Takeaway: Now that they've all cut to 0%, what happens when we go into the next global recession?
Takeaway: Positive catalysts could continue recent share price momentum
Wall Street is on the way to digesting the Prestige acquisition. Where do we go from here?
THE CALL TO ACTION
Similar to many in the investment community, we believe the Prestige deal makes a lot of sense and this week’s stock price surge was warranted. We had already highlighted a positive pivot for NCLH cruise pricing as a result of our survey two weeks to go. As a result, consensus Q3 earnings of $1.08 looks beatable. While the Q4 outlook is a little tenuous for the Caribbean, Prestige’s contribution will be evident. Our synergy forecast is higher than guidance, making current 2015 EPS estimates look conservative. We’re at $2.85 versus the Street at $2.62.
In this note, we focus on the important go forward issues related to the Prestige acquisition:
Strong yield growth
Prestige Cruise International has seen outstanding results the past 4 years due to strong yield growth stemming from an incredibly resilient luxury/premium consumer and the addition of a couple of new Oceania ships. 1H 2014 is off to a good start and we think 2H will be just as good or better; one catalyst is the end of the Insignia 2-yr charter this past April. 2015 should be a solid year as well. The stability of their bookings due to a long lead time (up to 20 months in advance) bodes well for the brands, Regent and Oceania.
Expansion into Asia Pacific
With the acquisition of Prestige, NCL will have a presence in the emerging markets such as China. Based on our analysis from proprietary sources, we believe Prestige’s Asia-Pacific exposure is about 15%, as calculated by estimated capacity days; if Australia itineraries are included, Prestige’s Asia-Pacific capacity of a % of total capacity would be in the 20%s.
While success is highly uncertain in such a market as China, NCL cannot afford to be left behind by RCL and CCL if their gambles pay off in 2015 and beyond. Emerging markets’ cruise business has been growing faster than that in North America and a partnership with Prestige may help alleviate some concerns when NCL do decide to dip their toes in the nascent Asia-Pacific market.
SYNERGIES TOO LOW:
Is the $25m considered too conservative? With $25m in synergies, the NCL-Prestige combo would generate 7% EPS accretion in 2015. We think this is low-hanging fruit and synergies of $40m in 2015 would not be an aggressive target with an additional $20m of synergies in 2016.
We believe most of the cost synergies will lie in corporate overhead efficiencies and better port contracts. As outlined in their presentation, other cost synergy opportunities include customer acquisition costs, purchasing/distribution, fuel, and payroll. Furthermore, according to Norwegian, Prestige has much room to improve on fuel costs.
Some revenue synergies could include: 1) Norwegian should be able to cross market Prestige’s established customer base to help grow The Haven concept. 2) Affluent couples who cruise on Oceania and Regent may consider Norwegian when thinking of a family vacation with kids. 3) Pride of America’s Hawaiian business may become stronger due to changes in marketing tactics.
Genting HK can still sell their shares at any time. It appears that Genting was fine with the deal - not expressing overwhelming support for the addition of Prestige or discontent at the dilution that comes from the new equity offering (20.3m shares). Pro-forma ownership is as follows: Genting HK (25%), Apollo (25%), TPG: 7%, Public shareholders (43%). Only the 20.3m new shares are locked up until end of 2015. The Genting overhang is real but probably mostly priced in.
We applaud management for structuring this deal with Prestige. It sets Norwegian on a different trajectory of growth and more importantly, gives it influence in competing in two areas where it has been largely absent—the premium/luxury consumer and the emerging markets. Accretion is always nice too.
This acquisition does not eliminate the concerns currently surrounding NCLH, which include the prevailing weakness and new competition in the Caribbean, volatile new ship premiums and the risk of Genting/other private equity owners selling shares.
Nevertheless, we believe this deal is a good one and is an example of Norwegian’s long-term commitment to fast growth. On a valuation basis, NCLH is the cheapest in the industry at 13x 2015 P/E (RCL: 14x, CCL: 16x), even after the recent move higher.
Takeaway: The sequential directional change in NFP is the same as ADP 64% of the time. We (still) don't pretend to have an edge on the monthly NFP #.
CAN I GET YOUR NUMBER? We’re frequently asked “what’s your number?” as it relates to the monthly NFP release.
The short answer is that we don’t pretend to have an edge on the BLS employment figures.
The regional Fed and PMI surveys offer some insight as does the ADP release and, with NFP being a net number, the trend in initial claims tells us something about the separations side of the Net Hires = job findings + job separations side of the equation, but we haven’t been able to generate a predictive model to forecast the NFP number with conviction on a month-to-month basis…..so we don’t.
'Ya Get What You Get (& Don't Get Upset): The current price/quant signals and our TREND view on domestic fundamentals generally drives our positioning into the number and we simply take what BLS gives us on jobs day and respond accordingly.
In truth, we find the myopia and manic speculation surrounding the 1st Friday release pretty amusing. The trend in the employment data is obviously important, but we’re paid to take high probability macro swings. Making a convicted, precision “call” on an estimate subject to significant seasonal impacts, revisions and a standard error of +/- 50K doesn’t seem like a high probability swing.
ADP vs. NFP vs CLAIMS: That said, below we show the directional change in the ADP and Initial Claims series vs the directional change in the NFP data. Over the 2001-Present period (n = 160 months), the sequential, directional change in NFP is the same as that of the ADP series 64% of the time. The directional change in NFP vs Initial claims is correct 42% of the time (note: here we are using the claims level during the week that corresponds to the week the BLS conducts its monthly establishment survey).
