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Peyto: Top Pick Performing

Peyto Exploration & Development (PEY.CN) remains our best long idea among North American E&Ps, as it has been since May 2012.  We think it’s the best run E&P company, as well as the best risk-adjusted return opportunity, in the entire sector; the 1Q13 results released last night strengthen our conviction.


On the Quarter and Outlook


Peyto delivered another solid quarter with production increasing 11% sequentially to 332 MMcfe/d (89% natural gas).  Cash costs came in at $1.01/Mcfe, which is, again, industry-best.

 

Current production is just over 61,000 boe/d and Peyto has another 5,000 boe/d “behind pipe” that will be brought on as soon as break-up is over (late May).  Assuming some natural decline over the final month of break-up, Peyto should be producing ~64,000 boe/d when those volumes come on-line in June/July.  Year-end 2013 guidance is 62,000 – 67,000 boe/d, but at this point we think 67,000 – 70,000 boe/d is more realistic given where production will be exiting break-up, and the Company’s plan to run 10 rigs all summer and possibly throughout the fall and winter (pending capital efficiencies).  If Peyto does run 10 rigs for the rest of the year (as opposed to the original guidance of 9) we expect full-year capex to come in ~$550MM vs. the $450 – $500MM guide.  With AECO gas around $4.00/Mcf and activity levels in western Canada muted, Peyto is in the sweet spot, and we like to see the Company putting as much capital to work as it can, without compromising efficiency.

 

The big news in the quarter was the 33% dividend increase from $0.72/share annualized to $0.96/share annualized.  We have mixed feelings about the decision – no doubt it will be applauded by the large Canadian investor base which holds dividends near-and-dear to its heart (a sentiment that we do not personally share, but whatever, to each his own), but good stewards of capital (return focused) are rare in the E&P sector and with Peyto being one of the best, we’d like to see that incremental $36MM per year invested back into the asset base.

 

However, we do appreciate that Peyto is growing production 30-40% per year and this year’s capital budget and 10 rig program is the largest in the Company’s history…  Oh yeah, and that it’s doing this with only 40 employees and an annual G&A budget of ~$12MM (including capitalized G&A). 

 

Peyto will be generating free cash flow in 2014, and there’s no reason to pay down the 3.5% credit facility.  If the Company believes it’s growing as fast as it sensibly can, we’re in no place to doubt it, so perhaps the dividend increase was the second best option (we like buybacks better).  Regardless, the fact that this is even a debate is a good thing.    

 

Too Expensive?  Broken Record


We get a lot of push back on valuation on Peyto – almost everyone tells us that it’s “too expensive”.  We heard it at $18/share and we hear it today at $29/share.  Frankly, valuation is one of the last things we consider in this sector because E&P NAVs involve so many assumptions that they’re almost arbitrary, and cash flow multiples can be misleading, as stocks are a claim on decades of earnings, not one year (COG and FST are great examples of misleading multiples).  In this sector, cheap often gets cheaper and expensive stays expensive.  Peyto’s industry-low cost structure, commitment to profitable growth (returns), unique corporate culture of creating shareholder value, and decades of drilling inventory is why we’re so bullish on this name.  If any of that changes, that’s when we’ll sing a different tune. 

 

Stats that Matter

  • Production: 332 MMcfe/d, +35% y/y (per share +26% y/y) and +11% q/q
  • Production mix: 89% gas/11% liquids, flat q/q.  New liquids volumes from the Oldman Deep Cut facility were offset by a higher percentage of Falher and Wilrich wells drilled, which are deeper/gassier zones than the Cardium.
  • Operating expenses (incl. transportation): $0.43/Mcfe, down $0.02 y/y and +$0.01/Mcfe q/q
  • G&A expense: $0.02/Mcfe, down $0.02 y/y and flat q/q.
  • Interest expense: $0.21/Mcfe, down $0.02 y/y and down $0.11 q/q.
  • Funds from operations (discretionary cash flow) were $103MM, or $0.69/share.
  • Capital expenditures were $167MM.
  • Net debt at end of Q: $750MM, +$88MM from 12/31/12

 

Kevin Kaiser

Senior Analyst


Commodity Bubble Bust?

A capital equipment supplier to a cyclical industry is almost always more cyclical than the cyclical industry itself.  Bearish on commodities? Short CAT.

 

 

Summary 

 

At the Ira Sohn conference yesterday, Stanley Druckenmiller put forth an extremely bearish view on commodities.  As we understand it, his thesis is driven by increasing commodity supply and reduced Chinese fixed asset investment.  We in no way claim to be as smart, savvy or good-looking as Mr. Druckenmiller, but we do agree with much of his commodity thesis.  

