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NCLH 3Q REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL:

 

SLIGHTLY WORSE - 2014 guidance (net yields: 4ish and EPS: $2.20ish) missed Street expectations slightly but EPS was in line with us.  Weak Caribbean commentary was offset by positive signs from Europe.   

 

NCLH 3Q REPORT CARD - nclh1

 

2014

  • WORSE:  mgmt lowered 1Q 2014 bookings expectations primarly due to the heightened compeitive environment in the Caribbean
  • PREVIOUSLY:  We're feeling pretty decent about what's going on for next year, although it's early. We're feeling pretty good about the booking patterns for 2014. First quarter, we're feeling very good about both on the load and the price.

PROMOTIONAL ENVIRONMENT

  • WORSE:  Mgmt refused to say promotional environment in the Caribbean has abated in the last month or so.
  • PREVIOUSLY:  I would say that we've had some promotional activities going on following that. And when I look at it right now, I would say that things in the last few weeks seem to have been a little bit better. And I think some of the noise as well is – some of the players may be doing a little bit more from a promotional standpoint to fill up their ships.  Having said that, what I'm seeing now is that will play out over the remainder of this year.

GETAWAY

  • SAME:  Getaway will be introduced in January 2014.  Bookings have been consistent with mgmt expectations.    
  • PREVIOUSLY:  Norwegian Getaway, is getting ready for her debut in Miami early next year.

ONBOARD REVENUE

  • SAME:  3Q onboard revenue grew 1.5%, led by strong performance from the casino segment.  4Q onboard revenue is back to normal.
  • PREVIOUSLY:
    • Onboard, we have a great quarter – some of it is Breakaway, some of it is just the continuing efforts we have. I would tell you that the remainder of the year is built into our forecasted guidance and yields...But it is a little lumpy.

EUROPE

  • SAME:  Positive commentary regarding 2014.  Mgmt believes mid-single digit pricing gains is reasonable.
  • PREVIOUSLY:
    • We've been able to bottom out in Europe market with yields and we're starting to see the ticket yields improving. But there are a few more Europeans on the ships than what has been the trend.
    • On the margin, we're seeing a bit more of the Americans, but we're also seeing quite a few – and you look at the European economic situation, you're getting a little bit of a later booking from some of these countries. And we're all fighting for the same number of consumers. So in some cases, you're getting people that are spending a little bit less from the European side.

HYATT 2Q YOUTUBE

In preparation for HYATT's F3Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

BOOKINGS

  • In the quarter for the year bookings up about 7%, and pace for 2014 is roughly flat at this time.

GROUP

  • Overall, over the short-term and consistent with what we stated last quarter, we expect group demand to continue to be positive but not as strong as transient demand.
  • Over the next 18 months, we expect Atlanta and Washington D.C. to continue to be challenging markets, while we expect others such as Chicago and Orlando to be stronger.

4 HOTELS IN FRANCE CONVERSION FEES

  • Over the first 12 months, post conversion, we expect to earn €5 million of base fees and €5 million to €10 million of incentive fees from these hotels.  There will likely be sequential quarter-to-quarter volatility in incentive fees due to the structure of the agreements. In fact, we expect to earn most of the incentive fees in the second and third quarters during the high seasonal months for these hotels.
  • Because the annual guarantee is measured on a quarterly basis, we may be required to fund up to the guarantee level in a particular quarter, which could negatively impact incentive fees in such a quarter. Again, we're on track to earn €10 million to €15 million of total fees over the first 12 months of operations of these hotels.

CHINA

  • Northern China has been the weakest year-to-date. Eastern China is next in line, and Southern China is actually relatively positive. It's somewhat positive in RevPAR. So what you see is a contraction of business. And I think one of the reasons why Northern China which includes Beijing, is relatively more negatively impacted, is that is because of the austerity program. And while we've seen RevPAR contract, I'm happy to report that we maintain comp set leadership in our hotels in Beijing. So I would say that while the overall story is somewhat challenging, our relative performance has been encouraging in terms of our maintenance of our number one position in our respective comp sets.
  • We continue to have confidence in the long-term prospects in China, but anticipate that this year will continue to be challenging.

HOTEL TRANSACTIONS IMPACT

  • Hotel transactions are expected to negatively impact our owned and leased EBITDA in the second half of this year. Specifically, we benefited from acquisitions, such as the Hyatt Regency Mexico City and The Driskill, which mostly offset the impact of asset sales through our second quarter. During the second half of 2013, however, we expect the earnings from recently sold hotels to have a negative impact on reported results, net of acquisitions due to the timing of these transactions and seasonality.

