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CRUISERS: PRICING SURVEY UPDATE

Takeaway: Our pricing survey suggests CCL should provide solid 2013 guidance

Carnival will report F3Q earnings on Tuesday.  We believe the company will maintain FY 2012 yield guidance and give a solid 2013 yield outlook.  Not surprisingly, the FY 2012 EPS guidance range may be lowered slightly due to a 16% rise in bunker costs since the end of June.  We’re forecasting $1.86 for FY 2012 EPS and $2.64 for FY 2013 EPS, in-line and 6% above the Street, respectively.    

 

CCL should reiterate the tough yield comps in the Caribbean, particularly in F1Q 2013, but stress that early European summer pricing is picking up due to easy comps.   Given that CCL has risen 11% since F2Q earnings and trading at 14x forward earnings (close to 20 year average), we think bullish expectations are mostly priced in the stock.

 

 

SEPTEMBER PRICING TRENDS

 

Weakness in Caribbean pricing for some last minute bookings is dragging down F4Q performance but that is offset by further improvements in European pricing.  While it’s too early to make a call given the limited summer 2013 itineraries, Costa pricing looks like it is rebounding strongly.  For the most part, 2013 pricing looks solid, which is expected given easy comps in Europe after two years of substantial price discounting.

 

 

Here are some other conclusions from our cruise pricing survey.  The charts below track pricing trends on a relative basis—i.e. prices relative to that seen on the last earnings call i.e. RCL - July 20 and CCL - June 22.      

 

CCL

 

  • Caribbean continues to be a concern.  With some newcomers entering the market in 2013 (e.g. Carnival Valor, Princess ships, Norwegian Breakaway), pricing looks weak.  Caribbean pricing is down 3% in F1Q 2013, F2Q 2013 pricing is flat, and very early F3Q pricing is also down slightly.  F4Q 2012 is also being dragged down by Caribbean weakness.  The good news is that the trend in September saw sequential improvement from a month ago.
  • Europe pricing continues to improve in F4Q 2012.  However, Cunard Europe pricing continues to lag, particularly in F1Q 2013.
  • Mexico pricing is trending modestly higher in F4Q 2012 and F1Q 2013.

 

RCL

  • F4Q 2012
    • In the Caribbean, modest discounting is seen for some last minute bookings by Royal brands.  Celebrity pricing remains robust YoY but trend is deteriorating.
    • Europe is looking better though remain much lower YoY.
    • Asia pricing is solid.
    • While sparse in itineraries, South America pricing continues to weaken.
  • Caribbean pricing is slightly up in F1Q 2013 but down modestly in early F2Q 2013.  Like CCL, trend is improving.
  • Asia pricing is higher in F1Q 2013.

 

CRUISERS: PRICING SURVEY UPDATE - CCL1

 

CRUISERS: PRICING SURVEY UPDATE - CCL2

 

CRUISERS: PRICING SURVEY UPDATE - CCL3

 

CRUISERS: PRICING SURVEY UPDATE - CCL4

 

CRUISERS: PRICING SURVEY UPDATE - CCL5

 

CRUISERS: PRICING SURVEY UPDATE - CCL6


Weekly European Monitor: Charts of the Week

Takeaway: Draghi’s “unlimited” fuels the disconnect between fundamentals and the market; however there’s risk in blind following.

-- For specific questions on anything Europe, please contact me at to set up a call.

 

Positions in Europe: Long German Bonds (BUNL); Short EUR/USD (FXE)

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -0.1% week-over-week vs +1.3% last week. Bottom performers: Italy -3.8%; Russia (RTSI) -3.8%; Finland -2.7%; Hungary -2.5%; Austria -2.3%; Czech Republic -1.5%; France -1.4%. Top performers: Greece +4.4%; Slovakia +3.1%; Denmark +2.1%; Cyprus +1.7%. [Other: UK -1.1% and Germany +0.5%].
  • FX:  The EUR/USD is up +1.09% week-over-week.  W/W Divergences: GBP/EUR +1.24%; TRY/EUR +1.10%; SEK/EUR +0.94%; CHF/EUR +0.42%; NOK/EUR +0.05%; DKK/EUR -0.01%; HUF/EUR -0.25%; RUB/EUR -0.75%; PLN/EUR -1.76%; CZK/EUR -1.99%.
  • Fixed Income:  The 10YR yield for sovereigns were mixed week-over-week after peripherals fell decidedly in the last two straight weeks.  Greece saw the largest decline, -45bps to 20.34%, followed by Germany’s -10bps move to 1.60%. Portugal gained the most, rising +51bps to 8.60% and Spain gained +12bps to 5.76%.  Italy gained +5bps to 5.02% while most other countries were flat.  
  • Sovereign CDS:  Sovereign CDS were mostly higher on the week. On a week-over-week basis Spain led the charge at +32bps to 367bps, followed by Italy +18bps to 328bps, and Portugal +10bps to 474bps. Ireland was a notable exception falling -12bps to 277bps and Germany fell -3bps to 47bps.

