Below are analyst updates on our sixteen current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
Please note that we added Utilities (XLU) and Hanesbrands (HBI) to the short side and the Canadian Dollar (FXC), Panera Bread (PNRA), and Citizens Financial Group (CFG) to the long side of Investing Ideas this week.
IDEAS UPDATES
FXB | UUP | FXC | TUR | EWW | XLU
Click here to read our analyst's original report on Turkey and here for our note on Mexico.
In addition to adding Turkey (TUR) and Mexico (EWW) on the short-side last week (*Mexico write-up here*), we added Utilities (XLU) on the short-side and the Canadian Dollar (FXC) on the long side this week. It’s all about rate-of change and growth in both the U.S. and Canadian economies. On the Canadian dollar position, a sustained inflection in growth relative to other economies is a strong currency catalyst (a set-up all of our long currency positions is currently enjoying).
In 2015 and the first half of 2016 when growth was slowing we were the long-bond and yield-chasing bulls (TLT, XLU, XLP), and have since pivoted with the bottoming and acceleration of domestic growth.
Our Growth, Inflation, Policy model has the U.S. economy in QUAD 1 and QUAD 2 for the rest of 2017. In this set-up, growth exposures outperform and slow-growth exposures underperform (XLU, XLP). You know the story here, so we’ll take the same framework north of the border….
From a Growth, Inflation, Policy perspective, Canada is set-up for growth for most of 2016. The Canadian currency bottomed in Q1 of 2016 with crude oil, right after GDP growth bottomed in Q4 of 2015. As Hedgeye analyst Darius Dale wrote in a note to institutional clients this week:
“On the growth front, driving the model’s expectation for accelerating Real GDP growth here in Q1 and again in Q2 is a confluence of receding base effects and trending momentum in high-frequency data and/or breakouts in key leading survey readings.”
More specifically, confidence readings suggest the recent bottoming in retail sales and industrial production could manifest into sustainable inflections. Very supportive base effects in growth and inflation in coming quarters and crude oil will be an obvious healing mechanism to net exports and the current account. A stronger economy on the margin supports a stronger currency:
TWX
Click here to read our analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
Earlier this week, Hedgeye Telecom & Media Policy analyst Paul Glenchur wrote an institutional research note updating his thinking on the AT&T-Time Warner deal:
"We continue to believe the AT&T/Time Warner deal is on track for ultimate approval but opponents and critics of the transaction are escalating their attacks in an effort to gain leverage for conditions and other mandates that could be imposed on the combined entity.
Earlier this week, the sole Democrat on the FCC, Commissioner Mignon Clyburn, suggested the FCC could assert review power over the transaction under the Clayton Act, the primary antitrust enforcement statute governing mergers. In addition, several Democratic senators on Capitol Hill demanded and received AT&T's public interest/consumer benefit justification for the merger.
Deal critics wanted some kind of substitute for the typical public interest filing that would have been made had the companies submitted the deal to the FCC for approval. Thus far, AT&T has determined that it will not seek the transfer of any FCC-regulated licenses from Time Warner, obviating the need for FCC review and approval.
Regulatory bottom line: We don't believe Clayton Act review is available to the FCC and it would not make a difference in any event to the final regulatory outcome. Capitol Hill input can, at times, offer insight regarding regulatory momentum for or against a particular transaction, but we do not expect criticism and opposition from Democratic lawmakers will make a material difference in this case."
***Click here to continue reading Glenchur's research note.
WFM
Click here to read our analyst's original report.
Whole Foods Market (WFM) had a strong week this week, up 4%. Let us remind you just how hated this stock remains, and why we love that very much. Currently, the sell-side is bearish on the company with 27% sell ratings, 54% hold ratings and just 19% buy ratings (the buy ratings don’t count us of course!).
As the recovery story begins to unfold and the Street starts to see the light at the end of the tunnel, upgrades will start to come piling in, and there are plenty of them to be had given how bearish everyone is.
There's still time to get on the boat before the sell-side analysts join.
LMT
Lockheed Martin (LMT) plays the game. This week CEO Marilyn Hewson joined with 23 other corporate executives, to include the CEOs of GE, Dow, Caterpillar et al, at the behest of President Trump to discuss manufacturing jobs in the US.
Trump took the opportunity to give credit to Hewson and LMT for announcing 1,800 new jobs and for “cutting her price over $700M” for the Lot X buy of 90 F35s. He also took a shot, “I assume you wanted her [Clinton] to win, but you know what? You’re going to do great… It’s going to work out the same, or better.”
