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Takeaway: CCL looks washed out (as are the bathrooms on the Triumph, finally) while RCL may be the stock at risk.

This is indeed a pivot for us - we’ve been crapping on Carnival (CCL) all year.  But with most of the issues flushed out, the stock may be bottoming out. 


Carnival: SHIPS OF STOOLS NO LONGER? - carcruise


In our latest pricing survey, Europe looks stable and with easy upcoming comps, CCL’s large European exposure should be an asset.  Moreover, CCL is doing better than the competition in Alaska and while the Caribbean outlook is still somewhat cloudy, our pricing survey did not indicate any further deterioration for early 2014 itineraries.  Could we be early?  It’s happened before but the hedge of Royal Caribbean (RCL) on the other side might be the solution, for those so inclined to a pair trade.


Our pricing survey actually presented a more uncertain 2014 for RCL.  Given RCL’s newfound position as the Cruise bellwether and recent stock appreciation to match, the risks look greater for that stock.  RCL won’t feel the Europe tailwind (“Europe tailwind”? it’s no longer an oxymoron) to the extent of CCL. 


Regionally, RCL faces pressure in all of its markets – potentially from CCL’s aggressive marketing strategy.  Pricing is way down in Alaska and Europe and RCL is overexposed to the Caribbean (highest since 2007) where visibility is the lowest.  Sell-side sentiment seems the most bullish in over 2 years.  While valuation is in-line with historical levels, RCL's earnings are at risk.


Here are some of the differentiating factors between CCL and RCL:


Editor's note: This is a brief excerpt from a recent report written by Hedgeye Managing Director Todd Jordan. For more information on how you can access Hedgeye Research click here


In preparation for RCL's FQ3 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



2H 2013

  • "In the second half of the year, we have lowered our revenue forecast by just under one percentage point due to lower expectations in China and some impact from the pricing environment in the Caribbean. In aggregate, our booked load factors and pricing are both up slightly for the full year. Since our last call, bookings have been slightly higher than last year after adjusting for capacity."


  • "Europe is developing about as we anticipated and we are expecting net yield increases in the mid-single digits for the year."


  • "The Caribbean, which represents about a quarter of our deployment in Q3 and almost half in Q4, is holding up pretty well. We are aware there has been a lot of focus in the investment community on the overall health of the Caribbean in light of some of the competitive pressures. And we would be naive to say that this has not affected us to some degree. But at a macro level, consumers seem to be recognizing the value of our brands and our pricing in the region continues to show improvement for the year."


  • "Asia is the only product in our portfolio that we are forecasting to have lower yields for the year."
  • "The territorial island dispute between China and Japan has forced us to drop Japanese ports-of-call from our itineraries, and in total we have had to modify 30 sailings. These modifications have resulted in some churn in our book-of-business as well as some volatility in the booking behaviors in the region."


  • "Our Pullmantur brand is one exception here (positive growth) and as Richard noticed, the brand will be putting much more emphasis on developing its business in Latin America."


  • "In recent weeks competitive pricing has gotten more intense.
  • "Throughout recent months, there has been a lot of promotional activity. We've discussed in the past that you can basically expect to see promotional activity throughout the revenue cycle."

2013/2014 BOOKINGS

  • "Bookings for both 2013 and 2014 are ahead of where we were at the same time last year, both in terms of load factor and pricing."

2014 NCC

  • "Our objective for next year is to at least achieve flat net cruise costs excluding fuel. And while we don't forecast what the price of oil will do, we do work aggressively to reduce our energy consumption."


  • "Onboard spending was much stronger. Onboard revenues increased 8.2% for APCD in the quarter and generated about $0.04 per share of favorability to our April's expectations.  Overall, we are generally seeing better spending behaviors out of the North American guests, but we are also enjoying very favorable results from our revitalization project. Gaming, beverage, specialty restaurants and shore excursions all out-performed."


  • "Current estimates indicate that we will reduce our year-end net debt balance by about $270 million versus prior year, which in combination with improved operating cash flows will help improve our credit measures as we continue to strive for investment-grade metric."