 

In our March 2013 Mining & Construction Equipment black book, we highlighted an environment that appeared weak for commodity prices and downright terrible for resource-related capital investment.  The data do point to a very negative commodity price environment, but even flat commodity pricing would likely result in large declines in commodity-related capital investment.  Importantly, these are not short-term headwinds, but are rather multi-year, largely unavoidable negatives.

 

A key conclusion is that resource-related capital investment – the key end-market for CAT, KMTUY, Sandvik, JOY and others – is likely to drop by approximately 50%-80% in the next few years (and stay there), not the 10%-20% expected by most bearish forecasts.  Mining and other resource-related capital spending, in aggregate, will not rebound back above 2012 levels this decade, let alone in 2014 or 2015, in our analysis.

 

We highlighted four drivers for the enormous price gains through 2011 that now appear to be reversing:

  • Under investment in the decade prior now met with over investment
  • Slowing Chinese fixed asset investment growth
  • Financial demand from investors, which can be subject to performance chasing
  • Easy monetary policy, which is at the whim of unelected central planners

 

Outlier Price Gains Attract Outlier Supply Growth

 

Copper 

 

Looking at real copper prices, the five year gains by 2010 and 2011 were the highest in over a century.  The gains even exceeded the transition from the Great Depression to World War II.  

 

Commodity Bubble Bust? - yy1

 

 

Not surprisingly, these gains have attracted what we estimate to be the most copper supply growth of the post-war period.  Most of it will come on line in the next few years because it takes 5-10 years to get a mine up and running.

 

Commodity Bubble Bust? - yy2

 

 

And the cash cost of the expected new production is far below current spot prices.

 

Commodity Bubble Bust? - yy3

 

 

While the charts above may not say much about copper prices over the next few weeks or months, the outlook for the next few years appears poor.

 

Iron Ore

 

The over-investment in commodity production goes well beyond copper.  By mass, iron ore has no doubt seen, and will continue to see, the most supply growth.  In the last ~12 years, iron ore prices increased by ~1,000%.   Really, that isn’t a typo.  Iron ore went from being a “rock” to a “commodity” and a Brazilian iron ore company went from being “CVRD” to “Vale.”  If it were not for the Indian production removed from the seaborne market by a series of Indian Supreme Court decisions, among other factors, iron ore would likely be in vast oversupply.

 

Commodity Bubble Bust? - yy4

 

 

Energy

 

Rapid capital investment growth can also be seen in the energy sector, as high oil prices, among other factors, attracted investment in new supply. (h/t Kevin Kaiser, Hedgeye Energy)

 

Commodity Bubble Bust? - yy5

 

 

Already In Oversupply


The judging by the growth total exchange inventories, many of these metal markets are already in over supply before much of the new production comes on stream.  If this continues, it is not good for CAT mining truck orders and it is not a factor that can reverse quickly.

 

Commodity Bubble Bust? - yy6

 

 

Chinese Fixed Asset Investment Slowing


Chinese fixed asset investment (FAI) is slowing.  The binge in FAI – a key factor that drove commodity prices higher – appears unable to continue at previous rates for a number of reasons.  We have already witnessed slowing growth and have hosts two excellent expert calls on Chinese financial and environmental regulation.  There is also excellent work here by Darius Dale on the Hedgeye Macro team.

 

Commodity Bubble Bust? - yy7

 

 

Critically, mining and resource expansion plans have come to rely on high levels of FAI demand growth from China, just as it appears to be drying up.  Rapid Chinese FAI growth was initially met with skepticism, but is now a standard assumption in metal demand forecasts.

 

Then again, there is scope for China’s economy to slow down from 2003’s frenetic pace and still achieve relatively high growth rates. The consensus is for an 8% growth in GDP, with a shift in the composition of growth away from investment towards consumption.”  - David Humphreys, Chief Economist, Rio Tinto, 2/4/2004

 

 

Investor Demand

 

Investors have had a very significant demand impact on a number of commodities.  In around 2001, it generally believed that the negative carry of gold in a portfolio was not worth its diversification benefits.  Five years later, following a period of very strong returns, commodities had become an “asset class.”  The problem is that commodities do tend to decline in real terms over time because the technology to produce commodities generally improves.

