🚢 If You Discount It, Will They Come?

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Housekeeping

Hi Everyone - we hope you've had an amazing weekend so far. A few quick housekeeping items.

First, the winner of our Flag Day giveaway is (drum roll please....) a mister Thomas B. from Minneapolis, Minnesota. Congrats Thomas and thank you to everyone who joined. We plan on doing more of these so stay tuned.

Also, if you find yourself excited to go to bed every night just to wake up in the morning and drink coffee well then you're going to love today's partner, Cometeer. Click here if that describes you and keep scrolling to learn more.

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Review

US stocks were mixed Friday following a choppy session that saw all three major indexes whipsaw back and forth between gains and losses. It marked the end of a volatile week defined by a lot of selling and scary headlines.

Markets dropped last Monday before a one-day reprieve midweek in response to the Fed’s largest rate hike since 1994. Still, the S&P 500 is firmly in bear market territory and the Dow fell below 30,000 for the first time since January 2021.

Investors are evaluating inflation, which is running at its highest level since 1981. In addition to several rate hikes, the central bank is tightening its monetary policy by reducing its balance sheet. That has some convinced a recession is near, as economic growth has slowed. Oil prices fell to end the week, possibly because traders fear a broader economic downturn is just around the corner.

On the economic front, Federal Reserve Chair Jerome Powell delivered comments Friday in which he reaffirmed the central bank’s commitment to fighting inflation. He said the Fed is “acutely focused” on returning inflation to its 2% target. That will take some work as the PCE, which is the central bank’s preferred inflation gauge, showed prices rising 4.9% year-over-year as of April’s reading.

In company-specific news, Adobe delivered full-year guidance that fell short of analyst projections. The company placed blame on foreign-exchange rates, something other large software companies have also mentioned.

Chinese e-commerce giant JD.com says it could expand into food delivery. That would set it up for direct competition with Alibaba, which just received regulatory approval for a financial holding company in China through its affiliate, Ant Group.

For the week as a whole, both the Dow Jones Industrial Average and Nasdaq Composite fell 4.8%. The S&P 500 was the worst performer, sliding 5.8%.

Preview

In observance of Juneteenth US securities exchanges, Federal Reserve Banks, and most of the nation's banking institutions will be closed tomorrow. 

Tuesday be on the lookout for May’s existing home sales, released by the National Association of REALTORS®. In April the number fell 2.4% from March, the third straight monthly decline. Year-over-year sales were down 5.9%. Inventory of unsold homes increased and the median average price climbed 14.8% over the previous 12-month period.

Wednesday, the Mortgage Bankers Association will release weekly mortgage applications. With interest rates rising, last week’s total mortgage application volume was down 52.7% year-over-year. That trend is expected to accelerate following the Fed’s latest rate hike. Also watch for the MBA’s average rate on a 30-year fixed mortgage, which continues to rise, and has contributed to plummeting numbers of applications to refinance.

Thursday, weekly jobless claims are due. Last week’s number fell to 229,000. Still, that exceeded analyst expectations. The reading continues to show a strong labor market all while some worry inflation and rising rates will push unemployment higher, something the Fed predicted last week. S&P Global’s flash manufacturing and services PMI for June are also set for release.

Friday, May’s new home sales will be published. The number fell 16.6% in April from March which was significantly higher than Wall Street estimates. Year-over-year new home sales declined by 26.9%. Analysts attribute that to rising mortgage rates and persistent inflation, all while home prices remain elevated. The University of Michigan will also publish its final consumer sentiment index for June, as well as this month’s final five-year inflation expectations.

On the earnings front, La-Z-Boy (LZB), KB Home (KBH), FedEx (FDX), and CarMax (KMX) are scheduled to report.

This week is a big one for economic data surrounding the real estate market. With that said, we're curious to hear what KB Home has to say given they're on the frontlines. The home builder announced the grand opening of its latest gated community in northwest Las Vegas late last month. Meanwhile, last week’s home builder sentiment index dropped to its lowest level in two years amid falling demand and increased costs.

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How to Play the Business Travel Comeback

High-End Corporate Travel Agent 

Business travel is finally making a comeback more than two years after the COVID-19 pandemic first struck. For American Express Global Business Travel (GBTG) and its investors, that slow but steady increase in demand presents a big opportunity. AmEX GBT provides end-to-end corporate travel management services, meetings, and booking solutions. It’s the leader in a fragmented market that counts a lot of blue-chip companies as customers.

The stock, which debuted on the market at the end of May courtesy of a SPAC merger with Apollo Strategic Growth Capital, trades at around ~$7 per share, which is below its $10 debut price. American Express (AXP) and Expedia (EXPE) also own stakes in AmEX GBT.

Apollo Got Paid

Thanks to somewhat recent investor trepidation when it comes to SPACs, AmEX GBT only raised $42 million in its IPO. Meanwhile, it paid more than $200 million in transaction costs and stock to Apollo. The company’s liquidity position should improve in a couple of months when over $300 million of shares sold to an investor group can be traded.

AmEX GBT currently sports a market valuation of roughly $3 billion, but with a public float of just 4 million shares, the stock tends to be volatile. Currently, the business travel company is valued at 7.5 times 2023 Ebitda, which isn’t too pricey for the incumbent. 

It's AmEX GBT’s to Lose 

AmEx GBT makes money arranging and managing travel services for its business customers. The company gets paid by the travel partners it utilizes. GBTG has heavy hitters on its roster including General Motors (GM), Microsoft (MSFT), and Goldman Sachs (GS). For 2022 the company expects sales to be $1.75 billion. That increases to $2.4 billion in 2023.

