Below are analyst updates on our fifteen current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels in a separate email.
Please note that we removed United Natural Foods (UNFI) from the short side and added MSC Industrial (MSM) to the short side of Investing Ideas this week.
IDEAS UPDATES
UUP | XLU
It was another solid week for growth accelerating exposures with the technology and consumer discretionary sectors outperforming. Unfortunately a so-so-GDP report (relative to both our proprietary and consensus forecasts) on Friday helped keep a lid on the USD. Utilities (XLU) remained flat against the S&P 500 on the week.
Here’s a breakdown on the first release of Q1 2017 GDP along with each GDP sub component:
- Sequential GDP: +0.7% quarter-over-quarter, down -1.7% from 2.10% in 4Q16
- Year-over-Year GDP: Decelerated to +1.9% from +2.0% in 4Q
- Consumption: slowed to +30bps QoQ (we knew this) with contribution falling from +2.4pts to 0.23pts. This should recover nicely in 2Q as accelerating income growth flows through to consumption activity.
- Investment: Resi & Nonresi investment are both improving, offset by reversal in inventory contribution
- Government: There was a reversal to negative -30bps contribution as Defense and State & Local Gov’t growth both slide
- Net Exports: Contributed +0.07pts with last month’s outsized worsening in the Trade balance moderating in 1Q.
- Deflator: QoQ up +20bps to +2.3%, YoY = YoY = 2% … up from 1.6% in 4Q and highest since 1Q12
On a trending basis, GDP is likely to accelerate to 2.0-2.5% throughout the balance of the year which is why we expect growth-related financial assets to outperform in that environment (short XLU). Our views here remain long-term in nature despite a frustrating quarter for Long UUP, short XLU.
A few other key data points were released this week, one of which was a pre-cursor for Friday’s GDP report:
- Retail Sales: A downward revision to retail sales came Wednesday. In particular, the headline number was revised down ~-50bps during the last couple of months. The control group (GDP input) number was revised lower by ~-60bps during the last couple months with QoQ annualized down to +2.9% from +4.0%.
- Durable Goods: in March Durable and Capital Goods orders closed out a strong 1Q with a solid print. Trend acceleration continued…
- Headline Durable Goods up +0.7% sequentially. They decelerated to +4.5% YoY… but, recall, last month was a 31-month high at +5.8% YoY.
- Durables Ex-Defense & Aircraft = holding at the highs = +3.8% YoY …. With comps remaining easy thru 3Q.
- Capital Goods = +0.2% sequentially and solid at +3.0% YoY …. Again, comps remain easy thru 3Q.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
The Senate postponed the confirmation hearing for Makan Delrahim, President Trump's nominee to head the Justice Department's Antitrust Division. Nonetheless, we continue to believe the AT&T-Time Warner deal is on track for approval before year end. We note that Mr. Delrahim has previously indicated, in an academic capacity, that the deal should not raise substantial antitrust concerns.
MIC
Click here to read our analyst's original report.
No update on Macquarie Infrastructure Corp (MIC) ahead of next Thursday’s earnings report. We continue to believe most other analysts value the company with some yield-based framework, which we believe is lazy and ill-advised. Valuing a highly-leveraged, cyclical business by capitalizing a return-of-capital dividend is a portfolio disaster waiting to happen!
Below is a brief company overview along with some core tenets of our short thesis.
WMT
Click here to read our analyst's original report.
Earlier this week, more details around Wal-Mart Stores' (WMT) pricing war emerged – this time in the grocery category. WMT has been aggressive in lowering grocery prices to ward off TGT and AMZN as well as the growing number of online competitors, placing more and more pressure on vendors. In a WMT management meeting last month, the company set a goal of having the lowest price on 80% of what it sells. We think the company is taking the right strategic actions in putting the capital behind the battle to win market share – especially in the US.
Meanwhile, US 1Q GDP missed expectations Friday morning. However we expect 2Q, which is where we are right now to accelerate growth yy. If US GDP is accelerating, then WMT comp sales are likely to also accelerate.
CRI
Click here to read our analyst's original report.
Carter's (CRI) reported 1Q earnings results Thursday morning. This was a decent quarter relative to street expectations – but no better than that. In two trading days the stock is back where it was before the release. Here’s what we liked and didn’t like on the quarter...
