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Long: PLBY, PSA, FWONK, ROK, AMH, VLVLY, CUBE, TOST, BROS, DUFRY, PCAR, SPOT, BIRD, WYNN Short: RRGB, SFIX, COLD |
Below are updates on our seventeen current high-conviction long and short ideas. We have removed Boyd Gaming (BOYD), JM Smucker Company (SJM), & Kroger (KR) from Investing Ideas. We have added Wynn Resorts (WYNN) to the long side. 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. |
Great print for PLBY on Monday. Revenue and EBITDA both ahead of expectations despite the company noting ~$5mm in lost revenue from supply chain constraints and Covid related store closures.
Business trends continue to be strong into Q4, the brand continues to build momentum, and new monetization initiatives are in progress. The most important incremental information on the call was likely around CENTERFOLD.
The company didn’t get specific on launch timing or who the key launch partners will be but did say it is “hoping to launch with a group of creators that already generate hundreds of millions of dollars in the creator economy” including some with exclusive partnerships with CENTERFOLD.
The company knows the new initiatives announced since last Q will drive incremental revenue, but since the initiatives haven’t even launched yet, it’s not providing any specific outlook. Needless to say, we see the revenue target for 2025 of $600mm is too low by 100%.
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. |
On Thursday CUBE priced $1.05 billion of new senior unsecured notes at 2.4% (above our assumption for ~3%), and last week also priced its 13.5 million secondary offering (up to 15.5 million with the over allotment) at ~$51/share.
The stock traded -8% lower immediately following the share offering on pending dilution, however the combined ~$1.7 billion of proceeds is being deployed towards acquiring West Coast-based Storage West at a sub-4% cap rate. Street FY22 numbers remain 5-10% too low with a high level of conviction, and the RoC profile on SSRev, SSNOI and earnings is favorable through mid-year 2022.
The CUBE deal is a “stabilized” versus “value add” acquisition, meaning that occupancy and in-place rental rates are largely in-line with market levels and there is no development pipeline, aka less “juice to squeeze” to move results higher and improve cash-on-cash returns.
This contrasts with PSA’s recent value-add acquisitions of All Storage and ezStorage financed 100% with new debt, both of which had significant opportunities to improve cash flows in the near-term. All else the same, we like PSA’s capital deployment versus CUBE, however we see a more favorable RoC profile in CUBE from here and most of PSA’s catalysts are now behind us.
Both names likely work on the long side with self-storage remaining an overweight in REITs, its just a question of degree of upside and relative performance.
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. |
It's official. Guanyu Zhou will become China's first full-time F1 driver when he makes his debut with Alfa Romeo alongside Valtteri Bottas in 2022. The 22-year-old, who is in contention for this season's F2 title, has had extensive testing in older F1 machinery through his role as test driver for Alpine. He has been linked with a move to F1 with Alfa Romeo for several months and was given the nod ahead of incumbent Antonio Giovinazzi, who the team announced was leaving earlier on Tuesday.
“To be the first ever Chinese driver in Formula 1 is a breakthrough for Chinese motorsport history. I know a lot of hopes will be resting on me and, as ever, I will take this as motivation to become better and achieve more.” - Guanyu Zhou
F1 President and CEO Stefano Domenicali added: "The news Guanyu Zhou will be in F1 next season is fantastic for the sport and the millions of passionate Chinese fans that now have a home hero to cheer all year long. The pyramid in F2 is working and promoting talent to the topflight of motorsport."
A quick refresher: On 11/6/2021, Formula 1 announced it extended its contract with the Chinese Grand Prix through 2025. Similar to the U.S., if F1 gains enough traction in China, we wouldn't rule out a second Chinese GP at some point.
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. |
Click HERE to watch Industrials analyst Jay Van Sciver updates on the automotive industry, Ford Motor Company (F), Apple, Inc.'s (AAPL) electric car, and Rockwell Automation, Inc. (ROK). Hedgeye CEO Keith McCullough gives further context on how these updates fit within his macro outlook on bottlenecks.
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. |
Also not much new to report on Best Idea Long AMH, with the next catalysts being (1) updated national apartment rent numbers (which have tangential implications for the SFR REITs) and (2) 4Q21 results in February which will be accompanied by initial FY22 guidance.
