VIDEO | PENN: A Series Of Bullish Catalysts

Takeaway: Penn National Gaming Inc. was added to Investing Ideas on Tuesday, February 24th 2015.

Earlier today Gaming/Lodging/Leisure Sector Head Todd Jordan sat down with Hedgeye CEO Keith McCullough to discuss the myriad of bullish catalysts for Penn National Gaming Inc.   


The current macro environment, a new casino and a great management team are three factors in Todd's bull case for PENN.




Takeaway: Overall positive commentary out of NCLH. Pricing raised in last few weeks - a positive takeaway from the discussion




Jason Montague, President and COO Prestige

  • In the past, had acheived $25m total synergies off of $750m revenue base
  • Oceania yields bounced back to 2008 peak yields in 2012
  • Net revenue EBITDA margin should be metric to look at 
  • 50+ years old accounts for 80% of luxury consumers
  • Prestige:  Winter capacity -  Asia/Austrlaia/ French Polynesia/ Caribbean
  • 2015 capacity
    • Regent:
      • Caribbean: 10.9%
      • Europe: 36.0%
      • Alaska: 9.0%
      • Asia/Africa/Pacific: 29.1%
      • S America: 4.1%
      • Other: 10.9%
    • Oceania:
      • Caribbean: 15.7%
      • Europe: 34.1%
      • Asia/Africa/Pacific: 18.8%
      • Caribbean: 15.7%
      • S. America: 5.9%
      • World: 12.2%
      • Other: 8.3%
  • Prestige's visibility into future revs: 20-30% in advance of its industry peers
  • Prestige: only accounted for 1% of premium brand market in terms of passengers - huge opportunity
  • Sees continued double-digit international growth

Wendy Beck, CFO NCLH

  • 2015 guidance excludes Prestige-merger related amortizations in backlog, and customer relations: $101m in 2015, $38m in 2016, $35m in 2017 
  • Pricing raised in the past few weeks
  • Higher MGO grade fuel mix for 2015
  • On IPO call: wanted net leverage ratio below 4x. In 2014, Norwegian brand stand-alone net leverage was 3.8x
  • Longer-term goals:
    • 3-4% net yield growth
    • +30% ADJUSTED EBITDA margin
    • <4x net leverage ratio
    • Adjusted Net income growth: +30%
    • Adjusted EPS of $5.00 by 2017
      • From $2.80 FY 2015 (mid-point)
        • $1.74 from fleet growth  (including newbuilds); organic fleet should generate 2-3% growth
        • $0.13: scheduled interest expense 
        • $0.14- voluntary debt prepayments: $350m baked in 2016 and $440m in 2017
        • $0.19 - fuel hedges in 2015
    • ROIC: Double from IPO level's 7% to ~14% in 2018
    • Assume no share repurchases (if they use the cash to buyback shares rather than pay down debt, it will translate into additional 4 cents in EPS)
  • Weighted debt cost: 3.72%
  • Leverage targets (combined company)
    • 2015: 4.3x
    • 2016: 3.3x
    • 2017: 2.3x
  • ROIC targets (combined company)
    • Payback of Prestige ship: 4.5-5.5yr range
    • ~13% for 2017, 14% in 2018
  • Fuel:  Don't hedge MGO grade
  • Increased fuel hedges to 77% (68% previously) for 2015 currently and 12% for 2018 currently (8% previously)
  • 2014 FX exposure
    • 8% Euro (1 cent change in FX results in 4.3 bps in YoY change in yield)
    • 6% Pound (1 cent change in FX results in 2.0 bps in YoY change in yield)
    • 2% Aussie $ (1 cent change in FX results in 2.1 bps in YoY change in yield)


Takeaway: CEO wants synergies to be implemented quickly - by end of Q3 2015. Possible China opportunity for Norwegian brand in 2018/2019.



