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Long: PLBY, PSA, FWONK, ROK, AMH, RH, VLVLY, BYD, PENN, CUBE, TOST, BROS, DUFRY Short: RRGB, SJM, SFIX, SFM, KR, COLD |
Below are updates on our nineteen current high-conviction long and short ideas. We have removed AMN Healthcare (AMN) from Investing Ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
PLBY
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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 real ecosystem opportunity from the many angles this company attacks is in sexual wellness, where PLBY has amassed a portfolio of brands that blankets the consumer across the product spectrum in lingerie, swimwear, and ‘adult bedroom paraphernalia’ (use your imagination here).
The commercial opportunity in this category, one with no clear category leader, is limited only by management’s ability to execute. The company has high margin digital offerings in the works with a creator platform and an NFT community experience.
This week’s NFT sale should generate about $9mm in revenue plus resale royalties on top all at high gross margins. To that end, the company has built out a top tier management that has all the tools to get this company to a $10bn EV looking over a TAIL duration.
PSA & cube
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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. Long Thesis Overview: This is a "keep it simple and straightforward" type of call: (1) the subsector is highly correlated internally given the submarket overlap and works well in an inflationary environment, (2) CUBE backtests well in each of Quads 2-4, (3) upward earnings revisions are extremely likely and a positive catalyst, and (4) CUBE's balance sheet is a huge strategic and style factor advantage. |
We are doing a joint update on Best Idea Longs PSA & CUBE this week. Peer Extra Space Storage (EXR) reported results last week where SSNOI grew nearly +28% vs. the Street at +10-11% and Hedgeye well above that number at +18.7%.
We have never seen numbers or a beat like that out of self-storage over 11 years of covering the space. Numbers were taken up almost uniformly across the board (guidance, the Old Wall, and Hedgeye), and it appears pretty clear that both PSA and CUBE will see above average top-line growth trends extending well into FY22.
We would highlight, however, that it is time to start keeping an eye on (1) real estate taxes and (2) payroll on the operating expense side across self-storage. Real estate taxes will likely continue to increase +5% to 6% y/y, perhaps a little slower adjusting for winning tax appeals. Higher rental rates lead to higher property values, which therefore result in higher assessments and tax expense.
On the payroll side EXR noted that absolute dollars were down this year because there was more headcount attrition and a longer time to fill open positions, while underneath the surface wages are increasing rapidly at both the property and corporate levels. We remain bullish on self-storage, however there is a potential scenario building where both payroll and tax expenses could accelerate and impact NOI margins exactly when revenue growth really begins to decelerate in 2H23.
We will keep our eyes out for any similar commentary from PSA and CUBE.
FWONK
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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. |
U.S. viewership for the U.S. G.P. came in at 1.22m, up 42% since the last race in 2019 and the most-watched race of the season so far. The average viewership for the season now stands at 903k, up 57% YoY.
There are some factors to this impressive viewership number, the first of which is the pent-up demand for the race in the U.S. since there wasn't one last year, and it is the home race for both U.S. fans and Haas F1 team.
The other contributing factor is Red Bull's Sergio Perez; he has a strong following amid amongst the Hispanic community, with Perez often citing the U.S. G.P. to be his home G.P. before the Mexico G.P. was added back to the calendar for the 2015 season.
ROK
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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. |
Tight, inflationary labor conditions continue to highlight the need for automation investment. As capacity utilization improves, organic growth should remain robust - a metric that typically correlates with ROK’s valuation.
Manufacturing is likely to become more skill intensive as automation & robotics facilitate higher wage, and formerly low cost regions (e.g. China) become less attractive. Most recently, restaurants are experimenting with robots* in the face of labor shortages.
Food and Beverage makes up ~20% of sales for Rockwell. Rockwell reports 4Q21 earnings on November 2nd.
AMH
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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. |
Peer INVH reported results last week which were roughly in-line with high expectations, however the froward-looking metric of blended leasing spreads up +10.6% (vs. 5.4%/+8% in the last two quarters) continued to accelerate, both increasing and elongating the above-average SSNOI and Core FFO earnings trends.