Everything is personal.
Of course the 1,800 jobs and even the cost reduction of $728M (8% lot/lot reduction in airframe costs) had been in the works for some time as part of the planned F35 production ramp and progression down the learning curve but those are just facts. Marilyn doesn’t care who gets the credit as long as she gets the orders.
Of greater concern to CEO Hewson this week was the F35 Joint Program Office announcement that its foreign customers would establish a block buy contract for FY18, '19, and '20 but that the US would continue to use single year contracts until after the completion of operational testing in 2019.
This is 3/4 of a loaf for LMT which wanted all parties on the block buy for a total of 431 aircraft in order to get the unit cost of the F35A down from the current $95M to $85M by 2019 as promised. As it is they will get the 195 international orders in a block and then add the US orders of 70, 80, 86 for each year added on.
As yet there is no indication that the target unit cost will not be met. The reason for that may be that the Pentagon is planning on adding ~10% in total annual spending beginning in FY18. Some of that will almost certainly go to increase US orders from a planned ~100 per year to 140 or more which could drive F35A costs down to $79M, further helping international sales.
MD
As Investing Ideas subscribers are well aware, we don't like Mednax.
Our Maternity Tracker for Mednax (MD) was on target relative to MD's reported -1.8% decline in NICU patients days in 4Q16. We have continued to see declines in maternity trends in our Maternity Tracker through January 2017 while management continues to expect "demographics" to lead to a reacceleration.
Not happening.
MIC
Click here to read our analyst's original report.
Shares of Macquarie Infrastructure Corporation (MIC) were down almost -6% this week after reporting lackluster earnings. Here are some highlights from the fourth quarter 2016 results:
- MIC’s 4Q16 Adj. EBITDA came in at $166MM, below Bloomberg consensus of $171MM.
- After management fees of $19MM, EBITDA was $147MM.
- 4Q16 CapEx was $117MM, putting unlevered free cash flow before acquisitions at $30MM.
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MIC’s 2016 pre-tax ROIC was 9.4%.
- Consolidated net debt ended 2016 at $3.1B, up ~$300MM YoY and ~$200MM QoQ.
- MIC disclosed that IMTT’s weighted-average contract length at YE16 was 2.3 years, down from 2.5 years at 9/30/16 and 2.8 years at YE15, the shortest contract length that IMTT has had since at least 2012.
- We estimate that non-utility LPG distribution represents ~65% of MIC Hawaii’s gross margin.
- Our estimate is that MIC booked a realized propane hedge gain of ~$2MM (or 15% of MIC Hawaii’s Adj. EBITDA) in 4Q16 – but high-and-rising propane prices should be a headwind in 2017+ for this business, which has experienced significant gross margin expansion since the financial crisis.
Our MIC thesis holds, fair value: about $40...
CRI
Click here to read our analyst's original report.
Last week, Carter's (CRI) beat the quarter – EPS beat by 8% with a 2% revenue beat, putting up 29% EPS growth year-over-year. That’s pretty huge. The first quarter was guided 28% below the Street, and full year Guidance was about in line with the Street, at 4-6% revenue growth and 8-10% EPS growth.
At the same time, however, CRI announced an acquisition of Skip Hop. Skip Hop sells diaper bags, kid’s backpacks, travel accessories, home gear, and hardlines for playtime, mealtime, and bathtime through 5000 doors globally in stores like Target and Babies-R-Us.
CRI is paying $140mm in cash for the deal, and the guidance includes the benefit of this acquisition. Skip Hop will add about 3 to 4 pts of revenue growth with the company guiding a total of 4 -6%.
Our positioning on this one was and STILL is that the company will earn between $5.00 and $5.50 for 3-5 years, with visibility (whether it happens or not) into $4.50 in earnings. By any valuation metric, we get to a stock of about $55 if we're right on the model and the fundamentals. That’s 30-35% downside and at best 10% upside.
TRIP
Click here to read the update we sent Investing Ideas subscribers on TripAdvisor (TRIP) earlier this week. Critically, Gaming analyst Todd Jordan & Internet & Media analyst Hesham Shaaban (co-coverage) write:
"A phase transition is slowly taking place in TripAdvisor, and we believe that the stock could be a real winner over the next twelve months. A reversal of business fundamentals and investor sentiment will be fuel for this stock and we’d like to be in front of that next big move."
