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Long: PLBY, PSA, FWONK, ROK, AMH, CUBE, BROS, DUFRY, PCAR, BIRD, WYNN, WOOF, AVB, COIN, RIVN Short: RRGB, COLD |
Below are updates on our seventeen current high-conviction long and short ideas. We have removed Volvo (VLVLY), Toast (TOST), Stitch Fix (SFIX) from 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. |
This week PLBY took another major step in officially launching its Big Bunny collection. As a reminder, Big Bunny is an upscale line of clothing and travel accessories written on the website as “Ready-to-wear styles inspired by the plane that transcended culture”.
Playboy continues to take steps in the right direction towards monetizing all the brand value the company possesses. The Playboy Brand does $3bn in global spend but only recognizes a small portion of that due to its horrendously low 2% blended royalty rate.
Initiatives like Big Bunny and others coming down the pike allow Playboy to recognize much more of that global spend on its own P&L by capturing 100% of the dollars of revenue.
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. |
CUBE announced this week that it had closed on its ~$1.7 billion acquisition of the 59-asset Storage West portfolio, which we estimated will be $0.03 to $0.04/share accretive to Core FFO in FY22.
The company funded the acquisition via the issuance of ~$790 million of equity plus $1.05 billion of unsecured debt at a sub-2.5% coupon. CUBE remains our favorite long idea in self-storage (which we are generally long of), numbers next year and beyond are likely still too low with a RoC acceleration through mid-year, the stock is signaling BULLISH TRADE/TREND/TAIL, and was just added to RTA on Friday. Nothing new to report on Long Bench name PSA.
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. |
"Lewis Hamilton won a controversial debut Saudi Arabian Grand Prix from pole position ahead of Max Verstappen and Valtteri Bottas amid two red-flag stoppages. The result means the two championship protagonists go to the Abu Dhabi finale level on points.
Abu Dhabi hosts the season finale, and with Hamilton having taken 26 points to Verstappen's 18 here, the championship protagonists are now equal on 369.5 points. But the fallout from Jeddah may well continue through the night, with the stewards set to investigate Hamilton and Verstappen's Turn 27 tussle after the race." - Source: Formula1.com
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. |
Rising costs & ‘oversight’ in China, along with tariffs and a less stable geopolitical backdrop may force a factory investment catch-up in developed markets. Baseline expectation for automation spending remain too low, particularly with improving capabilities, rising wage expectations, and increasing ESG awareness.
As ROK’s organic growth accelerates to reflect already robust industrial order activity, shares of ROK are likely to move to a meaningful market premium – a premium warranted for one of the best structurally positioned franchises in our coverage universe.
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. |
We remain very bullish on Best Idea Long AMH which has started to move higher but remains under-appreciated by investors. 4Q21 results is the next catalyst where the company will provide its FY22 outlook which should surprise to the upside. Concerns on slowing against “tough” comps are overblown, and the company is likely to deliver ~$1.70 per share of Core FFO earnings power in short order versus ~$1.35/share currently.
Whichever sell-side shop is calling around saying to short AMH and peer INVH here against Apartments (we like the Coastals, btw) is about to get steamrolled in FY22. Two weeks ago we published an updated note where we talked about the lead-lag effect between and among home price appreciation (HPA), leasing spreads and realized rents in AMH’s results. HPA leads leasing spreads by 3-4 quarters, which in turn lead actual results and earnings by another 2-3 quarters.
The trend in HPA for AMH’s markets show an acceleration in the RoC on leasing spreads and earnings likely through FY22, and there is zero chance this is accurately being reflected in consensus numbers.
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. |
Although Dutch Bros only sells drinks, it is much more than a coffee retailer. In fact, coffee drinks represent less than 40% of sales as seen in the chart below. Dutch Bros’ also has one of the most diverse daypart usages of any restaurant company we follow.
Being able to drive traffic to its locations throughout the day is particularly appealing to landlords. Dutch Bros is looking to rapidly grow its store base as other retailers have retrenched due to the pandemic and competition from e-commerce while being attractive to landlords’ other stores for the traffic it drives.
Dutch Bros has one of the brightest store growth outlooks in the restaurant sector.
