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Short: MPW, KNX, HELE, PSEC, GIS, EWCZ, AAPL Long: DKNG, FYBR, HII, XYL |
This week we removed AvalonBay Communities (AVB) and Choice Hotels International (CHH) from Investing Ideas.
Below are updates on our 11 current high-conviction Long and Short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
DKNG
Ned addition - Stock Report: DraftKings (DKNG): A Standout Investment in the Booming Online Gaming Market
DraftKings (DKNG) - It’s official – the great state of North Carolina is going LIVE with Sports Betting ahead of March Madness on March 11th. North Carolina initially was slated to launch in January but due to delays was pushed back and then was expected to launch closer to the June 15 deadline set by the commission – had this come to fruition, there would have been negative implications for DKNG and industry revenue numbers. However, following yesterday’s announcement, the concerns (if there were any left) can be put to rest.
As noted earlier this month, NC’s launch in March won’t drive much change for our DKNG model and other company estimates, but the launch timing is critical. Given the territory and hoops-centric population, a March Madness launch could be a boon for customer acquisition / adoption. North Carolina is expected to be the biggest launch in 2024 and will give a nice jolt to the already strong same-state growth. A few operators including DraftKings, ESPN Bet, FanDuel, Fanatics and Bet365 have already set up strategic partnerships in the state and are prepared for the launch. DKNG remains a Long.
FYBR
Frontier Communications (FYBR) - We expect FYBR 1H24 Capex to decline and FCF to improve. Their fiber build is fully funded and asset divestitures could unlock equity value for non-core/Wave 3 passings.
Lower interest rates should be positive for move activity as we move deeper into 2024. We think Fiber operators and FWA will benefit disproportionately relative to cable on share of gross acquisition. This will result in Cable churn accelerating, with minimal offsetting impact to net additions resulting in deteriorating internet net additions. NOT good for CHTR, which just reported a bad internet net subscriber loss number of -61K today.
HII
Huntington Ingalls Industries (HII) - The company reported a beat on their earnings call February 1st. They beat EPS and total revenue Old Wall projections, in line with our idea that HII is a solid long. The geopolitical uncertainty coupled with conflicts popping up around the globe lend to the strength of the defense sector in the coming future. The use of drones in warzones such as the Red Sea show why HII continues to work as a long.
XYL
Xylem (XYL) - The upcoming period in the U.S., and possibly globally, is set to mirror the 1970s in terms of water and sewer infrastructure development. This era is characterized by a resurgence in spending, much like the 1970s when investment in water systems grew substantially due to recognized deficiencies and escalating environmental concerns. Currently, priorities include managing PFAs (per- and polyfluoroalkyl substances), addressing freshwater issues like depleted aquifers, and mitigating increased storm damage, especially in densely populated coastal areas and near major waterways. This anticipated rise in demand for water and sewer construction underpins our long-term investment thesis on XYL, a company poised to benefit from these trends. We remain Long XYL.
LW
Lamb Weston Holdings (LW) - French fries in storage decreased by 112.3 million pounds at year-end, down 9.2% YOY. Last December, the processors increased inventories by 38.7 million pounds, and this year, the industry consumed 61.3 million pounds, the largest in five years. At the current rate, the industry has 29.5 days of finished product in storage, the second-smallest inventory at year's end. At the end of 2022, the industry had 32.5 days of inventory.
Industry inventory levels historically build during Q1. The five-year average build has been 93 million pounds. If the industry saw an average build in Q1, inventory levels would be 32 days. That would be the third lowest level for the end of Q1.
Potato inventories are at the highest level since 2000 in the U.S. and the highest on record in Canada. Potatoes are not the limiting factor for production; it is the processing. LW remains a Long.
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 ~7.1 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 longer-term risk of MPW eventually becoming a bankruptcy is extraordinarily high. It MUST sell equity to recapitalize itself, including cutting the remaining cash portion of the dividend to the maximum amount possible. It must first address any SEC investigations and/or unresolved staff conflicts before raising public equity. MPW is "shrinking to attempt to save itself," which buys time but materially impairs MPW on the other side after selling the highest-quality remaining cash flow.
REITs analyst Rob Simone was recently featured in an interview with WBUR in Boston. Click here to access.
The Boston Globe released a scathing article on how MPW is not only effecting their investors, but causing human harm in their hospitals. Click here to access.