So, for the NFP tea-leafers….the ADP series has been the better predictor of the NFP figure, being directionally correct ~2/3 of the time. The ADP report for August released this morning showed the sequential change in net payroll adds declined a modest -8K to +204K from a downwardly revised July total of +212K (revised down from +218k).
The current Bloomberg estimate for August Nonfarm payrolls is +230K, up sequentially from the +209K reported in July. By the numbers, the sequential decline in net payroll gains reported by ADP this morning suggests taking the other side of consensus and the 2:1 asymmetry into the print tomorrow
Joshua Steiner, CFA
Christian B. Drake
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EUR/USD falls on the announcement of rate cuts and credit easing programs. However, it’s not clear to us that this will necessarily be a catalyst to ignite European economic activity.
Investment Recommendations: short EUR/USD (FXE); Long GBP/USD (FXB)
Key Take-Aways from today’s ECB Meeting:
- ECB Head Mario Draghi surprised the market with rate cuts and the EUR/USD is trading sub $1.30 intraday. We remain short the cross via the etf FXE - quantit. broken TREND ($1.33) and TAIL ($1.34)
- Draghi’s policy outlook remains dovish and accommodative
- The market’s QE expectations remain elevated, however Draghi’s focus in today’s meeting (and perhaps to reset accelerated QE timing expectations following Jackson Hole) included announcing the ECB’s intention to purchase ABS (no formal size mentioned) and issuing a covered bond purchasing program (details on this program will be announced after the ECB’s next meeting on October 2nd)
- Draghi signaled he wants to return the ECB balance sheet to 2012 - the package to “lever up” now includes today’s policy program announcements, the previously announced TLTROs (scheduled for issuance in late September and December), and eventually QE?
- ECB staff macroeconomic projections for September show downward revisions to the GDP and inflation outlook for the Eurozone (and in-line with our expectations and building on downward revision in the June outlook)
- Despite cutting main rates to near zero and deposit rates to negative first in June, the policy move has not lead to increased lending to businesses that are willing to invest in and grow the European economy. This will remain Europe’s great challenge over at least the medium term
What was delivered in cuts? The cuts to the main interest rate were largely unexpected by the market. In the Q&A Draghi attempted to anchor expectations that there would be no further cuts over the medium term (also not a big surprise since we’re already at or below the zero bound) to encourage participation in upcoming bond purchasing programs.
- Benchmark Rate: cut from 0.15% to 0.05% (0.15% est.)
- Marginal Lending Facility: cut from 0.40% to 0.30% (0.40% est.)
- Deposit Facility: cut from -0.10% to -0.20% (-0.10% est.)
The updated [SEPT] ECB Staff Macroeconomic Projections show further slowing to the outlook (vs JUN):
Growth Projections: +0.9% in 2014 vs +1.0% in June; +1.6% in 2015 vs +1.5% prior; +1.9% in 2016 vs +1.8% prior
Inflation Projections: +0.6% in 2014 vs +0.7% June; +1.1% in 2015 (in-line); +1.4% in 2016 (in-line)
Other Press Conference Mentions
- QE was discussed – some council members in favor of doing more, others doing less
- BlackRock has been hired by the ECB to help structure an ABS purchase program. No size was mentioned, and Draghi did not substantiate a leaked report earlier in the week that called for a program worth up to €500B
- Draghi underlined the drag from Unemployment across the region (currently at 11.5%) and highlighted the slack in the economy as a drag on ECB staff projections
- He stressed the importance of fiscal consolidation at the state level
Hedgeye’s Bearish Bias Remains
- Weeks and months of declining data across the region continue to fuel our bearish outlook on the Euro area
- While QE has proven to put a floor in equities in the past, QE is far from the elixir to inflect weak and declining fundamentals across the region. Witness Japan’s failed efforts with QE!
- While on the margin Draghi’s credit easing programs should help to encourage lending and therefore growth to the real economy, the failure of past LTROs to improve lending conditions are fresh in memory. This time may in fact not be different
- We reiterate that inflation (via currency debasement) is not growth, even if Draghi showers us with QE
- From here our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates.
Takeaway: Labor market data softens a bit sequentially (ADP & Claims) and likely augurs for a miss on tomorrow's payroll number.
Still Good, but Less Good
The rate of improvement in the labor market slowed slightly in the latest week as initial jobless claims (NSA, 1-wk) were lower by 7.7% y/y vs an 11% improvement in the prior week. On an NSA rolling basis (4-wk), the rate of improvement slowed to 8.6% from 10.3%. Recall that claims tend to bottom out around 300k (SA), which is roughly where they are now (302k). As such, we expect to see the rate of y/y improvement converge toward zero.
The slightly weaker than expected ADP number this morning (204k vs 218k last month) coupled with August SA rolling claims being ~8k higher than July suggests there's a good chance that tomorrow's labor market report for August comes in light, especially considering expectations are for a sequential acceleration to 230k from 209k.
Initial jobless claims rose 4k to 302k from 298k WoW. There was no revision to the prior week number. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 302.75k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.3%
The 2-10 spread fell -3 basis points WoW to 188 bps. 3Q14TD, the 2-10 spread is averaging 199 bps, which is lower by -21 bps relative to 2Q14.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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