Cartoon of the Day: Small-Cap Canaries?

Takeaway: At 55x trailing earnings and 42% of the names in the Russell 2000 crashing (-20% or more from 12 month peak), the US stock market is cheap?

Cartoon of the Day: Small-Cap Canaries? - Small cap canaries 09.23.2014


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

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

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