Weekly European Monitor: Charts of the Week - 22. YIELDS

 

Weekly European Monitor: Charts of the Week - 22. CDS   A

 

Weekly European Monitor: Charts of the Week - 22. CDS   B

 

 

Charts of the Week

 

Due to the Central Banker Waves in recent weeks we’re focusing on the data this week vis-à-vis charts. We’ll continue to identify the risks we see across Europe and frame the political developments, however here we’ll let some of the more salient charts of the week do the talking. While Draghi has certainly made great waves with his newest “unlimited” sovereign bond purchasing program, we think there remains great risk in the market due to the constrained nature of the Eurozone; Eurocrat indecision on a concrete path forward; and grave hurdles in creating a fiscal and banking union across the Eurozone (and/or EU). 

 

What should remain is an environment of growth slowing, especially across the periphery, and to levels well below current consensus. Some of the forces acting on growth include: austerity, lower government tax revenues, high unemployment rates, reduced trade demand from key trading partners, all of which should continue to reduce confidence and spending across the economies.

 

Today we received a money card that we had long been expecting: Italy cuts its GDP forecasts for 2012 to -2.4% vs -1.2% prior and in 2013 to -0.2% from +0.5% prior. It also revised its public deficit estimates for this year from 1.7% of GDP to 2.6% and next year from 0.5% of GDP to 1.8%. These are massive misses!

 

In short, there’s a significant disconnect between fundamentals and market performance. We’re currently on the side lines given the risk profile and not playing into Draghi’s “unlimited” hand. 

 

Weekly European Monitor: Charts of the Week - 22. Euro indust and retail

 

Weekly European Monitor: Charts of the Week - 22. indust by country

 

Weekly European Monitor: Charts of the Week - 22. EU CAR

 

Weekly European Monitor: Charts of the Week - 22. china exports

 

Weekly European Monitor: Charts of the Week - 22. japan exports

 

Weekly European Monitor: Charts of the Week - 22. Spanish borrowing

 

Weekly European Monitor: Charts of the Week - 22. ZEW

 

 

 

 

EUR/USD:

 

Our immediate term TRADE range for the cross is $1.29 to $1.31. Our long-term TAIL line of resistance is also $1.31.  While Draghi’s “unlimited” promise has boosted the currency pair, we see a heavy line of resistance at our TRADE and TAIL resistance level that we do not expect to be overcome. We’re currently short the EUR/USD via the etf FXE. 

 

Weekly European Monitor: Charts of the Week - 22. eur USD

 

 

Data Dump:

 

Eurozone Labor Costs 1.6% in Q2 Y/Y vs 1.5% in Q1

Eurozone Economic Sentiment -3.8 SEPT vs -21.2 AUG

Eurozone Construction Output -4.7% JUL Y/Y vs -2.8% JUN

Eurozone Composite 45.9 SEPT Flash (exp. 46.6) vs 46.3 AUG

Eurozone PMI Manufacturing 46 SEPT Flash (exp. 45.5) vs 45.1 AUG

Eurozone PMI Services 46 SEPT Flash (exp. 47.5) vs 47.2 AUG

 

EU27 New Car Registrations -8.9% AUG Y/Y vs -7.8% JUL

  • Volkswagen (VOW.GR) 204,034 +1.6%
  • PSA (UG.FP) 81,562 (12.3%)
  • GM (GM) 53,586 (17.7%)
  • Renault (RNO.FP) 61,749 (13.0%)
  • Fiat (F.IM) 37,687 (17.7%)
  • Daimler (DAI.GR) 39,464 (0.3%)
  • Toyota (TM) 32,214 (5.5%)
  • BMW (BMW.GR) 42,894 (12.4%)
  • Nissan (NSANY) 22,668 (4.8%)
  • Honda (HMC) 8,567 +18.7%
  • Ford (F) 43,401 (28.7%)