Bad debt expenses are beginning to normalize across residential, which is another ~100-150bp tailwind to revenue heading into FY22, and local and state restrictions are loosening up and allowing landlords to increase rates to existing tenants at a faster clip.
We look for similar results from AMH and remain very bullish here. FY23 numbers remains far too low on the order of 10-15%.
RH
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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. |
For RH 2022 marks the year where it takes its immersive experience overseas with RH England, RH London, and RH Paris. To understand what RH will do abroad, just look at how it is using Aspen and completely controlling the consumer at all possible touchpoints.
While other retailers are pulling capital out of stores, RH is creating three stores next year that will probably rank as the top 1, 2 and 3 retail stores in terms of guest experience anywhere in the world. When we do the math on the revenue RH is likely to generate over a TAIL duration as it opens Europe, we build to ~$8bn vs about $3.5bn today.
VLVLY
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Long Thesis Overview: Shares of Volvo Group (VLVLY) have lagged other machinery-oriented names despite favorable industry and company specific factors. 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. |
Volvo reported 3Q21 last week with the company beating on headline numbers. Orders should improve during 4Q as 2022 build slots are filled out.
The higher margin service and parts business grew, aided by high utilization rates and aging fleets. Volvo should benefit from the spin of Daimler Truck, expected in December, a structural improvement that should support pricing.
BYD
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Long Thesis Overview: BYD looks like one of the most undervalued stocks in our universe, when measured vs its true potential. We get it, stock is up vs pre-Covid, but the numbers have justified most of the move higher. And yet, they continue to go even higher. There’s also a case to be made that BYD is deserving of structurally higher multiples given the inherent organic growth in its markets (especially LV Locals), and higher flow through, but also for the fact that the negative secular theses have pretty much been dispelled. Do we need to make the case for higher multiples right now? No, with the stock off its highs and numbers way too low, we have plenty of valuation support in our SOTP analysis. |
We heard mostly positive things from BYD this week about the health of the regional gaming consumer and the critical part of the discussion was that accelerating trends from 2H of September are continuing into October.
The 55+ demographic is gaining momentum, unrated play remains solid (for BYD at least), and they seemed confident that there’s still another level gear for their core customer to grow into.
Positive commentary indeed, and we think positive trends should continue to manifest through the rest of Q4, with November being an exception due to a challenging calendar comp. We remain bullish on the regional gaming names and BYD is a Best Idea Long at Hedgeye.
PENN
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Long Thesis Overview: (per Hedgeye GLL analyst Todd Jordan) "I would own Penn National (PENN). It’s had a great management team historically, which is critical for a buy & hold play. The Barstool move was very astute on their part. I have a pretty good idea what Barstool would be worth as a standalone company, and we know what Penn’s option to buy it at is; there’s a huge divergence, they can buy Barstool for far cheaper than it’s truly worth. The initial chunk they bought was at a very low price too.” |
PENN remains at the top of our Best Idea Long list as we look towards Q3 earnings next week. Many investors and analysts doubt the sustainability of top line growth and margins, however, PENN’s stock has underperformed the regional gamers due primarily to the perceived disappointing results for Barstool’s online sports betting launch.
We’re less concerned with market share this early in the industry’s development since marketing and promotional spend can heavily influence share, and PENN/Barstool have spent significantly less. Turning to the B&M business, our intra-month insights for the regional markets point to solid trends, and we think acceleration from a strong September is a good possibility. PENN remains a Hedgeye Best Idea Long.
TOST
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Long Thesis Overview: Toast (TOST) shares opened above the price range we highlighted in our pre-IPO Black Book. Comparing to publicly traded peers we thought the shares could trade up significantly. Not only did Toast have a larger TAM in the restaurant sector, but it also is set up to have a more dominant competitive position. |
Various industries are investing heavily in technology. Financial services have invested about 10% of their revenue, healthcare 5%, and retail 4%. But there is one outlier: the restaurant industry. As a whole, the restaurant industry had spent an estimated $25 Billion on technology in 2019.
The restaurant industry is clearly a laggard in tech spend and is slowly catching up to other industries. Toast expects that tech spend in the industry will be closer to $55 Billion by 2024 which would be about 5% of the revenue. As the market leader POS system, Toast is well positioned to capture a significant share of this market as restaurants ramp up spend.