Business travel hasn’t recovered as quickly since the pandemic, but it is rebounding. In the final three weeks of April AmEx GBT said its transaction volume reached 72% of what it saw in 2019. 

Life is returning to normal, even when it comes to traveling for work. As a leader in this space, AmEX GBT appears to be ready for takeoff.

Are You Bullish or Bearish on GBTG?

Drink Up With Duckhorn

Duckhorn Bucks the IPO Trend 

Duckhorn Portfolio (NAPA) is a bit of an anomaly in the current environment. The winemaker went public last year, but unlike many of the more than 1,000 companies to debut in 2021, its share price is trading higher. One reason: Duckhorn Portfolio is one of the only pure-play, high-end winemakers that’s public. Sure, Constellation Brands (STZ) and Altria Group (MO) make wine, but there aren't any large public companies that are solely focused on wine and dominate the market. 

It doesn’t hurt that Duckhorn, which has 10 wine brands, operates in an industry that has been around for years and tends to do well in both good and bad times given its well-heeled customer base.

Expensive Wine Insulates Duckhorn 

Duckhorn’s focus on wines that range in price from $20 to $200 a bottle serves the company well. Expensive wines tend to have better profit margins. Generally speaking, it doesn’t cost that much more to make a $100 bottle of Merlot compared to a $10 one. Selling expensive wine also helps Duckhorn weather the current high inflationary environment. Duckhorn’s customers can afford to keep buying wine even if gas is over $5.00 per gallon. The same usually can’t be said of wine drinkers on a budget. 

Revenue for the past four quarters has been $365 million at Duckhorn. Wall Street analysts expect that to hit $408 million for fiscal year 2023, which ends in July. 

Duckhorn Growth Is All In-House 

Duckhorn also has scale in a very fragmented industry. With ten brands of wine to sell to retailers, it has more negotiating power than the thousands of small wineries that have one or two brands to distribute. Meanwhile, Duckhorn’s direct-to-consumer business, in which it can keep the full retail price, is growing. That portion of its business accounted for about 18% of sales in the most recent quarter. 

To grow, Duckhorn is focused on boosting sales and brand recognition instead of expanding via acquisitions. It wants to use its working capital to grow what it already has in the high-end wine market. Cheers to that if Duckhorn and its stock continue to rise.

Are You Bullish or Bearish on NAPA?

Street Treats: Summer Outdoors Edition

Bad*ass Backpack, Must-Have Headlamp, Keep the Bugs at Bay

🎒 If you’re planning to head off the beaten path, this bag is an absolute must. The Tactical GO Bag is a marvel of engineering and design that was built to endure whatever adventure you throw at it. It’s incredibly versatile and perfect for fishing, hiking, camping, traveling, or hunting. Add it to your adventure arsenal today!

💡If you’re planning on heading into the great outdoors this summer, you'll want to keep the path lit ahead of you. This headlamp will keep you stay safe by boosting visibility after dark. Slip it on, and you’ve got a 230º field of view with five different lighting modes. Even better, there’s no need to search for buttons. Simply wave your hands, and the sensor will flip it on or off. Brighten the path ahead today!

🦟 Summer is here, and so are the mosquitoes. Make sure your home doesn’t become a blood bank for your local insect population. The MosQuiller perfectly zaps those pesky pests so you can enjoy the outdoors without worrying about getting bitten. With 12-hours of battery life, it’s also perfect for on-the-go activities. Stop them in their tracks before they get their stingers into you and your family!

If You Discount It, Will They Come?

Cruise Lines Bet on Deals to Boost Occupancy Rates 

Cruise lines are back in business, and they’re throwing discounts around like free donuts at the all-you-can-eat buffet. At a time when hotel prices and airfare are soaring, cruising on the open seas may be a cheaper alternative. Royal Caribbean (RCL), Carnival (CCL), and Norwegian Cruise Line Holdings (NCLH) are hoping consumers agree. All three operators are forecasting a return to profit on an EBITDA basis this year. To do that, in the face of rising costs, they will need a lot more passengers to board their ships. 

As it stands, it costs an average of $100 per night for a five-night cruise to the Caribbean, which is roughly 10% lower than the average daily rate just a month ago.

Passengers May Have More Cash to Spend 

Wall Street analysts expect occupancy rates for the major cruise operators to increase in 2022. At Royal Caribbean, this metric is expected to jump from 60% to close to 100%. Getting there may require a lot more discounting and promotions, which could eat away at profit margins. Despite soaring fuel prices and labor costs, the cruise operators have yet to pass it on to their customers. 

Discounting rates does have one benefit: passengers may spend more once they board the ship. Analysts expect onboard spending to explode, which bodes well for cruise stock’s bottom lines.

Trading Like It's 2020 

It doesn’t hurt that cruise stocks are cheap at current levels. They are down on average over 50% and are trading like it was 2020, when the industry came to a screeching halt because of COVID-19. 

Pricing for high-end cruises is doing better, which is good news for Norwegian. The cruise operator tends to cater to wealthy travelers, which accounts for about a third of its business. Its stock reflects that reality, holding up better than rivals including Carnival, which derives less than 5% of its sales from luxury cruises.

Cruise line stocks are beaten and battered. Discounting may seem like bad news, but if lowering the price can boost occupancy rates and get customers spending, it could be smooth sailing ahead for cruise operators.

Are you bullish or bearish on the cruise line industry over the next 12 months?

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security.  Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.