 

Germany Producer Prices 1.6% AUG Y/Y vs 0.9% JUL

Germany ZEW Current Situation 12.6 SEPT (exp. 18) vs 18.2 AUG

Germany ZEW Economic Sentiment -18.2 SEPT (exp. -20) vs -25.5 AUG

Germany PMI Manufacturing 47.3 SEPT Flash (exp. 45.2) vs 44.7 AUG

Germany PMI Services 50.6 SEPT Flash (exp. 48.5) vs 48.3 AUG

 

France PMI Manufacturing 42.6 SEPT Flash (exp. 46.4) vs 46 AUG

France PMI Services 46.1 SEPT Flash (exp. 49.5) vs 49.2 AUG

 

Italy Industrial Order -4.9% JUL Y/Y vs -10.8% JUN

Portugal Producer Prices 4.0% AUG Y/Y vs 3.0% JUL

 

UK CPI 2.5% AUG Y/Y (exp. 2.5%) vs 2.6% JUL   [0.5% AUG M/M vs 0.1% JUL]

UK RPI 2.9% AUG Y/Y (exp. 3.1%) vs 3.2% JUL

UK Retail Sales w Auto Fuel 2.7% AUG Y/Y vs 2.3% JUL   [-0.2% AUG M/M vs 0.3% JUL]

 

Spain Mortgages on Houses -17.5% JUL Y/Y vs -25.2% JUN

Spain Mortgages-capital Loaned -27.4% JUL Y/Y vs -20.4% JUN

 

Switzerland Credit Suisse ZEW Survey of Expectations of Growth -34.9 SEPT vs -33.3 AUG

Switzerland Exports 0.9% AUG M/M vs -0.7% JUL

Switzerland Imports 2.4% AUG M/M vs -0.7% JUL

Switzerland Money Supply M3 8.5% AUG Y/Y vs 9.5% JUL

 

Netherlands Consumer Confidence -29 SEPT vs -32 JUL

Netherland Unemployment Rate 6.5% AUG vs 6.5% JUL

Netherlands Consumer Spending -1.5% JUL Y/Y vs -0.5% JUN

Netherland House Price Index -8% AUG Y/Y vs -8% JUL

 

Ireland Q2 GDP 0.0% Q/Q vs -0.7% in Q1   [-1.1% Y/Y vs 2.1% in Q1]

Ireland PPI 6.0% AUG Y/Y vs 4.5% JUL

 

Slovakia Unemployment Rate 13.2% AUG vs 13.3% JUL

Slovenia Unemployment Rate 11.7% JUL vs 11.5% JUN

Poland Producer Prices 3.1% AUG Y/Y (exp. 3.0%) vs 3.7% JUL

Czech Republic PPI (Industrial) 1.9% AUG Y/Y vs 1.3% JUL

Croatia Unemployment Rate 17.5% AUG vs 17.5% JUL

Lithuania Industrial Production 10.9% AUG Y/Y vs 6.2% JUL

Latvia Producer Prices 2.2% AUG Y/Y vs 2.1% JUL

 

Russia Disposable Income 7.2% AUG Y/Y (exp. 2.7%) vs 2.2% JUL

Russia Real Wages 7.8% AUG Y/Y (exp. 9.6%) vs 8.1% JUL

Russia Retail Sales 4.3% AUG Y/Y (exp. 4.6%) vs 5.4% JUL

Russia Unemployment Rate 5.2% AUG (exp. 5.5%) vs 5.4% JUL

Russia Investment in Production Capacity 2.3% AUG Y/Y (exp. 3.5%) vs 3.8% JUL

 

Turkey Consumer Confidence 91.1 AUG vs 92.8 JUL

Turkey Unemployment Rate 8% JUN vs 8.2% MAY

 

 

Interest Rate Decisions:

 

(9/18) Turkey Benchmark Repo Rate UNCH at 5.75%

(9/19) BOE minutes show vote to keep rates and asset purchases on hold was unanimous 9-0

 

 

The European Week Ahead:

 

Monday: Sep. Germany IFO Business Climate, Current Assessment, Expectations; Aug. Germany Import Price Index (Sep. 24-30); Sep. UK Nationwide House Prices (Sep. 24-28)