BROS
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Long Thesis Overview: The Dutch Bros concept looks strong and is an interesting competitor to SBUX. BROS is an owner-operator and franchisor of drive-thru shops that focus on serving quality, hand-crafted beverages with substantial average unit volumes. Founded in 1992 by Dane and Travis Boersma, Dutch Bros began with an espresso machine and a pushcart in Grants Pass, Oregon. Once public, BROS will be one of the fastest-growing restaurant companies by new store growth at 20% annually. |
Dutch Bros is up about 10% this past week as they continue their expansion outside of their core markets which has only increased their profitability. Their newest location opens in San Antonio today. “We’re so excited to be part of the Universal City community,” said Meghan Cummings, the local operator of Dutch Bros Universal City, said in a news release. “We can’t wait to serve everyone Friday.”
According to Dutch Bros website, they plan on opening three additional locations in the North Texas area throughout 2022. These new locations will have no indoor seating and will be drive-thru only, allowing for the company to have low square footage and lower occupancy costs. For Texas locations opened in 2021, the AUV for these stores was $3.1 Million, their most lucrative state. This is compared to the systemwide AUV of $1.7 Million.
It comes as no surprise that the company has been quick to expand its Texas footprint. The company hopes to open more than 100 locations throughout Texas in the next two years. Currently it has eight locations in the state.
DUFRY
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Long Thesis Overview: Despite management teasing a 2023 recovery, we think the Street (and the current price) is still too conservative in not expecting a full recovery for another 5-years – particularly the European investment community. We think we’ll see a full recovery by 2023, on an EBIT margin double pre-pandemic rates. There’s your first paycheck. Then you get your second paycheck on the Hainan JV with Alibaba, which we think is running ahead of schedule (management is keeping people grounded here with expectations). That gets you paid by another CHf165mm, (1.50 per share) once the JV kicks into high gear in 2023. With the meaningfully higher margin profile comes the cash…and we think that the company will take out 15-20% of its share count over a TAIL duration – that is, unless it continues to consolidate the 88% of the industry it does not control. |
Dufry reported its Q3 numbers this week that showed recovery is happening. The company has now reopened 1,850 stores which represents 80% of total stores and 84% of total sales capacity which is up from last quarter's 1,600 shops which was 65% of stores and 75% of sales capacity respectively.
On a monthly basis sales improved vs 2019 each month by at least 200bps with current October estimates of about -39.4% of 2019 sales. The best performing regions are North America and Mediterranean/Eastern Europe, which coincidentally are the regions that are seeing the most tourists and having the least rigorous travel restrictions.
Management also provided passenger recovery forecasts for 2021 and beyond with all major data providers placing 2021 levels between -40 to -50% of 2019 levels, 2022 between -10% and -25% of 2019 levels and 2023 at even to +5% of 2019 levels. All the data is positive.
RRGB
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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). |
The industry posted the most robust results in the past four weeks for the week ending October 17. YoY check growth was the highest growth recorded since mid-April. QSR, fast-casual and casual dining improved the most (improved sales growth by 1.9%).
Only nine states had negative sales growth during the week: Wisconsin, Connecticut, Massachusetts, Oregon, Montana, Vermont, North Dakota, Wyoming, and Hawaii. The better sales are needed with costs rising as fast as they are.
SJM
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Short Thesis Overview: Management lowered EPS guidance a quarter after raising it due to higher than expected inflationary headwinds. J.M. Smucker (SJM) reported FQ1 EPS of $1.90, down 20% YOY, but a penny above consensus expectations. Sales decreased 6%, but in constant currencies excluding divestitures, sales increased 1%. |
Robusta coffee prices have hit ten-year highs. Dwindling supplies are due to higher demand, poor weather conditions in Brazil (the largest producer), port congestion, and higher shipping costs in Vietnam (the second largest producer). Robusta coffee beans are generally used for instant coffee like J.M. Smucker's Folgers brand.