Good:
- Wholesale better than expected, growing 0.2% accelerating 100bps with guidance for it to slow. Skip Hop acquisition added 2.3% to wholesale growth – slightly ahead of plan, thought below what we expected. That’s the first company we’ve heard say that, so sounds like a sandbag. Company also noted some early spring demand shipments shifting from Q2 to 1Q, dollar value of $5mm or about 2pts of wholesale growth.
- New segment reporting makes a lot of sense, and actually reduces confusion. The old store/comp commentary was getting ridiculous given the number of side-by-side and co-branded stores. The new set-up should make for more clarity in performance. Though trailing quarters would have been nice to add, rather than making us dig through old presentations for comparable store counts.
- Comps improved to ~+2% ytd in April, but that’s still over a 300bps slowdown from 4Q.
Bad:
- US comp slowed 900bps, we’ll give the benefit of the doubt with an Easter shift given what we have seen in other retailers – though that doesn't synch with the comments about wholesale pull-forward. Comps improved in April, but YTD still slowing about 300bps on a 1 and 2 yr basis from 4Q rate.
- Canada was downright ugly with a store comp slowing 1850bps, with international wholesale down 9%. An Easter shift can't explain that.
- Pricing was pressured in 1Q including a more promotion direct channel. The company is guiding AUR to increase in the back half to prop up gross margins.
- Inventory/Cash flow – Awful SIGMA move with inventory up 15% on 1% sales and down margins. The replenishment focused Skip Hop brand could be contributing a portion of this, but at only about a 4% revenue bump, its hard to think it could account for more than HSD of inventory growth. CFFO was down 34%.
- Stores – CEO Casey discussed the store plan early in the call. We got the usual commentary: nearly all stores are cash flow positive, high percentage of our stores are contributing to both sales and profitability, best customers shop at both stores and online, co-branded stores are performing well, etc. CRI is planning another 240 stores by 2021. That would put it near 1200 stores. JCPenney thought that was the right amount of stores a decade ago, until it became clear it was not. CRI US stores have comped negative for 9 straight quarters. Incremental investment is going to ecommerce, returns on store have to be getting worse.
- Management noted product costs still to help in back half. Check out a cotton price chart. We’re passed the trough of last year in March, and the lag for CRI should be no more than 4 quarters before that cost increase starts to flow through to the P&L.
CFG
Click here to read our analyst's original report.
Citizens Financial Group's (CFG) released its earnings results for 1Q2017 on Thursday morning of last week. Prima facie, CFG reported first-quarter income of $320 million with GAAP earnings per diluted common share of $0.61, up +43% and +49% YoY, respectively. However, performance was buoyed by a $23 million or $0.04 per diluted common share benefit related to a favorable settlement of certain state tax matters.
Adjusting for the former, as well as net gains made on the bank’s available-for-sale securities portfolio, CFG generated first-quarter net income of $294 million with earnings per diluted common share of $0.56, up +36% and +42% YoY, respectively. On both a GAAP and Non-GAAP Hedgeye-adjusted basis, CFG moved well beyond street estimates of $0.50 EPS for 1Q2017.
Recall, we hosted our Best Ideas Long Black-Book for CFG recently where we referenced an attractive valuation, greater asset sensitivity to peers, a superior capital position, and on-going efficiency improvement as the set of initial conditions that will allow CFG to disproportionately benefit from the expected tailwinds headed for the industry at large. We continue to maintain this view.
EXAS
Click here to read our analyst's original report.
Heading into this week's earnings announcement, Exact Sciences (EXAS) short interest remained elevated at 29%. After guiding to 88K tests for 1Q17 and 8% above consensus' 2017 sales estimates in February, EXAS reported 100K completed tests in the quarter and raised their 2017 guidance from $170-$180M to $195-$205M. The new sales guidance is in line with our estimates into earnings, but given the sizeable beat, and leverage in the model, we believe the guide is conservative and our new estimates reflect that. We are now projecting sales of ~$220M in 2017 which equates to +121% YoY growth.
TRIP
Click here to read our analyst's original report.
No update on TripAdvisor (TRIP) for this week's Investing Ideas but we reiterate our long call on the company.