KNX
Knight-Swift Transportation (KNX) - The company posted a negative earnings report recently, citing 3rd party insurance losses, which has been a trend throughout the trucking industry as of late. They are only giving next 2 quarters of guidance, and they are even backend loading these next 2 quarters. The outlook is negative for 1Q, as the trucking market slowed meaningfully in December. The report was an "excuse festival," saying there is lots of uncertainty surrounding the outcomes of bid season, and will experience heightened weather disruptions in January. Bid season is the time period where shippers and carriers negotiate freight rates and contracts for the upcoming shipping season. The company was quiet on their predicted outcome, and saying nothing in this case is bad news.
HELE
Helen of Troy (HELE) - HELE has a large amount of debt, $730mm to be exact, all at a variable rate. This week we saw rates go down a little but then bounce back up on Friday. The variability in rates is a risk for the company with low cash flow. The debt level here is a part of this story that can’t be forgotten, especially since the company has been clear that it is planning acquisitions that it will have to lever up to accomplish. Trading at nearly 10x EBITDA multiple, it is overvalued on an overstated EBITDA. This stock should trade at a MSD EBITDA multiple on a lower EBITDA base as it becomes evident over time that it can’t grow organically.
PSEC
Prospect Capital (PSEC) - An externally-managed Business Development Company (BDC) that has elected RIC status. Similar to a REIT, it is a pass-through entity where the corporation pays no income taxes (so long as it meets certain requirements) and individuals are taxed at the individual level on their distributions. It owns 100% of the common stock of National Property REIT ("NPRC"). NPRC is hopelessly over-levered, approaching ~20x net debt-to-EBITDA. NPRC did not cover its interest payments to PSEC with internal cash flow over 2020-2022 (Hedgeye estimates the shortfall at ~365 million combined).
Recently, PSEC reported that it has given about 58.6 million more in loans to NPRC since the end of the first fiscal quarter of 2024. Most of this money, around 50 million, was used during the second fiscal quarter, marking the third quarter in a row where NPRC has borrowed over 50 million. This money was mainly used for improving existing properties and for general business expenses. Despite this, NPRC hasn't bought any new property since June 2022, but PSEC's total loans to NPRC have gone up by 150 million, an 18% increase. It's not clear where all this extra money is being spent. Last quarter, PSEC lowered the interest rates on some loans, which is like giving a rent break to a big tenant who is having financial troubles. We think PSEC did this to help NPRC manage its costs better, especially with the increased interest expenses. We remain Short PSEC.
GIS
General Mills (GIS) - In its last earnings report General Mills lowered guidance for organic sales growth of 3-4% to flat to down 1% for the fiscal year ending May. Management also expects a slower volume recovery due to “a more cautious consumer economic outlook and a faster normalization of competitive on-shelf availability.” Improved in-stock levels from private label and smaller brands are pressuring General Mills on pricing while input cost inflation is expected to be about 5%. The company has its plans, but the competition has theirs and the consumer is under pressure. This creates an environment of future disappointments for General Mills. We remain short GIS.
EWCZ
European Wax Center (EWCZ) - While last week we saw a deceleration in visits trends, this week we had an acceleration getting to flat YY. As we approach Valentine’s Day, volumes are likely to pick up, so the rate of change will become an even more important indicator in the next couple weeks. We expect comps to be pressured over the upcoming quarters, weakening revenue trends and compressing the equity value given the leverage. The stock is trading at a 34x multiple at about 15, but both should head much lower. We would consider buying this stock closer to 5.
AAPL
Apple Inc. (AAPL) - Tech analyst Felix Wang has consistently argued that AAPL's issues extend beyond the Chinese market, facing broader challenges across their business spectrum. This perspective was validated by their recent earnings report, where Apple's performance in the U.S. market barely surpassed expectations, achieving a modest 2% growth. There's hope that the Vision Pro could provide a significant uplift to their revenue mix; however, it currently represents a mere 0.3% of total revenues, casting doubt on its immediate impact.
The earnings details further highlight areas of concern: Mac sales underperformed, with only a 1% year-over-year growth, falling short of market expectations. Additionally, the growth in Apple's Services segment slowed down by 5% quarter-over-quarter. This deceleration raises concerns about the future prospects of both the services' margins and growth into 2024.
The market's response to these developments was notably negative, with AAPL's stock price declining over 3% within the week.
We remain Short AAPL.
Felix Wang presented his full AAPL Short Black Book recently, as the first major call of the new Global Tech Sector at Hedgeye. For the full presentation and to view more of Felix's research, CLICK HERE.