  • "Quantum of the Seas will enter the fleet just over 15 months from now. We are very pleased with her initial bookings since we opened for sail at the end of May. Quantum has already reached the projected load factor for her 2014/2015 winter season that we have set as a target for the end of this year. And the demand for her suite and new stateroom types such as the studios are particularly encouraging."

1H 2014 

  • "We're feeling pretty good about the first quarter. We had very strong load factors; our pricing is up slightly. As we look out beyond Q2 the numbers are really too small to extrapolate, but I will say that in all our quarters in 2014 our load factors and APDs are running ahead of where they were a year ago."


  • "I think we anticipated that Alaska had a terrific beginning of the year and it was unlikely to continue at that trajectory."


  • "Australia is a very attractive southern summer market for us. We have a strong presence there with both Royal Caribbean and Celebrity. We did expect pressure on yields this year from the capacity increases and we're looking forward to be – playing a prominent role in that market going forward in the future."

RCL 2Q YOUTUBE - rcl11


In preparation for HOT FQ3 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.








  • So, why are rates lagging? Group demand has been slow, which means that the order books are filling later, leaving group-dependent properties either reluctant to push rates or turning to lower year – yield channels
  • We expect REVPAR growth in North America to step up in Q3 from June trends, followed by transient demand. Leisure travel, in both July and August, is looking strong based on business on the books
  • North American REVPAR has been growing at about 6% through the first half and we are projecting that this will continue with rate accounting for 80% of the increase.


  • In the year, for the year group bookings have been weak this year, tracking in the low single digits, while bookings for future years have been strong. Group pace for 2014 and 2015 is currently tracking in the mid-single digits. We expect group softness will persist through the year.


  • Transient demand, especially corporate travel has remained robust. Helped by record low supply, occupancies hit new peaks. Rates were up 4%, accounting for 80% of the REVPAR increase. Rate realization has been held back by weak group demand, which is increasing room supply available for transient customers.


  • We've seen unrest in Brazil and most recently Egypt. And while Argentine prospects remain uncertain, for now at least they're not getting worse. Meanwhile, Dubai and the other gulf states are booming.
  • Business transient travelers have been the first to come back [Mexico] and our teams expect to build on its momentum for group and leisure. Meanwhile, resource rich economies like Canada and Australia felt the slowdown in demand for commodities. Both currencies have weakened and pulled the REVPAR growth below our system wide average
  • Middle East: We expect growth rates in Q3 to tick down in this region for a couple of reasons. Egypt, which was recovering nicely, is impacted by the recent turmoil and Saudi Visa restrictions are sharply reducing Ramadan-related travel. Things are expected to recover as we enter Q4.
  • With the crisis in Argentina and now a slowdown in Brazil, Latin America has struggled this year. Brazil was down 6% in the quarter, but by the demonstrations, a slowing economy and the impact of major renovations at the Sheraton Rio, which remains in the same store set. Mexico is helping mitigate some of this as it grows from increasing business activity as well as the return of the American vacationer.
  • As we enter Q3, we lap 16% declines in Argentina last year, so we might actually see Latin American REVPAR grow 5% to 6%.


  • Turning to Europe, the economic picture is still anemic overall. But as before though, our business is holding up pretty well. We attribute this to tight supply and our ability to bring in global suppliers to Europe – global travelers to Europe with SPG, and our global sales team.
  • Europe is steady but sluggish, as it has been for the past couple of years. It may surprise you that our strongest markets invest in Europe in Q2, were France, Italy and Spain, reflecting the mix of our business which is global and pan-European in scope rather than local. 
  • We expect this 2% to 3% growth rate to continue into Q3 as leisure travel looks good for the summer and we may benefit from Ramadan ending earlier in August.
  • We're lapping the London Olympics, so that will be a drag. While Greece is recovering well, Turkey could be challenged if riots persist. Recent news on the economic front has been more positive and pro-growth policies are likely as austerity fatigue sets in. We're cautiously optimistic that the worst may be behind us in Europe. 


