Hospitality under threat
As the recession begins to bite, the hospitality industry will be affected by cutbacks among two traditional customers: business and blue collar workers. Whether family cruises or business meetings, there will be fewer expenditures.
I just booked a trip to Puerto Vallarta at a major resort hotel in peak season. My rates are ridiculously low ($100 per night including taxes) AND the operator has told me that the hotel is very far from full.
Cruises – Both luxury and fun getaways, these have been especially big for folks looking to splurge. While there are elegant cruise lines, the bread and butter money comes from more down-market clients. Costs are not cheap – a typical cruise will start at $3300 per couple with airfare included. But those costs are competitive compared to a week visiting two destinations: $2500 per couple for 1 week room, board, and island hopping. That’s about equal to 1 week in San Francisco with a side trip to Napa Valley. (hotel = $1400, food = $700, drinks and entertainment = $300, car to Napa = $100)
Many people budget that much for vacations. I suspect that, in fact, discretionary vacation spending will drop and shift to a mix of time at home and time on the road. Hey kids, lets drive to see the Grand Canyon!
Recently, Carnival Cruise Lines announced that all was well and that fuel costs were being managed thru fuel surcharges. But most cruises are big events, so they are booked well in advance. If there is going to be a slowdown, it won’t be seen for a few months as cancellations mount (better to be out $300 and not $3300) and as vacationers stay away. The cruiselines will respond with various discounts and gimmicks, all of which will hit the margins. They will respond by delaying refurbishings, squeezing their vendors, and various cutbacks. But there isn’t a lot that they can do. I bet those fuel surcharges don’t last, either.
Hotels – Buoyed by international travelers but hit by a loss of business travelers and conferences. A lot of cancellations are happening as companies trim costs by cutting back on extravagant business meetings and holding them locally. Or not at all. One large corporate meeting for 100 people is $100K for a hotel. If every Fortune 500 company cancels one such event, that’s a lot of money not being spent.
International hotels benefit from the weak dollar – Starwoods, for example, does 50% of business overseas, so that’s an automatic 20% profit increase on 50% of the business.
I could see more low-end hotels doing well as folks move down market and focus less on accommodations and more on destinations. Choice hotels would be a good long play for that. But a forward 22 P/E looks high. Still, they could steal business and stay ok
In general, I would beware going bearish on hotels
Casinos – Fun fun fun. And Vegas is good at running specials like free or almost free rooms. But the concept of gambling is more appealing to those with money or those desperate to get some. Vegas can be a place for cheap thrills, but not as much as it used to be. And if more gun shy visitors come and don’t gamble, margins get squeezed.
CRUISE LINES
Down only 20% in 1 year – ready for a deeper crash
CCL – The budget travelers choice. Revenue was up ~15% last quarter but profits are sagging. Sure gas prices have an effect, but costs are just up. The only shining light is the $2B+ in short term debt that will benefit from falling interest rates. But that’s a lot of debt. In any case, they seem fairly valued for slow growth, but I think bookings and onboard spending continues to droop.
RCL – Revenue is up 30% Year over Year, as is profits. Although not as debt loaded, they face the same problems.
CASINOS
In addition to Vegas, casinos are looking to Macau for Chinese gamblers and to condo and timeshare sales in Vegas. The former is great, but the latter is a money pit.
Business is off - I'd short al lof them
MGM – Performance doesn’t justify the 30 P/E. Not much growth last quarter
Las Vegas Sands – Very dependant on potential Chinese market. And that market is raging.
Wynn – Hugely successful but overpriced. I would buy in the 80s. But they are not exposed to the timeshares and condos.
I just booked a trip to Puerto Vallarta at a major resort hotel in peak season. My rates are ridiculously low ($100 per night including taxes) AND the operator has told me that the hotel is very far from full.
Cruises – Both luxury and fun getaways, these have been especially big for folks looking to splurge. While there are elegant cruise lines, the bread and butter money comes from more down-market clients. Costs are not cheap – a typical cruise will start at $3300 per couple with airfare included. But those costs are competitive compared to a week visiting two destinations: $2500 per couple for 1 week room, board, and island hopping. That’s about equal to 1 week in San Francisco with a side trip to Napa Valley. (hotel = $1400, food = $700, drinks and entertainment = $300, car to Napa = $100)
Many people budget that much for vacations. I suspect that, in fact, discretionary vacation spending will drop and shift to a mix of time at home and time on the road. Hey kids, lets drive to see the Grand Canyon!
Recently, Carnival Cruise Lines announced that all was well and that fuel costs were being managed thru fuel surcharges. But most cruises are big events, so they are booked well in advance. If there is going to be a slowdown, it won’t be seen for a few months as cancellations mount (better to be out $300 and not $3300) and as vacationers stay away. The cruiselines will respond with various discounts and gimmicks, all of which will hit the margins. They will respond by delaying refurbishings, squeezing their vendors, and various cutbacks. But there isn’t a lot that they can do. I bet those fuel surcharges don’t last, either.
Hotels – Buoyed by international travelers but hit by a loss of business travelers and conferences. A lot of cancellations are happening as companies trim costs by cutting back on extravagant business meetings and holding them locally. Or not at all. One large corporate meeting for 100 people is $100K for a hotel. If every Fortune 500 company cancels one such event, that’s a lot of money not being spent.
International hotels benefit from the weak dollar – Starwoods, for example, does 50% of business overseas, so that’s an automatic 20% profit increase on 50% of the business.
I could see more low-end hotels doing well as folks move down market and focus less on accommodations and more on destinations. Choice hotels would be a good long play for that. But a forward 22 P/E looks high. Still, they could steal business and stay ok
In general, I would beware going bearish on hotels
Casinos – Fun fun fun. And Vegas is good at running specials like free or almost free rooms. But the concept of gambling is more appealing to those with money or those desperate to get some. Vegas can be a place for cheap thrills, but not as much as it used to be. And if more gun shy visitors come and don’t gamble, margins get squeezed.
CRUISE LINES
Down only 20% in 1 year – ready for a deeper crash
CCL – The budget travelers choice. Revenue was up ~15% last quarter but profits are sagging. Sure gas prices have an effect, but costs are just up. The only shining light is the $2B+ in short term debt that will benefit from falling interest rates. But that’s a lot of debt. In any case, they seem fairly valued for slow growth, but I think bookings and onboard spending continues to droop.
RCL – Revenue is up 30% Year over Year, as is profits. Although not as debt loaded, they face the same problems.
CASINOS
In addition to Vegas, casinos are looking to Macau for Chinese gamblers and to condo and timeshare sales in Vegas. The former is great, but the latter is a money pit.
Business is off - I'd short al lof them
MGM – Performance doesn’t justify the 30 P/E. Not much growth last quarter
Las Vegas Sands – Very dependant on potential Chinese market. And that market is raging.
Wynn – Hugely successful but overpriced. I would buy in the 80s. But they are not exposed to the timeshares and condos.
posted by Andrew at
9:29 PM
2 Comments:
Vacations will rebound, it may take some time before this is noticed but they will rebound. Your trip to Puerto Vallarto appears to be extremely cheap. The time shares in Vegas are a gold mine because people can use them around once a year and they pay for it the entire year. They don't spend money on their room so they spend it gambling. Vacations may be down for a while but other than that, its alright.
I don't see the signs you see.
* Gambling receipts are down - february was down 5%. The college basketball games are not bringing in guests this month
* Rooms are too available
* Condo prices are dropping. This will have an impact on expected revenues and profits
* Prices are up for food and electricity - and casinos use a lot of electricity
Vegas is about to suffer.
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