Nomura Names Three Top Picks for 2015 in Gaming & Lodging (MGM) (HLT) (NCLH)

Nomura Securities analyst Harry C. Curtis released his Top Picks in Gaming & Lodging for 2015:

• MGM Resorts (NYSE: MGM) - Buy rating, $30 price target suggesting 55% upside.
  • 80% of 2015 EBITDA derived from wholly-owned casinos in Las Vegas. Demand and room pricing are accelerating. NSI ests. are driven by 4.6% 2015/2016 annual RevPAR growth and 70bps margin growth. Both are conservative. Las Vegas EBITDA could reach $1.5b sooner than our 2017
    est.
  • In three years, consol. EBITDA should grow 56% to $3.55b and EPS should expand to $2.55, a CAGR of 46% driven by a strong growth pipeline, including MGM Cotai, National Harbor, and Springfield, MA.
  • Our $30/sh target includes $19 for existing operations, $7.60 for MGM Cotai, and ~ $3 for DC and MA.
  • Sentiment toward the group has gone from bad to worse because a bottom has not yet been found in Macau’s GGR. A 20% decline in the stock YTD implies that same-store Macau EBITDA could be down nearly 25%-50% and its ROIC on Cotai will be no higher than 15%, or $400m on a $2.9b project. Even if true, the stock would be worth $25, or upside of over 30%. Once revenues stabilize in Macau, with trends in Vegas that should exceed expectations, we expect sentiment will follow.
• Hilton Worldwide (NYSE: HLT) - Buy rating, $32 price target suggesting 24% upside.
  • Positive supply/demand imbalance in the lodging sector should last into 2017. The two threats, supply growth and recession, remain benign. RevPAR is accelerating as occupancy reaches historic highs and group demand finally awakens from its slumber.
  • HLT should have the industry’s strongest revenue growth (5% unit +7% pricing). 1.5x flow through should lead to 17% annual EBITDA growth and 21% EPS through 2017
  • Leverage should decline to nearly 3x within 14 months which could lead to return of capital to shareholders by early 2016.
  • Valuation is 200bps below industry titan MAR. As HLT sells/spins owned hotels (and/or timeshare), as its balance sheet improves, and as additional capital is freed up, HLT’s multiple should lift.
• Norwegian Cruise Line (NASDAQ: NCLH) - Buy rating, $54 price target suggesting 18% upside.
  • Including Prestige, annual revenue growth should exceed 15% through 2017. EPS power rises to nearly $5/share, a 29% annual increase from $2.34 this year. Drivers are 12% unit growth, 3% annual yield growth, and low single digit increases in cost/albd.
  • Leverage related to Prestige should decline rapidly. 1Q15 leverage of over 6x declines to under 3x by year end 2016. ROIC should lift to ~ 12%, the industry’s highest, and almost double that of 2013
  • NCLH’s 100bps discount to peers should close as it delivers on earnings growth targets. Its 200bps discount to the S&P 500 should also narrow given EPS growth ~ 3x the index

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