Takeaway: Good 3Q beat but the focus is now on 2015 costs and whether Europe momentum can be sustained.

Given trends seen from our pricing survey, we believed a F3Q beat was already in the bag with the Caribbean, while slowly improving, still limping along in a tough promotional environment.  The ECA cost impact may be a little above expectations but more importantly, we wonder if the exuberance on Europe is overstated heading into 2015.






  • Steady progress in both Carnival and Costa brands in F3Q
  • 3Q confirmed Carnival turned the corner
  • Notable lengthening of bookings curve across European brands
  • NA/Europe bookings/pricing higher for 1H 2015
  • Yield growth can be sustained
  • Without mitigation, ECA requirements were originally expected to reduce EPS by $0.75.  But with new technology, limited ECA impact to $0.10.
    • Technology initiatives:  propelling, lighting and air conditioning.
  • Costa:  seeing steady improvement in yield and profitability
  • New Princess ship:  only new build for 2014 and will sell Ocean Princess
  • China:  expect double digit growth over next few years
    • Already the largest cruise operator in mainland China (1st in market through Costa brand in 2006).
    • China operations have and are profitable.
    • 4 homeports (shifting) and 12 marketing offices
  • 3Q
    • Better rev yields (11 cents) - split btw ticket and onboard
    • Lower NCC ex fuel (3 cents)
    • Lower fuel prices (2 cents)
    • Net ticket yields turned positive in 3Q
    • Capacity increased 2% (NA: +4%, EAA: flat)
    • Occupancy:  point higher than June guidance
    • Net ticket yields:  + 0.7% (EAA: +4% led by continental Europe and China); NA yields: down just over 1% due to continued promotional pricing environment in Caribbean
    • Net onboard and other yields:  +5.5% (considerably more positive than anticipated), increases in almost all categories.
    • NCC ex fuel: up +0.5%, better than guidance due to timing of certain expenses
  • 4Q yield: expect NA brand net ticket yields will turn positive
  • Higher EPS for FY 2014 due to:  11 cents (better 3Q), 4 cents from fuel prices and currency.
  • 1H 2015:  
    • NA
      • Caribbean ahead on price and occupancy (56% of 1H 2015 capacity)
      • European program:  ahead on price and occupancy
      • Booking volumes good at nicely higher prices
    • EAA
      • Ahead on occupancy; prices in-line with prior year
      • Booking volumes higher YoY at slightly higher prices.
  • Expect to offset inflation in 2015
  • Aggressively rolling out EGCs.  16 ships beginning in FY 2015; 42 ships by end of 2015.

Q & A

  • 2015 costs:  2/3 of cost increases due to dry docks; 1/3 due to 'investment in various areas of the business in terms of deployment and occu.  Not afraid to reinvest in business to drive yields.
  • Double digit ROIC target:  3-5 yrs
  • Holding price while sacrificing occupancy is only a tactic; they will continue to use the tactic as long as it works
  • Casino to-date has not been strong on CCL ships.  CCL is purely a cruise product.
  • Chinese govt has a plan for cruise development
  • China:  Lost money in 2006, broke even in 2012, made money in 2013/2014
  • Additional onboard opportunities:  casino/restaurants/beverages
  •  $75-80m cost investments
  • Negotiations with airlines ongoing
  • NCC ex fuel (excluding dry costs):  flattish over 2015/2016
  • Carnival brand:  recovery a little faster than where mgmt forecasted
  • Caribbean:  very tough environment
  • Capex 2014:  $3 billion  (similar levels for 2015 and 2016)
  • China challenges:  challenge is to communicate what is a cruise to the consumer; cruise port development; availability of international ports; infrastructure development.
  • China:  most ships are chartered; customers purchasing through a distribution network
  • 2015 yield:   late 2Q and onward should show better yields for Caribbean due to capacity reduction.
  • Evaluating where some of Costa's/Princess's Asia ships will continue to use Euro functional currency
  • May explore China partnership; Carnival chief operating officer Alan Buckelew will relocate to Shanghai.
  • 2014 NCC ex fuel guidance raised:  unexpected pension expense and some other expenses bumped the range up slightly.
  • 2/3 of dry dock costs in 2015 will disappear in 2016. 
  • Optimistic on both NA and Europe in 2015
  • 10 cent ECA cost:  early season dry dock may offset a little of that; much of 10 cents will be eliminated in 2016 and gone by 2017 due to ECG implementations.
  • 1% change in fuel efficiency equates to 2.6 cents in EPS.  Expect 2-3% fuel consumption improvement going forward. 
  • Raised ticket and onboard guidance for 4Q
  • Industry seems to be at or very near 2007 peak levels (mostly not coming from Carnival)
  • Not worried about the new ships coming on line; industry capacity growth still manageable.  Expect Asia to absorb much of the additional capacity.
  • 2014 Net ticket yield increase:  50% from occupancy, 50% from higher prices
  • Booking curve:  85%-95% (next Q), 50% (2Q out) 25% (3Q out).


