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Short: MPW, PEB, TSLA, ULTA, REXR, CFG, CMG, ONON, BUD, KNX Long: DKNG, ATVI, NYT |
There are no changes to the line-up this week. Below are updates on our 13 current high-conviction Long and Short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
MPW
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Short Thesis Overview: Medical Properties Trust (MPW) is not a traditional triple-net REIT, rather an investor in hospital systems ("WholeCos" using the company's own words). In the process MPW removes the arbitrage from a traditional PorpCo-OpCo arbitrage. These investments are structured as loans + equity investments to the operator tenants, which are in many cases distressed and owe significant rent payments back to MPW as landlord. The arrangement is circular and depends on MPW's ability to raise attractively-priced external capital. The equity is very possibly completely worthless, as we think the assets are worth no more than ~$9 billion (updated) to true "arm's length" third-party buyers vs. pro forma net debt of ~$10.5 billion at share. |
Medical Properties Trust (MPW) - The only thing propping the structure up had been extremely liquid debt markets and artificially low borrowing costs. The bonds are perhaps a more interesting story than the equity right now (on its way to "Dr. Zero"), and we think bondholders need to start thinking about recoveries here. Longer-dated maturities beyond 1Q25 look especially precarious. It is hard for some investors to wrap their arms around a case where a REIT may have overpaid by 2-3x, but we think that is exactly what happened here and now the bill is coming due... MPW remains a Short.
PEB
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Short Thesis Overview: Pebblebrook Hotel Trust (PEB) has a highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history. We see regression toward the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM. |
In the broader market perspective, last week’s hotel data was again soft. While there may have been some further timing issues with holidays, the broader trend continues to look soft. Similarly, corporate bookings, which we track on a weekly basis, have reverted to their existing trend after a calendar and timing impacted bump in the prior week. As noted below, there’s been little shift in trend, similar to the reported RevPAR data.
On a YoY basis, forward sales volumes are now flattish, and we’d note that the trend really hasn’t shown much of a pickup over the last 6-9 months. Our bearish bias is unchanged on Pebblebrook Hotel Trust (PEB).
TSLA
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Short Thesis Overview: Tesla (TSLA) numbers are messy with far too much inventory, improbable OpEx containment, and flat to lower margins. But Musk’s salesmanship has become increasingly goofy. Tesla is just a "pandemic liquidity" driven bubble stock that is likely already in the midst of a downward revaluation. |
Walter Isaacson's new book on the life of Elon Musk has been a hot topic amongst Hedgeye Nation as of late. It details the wild life of the current richest man in the world, giving a whole new light to the reasoning behind many of Musk's 'out of the ordinary' actions. In recent news on Tesla (TSLA) Non-Chinese brands of electric cars could be involved in a subsidy probe on imports of cars from China to Europe. The investigation, kicked off by the EU, could involve TSLA but it is currently unclear to what extent. TSLA remains a Short.
ULTA
Ulta Beauty (ULTA) is running its annual Fall Haul event this week. It ran the same period last year, only difference is that this year the discount is only up to 40% vs last year up to 50%. Lately we have been seeing lots of beauty promotions, both at wholesale and through brands’ DTC. With the overconsumption of beauty coming out of the pandemic, demand will continue to slow as consumers become fatigued and feel oversaturated with beauty products. Companies and brands are going to need to keep pace with each other in terms of promotions and discounts in order to make sales and maintain market share. We expect Ulta’s revenue growth to slow along with margins declining, giving the stock downside to sub $300.
REXR
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Short Thesis Overview: Rexford Industrial Realty (REXR) had a potentially vicious reflexive share price move for a ~3.5% cap rate asset, likely beginning a RoC slowdown right now. Uniquely vulnerable in a decelerating and historically macro-sensitive subsector. Net effective rates signed with new leases have peaked/are peaking. REXR remains a Short. |
No updates this week on Rexford Industrial Realty (REXR).
CFG
Citizens Financial Group (CFG) Slowing loan growth, both due to planned run-off and weaker demand in retail and commercial banking resulting from historic credit tightening; rising deposit costs; new regulatory concerns around capital requirements; and normalizing credit accelerated by the dual vacancy and refinancing risk associated with general office exposure are plaguing the broader regional banking space.
The earnings impact of higher funding costs will be amplified by increased conservatism through tighter underwriting and shifting asset mix targeting higher precautionary levels of liquidity.
CMG
Chipotle Mexican Grill (CMG) 2Q23 was strong, with sales growing by 14% to $2.5 billion, and SSS increased by 7.4%. In-restaurant sales rose by 16%. Digital sales accounted for 38% of total sales. Restaurant-level margin was 27.5%, up by 230bps YoY. Adjusted diluted EPS was $12.65, marking an increase of 36% YoY. The biz model will have significantly less leverage in 2H23 and 2024, 3Q32 SSS guidance is expected in the low to mid-single-digit range, and for the full year, mid to high-single-digit comps are anticipated. The midpoint of the range of SSS guidance for the forward quarter has gone from 8.5% in 1Q23 to 3.5% in 3Q23. Post reporting its 2Q23 results, Revenue Revisions are up 30bps, and earnings revisions are down 110bps. 3Q23 COGS is expected to be around 30% due to higher beef and avocado prices. CMG remains a short.
