Short: MPW, PEB, ULTA, REXR, CFG, ONON, BUD, KNX, HELE, KO, KIM, MAR
This week we added Marriott International (MAR) to the Short side.
Below are updates on our 13 current high-conviction Long and Short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
Short Thesis Overview: Medical Properties Trust (MPW) is not a traditional triple-net REIT, rather an investor in hospital systems ("WholeCos" using the company's own words). In the process MPW removes the arbitrage from a traditional PorpCo-OpCo arbitrage. These investments are structured as loans + equity investments to the operator tenants, which are in many cases distressed and owe significant rent payments back to MPW as landlord. The arrangement is circular and depends on MPW's ability to raise attractively-priced external capital. The equity is very possibly completely worthless, as we think the assets are worth no more than ~$9 billion (updated) to true "arm's length" third-party buyers vs. pro forma net debt of ~$10.5 billion at share.
Medical Properties Trust (MPW) - The only thing propping the structure up had been extremely liquid debt markets and artificially low borrowing costs. The bonds are perhaps a more interesting story than the equity right now, and we think bondholders need to start thinking about recoveries here. Longer-dated maturities beyond 1Q25 look especially precarious. We await the 10-Q filing later this week, which (again) is all that matters for this name each quarter.
Short Thesis Overview: Pebblebrook Hotel Trust (PEB) has a highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history. We see regression toward the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM.
Pebblebrook Hotel Trust (PEB) - The debate about the impact of "return to office" (RTO) on hotel revenue per available room (RevPAR) has evolved over time. Initially, it was seen as a key factor in boosting weekday RevPAR, especially in urban areas. However, recent trends suggest that this impact has been less significant than expected. Despite some improvements, the increase in office attendance hasn't significantly boosted hotel demand in key urban markets, hitting a plateau in the past year. This situation continues to be a challenge for the hotel industry, particularly affecting urban hotel Real Estate Investment Trusts (REITs). Among these, Pebblebrook Hotel Trust (PEB) is highlighted as a short investment option due to its exposure to these trends. We remain Short PEB.
Commentary on recent Earnings Report:
PEB beat lowered expectations but then provided guidance well below consensus. Our initial review of PEB’s print, guidance, and our model, does not instill much confidence that this company or industry is turning a corner. We remain bearish on much of the hotel complex with PEB a standout on the Hedgeye Best Idea Short List. Lower numbers heading into a possible recession at ~7x leverage is a scary proposition.
For Q3, better RevPAR (likely in Sep) was the biggest driver of the beat while higher costs kept a lid on the size of the beat. Any excitement around PEB’s beat should be quickly tempered because the guidance range provided on both RevPAR and EBITDA implies a lot of weakness. Due to easing comps (hurricane last year), RevPAR will “accelerate” in Q4, but to a lesser magnitude than initially expected. Management is looking for 1-4% comp RevPAR growth to should yield $51-$57MM in EBITDA. Relative to the Street at $65MM (pre-print) and Hedgeye at $67MM, the range, while beatable, is a disappointment.
Under the hood, PEB’s Q3 continued the company and industry trend of higher incremental hotel OpEx growth (on a “POR” basis) than incremental total revenue growth (on a “POR” basis), putting pressure on margins. Keep in mind, margins remain ~300-500bps below pre-Covid, and were down YoY on the back of Resort RevPAR and ADRs being down HSD to LDD YoY. With ADRs set to keep rolling over there could be downside risks to the quarter and downside risks for the coming 12 months. For the 4th consecutive quarter, our numbers are heading lower and so is our target downside on the stock. On ~12.5x next year’s EBITDA, PEB could be a $10 stock, good for 20% downside.
Ulta Beauty (ULTA) - E.L.F. Beauty (ELF), a vendor for ULTA, reported its earnings last week. The Elf brand has been thriving, benefiting from beauty trade-down, new distribution channels, and some popular products. This quarter, its revenue growth remained strong at +76%, and EPS exceeded street expectations by about 30 cents. Although the company raised its revenue guidance for the latter half of the year, there are indications that these remarkable growth figures may start to decelerate in the coming quarters. The stock had declined prior to the earnings announcement due to weakening point-of-sale data, and the company's earnings call did not alleviate bearish sentiments. Recently, a well-known short seller, Spruce Point, released a report on ELF, highlighting questionable practices in its marketing division. This could pose risks to the brand's momentum. As for ULTA, our thesis maintains that U.S. beauty product consumption is slowing down, and ULTA's margins will likely decrease to preserve market share, potentially continuing to drive its stock lower.