An Epic Bubble in Small Caps (And Why Market Illiquidity Remains One of Our Biggest Concerns)


In this excerpt from today's Morning Macro Call, Hedgeye CEO Keith McCullough discusses the recent trend we’ve been highlighting of down moves in U.S. stocks on greater-than-usual volume, and why investors need to be particularly careful right now with respect to the bubble in small cap stocks.


Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document.


Best of luck out there,


Darius Dale

Associate: Macro Team

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Texas Instruments: A Top Mega-Cap Long in Chip Sector | $TXN

Takeaway: Take a closer look at Texas Instruments.

In a macro environment where investors are rotating into the largest capitalization stocks, Hedgeye Semiconductors sector head Craig Berger likes TXN as the top mega-cap stock in his sector.  TXN just raised their dividend from 30 cents to 34 cents, a 13% increase, to now yield 2.7%.  Despite having raised their dividend numerous times, Berger says TXN still only pays out 35% of their free cash flow, giving them lots of room to increase dividends again in the future. The firm is also repurchasing much stock on the open market.


Texas Instruments: A Top Mega-Cap Long in Chip Sector | $TXN - 78t


TXN compares favorably to the other giant names in the space: Intel (INTC) earnings have already grown meaningfully, could be toppy, and are vulnerable to ongoing deterioration in PC demand.  The other biggest name in the Semiconductor space is QCOM. Berger is also constructive on QCOM given strength in iPhone 6 and 6 Plus smartphone shipments (where QCOM supplies the main communications processor), but Berger says “QCOM is in the penalty box in China” as the Chinese ramp their protectionist policies and push to stimulate domestic Chinese production. Given the size and scope of the Chinese consumer, this could be an ongoing headwind to QCOM shares.


TXN doesn’t have the China exposure that QCOM has, and it is also not tied to the PC market the way INTC is.  After buying a Japanese memory manufacturing facility for pennies on the dollar, TXN’s production capacity is only 2/3 utilized.  Berger says this investment could pay off huge, as TXN is now the only in-house producer of larger 300mm (12-inch) analog wafers, giving them a global leading cost structure. Their sizable cash flow generation and underutilized capacity make TXN a possible large-scale acquirer.  They could gobble up a big competitor and push all this production through their existing fabrication capacity.  Even with added personnel and manufacturing costs, Berger says 80 cents of each incremental dollar would drop right to TXN’s bottom line.  In a market that’s looking for quality mega-cap names, TXN looks like it has all the ingredients.

Keith's Macro Notebook 9/23: Russell 2000 | UST 10YR | Gold

LEISURE LETTER (09/23/2014)



  • Sept 23: CCL 10 am F3Q Earnings Call
  • Sept 24: MTN 11:30 am FYE 2014 Earnings Call
  • Sept 24: Revel Auction
  • Sept 24: Hedgeye Snakeye in Las Vegas - Research Meetings
  • Sept 29 - Oct 2: G2E


BYI & SGMS – Both companies now anticipate the merger transaction to close by the end of 2014.  Previous target was for Q1 2015.

Takeaway: Confident in their closing progress. 


GLPI & PENN (Sioux City Journal) With only a week left before its removal deadline, owners of the Argosy Sioux City have yet to move the riverboat from its moorings on Larsen Park Road. After the floating casino ceased operations on July 30, owners Iowa Gaming Co. and Belle of Sioux City had 60 days to move the vessel and vacate the Sioux City riverfront, under a provision in the Argosy's lease with the city. Even with the Sept. 28 deadline only days away, the boat hasn't budged.  Sioux City Mayor Bob Scott said he hopes the facility is removed by the deadline but has concerns that it may not happen. He said the casino's owners may say the 60-day "clock didn't start" until Sept. 4, when a federal judge in Pennsylvania dismissed a bankruptcy case involving the former casino. The casino owners filed for Chapter 11 protection in May in an attempt to block Iowa gaming regulators from closing the vessel.