 

Tuesday: Mario Draghi will discuss the state of economic and currency union in the Eurozone with German Chancellor Angela Merkel in Berlin; Oct. Germany GfK Consumer Confidence Survey; Aug. UK BBA Loans for House Purchase; Sep. France Own-Company Production Outlook, Production Outlook Indicator, Business Confidence Indicator; Aug. Spain Producer Prices, Budget Balance: Sep. Italy Consumer Confidence Indicator, Aug. Hourly Wages

 

Wednesday: Sep. Germany Consumer Price Index – Preliminary; Sep. UK CBI Reported Sales; Sep. France Consumer Confidence Indicator; Aug. France Jobseekers; Jul. Italy Retail Sales

 

Thursday: Sep. Eurozone Consumer Confidence – Final, Business Climate Indicator, Economic, Indust. and Services Confidence; Aug. Eurozone M3; Sep. Germany Unemployment Data Released by Federal Labor Agency, Unemployment Change, Unemployment Rate; Sep. UK Gfk Consumer Confidence Survey; 2Q UK GDP – Final, Total Business Investment – Final, Current Account; Aug. Spain Retail Sales; Jun. Spain Total Housing Permits; Sep. Italy Business Confidence

 

Friday: Sep. Eurozone CPI Estimate; Jul. UK Index of Services; Aug. France Producer Prices, Consumer Spending; 2Q France GDP – Final; Sep. Spain CPI - Preliminary; Jul. Spain Current Account; Sep. Italy CPI - Preliminary; Aug. Italy PPI; Jul. Greece Retail Sales

 

 

Matthew Hedrick

Senior Analyst


CHART DU JOUR: STRIP SLOTS – A SECULAR DECLINE

Rationalization or decline, call it what you will but we don’t see it as a good trend

 

  • At 46,000 and still declining, the number of slot machines on the Strip is back to levels not seen since 1993.
  • Regional gaming expansion has had its impact and that pressure won’t let up with a significant number of new markets likely over the next 5 years.
  • Unfortunately, a lot of profit margin lies in slots and bad demographics should continue to be a headwind.

 

CHART DU JOUR: STRIP SLOTS – A SECULAR DECLINE - vegas1


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DRI SQUEEZING THE PIPS

Takeaway: $DRI took managing earnings to a new level in 1QFY13. Declining AUV's & industry-lagging trends do not bode well for the rest of the year

Darden reported a beat this morning driven by lower tax rate($0.02-0.03), reduced labor costs as a percentage of sales, and increased promotions at Red Lobster.  Darden’s EPS came in at $0.85 for 1QF13 versus expectations of $0.83.   We are not convinced by this beat and do not believe that FY13 comparable restaurant sales guidance is within reach.  Earnings sustainability is also a question given that comparable restaurant sales are negative and labor costs are being cut so severely. 

 

Income Statement

  • Revenues came in 0.2% above expectations
  • Restaurant level profit beat based on significant reduction in labor and other expenses but cost of sales were not as much of a benefit as expected because of increased promotional activity
  • Operating Profit missed due to increased G&A focused in part on advertising for Red Lobster and Olive Garden
  • Net Income and EPS beat helped by the tax rate (24% versus 26% expectations) benefit of $0.02
  • Average unit volumes at the Big Three declined -1.3% year-over-year after declining -2.3% in 4QFY12

DRI SQUEEZING THE PIPS - dri income statement

 

The table below highlights 1QFY13 comps at Olive Garden, Red Lobster, and Long Horn versus our expectations. 

 

DRI SQUEEZING THE PIPS - dri comp surprise

 

FY13 Guidance

  • Darden guided to 1-2% blended “Big Three” same-restaurant sales growth for the year
  • Food basket inflation is expected to be in the range of 0.5-1.5%
  • Unit growth of 5%
  • Total sales growth of 9-10%
  • EPS growth of 5-9%

 

Red Lobster  

 

During the quarter, Red Lobster repeated last year’s feast promotion, offering a four course seafood meal of $14.99 but ran the initiative for three weeks longer than last year.  Rather than finishing the quarter with crab fest, as it did in 1QFY12, Red Lobster offered endless shrimp for the last two weeks of 1QFY13.  Endless shrimp was effectively pulled forward and this negatively impacted mix in August.  We estimate that Red Lobster lagged the Knapp Track Casual Dining comparable restaurant sales index by roughly 350 basis points during 1QFY13. 

