Below are analyst updates on our fourteen current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for our Investing Ideas in a seperate email.
Please note that we removed Las Vegas Sands (LVS) from the long side of Investing Ideas. We also added CIBC (CM) to the short side and Time Warner (TWX) to the long side. Hedgeye Financials analyst Josh Steiner will be sending a stock report on CIBC in the coming week. We will also outline the TWX long call for subscribers in a stock report next week.
TLT | GLD | MUB | JJC
Click here to view our analyst's original report on Gold.
The newsy Friday jobs report proved underwhelming once again. It was also a boon for us #GrowthSlowing bulls. Long Bonds' (TLT) continued their outperformance of equity market beta (on less volatility). The S&P 500, with 9 consecutive days of negative performance, exceeded the longest streak of negative daily returns set in October 2008. You'd have to go all the way back to 1980 to match that poor performance. So really bad.
Considering all of the volatility in equities these last couple years, the S&P is up a whopping 4% in two years to this day (Please note: That's sarcasm).
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Back to Friday’s jobs report. We don't forecast the monthly NFP number so we don't have to explain ex-post why we again failed to nail an unforecastable number.
Most of what matters from a trend perspective is already known. The print - with rare exception - just confirms that longer-looking reality. Here it is — The slow march to zero percent jobs growth since the peak in Q1 of 2015:
We’ve hit on the challenging outlook for the manufacturing side of the economy extensively, so clearly growth will remain largely in consumption’s court over the immediate/intermediate-term. See our update from last week for a primer on the outlook for consumption driving overall growth on a forward-looking basis.
Hourly earnings, employment, and aggregate income growth all face difficult comps in the near-term. As income growth has slowed, households have accelerated growth in revolving credit in an effort to help maintain consumption. However, that acceleration, while supportive, hasn’t been enough to offset the deceleration in income growth and the consumption capacity of households has continued to slow off its 1H15 peak. Here is a chart we created a couple of weeks ago to illustrate this point:
And on the corporate profit front, we received productivity and labor input cost data this week (the trend in this series is something we’ve pointed out before as combating the easy comp affect in corporate earnings):
- Productivity rose 3.1% QoQ in 3Q16, breaking the worst streak of negative sequential growth in 4 decades. But it was also negative year-over-year for a 2nd consecutive quarter, marking the worst streak in 23 years.
- Unit labor costs were up which is good for workers but they are still rising faster than output prices which is margin negative for businesses.
- Real & Nominal GDP accelerated sequentially but are still rising slower than payroll and aggregate income growth, respectively, which means profitability (& near-term productivity) will remain under pressure.
HCA
Click here to read our analyst's original report.
The implications for HCA Holdings (HCA) of the slowing consumption we see reflected in Friday's jobs report on the company's volume, pricing and margins, and especially 2017 EBITDA, are not good. Healthcare employment growth for October 2016 was +2.7% YoY, down from its peak of +3.4% YoY in March of 2016. This slowdown is in-line with our #ACATaper thesis and the approximate six-month lag with Healthcare Job Openings.
Hospital Employment growth was the slowest in the last 16-months at 2.9% YoY, after hitting a peak of 3.9% YoY in April 2016. We believe hospital employment will continue slowing due to deteriorating admissions trends. This supports our short thesis on both AHS and HCA as we continue to see further downside in both of these names.
In the short term, the election will play a big role for the stock, and for a lot of healthcare, as Clinton is considered the sector benefactor, while Trump and #Repeal&Replace are more clearly a threat. We don’t think policy will matter much in 2017, or at a minimum be secondary to what we expect will be declining admissions and margin pressure from multiple sources.
For more on the Healthcare policy implications of this election, click the image below to watch Hedgeye Healthcare policy analyst Emily Evans' discussion with CEO Keith McCullough.
AMN
Click here to read our analyst's original report.
AMN Healthcare Services (AMN) has passed through an extraordinary period of growth since the beginning of 2014. As the population of insured medical consumers grew at unprecedented rates, many with above average medical needs, the demand for healthcare workers skyrocketed. Skyrocketing demand flowed through AMN's results in rapid volume and pricing growth.
Over that time, management has commented on demand as largely driven by an aging healthcare workforce combined with medical demand demographics. We believe their analysis is deeply flawed.
