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[PODCAST] McCullough: Here's Where the Opportunities Are

In this morning's conference call, Hedgeye CEO Keith McCullough walks investors through what's working right now, what's not, and where the biggest market risks and opportunities exist.

 


MPEL 4Q CONFERENCE CALL NOTES

Hold adjusted in-line with us but nicely above the Street. Dividend policy a plus

 

 

CONF CALL

  • Premium mass will continue to be supported by infrastructure developments
  • 4Q luck-adjusted property EBITDA margin increased 400bps YoY to 28.6%
  • CoD Manila:  will open around mid-2014
  • New dividend policy: distribute 30% of net income
  • Macau still underpenetrated
  • Record CNY:  remarkable strength in mass market segment
  • 4Q luck-adjusted (2.85% hold) property EBITDA: $380MM (+36% YoY, +12% QoQ)
  • Mass EBITDA: 75% of luck-adjusted EBITDA at CoD and 70% on group-wide basis
  • 1Q guidance
    • D&A: 95-100MM
    • Corp expense: 24-26MM
    • Consolidated net interest epxense ; 31-33MM ($11MM CoD Manila, $17 Studio City, net of $18MM cap interest for CoD Manila/Studio City)

Q & A

  • Not surprised with January's slowness due to before CNY period
  • Need to look Jan and February together to get a sense of business trends
  • Tax situation in Phillippines:  working with PAGCOR
  • 2nd wk of CNY:  very strong; some VIPs customers coming this week and weekend; pattern repeating from last year
  • 4Q High mass hold: combination of service and floor strategy, putting more premium tables which is sustaining the high hold; high hold is sustainable
  • Will continue to move tables from Altira to CoD
  • Mass win per table:  is there a threshold?  No.
  • CoD:  creating a new high-end slot area on ground floor, new F&B experience on 2nd floor (also potentially more gaming machines) --projects may be completed in mid-2014
    • Total capex for both projects:  $30MM
  • Japan:  open-minded to opportunities
  • Altira EBITDA per table low compared with Starworld:  VIP EBITDA per table is on par with the market
  • CoD opex:  not concerned; bonus provision for 4Q was modestly higher than in previous quarters
  • CoD direct VIP:  did not hold well 
  • CoD 5th Tower:  PR event in 2Q will unveil budget and features
  • MSC:  will be the only stand-alone property to open on Cotai; on schedule, on budget

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On

Takeaway: Historic week within ETFs with record outflows in equities and record inflows into bonds...trends unchanged within mutual funds

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, we saw a continuation of the tale of two tapes with equity inflow and fixed income outflow in mutual funds (retail) and a record reallocation within more institutionally based ETFs with record outflows in stock ETFs and record inflows into bond ETFs.

 

Total equity mutual funds experienced another week of inflow as the lagged effect of fund flow chasing performance from last year has been strong enough to offset near term worries about emerging markets. For the week ending February 5th, equity mutual funds had $1.8 billion of inflow, a deceleration from the $5.4 billion inflow the week prior but none-the-less a positive inflow in a tough macro news flow week. The $1.8 billion subscription for the week however was below the running year-to-date weekly average inflow of $4.3 billion for stock funds in 2014. 

 

Fixed income mutual funds conversely had net outflows during the most recent 5 day period, a continuation from the negative performance of 2013. In the week ending February 5th, total fixed income mutual funds experienced a $2.8 billion outflow, which broke out into a $3.0 billion redemption in taxable bonds and a $146 million inflow into tax-free bonds, the fourth straight week of inflow for munis. The 2014 weekly average for fixed income mutual funds now stands at a $75 million weekly outflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in the bond market).

 

ETFs, a more institutionally oriented product, reflected the nascent risks in emerging markets and weaker U.S. economic data with record outflows in stock ETFs and conversely record inflows in fixed income ETFs. Stock ETFs lost a weekly record $27.4 billion in the 5 day period ending February 5th, the biggest weekly outflow in our data set spanning 18 months of information. Bond ETFs conversely booked the biggest weekly inflow in our information from Bloomberg putting up a $14 billion subscription. The 2014 weekly averages considering this latest data are now a $7.9 billion weekly outflow for equity ETFs and a $2.8 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $36.7 billion spread for the week (-$25.5 billion of total equity outflows versus the $11.1 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.5 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) with this week setting the 52 week low of equity/debt weekly spread of -$36.7 billion (negative numbers imply a net inflow into bonds for the week). 

