|
Long: AMN, PLBY, PSA, FWONK, ROK, PCAR, AMH, RH, FISV, VLVLY, BYD, PENN Short: PLUG, PK, RRGB |
Below are updates on our fifteen current high-conviction long and short ideas. We have added Volvo (VLVLY), Boyd Gaming (BYD) & Penn National Gaming (PENN) to the long side of Investing Ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
AMN
|
Long Thesis Overview: We expect prolonged wage inflation across the US Medical Economy as a result of widespread provider burnout and medical consumption pent-up demand remains significant for many types of care. We expect these trends to continue to benefit hospital staffing company AMN Healthcare (AMN). |
To provide some color on our AMN Provider and Wage Inflation Tracker, we have seen some softening in wages alongside an unclear trend in hiring, but based on an article we reviewed, Burnout, delta variant boost demand for traveling nurses again (8/18, Healthcare Dive), we believe that trend will establish itself with additional weeks of data. The article would support what we have been saying for a while now in that, “The reopen could be as hectic as the initial shutdown was.”
It is important to understand that across US hospitals “nearly every single unit is in need of staff”. Once you add the risk of unvaccinated people being terminated because of hospital vaccine mandates, that is going to only add to the dire situation and lengthen the crisis. For these reasons, AMN Healthcare remains a Best Idea Long on the Health Care Position Monitor.
PLBY
|
Long Thesis Overview: We think that the upside here is simply massive. 10-bagger over TAIL duration. Ideas like this come along once every few years. I know that it’s too thinly traded now for a lot of institutions to get involved, but that dynamic should change dramatically over the next 1-3 years while the P&L, Cash Flow, Balance Sheet and float characteristics catapult themselves worlds head of the consensus. |
The Big Bunny Jet used to be an iconic symbol of the Playboy lifestyle, and this management team is bringing it back in a big way. The obvious use is for marketing and influencers, as outlined in the slide below, to continue to generate and sustain brand buzz around Playboy (PLBY).
However, the other part of the Big Bunny Jet is the Big Bunny private label product that management announced will launch in Q4. These products will combine style, travel, and leisure for an upper tier demographic. PLBY has the ability to win in any category it chooses to enter, and with this rollout coming up we are looking forward to see management’s execution.
PSA
|
Long Thesis Overview: We can keep this short - all that really matters for Best Idea Long PSA is that the company inaugurated FY21 FFO guidance with full ranges for all the key drivers (SSRev, SSExp, SSNOI, Development, Acquisitions, etc). Not only does this bring PSA up to par with the other four peers in the space, but it signals management's ongoing commitment to address long-time shareholder gripes regarding engagement with the street, governance, capital deployment, balance sheet efficiency, etc. All of these items are core to the long thesis for accelerating earnings growth and a positive re-rating of the stock. |
For anyone outside of the "REIT Mafia," one of the more interesting and unique aspects of PSA is that it owns a 35% direct equity interest (~$1.6 billion) in Shurgard Self-Storage SA (Euronext: SHUR), which allows PSA to tap the European debt markets at much lower rates with the cash flows/equity of SHUR effectively acting as "collateral."
This is similar to how PLD uses its Strategic Capital platform, which focuses on investment outside of the U.S., to access a much lower cost of debt and improve the overall cost of capital, just at a smaller scale for PSA.
PSA now has about ~$1.8 billion of EUR denominated debt outstanding at weighted average cost of 95bps, versus a weighted average cost of ~4.6% for the $3.6 billion of remaining preferred and a ~4% marginal cost of preferred. This is a unique long-term strategic advantage to PSA for the purpose of funding external growth and optimizing the capital structure.