A few key takeaways from AMN's earnings results released on Thursday that confirmed our view:
- Organic growth slowed to 12%, slightly above guidance of 11% and below our JOLTS forecast model of 13.5%
- Local, which is "only" 7% of Nurse and Allied, declined -15%
- Bill rate grew 5%, below guidance of 6%, and well below recent results in the teens
- Gross margins in Nurse and Allied declined year over year
- Guidance for 4Q16 was in-line with consensus expectations for the first time since 2Q14
As we enter the winter of 2016, marginal demand is ebbing, growth rates are returning to normal, and we believe the marginal demand for healthcare workers, that was high enough to drive AMN's organic growth to ~30% in 3Q15, is entering an equally difficult phase of declines. Those long AMN should carefully consider the chart below showing guidance, consensus, and actual reported revenue. Investors should consider the of implication going forward of AMN's guidance merely meeting consensus estimates for 4Q16.
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HBI
Click here to read our analyst's original report.
Gildan, Hanesbrands' (HBI) closest public comparable, reported earnings this week. Gildan launched its own branded underwear in 2013 and has been a thorn in HBI’s side ever since. The original belief was that GIL would likely consume private label market share, but Gildan now has a significant 9% unit market share, up 180bps YY.
Branded underwear put up double digit point of sale and revenue growth in the quarter, seeing improved in-store placement. The company is expecting to hit 10% share by year end, which would be an acceleration in share gain.
In addition, management had some pretty bearish comments on Back to School and the retail market, saying:
"the overall back to school -- in every category -- is down. Underwear unit shipments are down. Sock shipments are down. And I think the overall apparel segment is down. So, the market is not robust".
When you combine this consumer environment with the competitive pressures that HBI is facing, we think organic growth for HBI remains negative, meaning significant risk to the peak margins at peak utilization.
WAB
Click here to read our analyst's original report.
Eroding Industrial activity/demand is in full swing, consistent with our #LateCycle Macro call. This jibes with earnings reports from two of our top Industrials sector short ideas Caterpillar (CAT) and Wabtec (WAB). Revenue shortfalls at both companies precipitated significant guide-downs setting the tone for what we expect to be continued slowing across the Industrials complex. Each company had various puts and takes but most notably WAB confirmed that the Faiveley deal would be both delayed and renegotiated (read more expensive).
We think both companies have significant downside. Hedgeye Industrials analyst Jay Van Sciver will be hosting a conference call next to update his short call on WAB. We'll have the key takeaways for Investing Ideas subscribers in the upcoming newsletter.
BX
Click here to read our analyst's original report.
No update on BlackStone (BX) this week but Hedgeye Financials analyst Jonathan Casteleyn reiterates his short call.
CERN
Click here to read our analyst's original report.
BEGINNING OF THE END | BEAR CASE $35
Takeaway: Expect the low-end of 2017 guidance, more disappointments and a stock in the $40s next 6-9 months
system sales disappoint; licensed software -12% YoY
Cerner (CERN) reported 3Q16 results that disappointed across most key metrics and provided support to our short thesis we laid out in September 2016. Consolidated sales of $1,184 million were below consensus of $1,240 million, with the bulk of the miss in system sales that were -7.3% YoY to $301.3 million versus consensus $350.2 million.
Management noted a -12% YoY decline in licensed software and -21% YoY in hardware, partially offset by subscription sales growth as primary contributors to the miss. We went back through 10-years of earnings transcripts and this was the first quarter where a decline in licensed software was highlighted as a factor driving negative system sales growth.
Licensed software represents ~13% of total revenue, but ~23% of total contribution margin as it has the highest contribution margin of all segments at ~91%. Licensed software is also highly levered to new client bookings from EHR/RCM replacement activity, which was -21% YoY and we expect weakness to persist and system sales to disappoint through 2017 as the replacement market continues to slow and sales cycle lengthens.
AXP
Click here to read our analyst's original report.
Let's review our short thesis on American Express (AXP) and why we think the company is entering a new phase of its corporate life: stagnation. Here's why:
- The company still derives over 20% of revenue and earnings from its lending business. We believe the credit cycle is in its twilight and will begin to deteriorate in the coming 12-24 months.
- The core business at American Express is facing growing pressure from the longer-term dual headwinds of falling pricing power and slowing volume growth.
- The primary and secondary businesses are set to become headwinds within the next few years, making it difficult, if not impossible, for the company to sustain its current earnings multiple and will make earnings growth harder and harder to achieve.
No change to those views this week. Stay short.
BATS
Click here to read the Bats Global Markets (BATS) stock report written by Hedgeye Financials analyst Jonathan Casteleyn.