  • India remains a soft spot and will likely remain weak until elections are completed later this year. Our results as reported in dollars have unfortunately been hurt by the sharp declines in the Yen, the Rupee, the Aussie dollar and other Asian currencies.
  • Asia accounts for most of our exchange rate headwind this year. The good news is that demand trends remain stable in the rest of Asia and we forecast growth rates to remain at the high end of our current global REVPAR outlook range of 5% to 6%.


  • In China, REVPAR growth continues to track well below the expectations we had at the start of the year.
  • We are reorienting our efforts to generate new sources of revenue from the private sector and consumer-oriented companies, which should benefit from the shift to consumption that the government seeks to drive. This is easier in the South and the East which have more diversified economies and higher per capita incomes, less so in the North and the West.
  • As we enter the second half, we begin to lap the slowdown in China last year.  As such, we expect REVPAR growth will pick up a bit to the 2% to 4% range.


  • Our vacation ownership business continues to perform very well. As you know, our priority here is to invest selectively with a focus on ROI, rather than earnings growth. 
  • Tours were up, close rates remain stable and price realization improved
  • Our loan portfolio continues to get better, with defaults at post-crisis lows. We will most likely complete our annual securitization of receivables in the fall. 
  • We still have 2 to 3 years of inventory at the current sales pace; we're selectively adding in Orlando, Palm Springs, and converting our resort in St. John entirely to timeshare over the next few years. 
  • Cash generation remains a priority for this business. We expect to deliver $200 million this year.
  • We're raising our full year forecast for SVO profits.  You should know that fourth quarter reported profits will be lower than last year, negatively impacted by GAAP deferral dynamics as well as some renovation activities at the St. John resort.
  • At the end of the quarter, we only had 22 condos left to sell or close. We have been raising prices and recent square footage rates have exceeded $1,500. Unfortunately, this gift will stop giving by the end of the year since we will be sold out. We are raising Bal Harbour profit expectations by $20 million to $110 million, and cash flow to at least $175 million


  • We're on our way to getting to a level where 80% of our profits will come from our fee business. Since 2000, as a part of getting there, we've sold 124 hotels, generated about $8.3 billion from those sales. We set a target of getting to that 80% by 2016. We think we can do this and we'll be selling approximately $3 billion worth of hotel assets as part of that process.
  • Selling $3 billion is probably about 60% to 65% of the value of our owned real estate. Somewhere, in that range would be our guess.


  • We expect that through the growth of our fee business, as we continue to expand our footprint and expand share, the performance of our owned hotel portfolio and cash that we'll be able to generate from our vacation ownership business, we'll be able to generate approximately $2 billion in cash. Add to that additional balance sheet capacity as we grow our EBITDA, it could be in the area of $3 billion that we will use to either redeploy within the business to grow it further or return to shareholders. And that doesn't take into account some cash that we could generate from the asset sales.
  • We will also discuss moving to a quarterly dividend starting in 2014. Stock buybacks remain a priority. 
  • I think we've made it very clear, we have no aspirations to being anything other than a triple B. Clearly, our ratio, as you said, are well below those levels. There were reasons why we couldn't be buyers in the second quarter. And those reasons are not relevant anymore, there are no constraints on our ability to buy and clearly there are no constraints in terms of our leverage and our ability to buy.


In line not good enough apparently



“Results for the quarter were excellent, with...strong performance in each of our business units...We have great momentum across the company, which when combined with our disciplined capital allocation strategy, will continue to create value for shareholders.”