BAKU/LONDON

  • Key owned hotels, particularly Baku and London are expected to have difficult comparisons in the third quarter. In Baku, we continue to face challenges related to significant increases in supply in this market. In London, our results last year benefited from the Diamond Jubilee, the Summer Olympics and the Farnborough Airshow. In London, we've grown market share year-to-date.

PLAYA/HOTEL TRANSACTIONS

  • During the third quarter, we expect to acquire an approximate 20% equity stake in Playa for $100 million, and purchase convertible preferred equity for $225 million. As to earnings associated with this transaction, in 2014, we would expect to earn in the range of $18 million to $20 million of EBITDA that will be reflected as JV EBITDA excluding franchise fees. We expect these earnings to grow over time as the resorts ramp-up, post renovations and re-branding.  I would say the second half of this year is probably quite modest (Playa contribution).
  • Our expected level of return on our investment is in the mid-teens percentage range, and represents a strong risk-weighted return. The minimum expected return on our convertible preferred equity investment is 10%, and we expect to achieve a higher return on our common equity investment. In addition to these returns, we expect to earn franchise fees from the six resorts that we plan to convert.
  • We believe the market continues to be healthy for transactions and have not seen any significant changes in buyer interest or pricing. And on the select service front, we have been, and I'll reiterate it again, we continue to be very active to look for potential deals and in some cases involving more than one or two properties. So bigger portfolio deals.

DC

  • Government remains weak.  We've seen a decline in room nights, and part of that is revenue management, and part of it is underlying demand. Group remains somewhat weak at this point as 2014 paces down a bit. In D.C., we own the Park Hyatt Washington, D.C. We manage the Grand Hyatt and the Hyatt Regency. Both of those hotels have had some renovation impact this year.

NEW YORK

  • New York was strong for us. We were up in the high single digits, mostly rate driven, we outperformed our comp sets, and it was really driven again by strong transient demand.
  • We have two other hotels coming, The Hyatt Times Square, which will open later this year; and the Park Hyatt New York, which will open next year.

EUROPE

  • We are really represented in key gateway cities, which has helped us through the downtime in Europe right now. Europe is up in the range of about 3% from a RevPAR perspective. The U.K. is a little bit behind that. Again, in Europe, we predominantly operate in the luxury segment, our owned properties in Europe, our owned luxury segment.

RE-UP STOCK REPURCHASE AUTHORIZATION?

  • We will continue to evaluate it.

CAPEX GUIDANCE

  • Our actual capital expenditure guidance for the year is down from $275 million to $250 million, a lot of that is timing but that's our true capital expenditure budget.
  • The large owned hotel renovations are substantially complete, and so we'll see sort of rolling off of major renovation activity both owned and managed properties by the end of this year. Our investment spending guidance which is really new investments in new projects and new hotels is now $500 million, which is an increase from our prior guidance because we've now included the $325 million planned investment in Playa as well as the $85 million acquisition which is already closed of The Driskill Hotel in the first quarter.

DEVELOPMENTS

  • The Andaz Wailea which we expect to open in the third quarter. The Andaz in Papagayo in Costa Rica, we've got a new project in Thailand that we'll open later this year, and we've got a newly constructed new opening in Sanya in Sunny Bay, in China.

Join E-Cig Call with NJOY CEO Craig Weiss Tomorrow at 1pm EST

We will host an expert call on electronic cigarettes with Craig Weiss, CEO of NJOY, tomorrow, October 30th at 1:00pm EST titled "NJOY and Developing Trends in the E-Cigs Industry." 

 

Please send any questions for Craig to and he will answer them following his prepared remarks.

 

We also want to note that Craig and NJOY were featured in an NYTimes article over the weekend.

 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 959896#
  • Materials: CLICK HERE (available shortly before start-time)

 

KEY CALL TOPICS WILL INCLUDE

  • Industry trends and the developing landscape
  • NJOY's company profile and share of the category
  • The regulator outlook for e-cigs in the U.S. and internationally
  • What the future holds for e-cigs

 

ABOUT CRAIG WEISS, PRESIDENT AND CEO OF NJOY

Before joining NJOY in June 2010, Craig Weiss, a U.S. Registered Patent Attorney, practiced law, where he focused on the drafting and prosecution of patent applications for medical device, eCommerce and business method inventions. Weiss has three patents to his name, including two for medical devices. He was also the managing member of a hedge fund focused on intellectual property. Weiss earned his law degree from Arizona State University and his bachelor's degree from the University of Pennsylvania.

