The Economic Data calendar for the week of the 24th of September through the 28th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
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.
Takeaway: Draghi’s “unlimited” fuels the disconnect between fundamentals and the market; however there’s risk in blind following.
Positions in Europe: Long German Bonds (BUNL); Short EUR/USD (FXE)
Asset Class Performance:
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.
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.
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
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
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Rationalization or decline, call it what you will but we don’t see it as a good trend
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.
The table below highlights 1QFY13 comps at Olive Garden, Red Lobster, and Long Horn versus our expectations.
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.
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.
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.
Keith’s quantitative model shows the immediate-term TRADE range for DRI at $54.66-$57.18.
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)
Terminal handlers: 166
Terminal operators: 13
Establishments: 2,381 pending
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