 

While the short term fund flow picture is showing drastic volatility with this week's historic outflow in ETFs, we highlight that the longer term picture within the mutual fund market continues to relay a rebound in stock funds to the detriment of fixed income funds. Looking at top line gross sales of all equity funds on a monthly basis, shows the continued trajectory higher to new record highs since 2007 through the end of last year. According to ICI data, all equity funds grossed $159 billion in sales in December 2013, a new high in all available data from 2007. Conversely, fixed income mutual funds continue to book lower highs in sales after peaking in early 2013. The most recent sales tallies in December (as January 2014 totals aren't available yet) amounted to $92 billion, well off the all-time high of $118 billion in fixed income monthly sales in January 2013. While net flows (what the industry normally focuses on) can be volatile on a short term basis, top line sales totals will eventually wash out short-term inflow or outflow and hence are a better indicator of which products have the most momentum. Thus these top-line sales trends still relay incrementally stronger demand for equities over fixed income in mutual funds for now.

 

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 15

 

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 2

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 3

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 4

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 5

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 7

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 8

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $36.7 billion spread for the week (-$25.5 billion of total equity outflows versus the $11.1 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.5 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) with this week setting the 52 week low of equity/debt weekly spread of -$36.7 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 16

 

 

While the short term fund flow picture is showing drastic volatility with this week's historic outflow in ETFs, we highlight that the longer term picture within the mutual fund market continues to relay a rebound in stock funds to the detriment of fixed income funds. Looking at top line gross sales of all equity funds on a monthly basis, shows the continued trajectory higher to new record highs since 2007 through the end of last year. According to ICI data, all equity funds grossed $159 billion in sales in December 2013, a new high in all available data from 2007. Conversely, fixed income mutual funds continue to book lower highs in sales after peaking in early 2013. The most recent sales tallies in December (as January 2014 totals aren't available yet) amounted to $92 billion, well off the all-time high of $118 billion in fixed income monthly sales in January 2013. While net flows (what the industry normally focuses on) can be volatile on a short term basis, top line sales totals will eventually wash out short-term inflow or outflow and hence are a better indicator of which products have the most momentum. Thus these top-line sales trends still relay incrementally stronger demand for equities over fixed income in mutual funds for now.

 

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 14

 

ICI Fund Flow Survey - Record Divergence in ETFs...Mutual Funds Carry On - ICI chart 13

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


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February 13, 2014

February 13, 2014 - Slide1 

BULLISH TRENDS

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BEARISH TRENDS

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NCLH: DOUBLE TROUBLE?

Two markets could negatively impact the 1st half of 2014 according to our proprietary pricing survey

 

 

We’re not done with our current pricing survey but wanted to point out some somewhat disconcerting trends we’re seeing with NCLH.  With the Getaway celebration in the rear view, jubilation and excitement may not be the exuded emotions when NCLH reports earnings next Tuesday morning.  4Q should be fine but we’re concerned with first half 2014 demand trends.  Starting with the Caribbean, we may be seeing some pricing pressure, finally, with the double digit increase in capacity this year.  Based on our proprietary pricing tracker, Norweigan Caribbean pricing has not recovered since we reported on its weakness in mid-January.  In fact, the discounting accelerated in the past month for 1H 2014.   While 1Q close-in pricing took a steep fall in February, 2Q’s prices were also lower.

 

While the bulls may focus on Getaway’s premiums over its peers (Sun, Pearl, Epic) in the Miami market which remain quite robust in 2Q and 3Q, that also reflects much lower prices (-20-30% in some cases) for the older ships since Getaway’s pricing actually fell slightly sequentially in February.  As we look out to the late fall/winter itineraries, Getaway’s pricing is almost in-line with that of Epic – not exactly bullish.

 

While the Caribbean is the largest market, the bigger area of concern, in our opinion, is Alaska.  Compared with RCL and CCL, Norwegian has the greatest exposure to Alaska in 2014 with 10% of capacity in 2Q and 19% of capacity in 3Q.  We continued to see close to double digit pricing declines for Norwegian in the Alaska market in February.  The frigid cold weather may have influenced potential cruisers to look at warmer destinations.  

 

Not all is bad.  Europe is the lone bright spot.  Pricing was up nicely +15-20% YoY in February, continuing the strong pricing trend seen in January.  But Europe only accounts for 20% of 2014 capacity, down by 5% points compared with 2013’s.

 

We think FY 2014 yield growth expectations of 4.25-4.5% is an aggressive target.  To achieve this, NCLH will need some help.  The good news is that there are still a number of weeks left in wave season.  Cost savings could offset some of the expected revenue shortfall but top line will likely be the focus for investors.  The midpoint of the 2014 EPS guidance range could fall below Street consensus of $2.29; for Q1, we’re estimating $0.16 (Street: $0.23).  Revenues for 1H could be $10-20MM lower than what the Street is expecting.

 

NCLH looks promising over the long term but dicey here ahead of earnings and into 1H 2014.

 

The following chart illustrates the initial results of our cruise pricing survey:

 

NCLH: DOUBLE TROUBLE? - nclh



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