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THE TRIPLE THREAT TO CRUISERS

As we pointed out in our 2/26/09 post, “CRUISING TOWARD STABILITY”, the cruise liners recently found their pulse.  The good news is that the customer is elastic.  Sure, prices are down a lot but at least the boats are full and the numbers are more predictable, at least for 2009.  For the first time in a while we believe the Street estimates for 2009 are reasonable.  That’s the bull case.

How long the bull case dominates the trading in the stocks is debatable.  Indeed, RCL and CCL are up 68% and 45%, respectively, off of their March lows.  It seems the 2009 stability thesis has played out.  Now for the bad news.

 

Capacity Kills

I have no idea what the consumer will spend in 2010.  However, if investors are looking for yield growth the economy needs to improve dramatically.  Capacity growth is huge, as depicted in the following chart.  If industry-wide capacity grows 10% in 2010, how can analysts project flat yield growth?  Maybe my calculator isn’t as smart as their slide rules but negative yield growth in 2010 is pretty close to a mathematical certainty. 

 

 

THE TRIPLE THREAT TO CRUISERS - cruiseline capacity

 

For investors hoping for capacity exiting the market, we’ve got bad news.  Even the older boats are still cash flow positive.  None of the operators, not even the small ones, have plans to reduce capacity, at least not through 2010.  Unfortunately, the new supply is pretty locked as well due to very putative termination costs of breaking a shipyard contract.

 

Demographic Headwind

As can be seen in the following chart, the number of Americans in the core cruising age group of 47-52 will grow only 0.8% in 2009.  This represents the first year in decades that growth in this segment falls below 1%.  More importantly, growth will slow every subsequent year until 2015.  The segment population turns negative in 2012 and remains so until at least 2020.  In 2020, the core cruising population will have dropped 9% from the peak of 2011.

 

 

THE TRIPLE THREAT TO CRUISERS - cruise demographics

 

The Wealth Effect

Given the business already booked and the price elasticity, 2009 revenue estimates are pretty reasonable and predictable.  However, 2010 estimates look way too aggressive due in part to the capacity issue discussed above.  Moreover, the significantly reduced wealth of the core cruising customer puts future demand at risk.  This age segment could be the most impacted by The Wealth Effect reversal.  A 50 year old is precisely the person that probably has much of his wealth in stocks and real estate, two of the hardest hit asset classes.  Those looking to retire early have likely pushed back retirement expectations, and are not happy about it.  Saving is more important now than almost any other time in their working lifetimes.  You think a cruise vacation might be “backburnered”?  I do.

 

The question now is when do investors turn their attention to 2010?  They are certainly feeling better about the 2009 outlook as indicated in the big stock moves.  However, when sentiment turns, as it inevitably will, 2010 will be the focus and it won’t be pretty.

 



THE AMERICAN CONSUMER

For the times they are a-changin'.

Bob Dylan

The consumer’s propensity to spend is driven by how he or she feels! Do you remember how you felt last December? To refresh your memory, at that time the current president of the U.S. was a complete lame duck and did not instill confidence, the U.S. financial system was near collapse, the unemployment rate was surging and the market registered its worst performance since 1931.  It seemed like the world was coming to an end! 

How do most people feel now?  As we have written over the past couple of weeks, consumer confidence is bottoming.  There has been a broad based rally in the S&P 500 due to a number of other factors; the VIX is declining; the dollar is down; housing is bottoming; we learned yesterday the ISM manufacturing index improved in February for the third consecutive increase; and the president of the US looks and acts like he is in charge.  Yes, it’s only been three months, but times have changed!

THE AMERICAN CONSUMER - consumer

All of this is clearly being manifested in consumer spending.  As seen in the chart below, Personal Consumption Expenditures has clearly bottomed.  Importantly it has bottomed for both discretionary and non-discretionary items.  Clearly, as we have moved through the early part of 2009, the policies of the Federal Reserve’s and the Obama administration have kept the US financial system from collapsing. Low interest rates have eased the burden on the consumer. 

