-up for the immediate term TRADE support is $1.24 and resistance is $1.27. Our intermediate term TREND support level remains at $1.23 and resistance is $1.29. Our call is that if $1.23 breaks, look out below! And we’re not EUR parity folks because we see Eurocrats stepping in to prevent it.
The political set-up over the intermediate term TREND appears to simply be based on wait-and-see what happens in the Greek elections.
Don’t forget that Eurocrats tread slowly; it’s the market participants and the media that want a resolution from Europe yesterday. This could mean that headline risk moves the currency around, but it stays within a band between $1.23 and $1.29. As we said many times, given the constrained and conflicted nature of the Union of such uneven states under one monetary policy, Eurocrats have a long road to travel to save the region’s current fabric, if they can at all.
In a thick calendar for June we see a high likelihood that no firm policy action comes from the meetings this month. Monday starts the G20 Summit in Mexico; the Eurogroup and EcoFin meet on June 20-21; and the EU Summit convenes in Brussels on June 28-29. The main topics of discussion will include:
- Fiscal Compact
- Pan-European Deposit Insurance
- European Redemption Fund
- ESM (and EFSF)
- European Financial Transactions Tax
We continue to view Ms. Merkel as the Eurozone’s paymaster, the lead horse pulling the Eurozone cart along. We see Germany pushing the fiscal compact route, the initial building block should Germany even decide to sign off on Eurobonds or a pan-European deposit insurance facility. That said, we see agreement on a fiscal union over the near term as incredibly challenged as countries are unwilling to part with their fiscal sovereignty, which should put downside pressure in the cross.
Interestingly, there have been mixed messages on the Germans’ position regarding the potential of a €2.3T European redemption fund that would essentially take over the excess sovereign debt of all countries that exceed the EU’s Growth and Stability Pact’s 60% debt to GDP limit in exchange for stricter economic oversight. This, however, especially in its initial discussion, seems out of character for the Germans who don’t want to signal they’re taking on the bulk of Europe’s risk (debt) – even though they’re carrying the lion’s share— and it also goes against their positioning that the member countries should do more for themselves (at least initially) to sort their fiscal houses before big brother Germany or Troika has to jump in.
Again, you’ll have to trade around the rhetoric versus actions of Eurocrats on any of the six policy bullets (listed above) that will be debated in the go-forward meetings. We’ll continue to update you on this ever changing political scene and refresh our quantitative levels.
We would like thank a subscriber for sending this to us and wanted to pass it on as we are sure many of you have been a little confused as to geopolitical identities over the past couple of years.
1. “Spain is not Greece.”
Elena Salgado, Spanish Finance minister, Feb. 2010
2. “Portugal is not Greece.”
The Economist, 22nd April 2010.
3. “Ireland is not in ‘Greek Territory.’”
Irish Finance Minister Brian Lenihan.
4. “Greece is not Ireland.”
George Papaconstantinou, Greek Finance minister, 8th November, 2010.
5. “Spain is neither Ireland nor Portugal.”
Elena Salgado, Spanish Finance minister, 16 November 2010.
6. “Neither Spain nor Portugal is Ireland.”
Angel Gurria, Secretary-general OECD, 18th November, 2010.
7. "Spain is not Uganda"
Rajoy to Guindos... Last weekend!
8. "Italy is not Spain"
Ed Parker, Fitch MD, 12 June 2012
Daryl G. Jones
Director of Research
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We added UA to the Hedgeye Virtual Portfolio late yesterday. Here’s how we’re thinking about it on different durations...
First off, this is a situation that was brought on by a recent call we made on Nike, whereby the near-term TRADE and sentiment factors are definitely not in its favor. But for a company that we expect to so grossly beat the consensus estimates over two years, we’re not going to get too cute on the short side of that. The better near-term call, however, is to buy UA, where the near-term factors are the inverse of NKE (i.e. very positive).
