Takeaway: TWX, PNRA, FXB, UUP, PENN, MU, WFM, WMT, CRI, CERN, HCA

Investing Ideas Newsletter - Euro rain cartoon 01.03.2017

Below are analyst updates on our eleven current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a seperate email.

Please note that we removed AMN Healthcare Services (AMN) from the short side and Muni Bonds (MUB) from the long side of Investing Ideas this week. 

IDEAS UPDATES

FXB | UUP

We took advantage of a correction in Municipal bonds over the last month to take the exposure off of Investing Ideas. Mr. Macro market told us post-Friday's jobs report that:

A) Wages accelerated and

B) The potential for #NFPSlowing to slow at a slower rate and maybe re-accelerate is on the table.

That's bad for long-term bonds, Gold, etc. and bullish for the US Dollar, higher beta and cyclical stocks, etc. Without a forward-looking catalyst in our process from here, the bull case for MUB is weak. 

A combination of the market’s pulse and inflecting fundamental data pushed us to shift our views regarding growth and inflation accelerating exposures after the election, an asset allocation shift which has worked out well thus far.

Our Growth, Inflation, Policy model is matching up well with those alpha generating exposures currently. We’re in a Quad2 environment (Growth ↑, Inflation ↑) from both a fundamental and factor alpha perspective where U.S. equity beta and cyclical sectors (energy and industrials) tend to outperform.

Sure there are election narratives related to the raw materials sector's outperformance but less talked about is:

  1. The inflection in fundamental domestic economic data
  2. The large comp tailwind in commodity sectors – the biggest tailwind for commodities is in Q1 of 2017, from a rate of change perspective, which should be supportive of these sectors (Q1 was the 2016 high in the USD and the low in commodities).

We received important consumption and industrial data this week with the most important call-out perhaps the continuing shift in manufacturing confidence and the change in data coming out of what had been an Industrial recession in 2015-16.

First on Consumption:

 

Retail Sales:  Sales growth across both Headline and the Control Group in Oct/Nov are accelerating Y/Y vs. 3Q16. Control Group sales in 4Q are currently tracking +3.6% QoQ annualized (compared to 1.1% realized in 3Q16).

 

Auto Sales:  Auto Sales rose +3% sequentially in December, marking a new cycle high at 18.29 Mn units.  While this isn’t sustainable, it’s also not bearish for reported growth.  With auto’s representing ~20% of total retail sales, the gain in unit auto sales suggest further incremental improvement in headline retail sales when the data is reported on Friday of next week. 

 Investing Ideas Newsletter - 01.06.17 Auto Sales

Now to ISMs…

  • ISM’s:  The ISM manufacturing index hit its highest level in 2 years in December - the New orders Component went >60, marking its highest level in 26-months.  The same dynamic characterized the services side as New Orders in the ISM Non-Manufacturing Index rose +4.6 pts to 61.6 in December, marking the highest level since August 2015. 

Both ISM Mfg and ISM Services New Orders are >60 at the same time for the 1st time since Nov 2014.

Investing Ideas Newsletter - 01.06.17 ISM Mfg

  • Durable Goods: Durable Goods Ex-Defense and Aircraft – which represents the series most closely aligned with household demand -  rose +0.6% sequentially in November while improving to +1.2% YoY.  This represents a 2nd month of positive YoY growth – the first such streak in almost 2 years – and the fastest pace of growth since April 2015.

When an economy is accelerating economically, especially on a relative basis, it warrants tighter central bank policy and currency appreciation against other currencies which are not experiencing those same dynamics.

This set-up applies to both our UUP and FXB long calls. PMIs out of Great Britain this week cotinued to show post-Brexit acceleration:

  • Services PMI: UK Services PMI for DEC accelerated (again) to 56.2 DEC vs. 55.2 NOV and the FTSE hit yet another post Brexit high this week. This accelerating data keeps us on the long-side of the pound.
  • Manufacturing PMI: UK economic data continues to accelerate with the best manufacturing PMI print in 2.5yrs (56.1 DEC vs. 53.4 NOV)

TWX

Click here to read our analysis of why we think the AT&T/Time Warner (TWX) deal will be approved. And here's an excerpt from an Institutional Research note written by Telecom & Media policy analyst  Paul Glenchur this week:

News reports this week suggested President-elect Donald Trump remains concerned about the proposed AT&T-Time Warner merger.  We continue to believe the deal is on track for regulatory approval this year.

As we noted following the election (Hedgeye Potomac, Washington Warms Up to AT&T-Time Warner, Dec. 2, 2016), Presidents do not direct the conclusion of antitrust civil investigations. 

Although policy elements can be a factor in the Justice Department's overall competition analysis, the ultimate call to seek a court injunction to block a proposed deal rests with the antitrust division. 

The DOJ is checked by the federal courts because an injunction cannot issue unless the government meets its burden of proof that the deal violates the antitrust laws.

At the FCC, an independent agency, the shift to Republican control suggests the proposed merger is unlikely to be derailed, assuming AT&T seeks the transfer of Time Warner licenses that would trigger FCC jurisdiction. 

At this point, it remains unclear whether FCC review will be necessary.  In any event, we believe the Commission would be relatively benign in this context, perhaps seeking some merger-relevant conditions as part of an approval order, but stopping well short of any action that would derail the transaction.

Bottom Line: We do not believe politics will dictate the ultimate regulatory outcome.

CRI

Click here to read our Retail analyst Brian McGough's original report on Carter's (CRI) that we sent to Investing Ideas subscribers earlier this week.

PNRA

Click here to read our analyst's original report. 

