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Vacation Unchecked

This note was originally published at 8am on June 28, 2013 for Hedgeye subscribers.

“Be good or I’ll send you on a nightmare cruise.”

-A warning to children that is spreading fast among parents

 

It’s Friday and time to start planning your summer vacations, if you haven’t already.  What will it be? A gambling spree to Vegas or white-hot Macau? A trip to Six Flags, Disney World, a vacation resort, or an exotic country?  Or spending less than the price per night at an economy motel for an all-inclusive (minus the cost of getting your butt there) cruise trip to the Caribbean? Here are 5 reasons why our Gaming, Lodging, and Leisure team, led by Todd Jordan, thinks the last choice should be avoided:

 

1)      A slim but fat enough chance that you may be stranded out in open water with no food and malfunctioning bathroom facilities. 

 

a.      12-year old Allie Taylor, who was abroad the infamous Carnival Triumph (aka poop cruise) where an engine fire stranded the ship for four days, described the moment perfectly, "I just wanted to vomit, like every second probably."

 

b.      Number of people at Hedgeye who want to take a chance aboard a ‘hot port-o-potty’: zero. 

 

2)     ‘I’m on Fire’—not because the ships love playing classic Bruce Springsteen but because they love to catch on fire e.g. Carnival Triumph, Grandeur of the Seas (operated by Royal Caribbean), Pullmantur Zenith (operated by Royal Caribbean)

 

3)     Norovirus (stomach flu) spreads like wildfire.

 

4)     If you’re new to cruising, think about which cruise brand and ship you trust.  Given all the embarrassing ship incidents in 2011-2013, it’s not easy to find one. Stick with the other potential 1st time cruisers, who have been turning towards other forms of entertainment, such as amusement parks and vacation resorts.

 

5)     Are you willing to save some bucks for mind-blowing unpleasantness?

 

We became bearish on the cruise industry from a TREND perspective starting with Carnival Cruise Lines (CCL) shortly after the Triumph incident (02/10/13). While Wall Street 1.0 and travel agents initially brushed aside Triumph as just another event, not really comparable to Costa Concordia—the Carnival-operated ship that capsized off the western coast of Italy on 01/13/12—we viewed the incident as a serious Carnival brand killer.  We believed Carnival needed aggressive marketing spending and discounted prices to fill capacity; Carnival later confirmed this on its F2Q earnings report, as promotional spending guidance will pick up in the 2H of 2013.  (see our notes, CHART DU JOUR: CCL: IT COULD GET SMELLIER (02/14/13) and CCL: SINK OR SWIM (03/19/13) for more details.)  After two guidance cuts, mainly stemming from the Triumph incident, Carnival’s EPS and yield expectations for FY2013 are finally reachable, but the company admits it will be a slow recovery for the tarnished Carnival brand (2-3 years). 

 

With Carnival licking its many wounds, we think the next opportunity on the short side is with Royal Caribbean (RCL). While RCL picked up market share in the face of Carnival’s woes early in the year, its own recent troubles may pressure performance for the rest of the year.  Based on our mid-June proprietary pricing survey for ~13,000 itineraries, we’re seeing pricing weakness in the RC brand.  The RC brand accounts for 64% of RCL’s total capacity for 2013.  Part of the discounting was attributed to negative publicity surrounding the Grandeur of the Seas fire (05/27/13)—a RC brand—but the pricing trend has signaled further deterioration since early June.  We analyze YoY trends as well as relative trends, which are determined by pricing compared to the last earnings/guidance date for a cruise operator e.g. RCL: 4/25.  Europe is particularly concerning for the RC brand in F3Q, as YoY pricing has turned negative, a sharp reversal from modest growth in May.  RC brand pricing is also struggling in the Caribbean, declining in the mid-single digits in mid-June, substantially lower than that seen in May.  So far, F4Q pricing is relatively unchanged relative to late April. 

 

Alaska is another region to keep an eye on.  While Alaska is bolstered by record bookings, it is still discouraging to see the Celebrity and RC brands significantly slash prices to fill cabins.

 

Thus, the tide may have shifted for Royal in June and the high end of its net yield guidance of +2-4% looks too aggressive if the pricing weakness continues into the summer months.  While Carnival mentioned on its F2Q conference call an improvement in the performance of its European fleet, it is mostly based on its Costa brand’s outperformance.  RCL doesn’t have Costa nor as easy comps in Europe as CCL, and we believe the challenging and competitive environment there will continue to prevail for some time.  As for North America, the Grandeur fire has muddied the visibility somewhat.  It remains to be seen whether RC brand pricing will recover in the coming weeks.  Royal Caribbean also has been hit with some recent isolated ship incidents, i.e. two Celebrity Xpedition itinerary cancellations to the Galapagos due to violations of local law and the Pullmantour Zenith fire. 

  

These cruise operators just can’t catch a break.  We shouldn’t take a break with them.

 

For additional information on the cruise pricing database, company models, or written research, please contact sales@hedgeye.com.