Right now as I look at my screen the S&P 500 is at 836 up 3.7% today (over 11% in the past month) and the Consumer Discretionary etf is the best performing sector up 6.3%.  We are not out of the woods completely, but the King of the Depression (istas) target of 600 on the S&P looks questionable.

Howard Penney


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A Tough Visual To Argue With

Yes, Personal consumption stinks – but it reeks less than it has in prior months. Check out the chart below that Zach Brown whipped up – it’s a tough one to argue with. Personal consumption expenditures have bounced about half a percent off the bottom, but home furnishings and softlines are both up 2% over that same period. As this delta in spending gets better, and coincides with tight inventories, a favorable 300bp downshift in SG&A, and capex growth going from +12% last year to -8% in ’09. Now we've got some powerful shifts in China to kick start exports and open up capacity for lower-priced goods (esp shoes and apparel) by improving economics for local manufacturers. This shifts the balance of power back into the US supply chain as capacity opens up again, and bolsters my view that 2H09-1Q10 will show free cash flow growth revert from -80% today yy to +20%.

A Tough Visual To Argue With - American Consumer Chart

Names I like best in retail include BBBY, RL, LULU, PSS, LIZ, UA, and DKS. I don’t like those who are cutting into bone to print profit, such as Ross Stores, Gap, Iconix, Sears, Carter’s, and Jones.

For more detail, see my note from March 31 titled “Retail Narratives Don’t Get Much More Powerful Than This.”


THE AMERICAN CONSUMER

For the times they are a-changin'.
Bob Dylan

 

The consumer’s propensity to spend is driven by how he or she feels! Do you remember how you felt last December? To refresh your memory, at that time the current president of the U.S. was a complete lame duck and did not instill confidence, the U.S. financial system was near collapse, the unemployment rate was surging and the market registered its worst performance since 1931.  It seemed like the world was coming to an end! 

 

How do most people feel now?  As we have written over the past couple of weeks, consumer confidence is bottoming.  There has been a broad based rally in the S&P 500 due to a number of other factors; the VIX is declining; the dollar is down; housing is bottoming; we learned yesterday the ISM manufacturing index improved in February for the third consecutive increase; and the president of the US looks and acts like he is in charge.  Yes, it’s only been three months, but times have changed!

 

All of this is clearly being manifested in consumer spending.  As seen in the chart below, Personal Consumption Expenditures has clearly bottomed.  Importantly it has bottomed for both discretionary and non-discretionary items.  Clearly, as we have moved through the early part of 2009, the policies of the Federal Reserve’s and the Obama administration have kept the US financial system from collapsing. Low interest rates have eased the burden on the consumer. 

 

Right now as I look at my screen the S&P 500 is at 839 up 3.7% today (over 11% in the past month) and the Consumer Discretionary etf is the best performing sector up 6.3%.  We are not out of the woods completely, but the King of the Depression (istas) target of 600 on the S&P looks questionable.

 

Howard Penney

THE AMERICAN CONSUMER - amer


LVS: COST CUTTING CONTINUES

The recent LVS news has been positive, as has our stance on the stock.  However, following the Bill Weidner and Brad Stone departures, it seems that Mark Brown, President of both Sands Macau and Venetian Macau, has been dismissed from the company.  We’re all for cost cutting but is the knife penetrating too deep?

We continue to believe LVS is worth more than where the stock is trading, even after the 200% move off the March 9th bottom.  However, the number of senior management departures is starting to trouble us a bit, especially as they come at a time when LVS appears to be turning a corner.  Asset sales and refinancing now looks more likely, LVS is outperforming in both Las Vegas and Macau, and Sheldon is putting his money where his mouth is.

Sheldon needs to communicate how he will replenish the management ranks to keep this positive momentum going.  The Venetian Macau and Sands Macau can’t run themselves, neither can LVS corporate.


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