-  Stephen P. Holmes, chairman and CEO



  • Enthusiasm from global franchisee conference
  • Expanded relationship with Grand City (17 hotels, 2,400 rooms), bringing WYN brand to Austria; opened Ramada Encore in Turkey
  • Added 4 brands in 12 new countries
  • Hotel group will be the fastest growing segment
  • RCI: premium platinum members eclipsed 200k
  • Rental business performed well despite choppy conditions in Europe
  • WVO
    • asset-light focus
    • sales & marketing initiatives:  
    • 1st sale of Margaritaville Vacation Club by Wyndham
      • Have begun telesales and expect full launch schedule for 1Q 2014
      • Expect strong visitation
    • NY sales that started in August running ahead of expectations; excited about other new city locations (Chicago-starting in November).
  • WAAM 2.0-3.0 will converge to WAAM Just-in-Time. Two deals in pipeline:
    • $10MM land in Beaver Dam, CO
    • Ground-up project with independent developer in Park City, UT
    • Will provide majority of sales in next 3-5 yrs
  • Exchange:  Increases in the average number of members reflects higher retention rates and growth in Latin America and North America, while revenue per member growth was supported by higher volume and better yields from member rentals
  • Lodging
    • $4MM favorable revenues related to Wyndham rewards program
    • Expect spending to catch up to revenues in 4Q, +$7MM YoY expenses
    • International REVPAR hurt by China
  • WYN Vacation Ownership
    • Shell contributed $33MM and $8MM in EBITDA
    • Gross VOI: +7%
    • Tour flow increased 9%
    • VPG down 1.6% YOY; ex Shell, VPG was flat, despite hard comps
  • 3Q WAAM sales: $51MM
  • Property mgmt revenues increased 22% because of Shell portfolio
  • $62MM defaults, down over 12%
  • Provision for losses: $102MM ($124MM year-ago)
  • Cease-and-desist activity in-line with historical trends
  • 3Q $1MM non-cash benefit to P&L from swaps
  • $650MM securitized timeshare receivables conduit facility extended to Aug 2015 (previously Aug 2014)
  • FY 2013 GUIDANCE: result of lower D&A, interest expense and share count
    • D&A: $216MM
    • Interest expense: $120MM
    • EBITDA performing at high end of guidance but currency dragged down results by $14MM
  • 4Q 2013 GUIDANCE:  $0.70-0.72 EPS; vacation rental business seasonally weak and exacerbated by previous acquisitions
  • FCF 2013 ahead of $750MM target
  • FCF 2014 will grow at less than EPS pace; these factors will result in higher cash taxes of $40MM:  AMT credits will expire and the rate of growth of timeshare receivables


  • FCF 2014 will grow in-line with 'absolute growth of the business'
  • Have made great strides in cease-and-desist
  • 3Q higher corporate expense- mostly employee costs, nothing unusual
  • 2014 tour flow/VPG:  will be anniversaried with Shell in 4Q 2014
  • No new program for C&P
  • Vacation ownership:  inventory coming down slower 
  • Just-in-time (JIT) will improve cash flow and returns;  in past, inventory has come down $100MM/year but JIT will not necessarily accelerate that process
  • Favorable timing of marketing expenses:  $11MM - didn't spend as much in 3Q as they will spend in 4Q and also benefit of the conference which they didn't have in the prior year
  • RCI:  have continued to increase prices modestly on exchange/membership fees; sees some small developers coming into the marketplace
  • 2014 currency:  15-20% euro impact
  • Financing of receivables and capital available for development coming back slowly; seeing some new developments out there but not as much as seen historically
  • Govt shutdown:  impact heavily felt at national park, presidential libraries; but did not see or fell much impact
  • Europe:  mixed sentiment- Germany/Spain saw markets up but other markets were down; generally, there's a sign of improvement but not across the board; 
  • China:  mix issue (largest growth in Super 8 segment; when they bring Wyndam brands into the mix, they expect China REVPAR improving) 
  • China full service development oversupplied?  
  • Same-store sales REVPAR not much differnet from reported REVPAR results





  • Company repurchased 2.7 million shares of its common stock for $160 million. From October 1-22 the Company repurchased an additional 0.8 million shares for $50 million. The Company’s remaining share repurchase authorization totals $732 million as of October 22, 2013.
  • The increases in revenues and adjusted net income reflect stronger operating results across all of the
    Company’s businesses. EPS also benefited from the Company’s share repurchase program, which decreased weighted average diluted share count by 7% year-over-year
  • The growth of free cash flow largely reflects stronger operating performance partially offset by higher
    capital expenditures.
  • Lodging: The [revenue] increase reflects higher revenues from owned hotels, hotel franchise fees and management reimbursable fees as well as incremental global conference fees.  The increase [in EBITDA] was primarily due to higher RevPAR and the favorable timing of marketing expenditures
    • US RevPAR: +5.2% YoY
    • System-wide RevPAR: 3.4% "reflecting proportionally higher growth of lower RevPAR hotels in China."
  • Wyn's hotel system consisted of approximately 7,440 properties and over 638,300 rooms, a 3.3% room increase compared with the third quarter of 2012. The development pipeline included over 900 hotels and
    approximately 114,000 rooms, of which 60% were international and 66% were new construction.
  • Vacation Exchange and Rentals: Rentals benefited from an improved pricing strategy and increased rental unit supply in Europe
  • Vacation Ownership: Excluding the impact of the Shell Vacations Club acquisition, revenues increased 6%, primarily reflecting higher gross VOI sales. 