AMH remains our favorite name on the long side from a fundamental perspective over a TAIL duration. We often like to draw parallels between AMH and peer INVH versus EXR circa-2005 in terms of growth trajectory. The fundamentals line up: (1) highly fragmented horizontal market as a roll-up opportunity, (2) asset class just starting to become institutional, (3) well-developed operating platforms and management expertise along with (4) large pools of capital entering the space and seeking experienced operators (third-party management and UJV opportunities).
The one key difference is the starting point on cap rates (8-10% for self-storage back then vs. sub-4% for SFR today), but with the pace of SFR rental rate growth we would make the argument that current in-place cap rates are not reflective of true “NOI” streams.
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. |
Toast announced a suite of new products yesterday that enhance how operators receive money, pay and tip their employees, and manage their operations and delivery networks. Toast Restaurant Card is a debit card that provides rapid access to credit card sales and cashback rewards from restaurant-specific merchants.
Toast Order Hub allows restaurants to view data from Toast and third-party delivery channels on a single dashboard. Toast Tip Manager calculates and moves pooled tips to Toast Payroll, making tips and wages accessible via the Toast Pay Card (a prepaid debit card) and allowing employees instant access to a portion of earnings after every shift with PayOut.
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. |
Sweetgreen went public this week and is now trading at 15x multiple for NTM EV/Sales, an astounding valuation. For comparison, Sweetgreen has a 13.1% restaurant-level margin for 2021, while Bros has a 26% margin, double Sweetgreen’s.
Sweetgreen and Dutch Bros have the same unit growth of 20% for 2022. Dutch Bros is the obvious play for a high-growth restaurant chain. Sweetgreen has fragmented operations across America, which makes it hard to leverage costs.
In contrast, Dutch Bros' primary operations are in the northwest, and they are slowly expanding towards the south. This strategic expansion causes new locations to have even higher AUV’s than existing locations.
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. |
Despite some impacts from COVID on the Chinese mainland which has hampered travel to Hainan Island, the Haikou City Customs Department reported duty-free sales for the first 9 Months of 2021 of $5.6bn which is a 121% YY increase.
This is a deceleration from the 257% YY increase in the Half Year Results, but that is due to the change in Duty-Free spending laws that happened in the Summer of 2020 which boosted sales on the Island.
Even despite tighter travel in China the Island continues to be a juggernaut. Dufry currently has 33,000 sq. meters of shop space on the Island and over a TAIL duration we are conservatively modeling that Dufry can obtain 8% market share which is good for about CHF 2 in earnings power just from its partnership with Alibaba on Hainan.
Source: Moodie Davitt Report
PCAR & VLVLY
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Long Thesis Overview: The truck industry should undergo a major structural change this quarter with the spin-off of Daimler Truck. We expect Daimler to seek higher margins via pricing. Hints of that are seen in the delays for opening build slots for 2022. If we are reading that correctly, we think PCAR and Volvo are straightforward beneficiaries. 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. |
We continue to expect PCAR and Volvo to benefit from the Daimler Truck spinoff as pricing is the most obvious lever for the newly independent OEM. Daimler has been the pricing spoiler and needs to bring up margins to a level that matches the company’s market position. Post-spin, it will be worth watching to see if it trades at a discount.
We think that PCAR and, to a somewhat lesser extent, Volvo offer a less complex exposure to easing competitive tensions in trucks. With the combination of subsidized electrification and pricing-driven EPS growth, we expect PCAR, Volvo, and perhaps Daimler Truck to revalue into a new range.
SPOT
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Long Thesis Overview: We are moving Spotify (SPOT) a few notches higher on the active long side ahead. The mobile app download data continues to be strong, along with the Top 200 streams. One of our agency contacts also flagged a consumption shift back to music in 3Q21. |
Spotify announced this week that it has entered into a definitive agreement to acquire Findaway, a global leader in digital audiobook distribution. Terms of the transaction were not disclosed. Together, Spotify and Findaway will accelerate Spotify's entry into the rapidly growing audiobooks industry, enabling faster innovation and bringing audiobooks to Spotify's hundreds of millions of existing listeners.
This deal isn't totally surprising; for years, Spotify has talked about their platform being used for music and being the default audio platform. They first introduced podcasts, and audiobooks are a logical next step. Their long format makes it easy to insert ads and to offer premium users ad-free experiences.
