CCL the positive standout in our most recent survey. NCLH still struggling a bit.
Snowstorms abating, but are consumers still booking? In the Caribbean, we saw discounting across the board among the lower priced itineraries in the Caribbean in mid-February, but the Carnival brand pricing stood out in March, outperforming its peers. Carnival sequential pricing picked up among the Eastern Caribbean itineraries. More importantly, sequential pricing rose among the Western Caribbean itineraries for 2H 2014. This is encouraging given Western Caribbean pricing has lagged. While Caribbean pricing overall remains sluggish and pricing has been quite volatile in the busy, promotional period of Wave Season, we continue to see Carnival as best positioned due to easy comps and low Street expectations.
Not surprisingly, the picture is starkly different in Europe. The RC brand and Norwegian are leading the charge in a rosy booking and pricing environment. CCL has the most exposure to Europe but it is still trying to find a solid footing there with mixed pricing performance in March. The Ukraine-Russia situation could be a wild card. So far, no Black Sea sailings have been rescheduled or canceled on RCL and CCL brands. There’s speculation that Baltic Sea itineraries could eventually be impacted; that would be significant for CCL and RCL if it happens. Alaska will be the weakest market pricing wise in 2014 – who wants to go somewhere cold nowadays?
While our study focuses on sequential pricing trends and pivots, we would point out that YoY pricing for Carnival is up significantly due to the lapping of the Triumph fire incident in 2013. RCL and NCLH face more difficult comparisons in the Caribbean. The Street is finally catching on to the low bar set by Carnival as even the most bearish sell-side have been raising yield and EPS estimates for CCL before they report earnings in three weeks. According to Factset, recent FY2014 estimate changes have trended around the $1.75 EPS range (at the upper end of CCL’s $1.40-$1.80 guidance). Our $1.90 EPS and 0.3% yield forecast for FY2014 remains unchanged from our note in December “CCL: $2 ON THE HORIZON.”
Here are the highlights from our latest pricing survey (+13,500 itineraries) on March 3-4.
OVERALL SURVEY SENTIMENT
- CCL: Positive
- RCL: Neutral
- NCLH: Negative
- Carnival brand showed the greatest positive momentum in sequential pricing among the big 3 operators in March. This is a big reversal from weaker pricing in mid-February.
- Better pricing pretty much across all brand names especially Sensation and Paradise
- While F2Q pricing was pressured in the Western Caribbean, they may be some light at the end of the tunnel for 2H 2014 as the chart below shows
- Costa lost a little bit of pricing power in March, although overall Summer ‘14 pricing is still solid
- AIDA continues to be mixed. Baltic Sea strength is offset by discounting in the Mediterranean particularly in F3Q. This could be a potential red flag as we roll into Spring.
- Princess pricing improved slightly, helped by Ocean Princess
- Cunard pricing remain higher for summer ’14 while Holland America pricing plunged.
- P&O Cruises UK pricing backed off in F2Q but remain higher in F3Q/F4Q
- Holland America sequential pricing fell slightly
- Princess pricing recovered somewhat after heavy discounting the last couple of months
- While a small market player, Carnival brand outperformed in pricing in the Alaska market
- Princess pricing slightly higher in FQ3 and FQ4
- Overall, RC brand pricing was flat sequentially and remain slightly lower YoY.
- Close-in pricing for 1Q lost momentum in March
- Quantum pricing unchanged relative to February
- Easiest the best region for the RC brand – pricing up high double-digits for F2Q and high single digits for F3Q-F4Q
- Celebrity pricing showed sequential gains for FQ3/FQ4
- Azamara pricing was generally positive
- Pullmantur pricing showed decent growth considering very easy comps
- Both RC brand and Celebrity pricing were down close to double digits YoY with trend stabilizing
- More discounting off of already low prices for F1Q-F3Q. F4Q pricing is stable.
- Getaway 2Q premium increased for 2Q but it’s misleading because its comp brands (Sun, Pearl, Sky, Epic) pricing fell 20% on average since February guidance while Getaway pricing declined 10%. Getaway premiums for 4Q was steady around 26% but only flat with Epic prices
- Breakaway 3Q premium remain in the low single digits for F3Q and ~25% for 4Q.
- Bleeding stopped in March but pricing remain modestly lower
- NCLH has 10% and 19% exposure to Alaska in FQ2 and FQ3.
- Europe pricing looks outstanding for the summer
- Hawaii summer pricing stable
ISM Services printed its worst headline number since February of 2010 as the Employment series went sub-50, posting its largest MoM decline since November of 2008 and its first contractionary print in 25 months.
The dead cat bounce for New Orders off its worst print in more than 4 years in December continued as the series gained just +0.4 MoM in February - with a cumulative 2-month gain of just 1pt.
Indeed, the rolling averages (3M/6M/TTM) in New Orders across both the Manufacturing and Non-Manufacturing survey’s continue to slow.