 

Gold

 

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” - Warren Buffett

 

Gold might be an okay short-term inflation hedge, but it is likely a terrible long-term one, at least from current levels.  In the long-term, gold will price at its marginal cost of production.  Said differently, if a buyer can dig it out of the ground for $800, he is not going to pay you $1400 for it.  For new Canadian gold mines, for example, that is actually the cost.

 

The other huge problem for gold is that demand is currently dominated by investors and central banks.  Around one-half of the gold is bought for financial reasons, a far higher ratio than 10 years ago.  If investors and central banks just stopped buying gold (let alone sold) one-half of gold demand would disappear.   That scenario would push marginal demand way down the marginal supply cost curve and probably yield a gold price in the $600-$800 dollar range.  The success of a current long gold position looks dependent on the continued purchases of performance chasing capital allocators.  If prices start to decline, as they have been, the risk of a reflexive tumble appears significant.

 

Commodity Bubble Bust? - yy8

 

 

The gold supply and consumption table is useful, too.

 

 

Commodity Bubble Bust? - yy9

 

 

Monetary Policy

 

If 10Y Treasuries were yielding 12% in the current inflation environment, we would bet that gold and other commodity holdings would look much less tolerable to investors.  Negative real rates on shorter-term low risk government debt definitely lower the opportunity cost bar for commodity holdings.  Experimental monetary policy has no doubt stoked investor fears of inflation, also driving further allocations.  In China and other countries, monetary policy has been used as a tool to stimulate investment in commodity intensive areas of the economy.  A weak dollar, the product of US monetary policy, also has a straight-forward impact on commodity prices.

 

Many excellent analyses of the impact on monetary policy on commodity prices have been put out by the Hedgeye Macro team (a top Q4 2012 Macro Theme, and they would probably note that timing matters).  They have also raised an important point:  with the job market improving at a fast clip, what happens when unemployment hits the fed’s 6.5% trigger level?  It seems likely that, at the margin, some of the easy monetary policy supporting commodity prices would be removed.  It is also likely to be dollar positive.

 

 

Conclusion


Rapidly growing supply, slackening investor demand, slowing Chinese FAI and marginally less accommodative monetary policy all seem poised to pressure commodity prices in coming years.  Even flat commodity prices can be a significant negative for resource-related capital investment.  The prospect of large, multi-year declines in resources-related capital spending leave us convinced that, long term, CAT is both a value trap and short opportunity.

 



CMG NOT A SHORT

If you have been reading out research regularly we are not shy about calling out if we the stock is a compelling short.  We have some shorts on our radar but CMG is not one!

 

Jeff Gundlach recommended CMG as a short at the Sohn Conference.  He has a simple take on the company and its competitive environment, contending, in essence that “a burrito is a burrito”.  Here is a quote from Forbes, reporting on his presentation, that goes some way toward summarizing his view:

 

“a gourmet burrito is an oxymoron... Barriers to entry aren’t all that high, when all that is needed to enter the market is a taco truck... I’m not impressed with [Chipotle’s] earnings growth or its high P/E ratio.”

 

We have a few points that are worth considering before shorting CMG alongside Mr. Gundlach:

  • P/E ratios may be artificially high because of overly-cautious earnings estimates. We think this is the case, currently, for CMG.
  • The company’s service model has redefined the industry and leads to above average margins and returns. Comparing CMG to others in QSR, in this regard, is not helpful.
  • “Food with Integrity” resonates with millennials and is clearly an early move within a much broader industry trend.
  • The barrier to entry point applies to all varieties of food, hamburgers, etc. We do not understand this point.

 

What Would Make CMG a Short?

 

We would short CMG upon gaining conviction that its growth story is faltering. New Unit Volumes are, increasingly, a key metric to follow with respect to future sales trends.  This trend seems to be improving. We were overly gun-shy in January, when this metric was showing signs of turning around, in staying on the sidelines. While earnings revisions continued lower, the stock moved higher in anticipation of better sales growth. As long as the macro environment continues to improve, we believe that this metric will continue on its current trajectory.