What's great about this acquisition is not only does Spotify get Findaway's catalog that they can instantly import into the Spotify app, but they also get the ecosystem. Findaway specializes in audiobook distribution and self-publishing for independent authors. Even more, creators will be Spotify; those authors now have a larger platform for their audiobooks and the ability to launch podcasts that tie into their books.
BIRD
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Long Thesis Overview: From where we sit – 30% annual top line is a slam dunk for this brand – especially given that it has only 11% brand awareness, with huge upside for new customer acquisition. Though it’s currently losing money on roughly $250mm in sales – 100% of which is DTC (i.e. extremely attractive) – the EBIT margin structure is likely to clock in at a 15%-18% level over a TAIL duration on nearly 3x the revenue base. That puts about $0.75 per share in earnings in play. |
In order to get a real sense as to what BIRD is worth, we need to roll the clock forward a few years and see where the revenue base, margin structure and capital intensity are likely to shake out.
From where we sit 30% annual top line is a slam dunk for this brand especially given that it has only 11% brand awareness, with huge upside for new customer acquisition. Though it’s currently losing money on roughly $250mm in sales – 100% of which is DTC (i.e. extremely attractive) – the EBIT margin structure is likely to clock in at a 15%-18% level over a TAIL duration on nearly 3x the revenue base.
That puts about $0.75 per share in earnings in play. This name should trade 40x-50x that number easily, which suggests a $30-$38 stock price over 2-3 years.
WYNN
Hedgeye CEO Keith McCullough adding Wynn Resorts (WYNN) to the long side of Investing Ideas this week. Below is a brief note.
I dribble one-handed so I didn't get to play with MJ, but I do get to play with GLL analyst Todd Jordan!
After a LONG waiting and watching research #process, he's going back to the bull side of a company he helped bring public back in the day: Wynn Resorts (WYNN).
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Takeaway: WYNN = Best-In-Class & BICs outperform during recoveries. Mkt tailwinds are also catalysts. WYNN/LV Strip deep dive presentation next Tues CALL DETAILS Date & Time: Tuesday, November 23rd @ 2:00PM ET |
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). |
Following the Halloween slowdown, restaurant sales have improved. According to Blackbox "Sales growth for the week was 0.6% stronger than the average for the previous 6 weeks.
Average guest check continues to accelerate and remains a concern for ongoing traffic recovery. Guest year-over-year growth was at its highest since mid-April.” Not surprisingly, customers say a discount or deal would make them more likely to eat out.
Family dining, fast-casual and fine dining experienced the largest year-over-year growth in their average checks during the week (as well as over the last 3 weeks). 46 states posted positive sales growth during the week.
The only states with negative sales growth were Oregon, Wisconsin, Hawaii, and North Dakota. The best performing regions of the country based on sales growth were the Southeast, Southwest, Florida, and Texas. The weakest sales growth regions were California, New York-New Jersey, New England, and the Midwest. Price increases are the most challenging for the moderately priced concepts like Red Robin because fast casual and quick service become more of a competitive risk.
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. |
The company’s Freestyle initiative, or Direct Buy, should end up being 50-60% of the business within the next two years, and that fact has massive ramifications on this model.
The first big one is on revenue as Customer count could accelerate as the company continues to step on the gas with its customer acquisition costs, but the Freestyle customer and the lower-spending incremental Fix customer both should drive down the spend/customer.
The second is on margins as the company opens itself up to severe competition with Freestyle, something that its ‘personalized curated’ AI model has been isolated from in the past. We think the company sees its revenue growth algorithm get cut in half and compete away 300-500bps of Gross Margin over a TAIL duration.
We don’t think this model ever generates sustainable profitability.
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. |
Nothing new to report on COLD this week. In terms of the stock, FY22 AFFO estimates have been slashed to the mid-$1.20/share range and we think (1) there is additional downside and (2) the new management team when announced is highly incentivized to set a very low bar for next year, likely below the Street.
Until then the stock likely trades on USDA cold stored commodity data with the next release coming on or about 11/22. We expect there to be a seasonal build sequentially ahead of the holiday season, and any downdraft in commodity levels would be very bearish for the stock.
More to come on that front. COLD is a prime example of why it is so hard to short REITs, but we are sticking with the short from a fundamental perspective for now as things are likely to get worse before they get better.
