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Long: PLBY, PSA, FWONK, ROK, AMH, CUBE, PCAR, SBEA, AVB Short: RRGB, EXAS |
Below are updates on our eleven current high-conviction long and short 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. |
PLBY’s ICR presentation was simple Q/A with the CEO and CFO. There wasn’t a ton of new info, but some important parts were reiterated. The CEO highlighted how the Centerfold offering will continue to evolve as more capabilities are being built and added.
Creator onboarding is a manual process at the moment that will become automated in the future, and the company plans to build an NFT marketplace on top of the Centerfold platform enabling creators to sell digital content pieces to followers/fans.
The CEO highlighted the different offerings talking about the “membership” mindset, but what we think might be lost on some investors is the ability to engage consumers in many different avenues and cross sell a large and growing product assortment to all those engaged customers. The last notable point was the pandemic impact on business that has been highlighted in recent quarters.
China negotiations on licenses have been delayed by Covid travel restrictions, the India launch was delayed to this year due to the Covid impact on the country, the casino closure, and supply chain pressured sales in parts of DTC all year, but particularly had issues around peak Halloween demand.
PLBY has a growth ramp ahead of it in 2022, Honey Birdette for the whole year, lapping covid revenue pressures, Centerfold, new product launches, and a hot brand in apparel. We think has multiple years of outsized growth after that which will ultimately take this company to $10bn plus in EV.
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. |
Last week we moved all of the Self-Storage names lower in the priority ranking of our Long ideas. CUBE is now our third-ranked storage name in the Best Idea bucket, with large-cap PSA near the top of the ranking on the Bias/Bench list owing to its factor exposure mix (size, leverage, beta, etc.).
The facts are that (1) all else the same decelerating inflation and a Quad 4 environment is not as favorable for shorter duration REIT sectors, and (2) the base effects and RoC get MUCH tougher moving from 2Q to 3Q, and we are now only a few months away from that. These remain longs for now but we are watching the signal, being mindful of changes and definitely prefer Apartment and SFR names on the long side here.
CUBE definitely had a bit of a relative “footfall” in investors’ eyes by buying Storage West at a full price with fewer value-add opportunities. Neither company has announced its 4Q21 earnings dates.
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. |
Liberty Media Formula One (FWONK) has had a great run since we made it a Best Idea Long in May 2021 in the mid-$40s. Many elements of our thesis have played out nicely as it relates to domestic viewership trends, which were up ~55% YoY in the U.S. in 2021. While the multiple has expanded from low 20s to high 20s over this period, there are multiple catalysts left that make us favor FWONK on the long side to start 2022.
- New sporting and technical regulations kick in starting this year, which should improve competition.
- The Inaugural Miami GP scheduled for May 6 – May 8th
- Renewal of upcoming U.S. media rights (Current F1 rights with ESPN are undervalued), which could see possible bidders from Amazon, Apple and Netflix. ← Most important catalyst
Meanwhile, we expect a material step up in financial performance in 2022 compared to 2019 (pre-COVID baseline). Note that Factset consensus estimates for 2022 partially reflect this improvement, with revenue ~18% higher than 2019 and adjusted OIBDA ~34% higher.
The 2022 Formula1 season kicks off in Bahrain on March 18-20. And while 2021 was an incredibly exciting year for the sport, we wouldn’t discount 2022 being another exciting year. We will continue to track viewership trends closely.
Click HERE to listen to Communications analyst Andrew Freedman discuss Formula One (FWONK) this week.
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. |
We continue to think ROK will benefit from capacity constraints, labor shortages, low cost sourcing difficulties, and increased wages. It’s also benefitting from the rapid production, adoption of EVs. For the first time since the 1960s, automakers are building greenfield factories and retrofitting current factories for EV production.
GM presented its Silverado EV at Consumer Electronics Show. It’ll hit production lines at its retrofitted Detroit-Hamtramck plant in 2024. Saudi Arabia is rumored to be the next location of Lucid’s second plant.
Most of these greenfield plants and retrofits will likely see some sort of Rockwell equipment installed which could move its automotive revenue from 10% to 20% of total sales over the next few years.
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. |
Nothing has changed since we last wrote on Best Idea Long AMH, with the next catalyst being 4Q21 results with no date announced yet. We remain very bullish on and struggle to find any REITs (other than INVH) with more potential to meaningfully increase earnings power in the near-term.
AMH’s 4Q21 results are 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 annual Core FFO earnings power in short order versus ~$1.35/share currently.
On the Macro Show two weeks ago we highlighted perhaps “the most important macro chart in REITs right now.” Home price appreciation (HPA) leads leasing spreads by 3-4 quarters, which in turn lead actual rent results and earnings by another 2-3 quarters. Leasing spreads lagged against HPA growth shows a very high correlation. If the relationship holds and spreads accelerate into the low-single-digit or mid-teens range, it is conceivable that FY23 Street earnings estimates could be 20-25% too low.
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. |
December Class 8 orders bounced back 139% month-over-month from November’s multi-year low as customers continue to demand new trucks. This should support an already enormous OEM backlog.
At this point it would take a ~1 year to at full capacity to work off just the North American backlog. We have pointed out that Industrials like PCAR can generate decent book-to-bills while simultaneously living off a giant backlog will outperform the high growth, low profit companies as investors pivot away from more risky exposures.