IVZ
Click here to read the original report.
Invesco (IVZ) reported first-quarter adjusted Non-GAAP earnings of $0.61 per share this week, beating estimates for $0.55 and coming in approximately 25% higher Y/Y. In tandem with its earnings report, Invesco announced a definitive agreement to acquire Source, a leading, independent specialist provider of ETFs. The deal brings in ~$25 billion in new AUM, of which $18 billion is internally managed by Source while the remaining ~$7 billion is externally managed.
BEN
Click here to read the original report.
Franklin Resources (BEN) reported a decent earnings result this morning for the second quarter (Q2) of its 2017 FY. The $1.6 billion top-line result was inline with consensus; however, EPS was markedly better than expectations at $0.74 per share versus Street estimates for $0.67.
Franklin continues to whittle down its expense base with year-over-year OPEX guidance now moved down to -3% year-over-year, which we outlined in our recent Black Book deck as a factor to be involved with the stock on the long side.
BEN stock continues to rise on "less bad" operating results assisted by cost cuts, but we think the next leg of upside will be driven by performance and an improved operating environment for active asset managers outlined in our enclosed research deck.
GLW
Corning (GLW) reported first quarter financial results of $2.49 billion and $0.39 versus Street $2.37 billion and $0.35 (we were $2.39 billion and $0.34). Breaking the results down further:
- 2Q guide looks like ~$2.61 billion vs Street $2.52 billion (and us $2.57 billion)
- Display in-line with our model on revenue (above Street), thanks to volume up mid-teens % y/y and glass price sequential decline moderated. Guiding Display m-s-d% y/y which is in line with us
- Optical was a full 5% above our revenue estimate, optical 2Q guidance in-line with us
- GG also much better than we thought
- GM % right in-line with us, below Street, likely due to mix of optical increasing
- FCF seasonally down but big improvement y/y
- And $400m buyback in 1Q, good to see continuation
Bottom line: The direction of fundamentals looks good. To really get the stock moving much higher will require chunky movement upwards on FCF. Revenue drives FCF, so we are in a good position to expect more FCF later this year, and LTM FCF is up on the quarter 10% but at 5% yield that’s ~$29 on the stock, and we need more FCF improvement to get to our zone. Still, it's good to be going in the right direction.
KATE
No update on Kate Spade (KATE) for this week's Investing Ideas but we reiterate our long call on the company.
RLGY
Existing Home Sales >$500K (+23.8% Y/Y) realized its third consecutive double digit year-over-year increase.
The National Association of Realtors (NAR) reported that March Existing Home Sales increased +4.4% sequentially to 5.71 million (SAAR), while rising +5.9% Y/Y. The current level of 5.71mn SAAR represents the highest number of existing home sales in nearly a decade (5.79mn SAAR in February 2007).
Meanwhile, the March NAR release represents the third consecutive month that existing homes sold above $500K increased by double digits on a year-over-year basis. In the month of March, the number of existing homes sold between $500K-$1mn, and greater than $1mn both realized an increase of +23% from March 2016.
As we mentioned in our Realogy Blackbook and Housing Outlook call last month, we see the recent uptick in luxury discretionary spending as positive for the high end housing market, and the past three months of existing homes sold by price tier data supports this view.
MSM
Below is a note from Hedgeye CEO Keith McCullough on why we're adding MSC Industrial (MSM) to Investing Ideas earlier this week:
"We have plenty of SELL ideas. I just don't like to be disrespectful of what Mr. Macro Market is telling me and be short everything before a big market ramp.
One of our latest Best Ideas (Institutional Research Product) on the bear side has been MSC Industrial (MSM). Here's an excerpt of Jay Van Sciver's recent research note about MSM's recently reported quarter:
Low Quality Quarter
We will leave it to others to summarize the MSM quarter, but the real ‘crime’ is that investors were willing to pay 27x earnings for a mature, family controlled business facing increasingly aggressive competition and Amazon’s competitive entry. In our February 21st Best Ideas Short addition and February 27th black book call, we highlighted high expectations, risks of pricing transparency, more adjacent competition, and temporary factors boosting estimates (e.g. Christmas/New Year’s on Sundays, roll-off of amortization item)."