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. |
Management is currently on the road meeting with investors in the States, and we were able to get a meeting with them in NYC. The takeaway from the meeting is that we have had no change in conviction on this name going forward.
Sure omicron is having an impact at the moment on sales given the uncertainty, but sales for the year are likely to fall within Dufry’s scenario analysis. That said, focusing on those factors is missing the forest for the trees.
Dufry is emerging from the pandemic a leaner and more efficient operation with the company continuing to say that CHF280mm is coming out of Personnel Expenses and CHF120mm is coming out of OpEx (we actually think gross saving get to CHF500mm) and travel is estimated to recover in 2023 which leads Dufry to double the EBIT margin on a 2019 recovery in revenue for 2023.
PCAR
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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. |
We continue to expect PCAR 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.
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. |
There were puts and takes on BIRD’s first print out of the gate, but overall, we definitely liked what we saw out the company. The market wigged out over the headline EPS miss, but operating results were in line with the company’s preannounced range.
The biggest bear case we’ve heard is that revenue growth in the core US market is tapped out – as evidenced by the flattish growth in the region in 2020. But the flat growth in 2020 was a function of the innovation cycle and the lack of new platform launches.
This year we saw the launch of multiple new platforms and colorways which accelerated growth in the US meaningfully to 42% and will continue to drive growth for the company. We think the bear narrative looks at the past, while the real opportunity here is what this company could become and grow to in the future.
WYNN
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Long Thesis Overview: If history has taught us anything, it’s that BIC makes a great lighter and in the casino world, BICs catch fire during recoveries and generally outperform the competition. Per our math, WYNN is indeed outperforming in the USA. Macau is the wildcard, and with all the fits and starts it’s impossible to discern a trend. However, we’re optimistic that WYNN will outperform there as well when the market stabilizes and recovers. |
If history has taught us anything, it’s that BIC makes a great lighter and in the casino world, BICs catch fire during recoveries and generally outperform the competition. Per our math, WYNN is indeed outperforming in the USA.
Wynn has grown its GGR share by almost 200bps in 2021 YTD vs 2019, and that’s with a lower-than-average table hold percentage. Hedgeye EBITDA estimates are now higher than the Street for 2022 and 2023, for the company and across every Wynn market.
The Las Vegas Strip continues to defy expectations and generated Q3 GGR and profits above 2019 levels, while Boston continues to outperform in a very competitive market. Macau stocks seemed to have stopped going down on bad news while the incremental chatter seems mostly positive. Importantly, the government seems to have backed off some of the potential initiatives associated with the renewal process that had operators and investors worried.
WYNN’s BIC assets will prove to be share gainers and it remains a Best Idea at Hedgeye.
WOOF
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Long Thesis Overview: The company is seeing an impact from strong sales in consumables due to the pet life cycle going from Year 1 (heavy supplies, little food) to Year 2 (low supplies, lots of food). Also keep in mind that as it scales its vet clinics the services personnel costs are booked in COGS as opposed to store labor, which is booked in SG&A. |
Despite coming in 10% ahead of consensus on revenue last quarter, there was a ‘freak-out’ factor associated with the Gross Margin line which had transitory pressure due to mix and freight pressure. The operative word there is transitory.
The company is seeing an impact from strong sales in consumables due to the pet life cycle going from Year 1 (heavy supplies, little food) to Year 2 (low supplies, lots of food). The reality is that this story is 100% on track.
Ultimately, we think this company sustains 7-8% top line growth – which is roughly in line with the category and if anything is a conservative assumption given the clinic/hospital rollout – and more than doubles EBIT margin from 4% last year to 8.8% over a TAIL duration.
AVB
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Long Thesis Overview: FY21 Guidance: 4Q21 Core FFO projected in the range of $2.19 to $2.29 on SSNOI +5.5% to +7.5%, so as expected SSNOI growth now definitely inflecting positive after JUST missing the crossover point in 3Q (-0.2%). This compares to Hedgeye at $2.20 and +9% for 4Q21, so we need to (1) take numbers up but also (2) re-work the mix between same store and non-same store contribution. Consensus was at $2.13 on 4Q21 coming into the print - thanks for coming out! |
AvalonBay Communities, Inc. (AVB) was just added to Investing Ideas a week ago. We are generally long the Coastal Gateway Apartment REITs (AVB, EQR and ESS) which will likely have the best year ever in FY22 from a SSNOI growth perspective, and AVB remains our favorite in the group.