SFIX
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Short Thesis Overview: There are clear negative implications there for sales predictability, gross margins, inventory turns and capital intensity. We don't think management is planning for having to compete like we think it will be forced to. This company was something special in its early pre-IPO days. Now it’s become just what the tech investors don’t want to admit – a retailer. Retailers trade on earnings and cash flow. A $40 stock definitely doesn’t respect that reality. |
On the last quarterly call for SFIX management guided revenue growth down to the teens vs the historical benchmark of 20%+.
That’s in the face of the biggest initiative for the company since it started its Fix offering. It’s cannibalizing its core with a more capital-intensive business. SFIX used to be a profitable business, but then it went to men, then kids, then Europe in search of TAM which have all been margin-dilutive.
The company should have stopped once it fully penetrated its core customer and churned out cash flow and bought back stock. Instead, SFIX is becoming an online version of a department store.
SFM
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Short Thesis Overview: With growing concerns about their plans, We are adding Sprouts Farmers Market (SFM) to our shortlist. Sprouts' two-year stacked comp was negative in Q2. Management now expects the full-year comp to decline 5-7% from -LSD% to -MSD%. Guidance implies an acceleration in comps that seems aggressive. |
Costco's second wage increase of the year went into effect on October 25. Starting wages were raised to $17 per hour. The average tenure of a Costco employee was nine years, and more than half of employees make over $25 per hour. In our Post-pandemic grocery outlook Black Book last week, we highlighted the wage increases in the industry are set to continue. It has elements of an arms race in a tight labor market. Sprouts Farmers Market does not have the unionized workforce that the conventional grocers generally have, making it more vulnerable to job switching for better pay.
KR
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Short Thesis Overview: Management raised EPS guidance from $2.95-3.10 to $3.25-3.35. Guidance for ID sales was raised from -4% to -2.5% to -1.5% to -1.0%, with the 2H expected to be flat to slightly positive. That implies a ~300bps deceleration in the 2H on a two-year stack basis. Management now assumes inflation to be 2-3% in the 2H. As they return to the office has been postponed, and indoor masking rules have been reinstalled in certain areas, food at home has benefited. A long investment in the grocers is also a bet on life not resuming to pre-pandemic behavior. |
IRI reported that its supply index continues to worsen ahead of Thanksgiving. Out-of-stock rates for five Thanksgiving-related food categories continue to worsen.
The availability of whipped toppings, liquid gravy, frozen and refrigerated pies fell 5 to 11% points for the week ended October 19 compared to the prior year. Compared to the recent two-month average, the in-stock level is 1-9% worse.
The lowest in-stock levels in the general food category were in cookies and crackers at 84%, baked goods at 84%, and snacks at 85%. Sports/energy drink in-stock levels in beverages were worst at 81%, juice at 82%, bottled water at 83%, and carbonated drinks at 84%. Higher out of stocks reduce promotions and are a benefit for conventional grocers. Retailers have 1-9% fewer promotions in the five Thanksgiving categories compared to the prior year. Prices for the categories are 3.6% higher YOY.
COLD
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Short Thesis Overview: Simply put, COLD is uniquely vulnerable given (1) its position in the “cold chain,” (2) the structure and mix of its revenue agreements, (3) the composition of its cost structure and high labor component, (4) the risk of integrating recent large acquisitions materializing at exactly the wrong time, and (5) consensus numbers that, in our view, were far too high both in FY21 but especially FY22 and beyond |
Best Idea Short Americold (COLD) reports results after the close next week on Thursday, 11/4, and this will be a big one. The company just slashed FY21 guidance on 9/21 by ~15%, so it is probably more likely than not that the stated outlook will remain unchanged at Warehouse SSRev growth down -2% to flat and warehouse SSNOI growth 400 to 600bp below that.
What will be most important, in our view, is the commentary heading into FY22, and we expect labor issues to be getting worse for a time and to REALLY impact earnings.
We think the ultimate FY22 guide will be terrible and likely below current consensus calling for AFFO of $1.29/share, which will lead to another round of estimate cuts and a washout of the stock. We think the guidance cut on 9/21 was an attempt to “kitchen sink” things, but that the operating environment has only gotten worse from there.