On the positive side, Prices Paid slowed sequentially and the Backlogs index ticked above 50 for the first time in 4 –months. Unsurprisingly, weather remained the ubiquitous caveat for both pundits and ISM survey respondents
In the end, the takeaway is really just this:
We’ve seen multi-decade/record MoM declines across a number if the sub-indices in the two ISM survey’s in recent months. Yes, perhaps the weather is providing a modest-to-moderate negative distortion but, even if you discount that, the current Trend is one of deceleration.
Overall, the ISM data remains in agreement with the preponderance of fundamental, domestic macro data which continue to reflect a slowdown from a second derivative perspective.
HOW IS THE MARKET SCORING 1Q14: Equity Indices are up but the market continues to provide a relative bid to slower-growth sector/assets (Bonds/Utilities/Gold).
Low Beta/Large Cap/Low Leverage Style factors continue to outperform and, with commodities and inflation hedge assets outperforming as well, investors (seemingly) continue to expect a rhetorical shift in policy out of the Fed in response to the fundamental deterioration.
More broadly, if the high-end is reigning in consumption (see Monday’s note: Consumer Spending: High End in Retreat) alongside a slowdown in housing and portfolio appreciation and energy and commodity inflation continues to drive the deflator higher while taking a larger share of wallet for the bottom 80%, the upside for consumption growth in the immediate/intermediate term remains limited.
TAKING HIGH PROBABILITY SWINGS: Will warmer weather bring a bounce in the reported data and, in reflexive fashion, drive confidence/hiring/etc higher, and a resurgence in pro-growth equity flows?
Perhaps, but neither the fundamental data nor the price signals are supportive of that probability currently.
We’ll change alongside the data, but until then we’ll continue to keep our gross and net domestic equity exposure tighter than we did over the Nov 2012 – Dec 2013 period, tilting that exposure towards slower growth sectors or those with positive leverage to inflation (vs. our focus on high beta, pro-growth, consumer leverage in 2013) while holding higher allocations to bonds and select commodities.
Looking forward to more manic weather and labor force participation rate related commentary come Friday…..
Christian B. Drake
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CLICK FOR FULL REPORT: Just How Understated are E&P MLPs' Maintenance CapEx Figures?
Companies in this Analysis:
Atlas Resource Partners (ARP)
BreitBurn Energy Partners (BBEP)
EV Energy Partners (EVEP)
Legacy Reserves (LGCY)
LINN Energy (LINE, LNCO)
QR Energy (QRE)
Vanguard Natural Resources (VNR)
- In our view, understated maintenance CapEx (and overstated DCF) is endemic among the upstream MLPs.
- VNR strikes us as especially aggressive, because they only replaced 17% of produced reserves with the drill bit in 2013, but did not include any capital spent on acquired PDs in maintenance CapEx. We calculate that VNR’s maintenance CapEx should have been ~5x higher than what it was in 2013, which would've reduced VNR’s reported DCF to below $0.
- Understated maintenance CapEx is not a free lunch. While it boosts the distribution in the near-term, it’s a long-term headwind, as the MLP needs to raise additional debt and equity merely to sustain that distribution.
- This is one important non-GAAP accounting issue with respect to the E&P MLPs, but not the only one. Other issues that we often see include aggressive hedge accounting (like adding back the cost basis of commodity derivatives to DCF); adding back unit-based compensation to DCF; adding back non-cash interest expense to DCF; adding back acquisition-related G&A to DCF; and more.
- We remain negative on the upstream MLPs. Aggressive non-GAAP accounting, particularly with respect to maintenance CapEx, is a serious concern. Valuations are difficult to justify on any metric other than reported DCF.
Takeaway: RadioShack doesn’t need to close its stores. It needs to close RadioShack.
- "The retailer has been retooling stores in response to competition from online rivals such as Amazon.com Inc. To help speed the comeback, RadioShack said today it will shut as many as 1,100 underperforming stores, leaving about 4,000 U.S. locations."
TAKEAWAY FROM HEDGEYE'S BRIAN MCGOUGH:
Despite a clever and much-discussed Super Bowl '80s flashback advertising blitz (see video: "The '80s called; they want their store back.") the reality here is that RadioShack probably does not need to close stores.
It needs to close RadioShack altogether.
The store banner is hardly an asset, nor is the fact that it is the destination for replacement transistors, extension cords, cheap electronic toys, and mobile phones (and even that is underperforming). The greatest asset, in our opinion, is actually the 5,000+ US store locations.
Think about it.
If you wanted to build a small format retail concept in any other category -- apparel, sporting goods, or heck, even e-tail showrooms -- it would take at least a decade to build up that kind of scale.
If current management (who is quite good -- especially for Radio Shack) can pull off this turnaround, then we'll give 'em all the credit in the world. But we think a better answer lies in a different strategic direction.
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