Takeaway: Bad form all around, Just remove the boat.


MGM (LVRJ) MGM CEO Jim Murren has indicated MGM is considering expanding the Borgata entertainment programming via its relationship with Anshutz Entertainment Group

Takeaway: Efforts to increase Borgata's desirability as competition for gaming spend escalates across the Northeast corridor.


102:HK – Summit Ascent Holdings announced phase one of its casino project in Russia will be delayed until April 2015. Summit Ascent previously said the first phase of the project, near Vladivostok, was targeted to open in the last quarter of this year. The casino complex is expected to have 119 hotel rooms, 800 slot machines, 25 VIP gaming tables, 15 mass market baccarat tables and 25 mass market tables providing other table games. The company highlighted several reasons for the delay, including “delay encountered in the re-design approval by the local government authorities”, a re-design needed to bring the project up to an “international standard” as well as issues encountered in the procurement of import materials and equipment, which needed to be certified by the relevant government authorities.

Takeaway: Development delays and costs going higher.


SNOW – disclosed via 8K, on September 19, 2014, Le Sommet Property Management Inc., a wholly-owned subsidiary of Intrawest Resorts Holdings, Inc., acquired from Blue Mountain Resorts Holdings Inc. the 50% interest in Blue Mountain Ski Resort that it did not already own, for CAD $58.0 million.

Takeaway: Closing on the previously announced acquisition.

CCL – P&O Cruises has announced added benefits on selected cruises for summer 2015 on Select Price bookings made before October 31, 2014.

The promotion, which runs in conjunction with the National Cruise Week in the UK, Sept. 27 to Oct. 5, includes sailings on the new Britannia, which launches next spring.  Passengers who book a Select Price on a range of Britannia cruises by October 31, 2014 will receive additional onboard spending money to use against drinks or treats such as a class with James Martin or Marco Pierre White in the new Cookery Club, a luxurious spa treatment in the Oasis Spa or Champagne afternoon tea by master pâtissier Eric Lanlard.

Takeaway: Giving out onboard incentives rather than lowering prices


RCL – On September 15, Royal Caribbean filed trademark applications with the United States Patent and Trademark Office for the following names:

1) Spectrum of the Seas
2) Joy of the Seas
3) Harmony of the Seas
4) Emblem of the Seas
5) Apex of the Seas

Royal Caribbean also added applications for three other cruise ship names it had previously sought to register back on December 29, 2012, including:

1) Pulse of the Seas
2) Passion of the Seas
3) Ovation of the Seas

RCL's next Quantum class cruise ship will be named "Ovation of the Seas"

Takeaway: RCL telegraphing its future growth and potential vessel name


Insider Transactions:

CCL –  MA 1994 B Shares L.P. (Micky Arison's trust) sold 123,337 shares of the company’s stock on Friday, September 19 at an average price of $40.22/share and following the sale, the trust owns 95,736,445 shares of CCL.


MAR –  SVP and Controller Brian G. Macnamara acquired and then sold 8,852 shares of Host Hotels and Resorts via non-qualified stock options (with expiration dates of 12/31/2022 and 02/05/2013) on Wednesday, September 17.  The shares were sold at an average price of $21.99, and Mr. Macnamara now owns 59,475 shares, rights to 22,914 restricted shares and 5,032 NQSOs. 


Macau Visitor Arrivals – during August 2014, visitor arrivals increased 7% to 3.09 million on a year-over-year basis and Mainland China arrivals increased +13% to 2.13 million. Same-day visitors accounted for 54% of the total, at 1.67 million. Mainland visitors traveling under the Individual Visit Scheme rose by 19%, at 1.06 million. The average length of stay of visitors remained unchanged from a year earlier, at 1.0 day in August 2014; overnight and same-day visitors stayed an average of 1.9 days and 0.2 day respectively.

Takeaway: Visitor arrivals increase but gaming GGR falls.  There's a disconnect somewhere...


Union Organizing Officials Arrested (GGRAsia) Macau authorities have accused five members of labor activist group Forefront of the Macao Gaming of aggravated disobedience following a protest on August 25. The five include president Ieong Man Teng, co-founder and secretary general Cloee Chao, vice-president Lei Kuok Keong and two other members of the labour association. Lei Kuok Keong said its members now feel intimidated by the police. He also criticized authorities for contacting their families when collecting information.

Mr Lei admitted that some members may quit the association and that many others may not take part in new protests.