 

CMG NOT A SHORT - cmg new unit auv growth

 

CMG NOT A SHORT - CMG sales growth new unit auv growth

 

CMG NOT A SHORT - cmg eeg

 

CMG NOT A SHORT - CMG ROIIC

 

CMG NOT A SHORT - cmg pod 1

 

 

To sum up, here are some of the more CMG important metrics that suggest that CMG is not a short:

  1. Sell-side sentiment has deteriorated over the past year
  2. Buy-side sentiment is negative as shown by high short interest
  3. New store average unit volumes are rising
  4. ROIIC on a TTM basis has stabilized and rising
  5. EBITDA to Cap Ex is 3.0x
  6. 2013E EPS estimates are rising
  7. SSS comparison get easier for the balance of 2013 (and look to be trending positive in the current quarter)
  8. Food inflation is easing
  9. $500 million in cash and no funded debt on the balance sheet
  10. Valuation is rich, but reasonable given the growth model

CMG NOT A SHORT - cmg sentiment historical index

 

We believe investors shorting CMG here will suffer. CMG is a growth story, with easing inflation pressures, high margins and returns, that has seen sentiment sequentially deteriorate over the last year. We expect earnings expectations to increase over the next six months.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


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WENdy's: TOO FAR, TOO FAST

Takeaway: Wendy's has the leadership team to bring the company back to prominence in its space, but it will take some time.

This note was originally published May 09, 2013 at 08:03 in Restaurants

In CEO Emil Brolick, and the team he has assembled, Wendy’s (CEO) have the executive leadership to bring the company back to its former place of prominence in quick service restaurants (QSR). The indications from the quarter are that the turnaround will take some time. 

 

Dublin Was Not Built in a Day

 

We believe that the turnaround at Wendy’s is going to take time. Given that this recent run has been driven largely by multiple expansion, rather than earnings revisions.  We expect the stock to “take a breather” at this point given a lack of catalysts for it to continue on its current trajectory.   The next two quarters are likely going to see a choppy top line performance from WEN.

 

First Quarter Results

 

Despite sales coming in below expectations, Wendy’s managed to print an in-line earnings number of $0.03 per share.  Management raised its Adjusted EPS Outlook to $0.20-0.22, largely due to the refinancing of its indirect wholly owned subsidiary, Wendy’s International, Inc.

 

Quarterly stats:

  • SRS gained 1% in the first quarter “despite bank holiday and weather impact” vs consensus 2.3%
  • North America restaurant-level margins improved 100 bps yoy to 12.8%
  • North America co-op comps are guided to 2-3% (back end loaded)
  • Thinning out of the franchisee base as 90-100 closures expected in FY13

Takeaways

  • Discontinued breakfast offering will negatively impact ’13 comps, offsetting positive impact of reactivations.  The offset to this is the benefits from the image activation program. 
  • Wendy’s will serve as a backstop on GE loans to franchisees with at risk capital estimated to be “some fraction of $100mm”
  • Wendy’s is struggling with value-seeking customer – McDonald's (MCD) is making life very difficult for WEN to talk about value.  We believe that SSS could decline 1-2% in 2Q13
  • Still difficult to gauge how successful Image Activation will be – Tier 1 restaurant are too expensive and not providing the require returns.  WEN still experimenting with Tier 2 and 3 design and cost package.
  • Total cost to company, of fixing the asset base, remains severe – The initial $10 million incentive program will likely more than double over time. 

 

 

 

 

 

 


SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE?

Takeaway: While the KOSPI has looked good on the long side for a TRADE, it’s important that investors do not overstay their respective welcomes here.

SUMMARY BULLETS:

 

  • Leading up to and through the recent 1-2 punch of monetary and fiscal stimulus, South Korea’s benchmark KOSPI Index has recaptured its immediate-term TRADE and intermediate-term TREND lines on our proprietary three-factor quantitative overlay. Now bullish TRADE & TREND and demonstrably underperforming global equities in the YTD (-0.9% vs. +12.3% for the MSCI World Index), the KOSPI looks like a tasty market to chase (it’s up +4.2% from its 4/18 YTD closing low).
  • At a bare minimum here, South Korea is no longer a short/underweight candidate across the Asian and/or EM equities space. What would reverse this conclusion, however, is the resumption of yen declines – arguably the single most important factor that has weighed on the KOSPI in the YTD. Over the past month or so, the trend of appreciation across both the dollar-yen rate and the US Dollar Index has been suspended. To the extent this immediate-term phenomenon reserves – as we think it should on strong US consumption growth that is underpinned by improvement in the domestic employment and housing picture, as well as a perpetually-widening divergence between Fed and BOJ monetary policy – the earnings outlook for KOSPI stocks will once again come under pressure as Japanese exporters take market share, at the margins.
  • All told, while the KOSPI (and emerging markets broadly; South Korea is the largest component of the EEM etf at 14.2%) has looked good on the long side for a TRADE, it’s important that investors do not overstay their respective welcomes here. While our TREND & TAIL duration calls on the USD (i.e. bullish) and JPY (i.e. bearish) have certainly cooled off quite a bit in recent weeks, we don’t anticipate yen strength and dollar weakness morphing into any kind of sustainable trend. In fact, both the DXY and USD/JPY cross remain bullish from an intermediate-term TREND perspective on our proprietary three-factor quantitative overlay.

