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CCL/NCLH/RCL: SUMMARY FROM MANAGEMENT MEETINGS

Takeaway: Came away from cruise management meetings less optimistic on CCL despite the fuel tailwind

CALL TO ACTION

 

This week, we met with RCL, CCL, and NCLH managements in Miami. The tone was quite varied among the 3 companies with CCL the most cautious and NCLH the most optimistic. All operators were quite bullish on the long-term outlook for the industry.  Falling fuel costs are a major tailwind in 2015 for CCL, RCL, and NCLH in that order.  However, the operators, particularly CCL, corroborated our assertion that Europe pricing is under pressure in the face of a weakening economic backdrop and accelerating supply growth (+5%) in 2015. 

 

CCL is the most exposed to European sourced customers and indeed we are most concerned with that stock as it sits at a 52 week high.  Management didn’t exactly bolster the long thesis that yields should outperform the industry (furthest from peak theory) as brand building costs abate (they probably won’t).  On the other hand, NCLH seems the best positioned for 2015.

 

Please see our detailed note: 

http://docs.hedgeye.com/HE_CCL_NCL_RCL_1.8.15.pdf


REPLAY: 1Q15 MACRO INVESTMENT THEMES CALL

On January 8th we hosted our quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 1Q15 and the associated investment implications.

 

We encourage you to check out the Video Replays for each theme below:

 

Global #Deflation

 

#Quad414

 

Long #Housing?


Knapp Headlines Strong, But...

Last night Malcom Knapp released casual dining sales results for December, estimating that same-store sales increased +2.2% as guest counts decreased -0.5%.  As expected, restaurant stocks are rallying on the print.  While the headline numbers are strong, the underlying trend is quite the opposite, as same-restaurant sales and traffic declined -2.0% and -4.2%, respectively, on a two-year average basis. 

 

For the quarter, same-restaurant sales increased +1.5% as guest counts decreased -0.6%.  While 4Q, as a whole, was strong, December marked the second straight month of deceleration in the two-year trend of both measures, suggesting that the state of the casual dining industry isn’t quite as strong as people suspect. 

 

The reality is, we’re not going to fight the headlines and with another 2-3 months of weak comparisons on tap, we imagine sentiment surrounding restaurant stocks will remain high over the near-term.  However, we believe the recent run-up, which we properly positioned for, will soon provide us with a plethora of opportunities on the short side.

 

Stay tuned.


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TABLE ALLOCATION UPDATE

Takeaway: 200 tables on average could even be more than what the gov’t is willing to allocate – investors won't like that

300-500 tables per new Cotai casino looking increasingly unlikely

 

 

A reliable contact in Macau has indicated to us that the new Cotai projects may be allocated only 150 tables or less on average each.  The smaller than expected allocation would likely disappoint some investors.  Estimates of up to 550 tables for Wynn Palace and 400 for some of the other new Cotai properties have been offered.  WYNN management has been particularly bullish regarding their potential allocation.

 

In public commentary from both the Macau government and State officials from China including President Xi Jinping during his Macau visit, it has become clear that diversifying the economy away from gaming is a clear public policy goal.  We believe this is no longer just talk – active measures are being taken to achieve this goal.  A lower table allocation is certainly one measure.

 

With Galaxy Phase II opening in Q2 (mgmt expecting up to 500 tables), we should get a feel for numbers soon.  Galaxy may obtain one of the healthier allocations since they're a 1st mover and have built a solid relationship with the Chinese government. If they are allocated significantly below what is expected, it could be an ominous sign.

 

Investors would likely react negatively as projections tend to be made on a revenue per table basis.  Thus, fewer tables equates to fewer revenues.  We don’t agree with this modeling approach and would not necessarily view a 200 table allocation as negative based on current demand trends, at least over the short term.  After all, we expect cannibalization so table migration from existing properties should somewhat alleviate the problem of too few tables at new properties.  Moreover, dealer costs will be subdued.

 

However, if market demand improves, gaming revenue growth could be impeded by short supply.  Of course, this may be what the government wants and relatively small table allocations should be a signal that government is serious about curtailing gaming growth or at least slowing growth rates below that of non-gaming sources.  


Cartoon of the Day: What a Drag(hi)

Cartoon of the Day: What a Drag(hi) - Draghi cartoon 01.08.2015

Overcoming his denial about deflation has been a major challenge for ECB head honcho Mario Draghi. Reality is setting in as prices fall across Europe.


Keith's Macro Notebook 1/8: Yen | Oil | SPX

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


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