Takeaway: A small victory for the gaming operators, especially SJM, prior to the Golden Week holiday.


Macau Health Bureau Warn Gaming Operators (GGRAsia) Macau’s Health Bureau said it warned one of the city’s six gaming operators about the construction of smoking areas with gaming on its mass floors because the company’s plan did not completely separate the smoking areas from the mass-market gaming areas. Lei Chin Ion, head of Macau’s Health Bureau, reiterated the bureau would “rigorously” inspect the smoking lounges and smoking areas that gaming operators are allowed to set up under the new rules. He also said casinos will have to go 100% smoke-free on their mass floors after October 6 if their smoking lounges have not been inspected and approved by then. The full ban would remain until the smoking lounges are approved and operational, Mr. Lei commented.  The Health Bureau’s Saturday statement added that “it is foreseeable that not all” of the city’s gaming venues will be able to finish the construction of their smoking lounges ahead of the October 6 deadline.

Takeaway:  While we are hearing this could be Sand China, we continue to ponder the possibility the offender is SJM, given the planned worker protests. 


Macau Gaming Operators to Provide Transportation (GGRAsia) The Macau government is negotiating with gaming operators for them to provide transportation for their labor force, including migrant workers and workers on the casinos’ construction sites.  The plan includes shuttling hundreds of workers deployed for the construction of the new casino projects in Cotai. These workers are usually employed by the construction companies, not by the gaming operators.

Takeaway: Higher expenses coming and lower margins.


Macau Chief Executive Formal Appointment (Macau Daily Times) Chui Sai On received the official decree of appointment from the Chinese State Council this morning, in recognition of his upcoming five-year term as the fourth Chief Executive of Macau. Prior to departing Macau for Beijing, Chui Sai On told the media that he has yet to discuss any possible choices for the principal officials of the new government and he would start choosing his new Secretaries immediately after his official appointment. Chui Sai On also indicated he will hold various meetings with senior officials of the central government.

Takeaway: By all indications, the CEO mandated worker reforms at the expense of the gaming industry.


Macau Legislative Agenda (Macau Daily Business) Macau legislators return to the Legislative Assembly in mid-October following a two-month recess. As such, housing will remain one of the hot topics in the legislature. Chief Executive, Fernando Chiu Sai On, considers housing a “top priority” for his new mandate. Political analyst Larry So believes that housing will generate many interventions from legislators. However, Mr. So commented “Even if more houses are made available in those areas, that will surely take at least ten years, so the high demand will remain and we’ll face growing problems from a lack of housing”, So says. A legislative draft on housing leasing has already been announced, and is purportedly currently being worked on by several departments.


Macau-Zhuhai Border Crossing – Macau CEO Chui will discuss with the Chinese central government the possibility of extending the opening hours of the Macau-Zhuhai border crossings. Mr Chui says he is confident that the extension of the opening hours at the border checkpoints could take place soon.

Takeaway:  An extension of hours for checkpoint crossing would be a small positive for the mass segment.

Chinese Gamblers Prefer Bigger Casinos(Gaming Today) A recent survey by the China Outbound Tourism Research Institute, found that Chinese gamblers prefer the casinos in Singapore and Macau, although they do patronize others. Growing in popularity, however, are neighboring regions such as South Korea

Takeaway: Interesting to note, South Korea gets a positive shout out.


Ho Tram Strip Financing Announced – Asian Coast Development, the owner of The Grand Ho Tram Strip, has announced a US$50m funding commitment from its majority shareholder, Harbinger Capital. The Grand Ho Tram Strip opened in 2013 with a 541 room five-star hotel, a championship golf course, and beach front activities. A further 559 rooms and other amenities are to be built in a second phase. NewCity Capital which is a shareholder with Harbinger and Pinnacle Entertainment in Asian Coast Development Ltd made a $20 million investment in the project in July this year.

Takeaway: Harbinger doubling down.


British Tourists Killed in Thailand (AsiaOne) The bodies of two young British tourists, Ms Hannah Witheridge, 23, and Mr David Miller, 24, were found last week with severe head wounds near where they were staying on the southern island of Koh Tao, known for its coral reefs and diving. Thai tourism and police fear the murders will cause many travelers think twice before visiting the country on holiday.

Takeaway: More negative tourism headwinds from Thailand.