 

Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):

 

UST 10yr 2.43-2.74% (bullish)

SPX 1559-1622 (neutral)

Nikkei 12815-13698 (neutral)

USD 82.33-83.89 (bullish)

Yen 96.67-99.67 (bearish)

Gold 1178-1295 (bearish)

 

Enjoy the summer weather,

 

Felix Wang

Senior Analyst, Gaming, Lodging & Leisure

 

Vacation Unchecked - ww.chartday

 

Vacation Unchecked - ww. porto


July 12, 2013

July 12, 2013 - dtr

 

BULLISH TRENDS

July 12, 2013 - 10yr

July 12, 2013 - spx

July 12, 2013 - dax

July 12, 2013 - nik

July 12, 2013 - dxy

July 12, 2013 - oil

 

BEARISH TRENDS

July 12, 2013 - VIX

July 12, 2013 - euro

July 12, 2013 - yen

July 12, 2013 - natgas
July 12, 2013 - gold

July 12, 2013 - copper


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 12, 2013


As we look at today's setup for the S&P 500, the range is 47 points or 2.45% downside to 1634 and 0.36% upside to 1681.                         

                                                                                                      

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.22 from 2.24
  • VIX  closed at 14.01 1 day percent change of -1.41%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: PPI, M/m, June, est. 0.5% (prior 0.5%)
  • 9:55am: U. Mich Confidence, July, P, est. 84.7 (prior 84.1)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: Baker Hughes rig count
  • Fed’s Plosser, Bullard speak in Jackson Hole, Wyo.
  • 5:15pm: Fed’s Williams presents paper in Vancouver 

GOVERNMENT:                                  

    • President Obama’s schedule TBA; Senate in session; House not in session
    • 12pm: CFTC holds meeting to consider “Final Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations”

WHAT TO WATCH         

  • Billionaire Icahn says he’ll sweeten Dell offer
  • China FinMin Lou Jiwei signals economic growth may miss target
  • China money-supply growth trails ests
  • Schneider Electric offers $5b for Invensys takeover
  • H&R Block to sell bank assets in plan to exit Fed oversight
  • Fannie Mae investors sue U.S. over 2012 terms of takeover
  • Bernanke, G-20, Dell, China GDP, Google: Wk Ahead July 13-20

EARNINGS:

    • JPMorgan Chase (JPM) 7am, $1.45 - Preview
    • Washington Federal (WAFD) 6am, $0.33
    • Webster Financial (WBS) 8am, $0.47
    • Wells Fargo (WFC) 8am, $0.93 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Crude Heads for Third Weekly Advance; Seen Rising in Survey
  • Gold Traders Most Bullish in Five Weeks After Fed: Commodities
  • Cocoa Processing in Asia Seen Falling as Powder Reserves Persist
  • Coffee Harvest in Vietnam Heading for Second Highest on Rainfall
  • Copper May Decline 13% on Death Cross Signal: Technical Analysis
  • Gold’s Decline Pares Best Week Since 2011 as Dollar Strengthens
  • Corn Falls on Signs of Ample Supplies Amid Declining Demand
  • Palm Oil Tumbles as USDA Raises Forecast for Soybean Supplies
  • Ships Told to ‘Shift Out’ at Kaohsiung on Typhoon: Inchcape
  • WTI Crude May Gain Next Week After Supplies Tumble, Survey Shows
  • Tokyo Commodity Exchange’s Ezaki Says Talks With CME Continue
  • Taqa to Halt U.K.’s Eider, North Cormorant Oil Fields End-August
  • Nickel Premiums Hit Lows Amid High Stocks, Oversupply: BI Chart
  • Coffee Climbs in London as Rain Seen Delaying Crop in Indonesia

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


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THE M3: GRAND WALDO SUSPENDED; S'PORE 2Q GDP;

THE MACAU METRO MONITOR, JULY 12, 2013

 

 

GRAND WALDO OVERHAUL TO TAKE SIX MONTHS Macau Business

Galaxy has requested government permission to suspend operations at the Grand Waldo hotel and casino for six months. Galaxy bought the controlling stake in the Grand Waldo last month and closed the property on July 1 for renovations.

 

It appears no major architectural changes will be made to the property and it may reopen in time for Lunar New Year.

Business Daily quotes a gaming industry source as saying that Galaxy Entertainment was “expected” to apply to use the Grand Waldo’s 38 live gaming tables and 148 slot machines at its other properties.

 

SINGAPORE 2ND QUARTER GDP GROWTH STRONGEST IN OVER TWO YEARS Reuters

According to advance estimates from Singapore's Ministry of Trade and Industry, 2Q GDP grew an annualized and seasonally adjusted 15.2% QoQ, nearly double the 8.3% median forecast of economists polled by Reuters.  The quarter-on-quarter expansion in GDP was the strongest since the first three months of 2011.  From a year ago, GDP rose 3.7%, improving from the first quarter's 0.2% YoY expansion and beating the median forecast for a 2.0% expansion.