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! |
The next catalyst for Best Idea Long AVB will be 4Q21 earnings results to be released on 2/2, where the company will also provide its initial FY22 outlook.
We look for a modest beat on the quarter ($2.25 vs. $2.24 FactSet), but more importantly an above-consensus guide with the Street at Core FFO of $9.36, including SSNOI growth likely to shake out in the low-to-mid-teens range. It is possible that SSRev, SSNOI and Core FFO earnings all accelerate into the final quarter of the year, and likely that both AVB and EQR post the highest SSNOI growth numbers in the companies’ histories.
Rental rates continue to accelerate in AVB’s key markets despite a RoC deceleration in several of the Sunbelt apartment markets, which were the first to recover and benefit from the pandemic.
SBEA
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Long Thesis Overview: Black Rifle Coffee Company (BRCC) is a veteran-founded coffee company. The company was founded in 2014 by Evan Hafer, a Green Beret. BRCC is a mission-focused company committed to supporting veterans, active-duty military, and first responders. BRCC has targeted the $28B coffee category as its serviceable addressable market. Our military is the most respected institution in the country according to Gallup polls. Veterans are 7% of the population while the active-duty military is less than 0.5%. Half of the company’s employees are veterans. BRCC also gives preference to veteran-owned businesses as vendors and suppliers. The company's three-pronged growth strategy is driving 30%+ top-line growth. |
Black Rifle Coffee Company held its first investor day presentation this past week. Management outlined their many growth initiatives from energy drinks to merchandise to 1,300+ outposts in the future.
In the next couple of years we expect the wholesale channel to drive the most growth. The brand is in a rapid rollout with varied products by retailer and channel. This offers a high level of visibility in both the new product offerings for the retailers and the number of retail stores that have agreed to add Black Rifle coffee and merchandise in the future.
We expect the de-SPAC process to be completed next month with some possible delays from the SEC registration process.
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). |
Restaurant sales growth experienced a sharp downturn during the week of Christmas, but this was affected by the holiday falling during the weekend - Christmas fell on a Wednesday during the comparable week in 2019. Beyond the effect of the calendar shift, there was some pullback from consumers, likely in response to heightened concerns from the spike in cases of Covid driven by the new Omicron variant. Sales growth was negative for the first time since March 14. It was also the worst week for restaurant traffic during the same period.
Sales growth declined for all full-service segments compared to the previous week. The most significant drops were in casual dining, upscale casual, and fine dining. Fast-casual experienced a significant improvement in sales growth, while quick-service only experienced a slight increase.
The downturn in sales growth was widespread throughout the country, with 24 states plus the District of Columbia posting negative sales growth during the week. Only four states had negative sales growth the previous week.
Sales growth performance worsened during the week in all regions of the country. Higher labor costs are a headwind for the industry. The minimum age is increasing in many states and tight labor market conditions are pushing wages further.
19 of the top 20 states that had the most significant year-over-year increases raised median pay in October to levels that were already higher than the minimum wage as of January of 2022. Within the casual dining industry Red Robin is also poorly positioned.
EXAS
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Short Thesis Overview: All that said, consensus estimate trends continue to reflect near-term weakness for our universe and the potential for a late 1Q22 bottom, which looks like it's in sync with the Macro Team's call (whether it's MacroQuad 1 or 4). This week, NEO rotated out of MicroQuad 4 and into 1, which is still a short position but lower exposure (the outlook looks better from a NTM revenue perspective, but we've got to find out what's happened in 2H21 that drove that weak guide). Also, EXAS slipped back into MQ4 from MQ1, which we've been expecting. Last, we've got some work to do on the estimate trends for XHS, XHE, and ARKG, so keep an eye out for that! |
At $76.15 as of this moment, Exact Sciences (EXAS) shares are down less than 1% on the week. Guardant (GH) was in the news for settling with Foundation (BW) and presented at JPM22 on Monday. The company is aggressively pursuing colorectal cancer screening, and EXAS could become a fast follower, with "one of many" screening options sooner than later.
EXAS pushed out a few PRs on Sunday, and we don't see how the acquisition of PreventionGenetics to Accelerate Availability of Hereditary Cancer Testing for More Patients (PR) helps, as it signals a move toward becoming more of a full-service lab, which doesn't scream, "Pay a high multiple to sales for this business!" to us. Also, the preliminary results (PR) appear to be COVID-testing driven as screening was in-line and short of our claims model forecast.
EXAS management was at JPM22 on the 12th, but we think the more positive news wasn’t even discussed: fixing the reimbursement issue for colonoscopy following a + test is important news for colon cancer screening and Cologuard: "plans and issuers must provide coverage without cost sharing for plan or policy years beginning on or after May 31, 2022."
Overall, the presentation was uneventful, and we still can't get our arms around Exact hiring the whole Pfizer primary care sales team after talking about wellness visits and office access issues, but the comment on productivity in the 4th quarter seemed constructive.
Management might be confident in $2B of revenue this year, but we're not sure that 14-15% growth is a slam dunk. Even if it is, how much competition and friction will there be for Cologuard and Oncotype? Put it all together with a Macro Quad 4 backdrop and we are happy to remain Short EXAS in our Health Care Position Monitor.