The group is several quarters behind the Sunbelt REITs in terms of recovery and return to prior (nominal) peak on rental rates, with accelerating leasing spreads and much less unit supply on the horizon as well.
The RoC on SSRev, SSNOI and Core FFO earnings growth will continue to accelerate through 3Q22, so we are sitting in the sweet spot here. We think SSNOI will grow in the mid-teens range next year (we model +14%) and are +10% ahead of consensus on Core FFO earnings estimates, implying that the Street is somewhere in the mid-to-high-single digit range on SSNOI growth which makes no sense.
The stock is BULLISH TRADE/TREND/TAIL with among the strongest signals among the REITs we cover. Buy the stock.
COIN
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Long Thesis Overview: Back in June, we hosted a Coinbase bull-bear debate in which we profiled the risk-reward setup for the broader digital asset space as well as Coinbase, the largest U.S. cryptocurrency exchange. The detailed bull case for Coinbase can be reviewed in that presentation. With the continued, widespread growth of the crypto asset class, and what had been a cooler third quarter, we are adding Coinbase (COIN) as a new Best Idea Long based on the strong October trends and the longer-term, secular growth tailwinds across the crypto-verse. |
Click HERE to watch Hedgeye CEO Keith McCullough break down why he was buying crypto-related equities (like Coinbase (COIN)) on the dip over the past couple days.
RIVN
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Long Thesis Overview: RThe well-funded electric vehicle start-up offers vehicles in the higher value segments of the auto market with innovative ‘adventure vehicles’, the R1T pick-up truck and the R1S SUV. On the commercial vehicle side, Rivian is a prospective supplier to Amazon with its EDV platform…positioning the company as another front for the Bezos v. Musk twelve-digit billionaire battle. |
The Rivian IPO performed well, but the disinterest of Ford in pursuing joint development, along with some rumors about challenges on the commercial side. Is Rivian worth $100 billion? Of course not. We just thought it was likely to trade there.
Longer-term, it wouldn’t trade at that sort of valuation without a VW or Ford trading at multiples of it. It would require a sustained inconsistency. As competition enters the EV truck and SUV market by, say 2025, we’d expect our survey result to decline. There is certainly a ‘bubble’ valuations for electric vehicle makers; we just aren’t sure that we are out of the ‘buy the bubble phase’ yet.
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). |
For the week ending November 28, 2021 restaurant sales and traffic growth were soft. Year-over-year growth in average check increased again, with the most significant increase in check since the last week of March.
All segments experienced a slowdown in sales growth rate compared to the previous week. The most significant drops in sales growth were fast-casual, quick service, and fine dining.
Despite the decline in sales growth, all segments except for family dining posted positive sales growth. Dinner sales growth softened by 1.5% compared to the previous week's rate, while lunch growth fell by 1.0%. Much more significant drops were seen in breakfast, mid-afternoon, and late-night. California, Florida, Mountain Plains, and New England were the best performing regions.
The regions with the lowest sales growth were the Southwest, Midwest, Mid-Atlantic, Southeast, and Texas. Red Robin is poorly positioned in the sector with food quality that is little differentiated from its fast casual competitors that are lower priced and have quicker service.
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. |
Still nothing new to report on Best Idea Short COLD until the next USDA commodity cold storage data. In general it will be quiet save for (1) the monthly data release from the government, (2) the ultimate conclusion of the CEO search and (3) 4Q21 results in February.
We received the most recent USDA report on cold storage commodity levels two weeks ago, which showed that stock levels increased sequentially from September into October as expected, however the stock levels ticked down to 93% of prior year levels versus 94% in the prior month. Commodity stocks should be building on an absolute basis quarter-over-quarter ahead of the key holiday period, however we believe the metric to watch is % of prior year levels.
We remain bearish from a fundamental perspective until COLD likely “kitchen sinks” its 2022 outlook in February.
