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Short: MPW, PEB, TSLA, ULTA, REXR, CFG, CMG, ONON, BUD, KNX Long: DKNG, ATVI |
This week we removed New York Times Company (NYT) from the Long side of Investing Ideas.
Below are updates on our 12 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. |
As a corporate travel exposed hotel name, we advise investors not to get too excited about Wednesday’s RevPAR print, especially in the context of the net benefit the growth data received from calendar shifts, but more importantly, in the context of the lackluster forward looking data. Global leisure demand and domestic outbound trends for leisure remain strong and are up YoY, but the same cannot be said for corporate related demand in the US. Corporate air ticket bookings (volume only), 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, like the reported RevPAR data and corporate proxies we track (weekday Urban, business market RevPAR, etc.).
On a YoY basis, forward sales volumes are now FLAT, 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. |
Keith McCullough mentioned Tesla (TSLA) on The Call @ Hedgeye on Tuesday, providing an in depth look at the seeming divergence between their production numbers and its stock price. That clip can be found HERE.
TSLA is once again lowering prices; they are lowering prices 2-4% across their U.S. offerings. We think the OEMs have jammed to much product out for the past ~2 years which is saturating the market. More consumers are buying brands in the EV space that they are more familiar with. There have clearly been hits to Tesla's brand from a variety of angles, including build quality, safety, etc.
It isn't surprising they are lowering prices given their production and delivery announcement earlier in the week, which saw deliveries at ~430,000 and production around the same, which is lower than we expected. TSLA remains a Short.
ULTA
Over the last month, Ulta Beauty (ULTA) has been making lower lows and lower highs, now in the high $300s -- which is consistent with our call. The upcoming quarter is probably not at risk, as management guided to a down quarter on the EPS line vs last year. Could it grow EPS in a mid-single digit range? Yes. But let that sink in for a minute...this is a company that was growing EPS by 100% just 1-2 years ago and is now closer to flat. Bulls argue that the stock looks cheap, but all we see is decelerating growth and risks to margins. While the stock is down 25% YTD, we still think there is downside from here. We’ll be more comfortable with this stock when it starts with a 2-handle. ULTA remains a Short.
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), as it remains a Short.
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. CFG remains a Short
CMG
Chipotle Mexican Grill (CMG) has announced that it will begin testing a new automated digital makeline, termed a "cobot" (a combination of collaborative robot and human interaction), at its Chipotle Cultivate Center in Irvine, California. This system was designed by robotics company Hyphen, which Chipotle invests in. Chipotle's Cobot is a dual-layered system: a human-operated line on top and an automated makeline below. The automated system caters only to digital orders and focuses on bowls. About 65% of Chipotle's digital orders are bowls or salads, allowing the human staff to concentrate on other tasks. The aim is to enhance capacity, especially during peak times. The goal is for the new makeline to produce approximately 350 bowls per hour. Chipotle's chief customer and experience officer, Curt Garner, emphasized the company's commitment to using robotics to enhance the human potential of their workforce and improve the dining experience for customers. The goal is for the automated digital makeline to be the focal point of all of Chipotle's digital kitchens. Additionally, Chipotle will be testing another robotic system called Autocado at the Cultivate Center.
In terms of the macroeconomic effect on CMG, we see student loans negatively weighing on an already burdened consumer. If the core CMG consumer is leveraged and is now facing paying off student loans, what about sales for the balance of 2023? CMG remains a Short.
ONON
On Holdings (ONON had its Investor Day this week where it put forward 2026 and LT targets. The growth targets are ambitious; doubling 2023 revenues by 2026 while increasing gross margin at least 150bps and adjusted EBITDA margin by at least 300bps. Long-term the company is targeting revenue growth of 20-25% YY with an adjusted EBITDA margin of over 20%. In those long-term targets the company wants to get to 10% apparel, 10% owned retail, and 10% China. While these targets may seem impressive from where the company stands today, we don’t think the story will play out as it hopes. No story in retail is linear -- especially for upstart footwear brands. We're already seeing discounting on ONON product, and think hitting -- never mind sustaining -- a 20% EBITDA margin (and implied 60% Gross Margin) will be highly unlikely. Management just guided Old Wall to a perfect scenario that is unlikely to play out. ONON remains a Short.
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): The National Beer Wholesalers Association’s (NBWA) Beer Purchasers Index (BPI) remained flat both sequentially and YOY in September at 45. The BPI is a diffusion index where a reading above 50 denotes expansion in volumes while below 50 indicates contraction.
- Below premium was 42, lower than the prior year of 47 and 52 in August.
- Premium lights were flat YOY at 47 and below the 58 in August.
- Premium regular increased to 40 in September from 36 in the prior year and 48 in August
The at-risk inventory measure ticked up one point to 53 in September as slower sales trends are leading to higher inventory levels. The higher distributor inventory levels are a negative read-through for AB InBev since its brands have been the underperforming brands this year. Both Molson Coors and Constellation Brands discussed shelf space gains and tap handle wins this past week, helping to cement their recent share gains at Budweiser’s expense. We remain Short BUD.
KNX
Our Industrials Team is hosted a Trucking call on Monday at 2PM ET with FreightWaves CEO Craig Fuller, which is available now to Industrials Pro subscribers. For the full rundown, you can visit their page or email to subscribe and get access.
There has been a freight recession hurting the market throughout the past year and a half. We have seen a 12% drop in freight volumes this week, which may be related to the UAW strike. This is the only time since COVID that we have seen a non-holiday trucking drop this significant. Rejection rates are continuing to suggest an oversupply of capacity. There is simply not enough volume or optionality to keep their trucks moving. This environment does not bode well for Knight-Swift Transportation Holdings (KNX) who is already facing headwinds. KNX remains a Short.
DKNG
As far as Sports Betting is concerned across the US, it’s still FanDuel’s market and everyone else is playing catch up in terms of GGR market share, hold %, ARPU, etc. However, changes could be on the horizon and recent performance in OH and MA – two marquee state launches in ’23 – suggest that DraftKings (DKNG) is making very solid headway went it comes to growing its share of the pie. In MA, DKNG’s home state, the company is putting up monster share in both handle and GGR terms and controls 48-52% of the market in terms of hold % and GGR. In OH, things continue to turn up for the #2 OSB operator and the below data which was just released suggests that DKNG is gaining critical mass and making a lot of progress on its peers, especially FanDuel.
For the third consecutive month in OH, DKNG is the #1 market share holder in terms of OSB handle and its GGR share continues to make strides, expanding from the high 20%’s up to 32% in August. What’s also noteworthy about OH is that Bet365 has made little to no incremental progress and CZR and MGM, despite their B&M presence in the market, have not had much progress either.
OH is a fiercely competitive market and yet DKNG is doing a lot of heavy lifting, with less external marketing and building off its initial launch. It’s encouraging to see for future launches and ahead of new competition (ESPN Bet). DKNG remains a Long.
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. ATVI remains a Long as we await more data pertaining to the trial.