 


 



YUM: THE WORST IS OVER – TIME FOR THE RECOVERY

Conclusion


Despite the significant volatility the company has faced since December 2012, YUM’s long-term growth story remains intact.  Yesterday’s earnings release suggests that the fallout from the chicken supply scandal and Avian flu issues are abating. 

 

Though we will wait for further confirmation on the near-term duration, we remain confident that the long-term upside for YUM shares represents an attractive opportunity for investors willing to look past the near-term issues.  The talk of the earnings call today quickly transitioned away from the poor results in China and toward the timing of the expected recovery in sales and margins. 

 

 

2Q13 Recap


The stock traded sideways as expected.  YUM reported 2Q13 EPS of $0.56 (-16% YoY) vs. Street consensus of $0.54.  During the second quarter, YUM demonstrated impressive COGS and labor controls.  The company maintained its guidance for the balance of 2013, including a 4Q turnaround in China same-store sales trends and a mid-single digit decline in 2013 EPS.  Importantly, trends in China continue to improve with June same-store sales down only 10% after coming in down 20% in May.

 

Other 2Q Highlights

  • The effective tax rate, prior to one-time items, decreased from 23.9% to 22.1%. This decrease positively impacted EPS results by 2%.
  • Same-store sales grew 1% at YRI and 1% in the U.S.
  • Both YRI and the U.S. had 80bps of restaurant margin expansion.
  • Operating profit declined 63% in China, while it increased 12% and 4% in the YRI and U.S. divisions, respectively.
  • China restaurant level margins fell 500bps in the quarter to 10.6%. 
  • Total international development included 315 new restaurants, with 76% of this development occurring in emerging markets.

 

China


The largest short-term risk to the YUM story comes from the built in expectations that China will turn the corner in 4Q13.  China’s June sales trend was only down 10%, indicating that sales are beginning to recover and moving in the direction of current expectations.  With Pizza Hut’s June same-store sales coming in at 6%, it is clear that the brand continues to build momentum.  Although the KFC numbers leave much to be desired, the comps appear to have bottomed out earlier this quarter.  Same-store sales have improved over the course of the quarter, moving from down 26% in April to down 13% in June.  We believe that China is on track for flat to positive same-store sales trends coming out of 3Q13 and positive trends early in 4Q13.    

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - YUM China SSS

 

 

Rest of the World


The YRI and U.S. segments of the business continue to be solid performers and contribute to YUM’s growth profile.

 

YUM’s YRI Division reported 1% same-store sales growth, led by 5% same-store sales growth in emerging markets.  This performance was somewhat offset by weakness in the developed regions where same-store sales fell 1%.  

  • Emerging markets system sales grew 12%, driven by 8% unit growth and 5% same-store sales growth.
  • Developed markets system sales grew 1%, driven by 1% unit growth; this number was partially offset by a 1% decline in same-store sales due to weakness in Japan and the UK.
  • Restaurant margin increased 0.8% and operating profit grew 12% in the region.
  • YRI is on track for a record amount of openings this year and continues to benefit from recent asset sales.
  • Opened 205 new units in 50 countries, including 129 new units in emerging markets.

 

YUM’s U.S. Division reported 1% same-store sales growth, led by 2% and 3% same-store sales growth at Taco Bell and KFC, respectively.  Taco Bell continues to be one of the strongest brands in the QSR segment.  The brand was able to increase same-store sales despite facing a 13% comparison from last year.  Same-store sales fell 2% at Pizza Hut in the second quarter. 

  • USA same-store sales increased 1%.
  • Taco Bell same-store sales increased 2%.
  • KFC same-store sales increased 3%.
  • Pizza Hut same-store sales decreased 2%.
  • Restaurant Margin improved 0.8%.
  • Operating profit increased 4%.

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - Taco Bell SSS

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - KFC SSS

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - Pizza Hut SSS 

 

 

Valuation


Similar to the rest of the restaurant industry, YUM’s valuation appears stretched.  We intend to issue a report card on YUM’s road to recovery as the company continues to report monthly same-store sales trends in China.  YUM’s long-term development plans in China remain intact, particularly as the company begins to focus on establishing Pizza Hut locations in lower tier cities.  We believe that the Street will soon shift its focus away from the recent negative results in China and will begin to focus on 2014 and the timing of a margin recovery.

 

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - YUM EV EBITDA

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - YUM PE

 

 

 

Howard Penney

Managing Director

 


REPLAY: Stratfor's Top Three Geo-Political Tail Risks Featuring George Friedman

This morning we hosted an expert call with George Friedman, renowned author, Founder and Chairman of global intelligence company, Stratfor Enterprises.   

 

George walked through "Stratfor's Top Three Geo-Political Tail Risks" with focused discussion on key risks and current geopolitical dynamics in the U.S.,  Europe and China.   30 Minutes of QA follow George’s prepared remarks at the 33 minute mark.  Replay details below.

 

REPLAY: CLICK HERE

*Note:  There were no slides associated with this presentation

 

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