Here Are Some Considerations on UA:
TAIL (3-years or Less): We think that UA will put up $3bn in revenue by 2014 – an impressive run given that it is coming off of a print of just under $1.5bn in 2011. That incremental top-line breaks out as follows. a) $500mm in core apparel growth, b) $300mm in incremental footwear, c) $300mm in international apparel, d) $250mm in women’s apparel, e) $125mm in accessories (having brought hats and bags licenses in house). Our confidence here is greater than it is with most other companies given that UA clearly has invested (and will continue to invest) the capital in the right places to get the job done. One of the key points we look at is that it’s sitting at an EBIT margin of only 11% -- when it could be printing a margin number with a 2 if it wanted (but would otherwise jeopardize forward growth potential). It’s tough for us to find any name out there in retail -- -sans LULU – where we can build a consistent annual EBIT growth model in the 25-30% range.
TREND (3 Months or More): A key consideration is that we’re now anniversarying a period last year where inventories were up an average of 70% as UA battled through problems with it’s supply chain. Even with growth humming in the 30-40% range, 70% inventory growth was not exactly a confidence builder for anyone building a financial model. Since these problems, UA has made many changes in its management ranks, created new positions, and made key external hires to get its fulfillment to where it needs to be. The reality is that this happens to just about every company going through different stages of maturation. UA is no different. Where it is different is the speed at which it appears to be fixing the problems. The Punchline is that this is gross margin bullish for UA in the coming 3 quarters. Lastly, one interesting angle here is that UA has less than 5% of sales coming from outside the US. With a strengthening dollar, this creates a situation where its failure has actually turned into a near-term benefit relative to competitors that operate globally and need to translate profits to US$. That ‘benefit’ should wane in 2013 when we start to see the benefit of the new organization UA has put in place in Europe.
TRADE (3-Weeks or Less): There are some mixed message here.
- On one hand, business appears stable, with the year/year change in apparel market share continuing on the uptrend. In addition, the Hedgeye Sentiment Monitor is sitting near the lowest levels in a year, and the company is about to execute a stock split. While we all know that this should not matter, the reality is that there are some people that will always think that a $50 stock is half as expensive as a $100 stock.
- On the flipside, footwear continues to do a whole lot of nothing. That supports the ‘where could we be wrong’ part of our longer-term call, is the potential for a capital infusion needed (hence lower margins) to amp up the footwear business to attain our revenue numbers.
- The bottom line is that our TRADE factors lend clear support at $101, with near-term upside to $107.
Just a quick point on valuation – something we think needs a bit of context with UA. By most metrics – P/E, EBITDA, EV/Sales, UA is just flat out expensive. But if you went by those metrics over the past 3-years, you’d pretty much have been wrong on both the long and short side almost every time. We think the better metric is EV/Total Addressable Market. For UA, that equates to about 0.15x based on our math. That makes it the cheapest name around. LULU is 0.33x, RL 0.45x, NKE 0.60x. Will that matter on a day where the consensus freaks out because apparel sales miss by 2%? No. But that’s when we think we’ll be able to step in and make the most money on one of the best names in the space.
UA’s Apparel Market Share Continues to Rebound…Footwear Not So Much
Some brand commentary from our private company contacts
- Given that most US incentive fees are so “out of the money”, brand management companies seem more interested in growing the top-line where they collect a percentage of revenues instead of focusing on the bottom line
- Almost all of the programs offered by brands are focused on growing the top line vs. achieving cost savings
- Still the premier brand company in North America
- High brand integrity
- Best reservation system
- Strongest exposure to corporate travel
- Marriott hasn’t been that aggressive in raising fees since they have a lot of large franchisees and operators that would give them strong pushback
- Salesforce One hasn’t been viewed as particularly successful by owners who complain that it’s more expensive than doing the selling of meeting business themselves and that MAR doesn’t necessarily have maximizing their profits as a top priority
- Program has not been popular with franchisees who have chosen to opt out for the most part as they see little upside in sharing their convention contacts with MAR
- Property owners where MAR is the operator complain that they have yet to see results from the shared services model but are hopeful that things will improve as group business revs up in the coming years
- We’ve heard that once MAR hits incentive targets, they shift business to other properties to maximize their fees
- The best brand portfolio internationally but isn’t the top dog in North America
- Perception that Aloft and Element are failed brands in North America. While Aloft does reasonably well in urban and high volume corporate travel markets, there are too many Alofts in suburban markets where the product doesn’t do well.
