Takeaway: While early, we are getting interested in $UPS & $FDX on the long side. FDX may pull capacity. Lucrative USPS contract up for grabs.
Express Carriers: Getting Interesting
- Express Carriers Long Out of Favor: We have covered Fedex and UPS for a really long time and have not been interested in them for a really long time. However, recent underperformance (i.e. valuation improvement) and a better cyclical set up is starting to make the group look more promising.
- Capacity Reductions?: Fedex appears to have added excess express capacity after the financial crisis and may announce its withdrawal at its October analyst meeting. That capacity reduction, among other factors, could be a help to industry utilization and margins.
- USPS Contract Up: We also note that the Fedex USPS contract is up for grabs now. UPS has a bid in. It’s a ~$1 billion in revenue with above average margins, so it moves the needle – down for FDX if it loses the business.
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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.
- 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.
- 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.
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:
- 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.
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
- 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
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.
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