CAT: 2014 EPS Down & Where’s The Restructuring?

Takeaway: This is our first read - more after the call


The most surprising part of the CAT release this morning is the lack of specifics on a restructuring program.  Another unusual item is that CAT continues to focus exclusively on mining equipment, despite declines in Power Systems and Construction Industries.  While, CAT has finally reduced guidance to a reasonable number for this year, we do not think that the 2014 top line will matter as much as the 2014 margin.  Mix is shifting away from high margin resources-related capital equipment, while price has turned unfavorable at Resource Industries.  That suggests a 2014 EPS decline vs. 2013’s.  This release is consistent with our long-term view of the down-cycle in resources related capital spending.




Quick Highlights


  • 2014 Mix Problem:  Growth in Construction Industries, flat Power Systems and declines in Resource Industries (amid pricing pressure) does not bode well for CAT's margin next year.  Flat revenue plus a margin decline results in a 2014 EPS decline from 2013.  That is consistent with our expectations.
  • No Restructuring:  CAT has paired recent disappointments with buyback announcements, giving longs a lollipop for their time in the dentist chair.  We had expected a detailed restructuring program to serve a similar purpose today, but the cost reductions discussed are a continuation of earlier efforts, by our read.  Maybe we will hear more on the call, but this is likely to be a key source of pressure on the shares.
  • Power Systems Down:  CAT management had directed investor focus to Power Systems, but Power Systems is not performing so well, with sales down 7% and operating profit down 6%.  2014 guidance suggests it will only be flat.
  • 2013 Meets Us:  We have had a sub $6.00 expectation for 2013 throughout the year (e.g. Feeling Managed?) and margin expectations for 2H in the previous guidance appeared unrealistic.  CAT can probably do $5.50 this year, so the focus now turns firmly to 2014 earnings, which appears from initial guidance likely to decline vs. 2013.  More after the call.

Watch the Dollar

Client Talking Points


The Dollar is getting pulverized. Why? Because the U.S. doesn’t have a monetary policy to protect it. Euros and Pounds love this. Guess what? The world will even buy Yens if Ben Bernanke doesn’t buck up to the bar. With my long-term TAIL risk line of $79.21 USD Index under attack, I went to net short in #RealTimeAlerts yesterday (6 LONGS, 9 SHORTS).


On the margin, Dollar Down is bad for real consumption growth. Rates and Dollar down is really bad – the 10-year snapped our Hedgeye TREND support of 2.58% like a hot knife through butter yesterday. Meanwhile, the 10s/2s Spread is compressing fast again this morning. This is not good for the Financials (XLF). And make no mistake, it's not good for the Growth Style that’s led this 2013 US stock market.


Here's the formula: Down Dollar, Up Yen = Down Nikkei (-2% overnight). The Nikkei breaking my immediate-term TRADE line of 14,465 is the more important point. That development, along with the Gold move higher yesterday were big bell ringers in my model. It's really important to monitor the follow through from here. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


We made 2 big Dow component short calls this wk - $MCD and $CAT - both companies hate us for it @KeithMcCullough


In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. -Charlie Munger


Banks underwriting Twitter's upcoming IPO have officially agreed to lend it as much as $1 billion over the next five years, according to a new filing with regulators. The $1 billion revolving credit facility, which was completed this month and will mature in October 2018, was detailed in an updated SEC filing late on Tuesday. 

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