 

SOUTH KOREA – BACK FROM THE DEAD

Overnight, the BOK cut its Benchmark 7-Day Repo Rate to 2.5% from 2.75% prior. The move was predicted by six of 20 economists surveyed by Bloomberg News, which was a reasonable position for consensus to take, given that BOK Governor Kim Choong Soo actually opposed a cut last month.

 

That being said, however, this fairly meaningful acceleration in the BOK’s easing bias is not completely out of the blue: CPI tied a for a 13-year low in APR at +1.2% YoY and Export growth continued at a paltry +0.4% YoY pace in the same month. Additionally, the swaps market started to price in some magnitude of rate cuts going back to mid-FEB.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 1

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 2

 

Make no mistake, this decision was particularly political: the KRW’s +30.2% increase vs. the JPY since the 9/27 initiation of our bearish bias on the yen is weighing on the new orders of South Korean exporters – particularly in the autos, electronics and capital goods sectors – aiding their Japanese rivals in the process; reference our 3/25 note titled, “IS THE KOSPI IS LOSING ITS LEADING INDICATOR STATUS?” for more details. In the accompanying statement, Kim indeed stated that “Japan’s aggressive monetary easing has big impact on South Korea” and added that “a big fall in yen is a concern and threatens market stability”.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 3

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 4

 

Finance Ministry Director General Choi Sang Mok aggressively welcomed the cut; recall that the Park Geun-hye administration had been applying pressure upon the BOK to ease monetary policy to support their fiscal stimulus efforts. Regarding those efforts, the government said yesterday it will add KRW11.1 trillion ($10.2 billion) of financial support this year for companies – particularly to export-oriented SMEs – to help them cope with the demonstrably weak yen. This is on top of the recently ratified KRW17.3 trillion ($15.9 billion) supplementary budget announced back on APR 16 (~1.4% of GDP).

 

Leading up to and through this 1-2 punch of monetary and fiscal stimulus, South Korea’s benchmark KOSPI Index has recaptured its immediate-term TRADE and intermediate-term TREND lines on our proprietary three-factor quantitative overlay. Now bullish TRADE & TREND and demonstrably underperforming global equities in the YTD (-0.9% vs. +12.3% for the MSCI World Index), the KOSPI looks like a tasty market to chase (it’s up +4.2% from its 4/18 YTD closing low).

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - Korea KOSPI

 

SHOULD YOU CHASE?

Starting with our proprietary Growth/Inflation/Policy modeling process, the South Korean economy looks set to enter Quad #2 and remain there for the foreseeable future (i.e. 2-3 quarters at best). This move to a steady state of Growth Accelerating as Inflation Accelerates is supported by the aforementioned stimulus measures, as well as an outlook for directional weakness in the YoY strength of the KRW – particularly relative external inflation pressures, which mostly emanate from the commodities market as well as from inflows of “hot money”. Regarding directional pressures on CPI, it’s not enough to simply have commodity inflation/deflation; the currency’s relative strength or weakness to the key markets within commodity complex is what matters most.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - SOUTH KOREA

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 7

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 8

 

While Quad #2 is neither overtly positive or negative for equities, we think that because CPI remains demonstrably below the BOK’s +2-4% target range, the market’s focus will likely be on the likely acceleration in Real GDP growth – a phenomenon that hasn’t occurred in South Korea since 3Q11!

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 9

 

GLOBALLY-INTERCONNECTED RISKS REMAIN

At a bare minimum here, South Korea is no longer a short/underweight candidate across the Asian and/or EM equities space. What would reverse this conclusion, however, is the resumption of yen declines – arguably the single most important factor that has weighed on the KOSPI in the YTD. Over the past month or so, the trend of appreciation across both the dollar-yen rate and the US Dollar Index has been suspended. To the extent this immediate-term phenomenon reserves – as we think it should on strong US consumption growth that is underpinned by improvement in the domestic employment and housing picture, as well as a perpetually-widening divergence between Fed and BOJ monetary policy – the earnings outlook for KOSPI stocks will once again come under pressure as Japanese exporters take market share, at the margins.