Frank Del Rio (President/CEO)

  • Synergies will be done by end of Q3 2015
  • Sold Oceania to Apollo for $475M 
  • Norwegian brand
    • Four 4,200 berth newbuilds on order (Q4 2015, Q2 2017, Q2 2018, Q4 2019)
      • 2018: Breakaway Plus 3 (possibly targeting China)
      • 2019: Breakaway Plus 4 (possibly targeting China)
    • Average age is 51
    • Kids comprise ~12% of passengers
  • Oceania:  new R-Class ship by 2Q 2016
    • Average age: 67
    • Cater to retired/semi-retired seasoned travelers
    • Very high repeat customers
  • Regent Seven Seas
    • Explorer to arrive in mid-2016
    • Most inclusive luxury experience
    • All-suite staterooms, 97% with baloncies
    • High net worth guests comprise 50%+ of volume
    • Average age: 68
  • Oceania: between premium and luxury segments
  • NCLH: has no internal competition within each brand segment (premium, luxury, contemporary) as opposed to RCL and CCL
  • Oceania/Regent: Destination is key
  • Cost per berth
    • Breakaway class: ~$215k
    • Sirena: ~$180k
    • O-Class Oceania: ~$525k (richer cabin mix on O-class)
    • Seven Seas Explorer: ~$600k
  • Jason Montague/Drew Madsen as brand Presidents: primarily responsible for driving occupancy
  • Revenue mgmt department:  focused solely on pricing
  • Oceania/Regent:  have highest per diem in their respective brand segments
  • Cost Synergies in 2015: $25m in the bag
    • $10.4m in consolidation of office operations
  • Revenue Enhancement opportunities
    • Optimize itineraries
    • Shore excursion sales
    • Ticket Price - Deal vs Price marketing message
      • Selling the deal (value) rather than low price
    • Leveraging relationships with Travel Partners catering to affluent travelers (occupancy)
    • Cross-utilization of past guest database (occupancy)
    • Best Practices: maximization of Norwegian's upscale offerings
      • Pride of America
      • The Haven by Norwegian
  • Cost reduction opportunities
    • Sharing of best practices/economics of scale
    • Cost of delivering product
    • Further rationalization of overhead
    • Foster culture of cost consciousness
  • 'FDR's' New Deal
    • Flawless execution of strategy in place
      • Potential of Asia and other new international source markets
    • Drive higher per diems to delivers higher yields
      • Weaving in the Prestige Go to Market Strategy
    • Leverage scale to suppress costs
  • Prestige:  carries 200k passengers/yr; 50% past guest participation on a database of 300k past guest households
  • Norwegian: carries 2.1m passengers/yr; 35% past guest participation on a database of 3.7 million past guest households
  • 'Low hanging fruit' with taking advantage of past guest databases across brands
  • Annualized contribution for Norwegian newbuild: $100m
  • Incremental increase in Norwegian ticket pricing growth necessary to achieve equivalent of newbuild net income: ~3.0% to 4.0%
  • Norwegian waiting for China to mature and waiting to replenish the Norwegian fleet to rightful capacity
  • China:  
    • Looking for China partner
    • Go/No Go decision by Spring 2016
  • Targeting additional $10m for marketing for Wave Season 2015
  • Prestige:  usually 65-75% sold for following year
  • Regent per diem: $700
    • Introduced pre-cruise hotel stay in 2011 which raised pricing
    • 2009-2014 CAGR: +6.8% net ticket yields
  • Top source markets:
    • Oceania:
      • US: 64.7%
      • Canada: 14%
      • UK: 6.2%
      • Australia: 4.0%
    • Regent:
      • US: 67.5%
      • UK: 11.6%
      • Canada: 7.4%
      • Australia: 3.7%
    • Norwegian
      • US: 73.9%
      • Canada: 7.1%
      • UK: 4.2%
      • Germany: 2.2%
    • Norwegian sources 8% in California (vs other brands sourcing 25% in Cali) - sees opportunity there
  • On March 1, 2015,  NCLH will raise bar list by 6.6%, which will generate $10m in onboard revenue with no cost implications
    • More onboard opportunities in medical center. (Norwegian brand loses money in medical center. Want to get to break even)


Drew Madsen (President/ COO)

  • The Haven: Oceania/Regent cross-marketing opportunity
  • Pride of America:  highest yielding ship with strong double digit premium to core fleet
  • Dry dock schedule 2015:
    • Norwegian Star (March)
    • Norwegian Gem (September)
    • Norwegian Epic (October)
  • Norwegian Escape (Nov 2015): largest Haven complex in fleet

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Yellen Puffs Dovish Peace Pipe, Bond Yields Fall

The UST 10YR Yield is getting smoked after Fed Chair Janet Yellen takes a toke of the dovish peace pipe, keeping the “patient” word in, and acknowledging what she cannot reverse (#Deflation in all reported inflation metrics). In other words, her acknowledging deflation (without actually calling it that) is what kept "patient" in the vernacular.

