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Below is a complimentary research note from Gaming, Lodging, and Leisure (GLL) analyst Todd Jordan.  If you are an institutional investor interested in accessing our research email sales@hedgeye.com.

3 Tickers To Sharpen The Pencil On During The Coronavirus Dip - 1 27 2020 9 25 50 AM

While the US stock market has held in there, until this morning at least, our closely covered GLL stocks have certainly took a decent hit.

With fears that the Coronavirus could spread and further impact global travel and sentiment towards travel, there shouldn’t be much of a surprise that the stocks are down.  Within the growing angst and fear out there, we do see areas of our coverage that could be worth taking advantage of on this dip. 

If we draw parallels to the Ebola scare of 2014 and see how it impacted a few groups of GLL stocks, the current drawdown is a little less than halfway done, so now would be good time to do the work on a few of our favorite names. Names that we would first go to are Norwegian Cruise Line (NCLH), Booking Holdings (BKNG), and MGM Resorts International (MGM), for the following reasons:

  • NCLH – stock is down ~7% from its recent highs, and trading at 9.5x forward EPS, implying levels of sizable yield and earnings deceleration.  Is NCLH fully immune from any Coronavirus fall out?  No it is not, but their 2020 deployment to the region is just 0.5% of total deployment by our calculations, with China customer sourcing likely close to 1-1.5% of their total sourcing.  This number is vastly different from competitors RCL and CCL, where China market deployment and total passenger mix could be 5-6% and 7-8%, respectively.  We will keep an eye on any fluctuations on close in pricing and booking volume changes, but as we reported on last week in our NCLH Deck, there could be plenty of earnings upside for the company in 2020.
    • For context, the Ebola virus drawdown in 2014 showed the cruise stocks fall -16%, which compares to the current drawdown of -7%.       
  • BKNG – stock is down ~6% from its recent highs, and trading at 17x forward EPS, implying levels of growth that are far below levels that we can fundamentally envision.  Like the others, BKNG is not fully immune from any Coronavirus fall out.  We estimate that their direct exposure to China and the broader outbound consumer is in the range of 6-8% of their total business, and investors should recall that much of the China outbound business has actually been somewhat of a headwind over the last 18 months (China Trade War, travelers trading down to lower ADR markets, etc), so the incremental impact may not be as bad as feared.  Additionally, BKNG could benefit from from a rebounding EU economy (vast majority of their business), potential share gains in the US, and then also the robust growth out of the alternative accommodation space.
    • For context, the Ebola virus drawdown in 2014 showed the OTA stocks fall -13%, which compares to the current drawdown of -6%.
  • MGM – stock is down ~9% from its recent highs, and despite its very big run leading into this event, is still trading at a valuation mismatch relative to the accelerating fundamentals that its domestic business is likely to generate in 2020 and 2021.  Macau represents ~20% of EBITDA, but up until very recently, MGM was getting little credit for its Macau operations.  To us, the downside move looks overdone, particularly given that less than 1% of visitor to Las Vegas originate from China, and much of that business has already been under duress over the last few years.

 If you are an institutional investor interested in accessing Todd's research email sales@hedgeye.com.