FWONK
|
Long Thesis Overview: In 2020, F1 reached a new Concorde agreement for the 2021-2025 seasons that will meaningfully improve the economics of a race. Liberty has also focused on entering more attractive, long-term race deals like the Vietnam and Miami Grand Prix agreements. We believe there is more grease on the wheels. Liberty can maximize its efforts to increase interest in the sport, continue to go after underpenetrated markets, and use its SVOD service to capitalize on its content more efficiently. The most significant area of improvement for F1 is their sponsorship and partner agreements. We believe there is ample opportunity in sponsorship with only 17 races out of the record-breaking 23 race calendar having a title sponsor and F1 lacking many low-hanging partnerships such as fuel and hospitality providers. |
Dutch G.P.: After 36 years, F1 returned to the Netherland's Zandvoort circuit for the Dutch G.P. The Race was highly anticipated for the Dutch fans as it marked Red Bull's Max Verstappen's first-ever home G.P., with the 300k tickets available for the Race selling out immediately when they went on sale nearly two years ago (the Race was originally to be in 2020 but was postponed due to COVID).
Attendance was at the maximum capacity for all three days of the G.P. (a 70% attendance cap was issued due to COVID), and the fans weren't disappointed. Max Verstappen took pole in Qualifying with Mercedes Lewis Hamilton and Valtteri Bottas taking second and third positions. The Race would ultimately see the same result, much to the delight of the home crowd, with Verstappen claiming first, Hamilton in second, and Bottas rounding up the podium.
The crowd was treated to a special post-race concert by Dutch native Tiesto, who performed around the track on the back of a specially fitted truck, similar to the used in the post Sprint Qualifying interviews at the British G.P. Concerts aren't anything special at a G.P., at this year's U.S. G.P. Twenty One Pilots and Billy Joel will headline the concerts at the circuit on Friday (10/22) and Saturday (10/23) of race weekend this year. Still, no concert has ever performed around the circuit like this one.
U.S. viewership for the Dutch G.P. came in at 864k, which is a 44% YoY - an improvement to the Italian G.P. that was held last year that had 602k viewers. The average viewership for the season now stands at 901k or 57% YoY. As the NFL season starts to kick off in the U.S. we will be closely monitoring any potential impact it could have on U.S. viewership for F1.
ROK
|
Long Thesis Overview: We expect this to be an unusually good cycle for ROK as developed market automation investment benefits from less ‘offshoring’ of production amid higher emerging market labor costs and other considerations. The capabilities for automation technologies, from machine vision to software to 5G and the like, broaden the market opportunity substantially. Despite being one of the best businesses in our coverage, shares of ROK don’t yet sport the premium valuation we’d expect them to receive as organic growth accelerates through 2H21. |
Cyclicals often ‘feel’ or ‘look’ expensive at the start of an upcycle. Oil & gas, automotive, mining, and building materials market demand has begun to recover but capital investment in production capacity impacts Rockwell Automation (ROK) on a lag. Valuation multiples also lag.
ROK enjoys one of the strongest structural positions in the Industrials sector, with a robust, segmented market position and high customer switching costs notable factors. ROK’s organic revenue growth recovery will lag the already V-shaped rebound in industrial orders, as capacity utilization remains depressed even as backlogs swell and inventories tighten.
PCAR
|
Long Thesis Overview: With labor tight, inventories low, traffic heavy, and truck orders soaring, it is surprising that shares of PCAR have lagged the industrials sector by over thirty percentage points in the last year. We’ll take the other side here, adding PCAR back as a Best Ideas long at a relative level that’s about as ‘cheap’ as it gets. We expect that shares to outperform in the next year by more than 50%, with construction & infrastructure spending, aftermarket growth, and (yes) electrification all prospective catalysts. |
Shares of PACCAR (PCAR) have substantially lagged the Industrials sector despite soaring demand and rising order backlogs. Weak build rate gains on component shortages and other frictions are likely to help with pricing, along with the spin of Daimler Truck and VW’s buy of Navistar.
The industry looks better positioned to extract oligopolistic returns in this upcycle than in the last few recoveries. Oil & Gas, vocational, and on road demand should remain robust through 2022. Order rates are well above replacement demand because industry needs trucks… the broader fleet remains relatively old and higher freight rates & fuel costs justify the investment as truckers try to attract scarce drivers. Vertical integration and aftermarket parts investment have helped make PCAR sustainably more profitable.