 

All told, while the KOSPI (and emerging markets broadly; South Korea is the largest component of the EEM etf at 14.2%) has looked good on the long side for a TRADE, it’s important that investors do not overstay their respective welcomes here. While our TREND & TAIL duration calls on the USD (i.e. bullish) and JPY (i.e. bearish) have certainly cooled off quite a bit in recent weeks, we don’t anticipate yen strength and dollar weakness morphing into any kind of sustainable trend. In fact, both the DXY and USD/JPY cross remain bullish from an intermediate-term TREND perspective on our proprietary three-factor quantitative overlay.

 

SHOULD YOU CHASE SOUTH KOREAN STOCKS UP HERE? - 10

 

Alas, managing Duration Mismatch remains omnipotent to Global Macro investing.

 

Darius Dale

Senior Analyst


Carnival: Pricing shows weakness

Takeaway: As the tide slowly turns around, Carnival Cruise Lines might be left behind.

This note was originally published May 08, 2013 at 06:45 in Gaming

 

Carnival Cruise Lines (CCL) investors will have to continue to wait for a definitive inflection point in Europe.  Royal (RCL) and Norwegian (NCL) has kept yield guidance unchanged. Moreover, our monthly pricing survey suggests that CCL pricing remains under pressure. Aggressive promotions by Carnival indicates that to fill capacity, it needs to offer dirt cheap prices to potential cruisers. Carnival needs to repair its image worldwide—a tall task at a hefty price.  

 

As the summer season revs up, a barrage of promotional deals should be hitting your inbox if you've shown a tiny bit of interest on going on a cruise. While we’ve seen some usual promotions post Wave Season, one recent promotion was particularly striking. Princess, one of Carnival’s premium cruise lines, announced a special sale running from May 1-8, offering up to 50% off on more than 200 cruise itineraries throughout Europe and Alaska in addition to an onboard credit ranging from $25-$100. This Princess sale is not only early for Alaska (they did something similar for June last year) but it shows Carnival’s aggressive price discounting strategy to desperately fill up cabins in the critical fiscal third quarter (FQ3) period.  

 

While the Carnival brands continue to cut prices in its effort to regain loyalty, we've seen the competition capitalize on CCL’s misfortunes.  Royal & Norwegian pricing and bookings are doing particularly well in the Caribbean and MSC Cruises recently saw its April UK bookings almost double due to a successful promotional strategy of its newest ship, the MSC Preziosa. 

 

Here is what we’re seeing from our proprietary pricing survey for May in Europe and North America.  We analyze year-on-year (YoY) trends as well as relative trends, determined by pricing relative to those seen near the last earnings date for a cruise operator. 

 

Europe

RCL recently mentioned on its conference call even though Europe still was struggling, the market was performing better than its expectations in February. Based on our survey, we saw that the RC brand pricing is improving YoY in Europe.  For FQ3, we estimate average pricing YoY for the Royal Cruise brand has been trending higher in the mid-single digits in May, up from low single-digits in April. NCL’s European pricing fell moderately for FQ2 on a relative basis but its FQ3 pricing gradually improved.  This is consistent with management's commentary on a very slow recovery in European pricing.

 

Carnival is lagging way behind. With the exception of Costa and a handful of Cunard itineraries, Europe pricing for other Carnival brands (e.g. AIDA, Princess, Holland America) are lower for the rest of the year and the trend is worsening.  In addition, Costa’s +30% YoY price gains in March for FQ3 have shrunk to +15% in May; on the brighter side, FQ4 prices remain up 30% YoY .

 

As for Princess, YoY pricing has slipped into negative territory in May, falling in the mid to high single digits—a substantial decline in trend from April due to the aggressive promotion mentioned above. 

 

North America

We continue to believe Carnival’s biggest concern should be the Caribbean due to the multiple operational failures.  The Caribbean accounts for roughly 34%, 23% and 29% of Carnival’s total itineraries for F2Q, F3Q, and F4Q.  The Carnival brand pricing suffered a sharp decline sequentially (~10%) in May for F2Q, F3Q, and F4Q. We also saw early F1Q 2014 pricing exhibiting weakness.

 

There was not much change in RCL’s pricing for the region.  It continues to be robust particularly in F2Q and F3Q.  Norwegian pricing picked up slightly in May. This divergence suggests that Carnival continues to lose share to Royal and Norwegian in the Caribbean market.

 

Alaska may not be as strong as people expect in 2013.  Summer prices were discounted substantially in May across most brands. It seems the discounting in Alaska is earlier than usual this time of year.  However, the expected record bookings should alleviate that. Carnival is also struggling in Mexico for F2Q and F3Q due to hard comps as the pricing trend remains lower. 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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