Saipan Integrated Resort Details Not Filed – Macau junket investor Imperial Pacific International Holdings Ltd has announced an eighth delay in giving formal details to the Hong Kong Stock Exchange over its major transaction concerning a casino license on the Pacific island of Saipan. The firm has set a new deadline of October 10 for the relevant disclosures, it said in a filing on Friday. It first formally announced its bid for a Saipan license, including the payment of a US$30 million refundable deposit on May 7

Takeaway: We remain skeptical regarding the development of the stipulated integrated resort as the market lacks sufficient airlift to support the required 2,000 hotel rooms.  We outlined these thoughts in our Leisure Letter on March 25, 2014.  


New Jersey Online Poker – New Jersey's fledgling Internet gambling market lost its first provider Friday when Ultimate Gaming accused its partner, the Trump Taj Mahal Casino Resort, of multiple contract breaches and said it is pulling out of New Jersey. Ultimate says it is owed $1.5 million by the casino's parent company and hasn't been paid in more than two months. Ultimate was ranked last out of New Jersey's six Internet gambling operations, taking in $4.9 million from online customers so far this year. The market leader, Borgata and partypoker, have won $30 million online so far this year. Ultimate Gaming was established in 2010 by Frank Fertitta III, Lorenzo Fertitta and Tom Breitling.

Takeaway: Online poker not the elixir of growth as once expected for New Jersey.


Antigua Integrated Resort – Following on the September 11, 2014 announcement by Antigua and Barbuda to seek a gaming dispute resolution with the United States, YIDA International Investment Antigua Limited acquired a land portfolio comprised of approximately 987 acres on the mainland, plus three adjacent islands for a combined total of approximately 1,522 acres.The Chinese firm plans to create “Singulari,” a multi-billion dollar mixed-use project including a golf resort, several five-star hotels, a horse track and residences stretching from the Crump Peninsula to Guiana Island.

Takeaway: Interesting timing of both announcements. The proliferation of gaming continues to be in much smaller and more remote regions.


Hoteliers to Reduce Discounting (Hotel Online) Hotels in major North American markets are continuing to experience solid growth in both rate and occupancy across all travel segments, according to data from the September 2014 TravelClick North American Hospitality Review (NAHR). This sustained growth is enabling hoteliers to reduce transient discounting, paving the way for even stronger revenue per available room (RevPAR). For the next 12 months (September 2014 - August 2015), overall committed occupancy (transient rooms reserved plus group rooms committed divided by capacity) is up 4.4% when compared to the same time last year. ADR is up 4.1% based on reservations currently on the books.

Takeaway: A positive trend for lodging, higher ADR and higher RevPAR results.


Guests Pay More for Hotels with Better Reviews (Hotel Online) Travelers are 3.9 times more likely to choose a hotel with higher review scores when the prices are the same. When hotel prices are increased for hotels with better review scores, travelers are more likely to book the hotel with the higher score even when it costs more. 76% of travelers were willing to pay more for a hotel with higher review scores, when asked explicitly.

Takeaway: Of course, guests prefer rooms with better reviews and ratings.


Ebola Impacts Safari Tourism – According, the company surveyed 500 safari tour operators, half of which reported that bookings are down between 20% and 70% due to the Ebola outbreak in West Africa, which is more than 2,000 miles from safari destinations.

Takeaway: With African tourism suffering, the global tourism spend will go elsewhere - the southern Mediterranean could be a likely beneficiary.


New Avian Flu Outbreak (UN News Center) The United Nations Food and Agriculture Organization (FAO) today warned that a recently-emerged strain of avian influenza virus detected in poultry in Southeast Asia presents a new threat to animal health and livelihoods and must be closely monitored. The virus known as H5N6 has so far been detected in poultry in China, the Lao People’s Democratic Republic and Viet Nam.  The H5N6 bird flu is highly contagious in chickens, geese, and other poultry, which hundreds of millions of people rely on for their livelihood. FAO’s Chief Veterinary Officer, Juan Lubroth, said “H5N6 is particularly worrisome, since it has been detected in several places so far from one another, and because it is so highly pathogenic, meaning infected poultry quickly become sick and, within 72 hours, death rates are very high.”

Takeaway: A story which we will closely monitor.


China Macro – September HSBC flash manufacturing PMI 50.5 vs Reuters 50.0 and 50.2 in August


Singapore Inflation – Compared with Aug 2013, the CPI in Aug 2014 increased 0.9% with lower cost of transport partially offset by higher costs of food, education & stationery and healthcare. The CPI in Aug 2014 rose 0.5% over Jul 2014.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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 80.46%
  • SHORT SIGNALS 78.35%