AMH
|
Long Thesis Overview: On balance, we see the data as very supportive of the long-term SFR long thesis in general, but in particular AMH with its captive "bank" of lot inventory and unique development program set against an extremely tight supply environment. As the space matures and grows more competitive given the outsized yield opportunities, operators with pre-sourced inventory to control, build and deliver have a massive advantage |
Recall that American Homes 4 Rent (AMH) (1) has been collecting high-90% of its cash rent billed to tenants, (2) has been running at well-above average occupancy levels near 98%, but (3) also booking above-average bad debt for the non-paying portion of their tenant base unable to be evicted. This has resulted in a ~150bp drag to revenue growth. All else the same, the overturning of the moratorium accelerates the normalization of bad debt (our base case was for 2022) and creates a now ~150bp tailwind to revenue growth earlier than we expected.
This comes on top of already record asking rental rate growth. We continue to see the need for significant upward estimate revisions.
RH
|
Long Thesis Overview: as the company is going to have to show success in opening up new countries to prove the top line consistency and momentum, and that will take 2-3 years. But we’re been here for the ride since $28 – and this ride is far from over. There’s no better ‘buy the dips’ name I can find in retail than RH. This team’s strategy is going to make long-term shareholders a lot of money. |
Don’t underestimate the GLOBAL ecosystem RH is building around the rich…Furniture, Home Furnishings, Houses, Hotels, Restaurants, Yachts, Airplanes. It has a massive competitive moat, and no peers. International is a big call option and that growth is starting next year with new stores opening whole new markets. The revenue opportunity in international is arguably larger than in the US.
The 2Q RH quarter was spot on with our expectations on both the revenue and margin lines. On the bottom-line RH reported $8.48 vs the Street at $6.50 and our model of $7.15 but using a normalized tax rate the company earned $7.21. Looking forward the company gave commentary that 3Q-to-date is accelerating off of 2Q levels. Clearly, demand in this segment of the market is far from cooling. On one hand, we’re mildly concerned that near-term expectations are getting elevated, and people are finally starting to ‘get’ the story over a 1-2 year basis.
However, on the other hand, few – if any – are correct in modeling what this company cranks out in years 3-5. How we’re doing the math, by year 5 of the model we’re at between $7.5bn and $8bn in revenue at a 25% EBIT margin. That gets us to $50 per share in earnings. The Street is at $32 in Year 5. Before this print, our estimate was closer to $40, but the ecosystem RH is building is coming together stronger and faster than even we modeled. Over 3-5 years we think this name has upside to $2000+.
fisv
|
Long Thesis Overview: With the domestic reopening progressing at full clip, resilient Quad III and Quad IV setups, and shares trading at a historical discount to the broader market, Fiserv is a rare, high caliber value play in a red hot payments space. Accordingly, shares of Fiserv remain a Best Idea Long based on an array of positive catalysts through 2021. |
Fiserv (FISV) reported adjusted EPS of $1.37, up +47% y/y and coming in ahead of the top-end of the 29-analyst estimate range of $1.18-$1.34. The beat was driven by the top-line, namely better-than-expected performance in the company's merchant acceptance segment.
Fiserv's Merchant Acceptance segment, composing ~40% of total revenue, posted organic growth of +41% y/y in 2Q21, greatly outpacing the -15% organic revenue decline in 2Q20. Growth in the Merchant Acceptance business, while broad-based, was led by a +33% y/y increase in North America volumes. Moreover, Clover volumes rose +96% y/y to $184 billion annualized, while Clover Connect, the company's ISV-focused offering, saw volumes grow +122% y/y in the quarter.
VLVLY
Hedgeye CEO Keith McCullough added Volvo (VLVLY) to the long side of Investing Ideas this week. Below is a brief note.
There's not only a buying opportunity here in US Industrials (XLI) and names like ROK, but there's a big one in a new European Industrial idea we had in Volvo (VLVLY)...