 

DRI SQUEEZING THE PIPS - rl POD1 1

 

 

Olive Garden – “New Promotional Constructs”

 

Olive Garden continues to disappoint from a same-restaurant sales and operational perspective.  The same esoteric lines on new “constructs” still punctuate management’s explanation of how Olive Garden’s turnaround is going to come about.  The remodeling initiative is set to begin, in earnest, in the second half of FY13.  We expect Olive Garden to lag the industry for the remainder of the year.  In terms of expectations, the Street is expecting a rebound in comps that we do not see as likely.  Olive Garden same restaurant sales lagged the industry Knapp Track index by roughly 60 basis points.

 

DRI SQUEEZING THE PIPS - OG SRS

 

 

LongHorn Steakhouse

 

LongHorn continues to be the bright star in Darden’s sky as same-restaurant sales grew 3.6% as two promotions and the lunch menu introduced in 2QFY12 drove sales in excess of expectations.

 

DRI SQUEEZING THE PIPS - LH pod1

 

 

Quantitative Levels

 

Keith’s quantitative model shows the immediate-term TRADE range for DRI at $54.66-$57.18.

 

DRI SQUEEZING THE PIPS - dri levels1

 

Howard Penney

Managing Director

 

Rory Green

Analyst


IL LICENSING ACCELERATES

Takeaway: New markets should be a big boost to the slot suppliers in the coming years and Illinois VLTs is providing a near term lift

At least something is going right in Illinois

 

 

Yesterday, the Illinois Gaming Board released a list of all licensees as of September 20th.  The list included 333 licensed establishments, implying approval of an incremental 153 establishments in September.  This is an acceleration over the 92 licenses granted in August.  To date there have been no establishment licenses revoked and only 10 establishments have been denied licensure.  There has been one terminal operator who had their license revoked along with one manufacturer and 22 terminal operators that have been denied licensure.  Currently there are 2,381 establishments pending approval, up 35% from August.

 

Starting in September, authorities began actively pursuing enforcement against locations operating “grey” machines.  Those found in violation of the law will be charged with Felony action.  The crackdown on "grey" machines should continue to boost the demand for legal VLTs.

 

Each location is allowed to operate a maximum of 5 machines so 333 approved locations implies a current maximum market size of 1,665.  We expect that about 1,000 VLT's will get shipped to IL in the September quarter with IGT machines comprising the majority of those machines.  Our best guess is that 3,000 VLTs will be shipped to IL in 2H2012 and by the end of 2013, the market should consist of about 10,000 units.  We expect that the majority of VLTs will be for sale with manufacturers providing financing to the route operators.  We are hearing that ASPs should be in the mid-to-high $12k range.

 

DETAILS ON PENDING APPLICATIONS:

Distributor:  4 (Cadillac Jack IL, Gametech International, Golden Route, PDS Gaming-IL)

Manufacturer:  3 (Cadillac Jack, Gametech, Golden Route)

Supplier:  6

Technicians:  39

Terminal handlers:  166

Terminal operators:  13

Establishments:  2,381 pending

 


The Trouble With China And Japan

Takeaway: War is unlikely, but election outcomes and economic growth are certainly at risk in both countries.

Over the last few weeks, there have been daily protests in China against Japan over territory in the South China Sea. Over 500 protests have occurred daily with the Chinese government rarely interfering, which is odd in the sense that the government is usually keen to keep demonstrations of this sort on lock down. The questions that outsides looking in have been asking are: what’s going to happen? Will the two countries undergo a trade war or a military conflict?

 

Military action is an unlikely scenario; both sides have too much to lose and are too interdependent on one another. That said, however, our Macro team believes that as the territorial dispute drags on, economic growth is potentially at risk as trade protectionism kicks in and sentiment becomes depressed. With the militaristic undertones of current policymakers on both sides in full swing, the conflict is unlikely to be resolved soon.

 

Hedgeye Senior Analyst Darius Dale brings to light what could happen as we head into 2013:

 

Both China and Japan have leadership transitions/parliamentary elections on the docket in 2013, so it would seem that maintaining a strong geopolitical face is in the interest of policymakers in both countries. Leaders who engage in defending the sovereignty of their nation tend to resonate well with their respective populace.”


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