PNRA | UPSTART MAKING WAVES

Panera Bread’s (PNRA) craveable wellness platform appears to be making significant headway, especially as the company ramps up its Panera 2.0 and delivery concepts.

According to data provided by Google Trends, Google searches of the phrase “Panera Delivery” has seen a steady climb, whereas Google searches containing the phrase “Dominos Delivery” have stagnated.

It will be interesting to see whether these trends continue going forward, especially as PNRA aggressively infiltrates the on-demand delivery space.

Investing Ideas Newsletter - PNRA update

CERN

Click here to read our analyst's original report. 

Investing Ideas Newsletter - cern update

OVERVIEW

We spoke with the CEO of a 44-bed Rural Hospital in Alabama who has been a CPSI customer since 1990 and is now considering switching vendors.  

The hospital is evaluating bids from athenahealth (ATHN), Cerner (CERN) and incumbent CPSI for an integrated ambulatory and inpatient EHR system with revenue cycle services.  We spoke with the hospital at the end of November 2016 and at that time we were told they wanted to make a final purchase decision by year-end. 

We followed up with them this week and they selected athenahealth and will be transitioning at the end of 2017. The purpose of the conversation was to understand the economics and drivers behind the replacement, as well as experience with each vendor. 

We continue to believe that athenahealth is well positioned to rapidly take share of the < 50 bed hospital market.  CPSI and Cerner (top competitors for new business) are more expensive and lack the solution set and partnership mentality to compete as effectively in the small, rural hospital market.  

For CPSI specifically, the risk from here is not only losing out on new business, but keeping the business they have as CPSI and Healthland represent ~40% of athenahealth's target market of independent, single-hospital health system.

KEY TAKEAWAYS

  • Replacement decision was driven by desire to explore what other options were available after being a CPSI customer for over 20-years
  • athenahealth pricing 3.8% of collections or $587k per year, compared to CPSI of 6.5% and Cerner 5.8% in addition to $1.8 million in up-front costs; almost budget neutral to the hospital to switch to athenahealth. 
  • athenahealth flying out hospital staff to Watertown for tours, demos and dinner with management.  Cerner sales rep not attentive, met with the hospital twice and has not heard back since. 
  • CPSI management is worried about athenahealth and "[has] no clue" what athenahealth is doing to drive hospitals to switch systems.
  • "We go to the Alabama Hospital Association meetings and everyone is talking about athena right now."
  • "While the system may not be 100% ready today, in 5-years they are going to be best on the market."

WFM

Click here to read our analyst's original report. 

No update on Whole Foods Market (WFM) this week but Hedgeye Consumer Staples analyst Howard Penney reiterates his long call.

HCA

Click here to read our analyst's original report.

HCA Holdings (HCA) seems poised to disappoint in 2017 at the EBITDA line.  The employment reports from BLS and ADP this week continue to confirm a slowdown in healthcare employment, which given the high fixed labor component for services, implies slowing demand. 

Investing Ideas Newsletter - hca image

Next week, the key leading indicator, JOLTS – Healthcare, will be updated for November, giving us a fairly complete view for the quarter. 

HCA will also be meeting investors at JPM Healthcare conference in San Francisco next week, and we expect to hear more specific commentary on volume and their long rumored dividend.  We’ll also be listening to their peers as they describe the current medical consumption environment, which we expect to disappoint on balance, particularly after the post-election rally. 

We also expect to hear more about the ACA Repeal & Replace efforts now ongoing in Washington DC, which we see as holding only downside across any scenario for providers, particularly hospitals.

WMT

Click here to read our analyst's original report. 

Wal-Mart Stores (WMT) acquired online footwear retailer ShoeBuy for $70mm this week, a move that will help accelerate Jet.com’s penetration in the category.

We think WMT is taking the right strategic actions in order to continuously win the market share battle – especially in the US market. WMT is investing in e-comm when TGT is going the other way.

As the chart below indicates, WMT's growth rate has surpassed TGT's. With the acquisition of ShoeBuy, we expect continued outperformance by WMT.

Investing Ideas Newsletter - WMT TGT ecomm

PENN 

Click here to read our analyst's original report. 

Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan reiterates his long call on Penn National Gaming (PENN). Let's review his bullish thesis:

  1. Regional gaming improving – We were already projecting sequentially accelerating improvement but there seems to be a new level of optimism in regional gaming. Looking ahead, our contacts are now expecting some growth. Positive same store EBITDA growth next year would probably surprise some investors.
  2. Cost Cutting – Following our meeting with management, we now feel there is actually some opportunities for cost cutting so even in a flat revenue environment, EBITDA could grow. PENN has run a pretty lean operation for a few years so we hadn’t expected even more cost saving initiatives.
  3. Capital return makes sense right now – Despite sluggish regional gaming revenues this year, PENN finds itself in a good position to start returning cash to shareholders. With only maintenance capex, 2017 will be a year of cash harvesting. A dividend is possible, but with the stock down here, a buyback program makes much more sense and would be a bigger catalyst for the stock, in our opinion.
  4. Cheap valuation – PENN was down -19% prior to adding the company to Investing Ideas and -26% off its 52 week high. The stock traded at ~6.6x 2017 EV/EBITDAR (even lower on an EV/EBITDA basis). At these levels, it wouldn’t take much in the way of positive catalysts to move the stock. We think those catalysts are in place.

PENN is up +7% since we added it to Investing Ideas. We're sticking with the long call here.

MU 

No update to our Micron Technology (MU) thesis this week but Hedgeye Technology analyst Ami Joseph reiterates his long call.