Here's a great summary excerpt from Jay Van Sciver's Industrials Pro independent research product on the name:
|
Shares of Volvo Group have lagged other machinery-oriented names despite favorable industry and company specific factors. We expect the spin-off of Daimler Truck and, to a lesser extent, the acquisition of NAV by TRATON, to reduce the competitive intensity among Truck OEMs. While we also have a positive view on shares of PACCAR, Volvo also offers greater exposure to more favorable European macroeconomic drivers. Trucking conditions in Volvo’s key markets remain extremely tight, while labor conditions may ease in coming months. Construction equipment demand in developed markets should remain reasonably robust, a view supported by fleet demographics, COVID recovery stimulus, elevated commodity prices, and aging infrastructure. We see greater than 50% relative upside for shares of Volvo as robust demand intersects with stronger 2022 pricing. |
BYD & PENN
Hedgeye CEO Keith McCullough added Boyd Gaming (BYD) & Penn National Gaming (PENN) to the long side of Investing Ideas this week.
Here a brief excerpt from his latest Real-Time Alert:
|
Been waiting patiently on PENN to correct too... Todd Jordan remains The Bull on this name. Buy more of BYD into the close too, KM |
PLUG
|
Short Thesis Overview: PLUG seems to be in the business of issuing shares of stock, even giving warrants to facilitate product sales at valuations that ended up being absurdly low. The behavior around the most recent equity offering looks dubious. Forklift fuel cells are a difficult business, likely entering a post COVID downswing. Reputational damage could become a broader issue, and we see ~80% relative downside. |
For Plug Power (PLUG), neither the big stuff nor the small stuff makes much sense.
To the extent that a hydrogen economy emerges in coming years, PLUG is unlikely to be a relevant part of it. It would make vastly more reasonable for Air Products to buy electrolyzers from Ceres Technologies – a more efficient offering than the PLUG PEM electrolyzers on last check – and dominate the industry with the other industrial gas companies.
PK
|
Short Thesis Overview: We’d characterize Park Hotels & Resorts (PK) trends as soft and while the company conveniently blamed the Delta variant of Covid-19, that only tells part of the story. Looking ahead, PK warned of softer results now expected in September and October versus when they last provided and outlook in early August. While Delta is no doubt impacting the US travel sector, the seasonal slowdown in leisure travel is revealing the weakness in corporate transient that would’ve been evident with or without Covid issues. We’ve been adamant on this point and haven’t felt the management teams have adequately discussed the issue with investors. |
Our own forward looking data already suggests softer demand ahead and decelerating RevPAR trends. Hotel demand has remained more tepid on an absolute basis for higher end hotels but the 2nd derivative into peak summer leisure was equally as strong as seen elsewhere in the industry. With that in mind, our closer-in 1-mth forward room rate tracker continues to flag decelerating growth for the coming weeks, a trend that we have been flagging since mid-late July. We smooth this data to adjust for calendar shifts and other dynamics, but the implications are that RevPAR should continue slow into early October, minimum.
We went through the potential drivers of industry deceleration in our August themes deck – namely the pending seasonal shift, supply, and the overall sluggishness of traditional corporate travel as likely to be the biggest drivers of deceleration and it looks like these are playing out in more real time. Typically, we update our 3-mth out room rate tracker in this email, but for a shorter timeframe snapshot, we’re seeing more confirming evidence that the hotel industry could be in a tough spot over the nearer term (absent the abovementioned calendar dynamics.
Our bearish bias towards much of the hotel ownership (REITs) industry is unchanged – including Park Hotels & Resorts (PK).
RRGB
|
Short Thesis Overview: Restaurants that we could operate at total capacity saw comparable restaurant revenue increase 7.0% from the pre-pandemic comparable quarter. In addition, margins at these restaurants reached 19.5%, a 180 bps increase. However, overall comparable restaurant sales are still down 2.4% compared to 2019. Nothing exciting to see with Red Robin Gourmet Burgers (RRGB). |
Red Robin (RRGB) was in secular decline before the pandemic and nothing has changed. While restaurants that could be operated at total capacity had a comp increase of 7% from the pre-pandemic quarter overall comparable restaurant sales were still down 2.4% to the same quarter. Red Robin missed consensus EPS estimates by $.22.
The miss was due to restaurant margins being lower than expected from higher operating expenses and higher wages. The restaurant’s modest average check is being challenged by commodity inflation up MSD% and wage inflation of MSD%. Price increases are at risk for pushing the customer towards fast casual chains or eating at home.
In a very tight labor market it will be increasingly difficult to hire the service needed to justify the higher average ticket compared to the server-free competition.