ONON
One of the top three most popular styles of shoes are adult road running shoes according to Circana’s Retail Tracking Service. American’s are still investing in these shoes, with purchases up 6% in Jan-Aug of this year vs last year. While ON Clouds may be included in that categorization, that’s infrequently their actual utility rather being worn for their look over function. Consumers are looking to invest in performance shoes that they trust, whereas we frequently hear that people are worried about the level of foot support when using ON Clouds for athletic purposes. We expect the demand to slow for these sneakers as they are more aesthetic trend based than performance based. As demand slows the wholesale channel sales will slow and inventories will rise causing ramp in promotions to work through excess inventory. The brand hasn’t had so show investors a discounting cycle, but when it does this stock will re-rate much lower.
BUD
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Short Thesis Overview: Anheuser Busch (BUD)'s Bud Light brand is permanently impaired. Bud Light volumes have been consistently 30% lower YOY since the social media marketing mistake. Making matters worse, some customers are also avoiding other AB InBev brands pressuring sales. With lower velocity the company is losing shelf space ahead of the spring resets. Management has told stakeholders that it is pulling marketing dollars from international markets to support domestic sales. International markets had been the strong part of the portfolio as various regions recover from the pandemic. What was a brand specific problem has become a problem across all U.S. brands and international markets. |
Anheuser Busch (BUD) Teamsters and the Teamsters Brewery, Bakery, and Soft Drink Conference began negotiations recently for a new contract covering 5,000 brewery workers nationwide. It was the Teamsters that won the most recent contract at UPS. UPS drivers will earn an average of $170,000 in pay and benefits at the end of their five-year contract. The union is asking AB InBev to reward its employees for their sacrifices during the pandemic by increasing wages, health care, and retirement benefits. The current contract expires at the end of February. Unions have been successful recently in extracting higher pay and benefits with a tight job market and surge in inflation. The difficulty for AB InBev (BUD) is that it does not operate in a near monopoly which facilitates increasing prices. Brewery workers are in line for a pay raise and AB InBev has to hope to avoid a strike – the last thing it needs in its troubled U.S. division. BUD remains a Short.
KNX
Our Industrials Team is hosting a Trucking call on Monday at 2PM ET. You can CLICK HERE if you are a subscriber to Industrials Pro to mark this event or email support@hedgeye.com to get access.
In a brief overview of the overall industry, truck rates continue to lower as we see ongoing margin compression. Volume prices, loads, and tonnage are all down which is driving utilization and pricing lower. These challenges continue to weigh heavily on KNX, as it remains a Short.
DKNG
For those that may have missed it, we hosted another well-attended deep dive presentation, this time focused on the online gaming industry. DKNG remains our go to horse in the space and from our vantage, it looks really good to be King right now.
We cover a lot of ground in ~70 slides of material – catalysts, updated numbers, narrative debunking, and refreshed upside targets for DKNG. If interested, subscribers can access the replay materials via this link CLICK HERE (email support@hedgeye.com if you would like to get access)
It's been a long road, but DKNG is finally #1 in terms of total industry market share. They are the best positioned to capitalize on very favorable industry trends, and we are expecting a big Q3 beat & raise. They are acquiring a more productive user & yielding up while they still have a big hold percentage and margin opportunity. We think there is plenty of upside potential here due to industry and company specific catalysts that should drive their price up tremendously. Their positioning now is much better than when the stock was > $70 back in 2021. There is a new dawn in the online gaming industry and DKNG is the premier way to play the next phase of the up cycle. DKNG remains a Long.
NYT
New York Times Company (NYT) Back on August 15th, we added The New York Times (NYT) to the long bench on the basis that their transition to a digitally-driven journalism brand has been a success, and they have the potential to grow even further in the digital space. Furthermore, strategic acquisitions have diversified their product offerings and an aggressive bundling and promotional strategy will accelerate this subscriber growth and drive ARPU expansion as the subscriber base matures. We also have cyclical tailwinds over the next 9-12 months, as anticipated strength in digital advertising and a U.S. Presidential Election cycle are upon us. We see The New York Times as the strongest digital journalism brand at the moment and anticipate 30% upside to it's current price.
ATVI
On Aug. 22 the Competition and Markets Authority (CMA) in the UK opened a new regulatory review for final approval of the Microsoft acquisition of Activision Blizzard (ATVI). We continue to believe the UK regulators are likely to approve the revised transaction at the end of Phase 1 of the CMA, and are still aiming for approval before the current merger agreement expires on October 18. Head of Microsoft Gaming, Phil Spencer, made positive comments recently, indicating confidence the regulators will clear the deal the acquisition. This dispels the sentiment that further merger agreement extensions (beyond the current October 18 expiration) do not appear necessary at this point. The FTC is still appealing the denial of the preliminary injunction to block closure of the deal, but the appeals court denied the FTC request to freeze the deal pending the appeal. So the UK process is the only obstacle to closure, and we anticipate the deal will soon get the green light there.
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