Short Thesis Overview: Rexford Industrial Realty (REXR) Potentially vicious reflexive share price move for a ~3.5% cap rate asset likely beginning a RoC slowdown right now.
Rexford Industrial Realty (REXR) - Uniquely vulnerable in a decelerating and historically macro-sensitive subsector. Net effective rates signed with new leases have peaked/are peaking. 3Q23 results validated our concerns around a faster-than-average market rent growth RoC deceleration.
Citizens Financial Group (CFG) - In their Oct 18th earnings, the bank's non-GAAP earnings per share fell short of expectations at $0.89, primarily due to reduced revenue from both net interest and non-interest sources, and higher operating expenses. There was a notable decline in net interest income, partly due to increased funding costs. Loan growth slowed, and deposits decreased slightly due to interest rate impacts. Although overall credit quality was stable, there was a minor uptick in non-accrual loans, especially in commercial real estate. These factors contribute to the current challenges in the regional banking sector, including increased deposit costs and regulatory changes affecting capital requirements. CFG remains a Short.
On Holdings (ONON) - During the recent New York City Marathon, performance running "super shoes" were once again in the spotlight. Tamirat Tola clinched first place wearing Adidas, while a month earlier, Kelvin Kiptum set a world record marathon time in Chicago in Nike shoes. Notably, On Running's shoes were absent from the winner's circle. Although ONON offers some decent performance running shoes, the majority of its sales come from casual wear and fashion-oriented products, rather than top-tier performance running sneakers. We anticipate that the brand's appeal may diminish as it continues to focus on variations of its core Cloud platform, especially as older models are discounted. It will be interesting to see if Kelvin Kiptum can break the two-hour mark in the Rotterdam 2024 Marathon wearing Nike shoes.
Here are the brands worn by the top 10 finishers in the NYC Marathon:
Short Thesis Overview: Anheuser Busch (BUD)'s Bud Light brand is permanently impaired. Bud Light volumes have been consistently 30% lower YOY since the social media marketing mistake. Making matters worse, some customers are also avoiding other AB InBev brands pressuring sales. With lower velocity the company is losing shelf space ahead of the spring resets. Management has told stakeholders that it is pulling marketing dollars from international markets to support domestic sales. International markets had been the strong part of the portfolio as various regions recover from the pandemic. What was a brand specific problem has become a problem across all U.S. brands and international markets.
Anheuser-Busch (BUD) - The National Beer Wholesalers Association’s (NBWA) Beer Purchasers Index (BPI) improved to 48 in October from 45 in September. The BPI is a diffusion index where a reading above 50 denotes expansion in volumes while below 50 indicates contraction. October is the third consecutive month of contraction. Only two of the seven beer categories were in expansion.
- Imports increased to 67 in October from 59 in the prior year.
- Below premium was 45, lower than the prior year's 47.
- Premium lights improved YOY to 53 from 45 last year and 47 in September.
- Premium regular increased to 49 in October from 32 in the prior year and 40 in September.
- Craft beer remained in contraction at 31, up from 23 in the prior year and well below 27 in September.
- FMBs & hard seltzer’s reading was 28 in October, flat from September, but improving from 18 in the prior year.
The at-risk inventory measure was 50 in October, down from 53 in September, as inventory levels have come into balance. AB InBev's declines are the largest contributor for the decreases seen this year. September's was the third largest decline this year pointing to AB InBev's challenges being far from over despite the passage of time. BUD remains a Short.
Knight-Swift Transportation (KNX) - The recent earnings report from KNX had an initial surprising bounce, but the stock has since fallen by approximately 6%. Despite beating consensus on the surface, their downward revision of guidance suggests potential challenges in the fourth quarter. This is reflected in their shrinking profit margins, signaling a tough environment. The trucking industry as a whole is facing a profit recession and dealing with structural overcapacity. High barriers to exit mean this overcapacity issue may persist. Earnings estimates for KNX have sharply declined, now barely exceeding $2 per share.