HBI
Click here to read our analyst's original report.
"This is a slow-volume bounce to lower-highs for what's been one of our best SELL ideas in a raging bull market for US Equities," Hedgeye CEO Keith McCullough wrote this week on Hanesbrands.
Here are a few quick thoughts/reminders from Retail analyst Brian McGough on the fourth quarter financial results for Hanesbrands (HBI):
- 4Q organic growth rate -5.5% on top of -10% in 4Q last year. That included higher finished goods inventory, and higher DSOs – which appears to be HBI pushing cancelled WMT orders to TGT.
- EPS missed by 5 cents, or 9%, while interest was slightly below guidance, tax rate was lower than guided, and non-GAAP charges were slightly above guidance. The real EPS performance was more like $0.49 vs the reported $0.53.
- CFFO missed the annual target 22% miss even with only 2 months of the year to go when guided, despite management being " very confident" in the numbers.
- Leverage back up to 4.2x, committed 60% of operating cash to dividends, mitigating ability to do deals or invest in the business to grow.
When roll-ups come to an end, it is a very ugly picture. There’s more ugliness to come. This cash flow draw down was the first domino.
CFG
Below is a note from Hedgeye CEO Keith McCullough on why we added Citizens Financial Group (CFG) to the long side of Investing Ideas earlier this week:
"I didn't come into this latest pull-back in bond yields choking on long Financials exposure.
Nope, we said sell some of those when they were signaling overbought. And now I'm happy to signal buy on some of them as they become oversold.
Our Veteran Financials Analyst, Josh Steiner, likes Citizens Financial Group (CFG) as a value idea on the long side – a northeast regional/super-regional bank that was spun out of RBS (Royal Bank Scotland) two years ago.
Here are a few things to like about it:
- Cheap Valuation. It still trades at/near the bottom of the range of Regional/Super-regional peers on valuation at 1.4x tangible. The group is at 2.1x (PBCT, USB, PNC, BBT, ZION, FITB, MTB, RF, KEY, CMA, HBAN, CBSH, CFR, FHN, FRC, TCB, SIVB, SNV, GBCI, STI, SBNY). It has ~50% upside to the group average.
- More Asset Sensitivity. Citizens will see NII increase by 5.8% from a gradual 200 bps increase in rates, which is a good bit ahead of the peer group at 4.6%.
- Excess Capital. The CET1 ratio at Citizens at 11.3% vs the peer group at 10.3% so they have the ability to return more capital than peers.
- Proper Incentives. When CFG was under the RBS umbrella, returns were poor partly due to a lack of direct management incentive. Since the IPO, ROTCE has risen from 4% to ~8% and is on a path towards 9-10%.
The stock has risen significantly since the election but so has the group. Relative to other regionals, CFG is still one of the cheapest, has more exposure to rising rates, more excess capital to return and is coming off a lower starting point."
PNRA
Click here to read our analyst's original report.
"Unlike Hanesbrands (which is up on decelerating volume today), one of Hedgeye Restaurants analyst Howard Penney's favorite names (Panera - PNRA) is down on decelerating volume," writes Hedgeye CEO Keith McCullough. "It's down on an Old Wall "valuation" downgrade, to boot!"
Here's a brief update on Panera Bread from a recent institutional research note written by Penney:
"It seems as if PNRA has found the secret formula, as the Company reported a stellar 4Q16, with their Panera 2.0 concept stealing the show. According to management, they have completed the rollout of their 2.0 concept to all company-owned bakery cafes.
As you may recall from our delivery black book presentation in January, we laid out why PNRA was well-positioned to control its own destiny, and at the center of it were the following reasons: PNRA is making critical investments to get ahead; PNRA owning delivery will set them apart; and PNRA’s earnings are set to accelerate. (CHECK, CHECK, and CHECK). The Company’s aggressive investments to build out its Panera 2.0 concept (and simultaneously its digital platform) and delivery capabilities have propelled the brand to rarified air, as evidenced by its 4Q16 performance.
Panera now leads the industry in digital sales, with 24% of sales in company cafes occurring digitally. This 24% figure is the highest outside of the big three pizza brands. Furthermore, PNRA’s Rapid Pick-Up program (mobile order & pay) now represents 9% of sales. In relation to digital, PNRA has now grown its MyPanera program to an industry leading 25 million members, and according to management, 51% of transactions are done through their loyalty program."