 

 

ABOUT NJOY 

NJOY is a private e-cig manufacturer, founded in 2006 and headquartered in Scottsdale, Arizona, with online sales and retail distribution in over 60,000 locations nationwide. NJOY has carved out a leading position in the category, offering a variety of rechargeable and disposable products in traditional tobacco and menthol varieties.  

 

In April 2010 the company announced that it received a $20MM investment from the private equity company Catterton Partners. In June 2013, a collection of investors, including Sean Parker (formally at Facebook), announced a $75MM investment in the company.

 

 


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Sneak Peek: Investing Ideas

Takeaway: A sneak peek at two stocks covered in Hedgeye's Investing Ideas this past Saturday.

Editor's note: What follow below is a brief, complimentary excerpt from this weekend's "Investing Ideas." This Hedgeye product is designed for the savvy, longer-term self directed investor looking for long-only opportunities. Click here for more information and how to subscribe to this valuable investing tool.  

 

Sneak Peek: Investing Ideas - nik1

 

NKE– We’d like to address the elephant that’s been quietly sitting in the back of the room since Nike’s analyst day on October 9th. Specifically, Nike finally outed a key initiative we’ve been talking about for two years – the ability to manufacture customized product (by color and size) at point of sale. 

 

Think about it – the model for footwear makers over the past four decades has been to design product in the US, and then to outsource to Asia – the entire process taking nine months at the earliest. 

 

Now, NKE is introducing the capability for a consumer to walk into a store and build their own shoe at a kiosk. They’ve had that capability through NikeID at their own stores for a while. But those orders still go to one of its 700 third-party plants in Asia to be processed. Now the product is being manufactured right there…on the spot.

 

So basically, a consumer could go into the store, build a shoe electronically, then go to Chick-fil-A for a bite to eat, and return an hour later and their shiny new kicks will be waiting.  This is an absolute game changer, and it’s one that no other brands have the scale to compete with. 

 

Sound expensive for Nike?

 

Ask yourself this…what retailer on the planet would not give their left arm to have one of these Nike kiosks/mini-manufacturing hubs in their stores? It’s be a big competitive advantage, and one that we think would lead the Foot Locker’s of the world to lay out the capital needed on their own balance sheet.  Nike only allocated 90 seconds to this at their meeting. It was worthy of three hours. We think that people will grossly underestimate the importance of this initiative (no one even asked any questions on it).

 

* * * * * * * 

Sneak Peek: Investing Ideas - trow 

 

TROW – T Rowe Price continues to fire on almost all cylinders after its earnings report this week that beat Street expectations on both revenues and on earnings per share. The firm did however see institutional outflows at the end of the quarter which was the only hang up in an otherwise strong release. 

 

The outflow in the third quarter was improved from last quarter’s withdrawal and is again coming for only a small select group of sovereign wealth funds in Asia that are rebalancing their asset allocation after above benchmark performance from TROW funds. TROW continues to maintain the largest percentage of fund assets in 4 and 5 star funds, the only mutual funds that historically have received any new inflow.

 

As such with these sovereign outflows to be finished soon in our view, TROW will again return to positive net inflow which will be a positive catalyst for this leading fund manager.  T Rowe has $1.6 billion in cash, forward free cash flow of $1.2 billion, and no debt which give this company leading financial stability in the group with the ability to raise its dividend again into 2014 as investors wait for net inflows to return. 

 

* * * * * * * 

 

Click here to learn more about Investing Ideas.


LINN Energy 3Q13: Spend, Baby, Spend

Takeaway.....Better-than-expected 3Q13 on the DCF side, but with a massive outspend relative to maintenance CapEx (again); 4Q13 organic production guided down; outcome of the SEC Inquiry / BRY merger remains a big question; we make the case for LINE fair value at $5.00 / unit; no change in our view, LINE / LNCO remains a top short idea. 