- Complaints that the materials they use are very cheap and the walls are thin
- Lenders refusing to lend on new Aloft developments
- Many of the ADRs in suburban markets are $80 or less
- HOT may come out with an Aloft refresh to salvage the brand in the next year or so
- Little interest in Element: no new openings in 2011, 1 in 2012 and 2 scheduled to open in 2013
- Really jacked up royalty fees since the Blackstone deal
- Increased fees from 4% in 2008 to 6% in 2012
- Lots of onerous kickback deals in their contracts like forcing franchisees and owners to buy internet from them at 3x the price of getting it from a competitive source
- Able to get away with the fee hikes given the strong performance and locations of their brands, high brand integrity, and a fragmented ownership base
- Higher leisure exposure though so MAR is still preferred by many owners who believe that it will be a long time before leisure travel returns to 2008 peak levels
- Brands are on the decline
- Little brand integrity. One franchisee referred to IHG as a brand “prostitute” allowing applicants through the door and being indiscriminate about what gets a IHG flag
- Older product base. Aside from the Holiday Inn Express brand, they are viewed as having a weak brand portfolio and little group loyalty amongst their customers.
- Working very hard to compete head to head with HLT and MAR
- Hyatt has good reputation amongst owners and is often a second or third choice for owners who can’t get a MAR or HLT flag
- Strategy is to be the conversion brand portfolio of choice
- When HLT, MAR, HOT kicks hotels out of their portfolio after the initial license term expires or if they fail to meet brand standards, WYN is waiting in the wings to convert those hotels.
- There are many that think WYN will grow faster than HLT or MAR over the next few years with limited new construction in NA
- Quality Inn is their go to conversion brand. The majority of Hampton Inns that lose a flag become Quality Inns and a decent percentage become Best Westerns
- The standard of renewing a license that expires from its initial term of 20 years is much higher than that of maintaining a flag during the license term.
- Many owners try to sell their hotels a year or 2 before the license expires
- A hotel with a good flag will usually sell for almost twice the price per key as an unbranded hotel in a suburban location.
- It’s not easy to get approved for a high quality flag since there are a lot of conformity hurdles
- Some investors look to buy the old full service Holiday Inns at $20k/key and turn them into Courtyards which sell close to $100k/key
The Macau Metro Monitor, June 15, 2012
U.S. MUTUAL FUND SELLS SHARES IN SANDS AND WYNN Macau Business
Waddell & Reed Financial is offering 41MM shares in Sands China from HK$24.18 to $24.68 each, and 55.5MMshares in Wynn Macau. The goal is to raise about US$250MM (MOP2 BN), according to terms obtained by Bloomberg News.
WYNN MACAU LOOKS TO RAISE CASINO LOAN Macau Business
Wynn Macau is considering raising its Wynn Cotai loan to US$2.5BN (MOP20 BN) from its initial goal of US$1.5BN. According to Bloomberg sources, Wynn Macau drew around US$2.7BN in commitments in the first stage of syndication.
MELCO CROWN SAID TO CONSIDER ADDING BONDS TO LOAN Macau Business
MPEL is looking to raise about US$2.2BN (MOP17.6 BN) in debt via a bond and a loan. It had already been reported that the gaming operator was seeking about US$1.4BN in a syndicated loan. Now the chatter is that Melco Crown is also considering a bond of about US$800MM. The final size of the loan and bond hasn’t been decided, the sources said.
OKADA FILES NEW CLAIM IN BATTLE FOR WYNN RESORTS STAKE Reuters
Okada asked a federal judge in Nevada to immediately restore the rights of his Universal Entertainment Corp. subsidiary, Aruze USA, as the largest shareholder of Wynn Resorts. Okada also filed an amended counterclaim against Wynn, the company's general counsel and individual board members.
SINGAPORE HOME SALES IN MAY DECLINE TO LOWEST THIS YEAR Business Week
According to Urban Redevelopment Authority, Singapore’s May private home sales fell 32% from a month ago, posting the lowest sales this year as the Europe crisis damped demand. Private home sales fell to 1,702 units last month from this year’s peak of 2,496 units in April.
SINGAPORE'S Q1 UNEMPLOYMENT UP SLIGHTLY, JOB VACANCIES FALL Channel News Asia
According to the latest labour market report released on Friday by the Ministry of Manpower, the unemployment rate edged up to 2.1% in March, from 2.0% in December 2011. After adjusting for seasonality, job vacancies dropped 9.7% over the quarter to 50,000, though this was still higher than the recent low of 49,200 registered in September 2011.
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