Moreover, the trucking industry is in a difficult phase, evidenced by a 33% year-over-year drop in Class A truck orders for October. This overcapacity, challenging to offload in the current climate, afflicts the entire sector. In view of these challenges, we continue to hold a short position on KNX.
This downturn aligns with a broader macro deceleration in transport data, especially in North America, where reduced government spending and a slowing consumer market are evident.
Helen of Troy (HELE) - On Thursday, we hosted renowned short seller and vocal Helen of Troy (HELE) critic, Marc Cohodes, on HedgeyeTV. He joined a webcast alongside our Retail Sector Head, Brian McGough, and Analyst Jeremy McLean. The discussion about HELE starts at 50:40, but we recommend that viewers listen to the entire webcast to gain insights from Cohodes and the Hedgeye Retail team on other companies like Overstock (OSTK), Beyond Meat (BYON), Camping World Holdings (CWH), and more. HELE remains a Short.
Coca-Cola (KO) - The future threat from GLP-1 drugs reducing demand for Coca-Cola’s products is weighing on the multiples of food and beverage stocks. As a marketer of sugary beverages, Coca-Cola faces an existential threat from consumers reducing their calorie consumption. It will take some time for the market to assess the full impact of GLP-1 drugs, but in the near term the data points will continue to be more consumers taking the drug and more insurance companies paying for the drugs. Investors should expect a lower valuation range for the company while the data points point to more patients on the weight loss drugs. KO remains a Short.
Kimco Realty Corp. (KIM) - They recently acquired Retail Properties of America (RPT) at what appears to be the peak earnings period for retail real estate investment trusts (REITs), paying a premium price just as we are entering a consumer-led recession. We anticipate that forward earnings may be at risk due to increasing debt costs and the likelihood of defaults among smaller tenants, which are common occurrences during a recession. KIM remains a Short.
Marriott International (MAR) - Their recent report didn't offer many positives, especially for a company known for consistently outperforming and guiding ahead. Since their analyst day in late September, and with known revenue per available room (RevPAR) trends, there's little new information in the quarterly report or the outlook for the upcoming months. Our analysis suggests the quarter was generally in line with expectations, with slightly weaker RevPAR balanced by stronger net unit growth (NUG) and incentive management fee (IMF) production. While not a low-quality quarter, it wasn't outstanding either. The guidance implies modest growth in the profit and loss statement (P&L), not meeting expectations for significant improvement.
Reflecting on Hilton's (HLT) recent earnings call, we expect the focus of Marriott's call to be on Net Unit Growth. Analysts are unlikely to challenge their ambitious RevPAR guidance of 3-6% for 2024 and 2025. In Q3, excluding City Express, Marriott's core net unit growth aligned with expectations, and its guidance remains mostly the same. However, in terms of pipeline growth, which affects future NUG, Marriott lags behind its peers with only a 4% year-over-year increase. Additionally, the construction pipeline has decreased for the 11th consecutive quarter, now at its lowest since 2016, representing about 13% of the base. While Marriott has achieved growth through mergers and acquisitions and partnerships, this approach differs from Hilton's organic growth. Therefore, we question the market's rationale for valuing them equally, as they arguably shouldn't be. MAR remains a Short.
DraftKings (DKNG) - Hard Rock, operated by the Seminole Tribe, has relaunched its online sports betting services in Florida to a limited group of users, marking progress after a two-year legal battle. This relaunch is a phased approach, initially only for users previously registered in 2021, following a U.S. Supreme Court decision favoring the tribe's gaming operations. However, the legality of online sports betting in Florida remains contentious, as demonstrated by West Flagler Associates' immediate push for an urgent suspension of the Seminole Tribe's mobile betting operations. The tribe, facing potential legal delays into 2024, is strategically introducing in-person betting at its casinos while limiting online services to a select user group from their loyalty program.
Meanwhile, DraftKings has successfully entered the Maine sports betting market, securing substantial profits in its first weekend. Its primary competitor in the region is Caesars Entertainment, which has partnered with three Wabanaki Nations and launched Caesars Sportsbook. The situation in Florida contrasts with Maine's market, where operators like DraftKings and Caesars are actively expanding their footprint. While the Hard Rock's relaunch in Florida is a significant step, it's uncertain how long this limited structure will last, and it's unlikely to significantly impact the broader online sports betting brand landscape, including DraftKings.