 

3Q13 DCF Beats, Production In Line……LINN’s 3Q13 Distributable Cash Flow (even though LINN doesn’t use the term anymore, it’s still what some people care about) came in at $173MM vs. $148MM guided.  Stronger-than-expected oil production volumes and lower cash costs drove the beat.    LINN reported volumes of 823 MMcfe/d vs. guidance of 810 – 830 MMcfe/d and 780 MMcfe/d in 2Q13 (up 5.5% QoQ).  Oil production beat the high end of the guidance range, likely due to a ramp in activity and spending in the Granite Wash and Anadarko JV over the last two quarters.  Production taxes came in $11.5MM below guidance, as ad valorem taxes, “which are based on the value of reserves and production equipment” fell “primarily due to lower assessed values on the Company’s base properties” (3Q13 10-Q).  Is that bullish?  Adjusted, Open Net Income came in at $0.12/unit and open EBITDA was $334MM 

 

4Q13 Organic Production Guided Down……LINN left its 4Q13 production guidance flat at 850 MMcfe/d (assuming no ethane rejection) from its prior guidance, despite the fact that it will have a material contribution from the newly-acquired Permian Basin assets, which was not factored into the previous guide.  The deal is expected to close “on or before October 31, 2013” (3Q13 10-Q).  LINN expects the asset to average 4,800 boe/d (63% oil) over the first 12 months, which would amount to a ~19 MMcfe/d contribution in 4Q13.  This makes the acquisition all the more interesting because it looks like it was done just to plug a hole.  LINN increased 4Q13 DCF guidance by ~$9MM, but by our math that incremental DCF is all from these acquired, high-margin oil properties.   

 

Huge CapEx Burn (Again)……LINN spent $339MM in total organic CapEx in the quarter, with only $116MM held back from distributions as “discretionary reductions for a portion of oil and natural gas development costs.”  (This was formerly known as “maintenance capital expenditures;” despite the change in terminology, nothing has changed with how this number is calculated.)  Total CapEx exceeded maintenance CapEx by $223MM in the Q, more than the $171MM distribution payment.  Over the TTM, total CapEx exceeds maintenance CapEx by ~$900MM, while production was ~+1.6% YoY on an organic basis, by our calculations.  Just shocking…

 

LINN Energy 3Q13: Spend, Baby, Spend - linn1

 

2013 CapEx Guidance is Too Low……Excluding acquisitions, YTD 2013 CapEx is $959MM (per the CF statement); the 2013 guidance remains at $1,150MM (3Q13 10-Q), implying that LINN will spend less than $200MM in CapEx in 4Q13.  We find that highly unlikely considering that CapEx was ~$340MM/quarter over the past two quarters.  FY13 CapEx is likely to be closer to $1,300MM.

 

Free Cash Flow Negative……Over the TTM, LINN has paid out $682MM in distributions on a similar amount of what was previously called DCF, all the while being sharply Free Cash Flow (FCF) negative, before acquisitions.  In 3Q13, FCF was -$84MM; over the TTM FCF was -$388MM.  For a Company that doesn’t grow organically, and pays out massive distributions, this is concerning. 

 

LINN Energy 3Q13: Spend, Baby, Spend - linn2

 

Premiums Paid Disclosure Disappears......It is disappointing that LINN has removed disclosure telling investors what the premiums paid for derivatives that settled in the period were.  It was disclosed in the 2Q13 10-Q as $43MM (~28% of DCF).  In our view, this is the amount by which LINN's DCF is overstated due to its aggressive derivatives accounting methodology, and is important information that needs to be disclosed.

 

An argument for LINE at $5.00/unit……LINN is now trading around 8.9x Adjusted EV / Open EBITDA (we annualized the 3Q13 open EBITDA number and adjusted the EV lower by the net derivative asset per the 3Q13 balance sheet).  On this measure, of the large cap E&Ps, only EQT, COG, PXD, and RRC are more expensive, and these companies have arguably the best undeveloped acreage positions and future growth potential of all NAm E&Ps.  Consider that SU, DVN, OXY, APC, and DNR all trade around 5 – 6x 3Q13e Annualized EBITDA.  What is LINN Energy?  A free cash flow negative E&P with no organic growth, no shale scale, no material non-proven value (midstream or acreage), and highly-dubious accounting practices which are currently the focus of an SEC inquiry.  For perspective, LINN at 5.0x EBITDA is a ~$5.00/unit stock.  This isn't to say it's going there (at least any time soon), but we are tired of hearing the "LINN is cheap" argument.  In our view, LINN is over-valued by at least 100%. 

    

LINN Energy 3Q13: Spend, Baby, Spend - linn4

 

Kevin Kaiser

Managing Director



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