Yellen Puffs Dovish Peace Pipe, Bond Yields Fall - Yellen cartoon 08.18.2014

The UST 10YR is at 1.96% this morning and is down -14 basis points lower than just 24 hours ago with slowing CPI and GDP reports (Thursday and Friday) up next.


On a related note, the USD evidently did not like the dovishness either, but the selloff here is modest compared to bond yields. The USD is only -0.2% vs. Burning Euros and Yens. That should put a short-term bottom in for Oil, Gold, etc. And that also helps keep the S&P 500 at all-time highs (both rate sensitive and inflation expectation stocks stop going down).


For the record, Yellen is as dovish, on the margin, as I thought she could be.


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LEISURE LETTER (02/25/2015)




  • Feb 25: 
    • Prestige analyst day (9:00am-12pm)
    • ISLE F3Q 2015:
  • Feb 26: RHP 4Q CC 10:00am  pw: 73087325


SJM - Legislative Assembly member Ella Lei Cheng I has asked the government to look again at the gaming tax relief that SJM gets for dredging the harbor. Ms Lei says in a written inquiry that the government should reconsider the arrangement when it gets round to reviewing the gaming concessions. The rate of gaming tax SJM pays is one percentage point less than what the other concessionaires pay.



LVS -  Sands China announced what it describes as an “exclusive partnership” with a major non-gaming resort on neighboring Hengqin Island in mainland China, to offer two-center holiday packages.


The arrangement with Hengqin Chimelong International Ocean Resort – a few minutes drive from Sands China’s Cotai Strip properties via the Lotus Bridge immigration checkpoint – is to be marketed by Sands China as the ‘Macao Hengqin Experience Package’.



Ainsworth - The company said revenue gains in the Americas “assisted in increasing the contribution of revenue from international markets which now represent 52 percent of total revenue compared to 33 percent in [the] previous corresponding period”. Revenue in Australia dropped 34% YoY to AUD53.5 million, while that of the international segment went up by 45% to AUD58.4 million. The company grew its installed base of recurring revenue machines in the US by 48% to 2,286.

Takeaway: Ainsworth is making headway in the US slot market.


IGT - has been chosen to provide its Advantage 9.2 System Suite with Service Window, in addition to 80 IGT games at the new Three Rivers Casino Coos Bay, slated to open in April 2015 in Coos Bay, Oregon.


RCL - Citing foggy conditions that have delayed Brilliance of the Seas' previous cruise and are forecast to continue for the next few days, RCL canceled the Feb. 23 sailing. RCL will provide a full refund of the cruise fare plus a future cruise certificate for 25% of the fare paid for the Feb. 23 voyage.  

Takeaway:  RCL has been busy dealing with ship-specific incidents this year.


Viking - Viking Cruises, currently with 60 vessels across Europe, Russia and Asia, plans to begin sailing on the Mississippi in late 2017. Plans call for the construction of six vessels over the next three years at an estimated cost of $90m to $100m per vessel, all to be built in US shipyards and crewed by US citizens. The vessels will be owned by Tennenbaum Capital Partners, a Los Angeles-based alternative investment management firm, and time-chartered to Viking in compliance with maritime laws.



Arizona - The Tohono O’odham Indians are building a temporary casino as the first phase of their $400 million casino in Glendale, west of Phoenix, the Phoenix Business Journal reported. The temporary casino will have 1,089 slot machines and should be open by the fourth quarter. 

Article HERE

Takeaway: After much controversy, it looks like this property is finally on its way


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


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