Below are analyst updates on our fifteen current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we removed Carter's (CRI) from the short side and added Host Hotels (HST) to the long side of Investing Ideas this week.
LEVELS
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
IDEAS UPDATES
UUP | XLU
In this update we’ll focus on positive inflections in Q1 2017 corporate earnings season so far, while also giving a detailed view into growth-favoring labor market trends stemming from Friday’s Non-Farm Payroll release.
The bottom-line is that sales and profit growth are accelerating. A positive 2nd derivative is the trending fundamental actuality. Period.
Earnings growth in all three of the major U.S. benchmark indices is up at least 15% Y/Y, marking the best RoC figures since 2011 for Q1 of 2017. Below we show a snapshot of S&P 500 sector earnings growth so far with 410 companies in the S&P 500 having reported. Sales & earnings growth is +8.2% and +15.7% respectively. Q2 may not bring the same growth trajectory, but corporate profit growth should remain supportive of the broader economy.
And now a simplified version of the jobs report and labor market in April. Here’s what matters…
Payroll Growth, Aggregate Hours Worked Growth & Aggregate Income Growth all accelerated in April ... and will accelerate further in May so get ready amidst all of the “nail the number” elusiveness you’ll read in mainstream media.
Macro analyst Christian Drake summarized the Q1 takeaways from the labor market in Thursday’s Early Look:
“…aggregate private sector income growth accelerated to its fastest pace in 6-quarters in 1Q. ….. Now, to be sure, consumption growth was underwhelming in 1Q and served as a drag from a GDP accounting perspective but don’t conflate the dip in consumption proclivity with a deterioration in consumption capacity. Collective household spending capacity improved alongside accelerating aggregate income growth in the 1st quarter. That’s a positive fundamental development.”
More specifically breaking down Friday’s jobs report:
- NFP: Private payrolls increased +211K which is a +4bps sequential acceleration to +1.56% YoY
- Aggregate Hours: The combination of accelerating employment and the tick up in average weekly hours makes for another notable acceleration in aggregate hours worked growth
- Aggregate Income Growth: Hourly Earnings were +0.3% MoM but declined slightly Y/Y (+2.5%) … employment acceleration and increased hours were more than enough to offset this slight decline, so implied aggregate income growth accelerates (recall, income growth in 1Q17 was highest in 6-quarters)
- Other Internals: The report details were positive with decent gains across industries. Part-time employment was down another -370K. The Labor Force Participation rate was down a tick but internals on the HH survey/Unemployment rate were solid.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
The confirmation hearing for President Trump’s nominee to head the Justice Department Antitrust Division, Makan Delrahim, is now set for next week, May 10. We expect he will win Senate confirmation, taking charge of the Division as it continues its review of the proposed AT&T-Time Warner transaction. Mr. Delrahim has previously indicated, in an academic capacity, that he does not believe this vertical merger proposal (combining entities in different parts of the media distribution chain) will present major antitrust concerns. We expect the deal will ultimately gain antitrust approval. AT&T has agreed to pay $107.50 per Time Warner share when the deal closes.
Meanwhile, the FCC has taken no steps to assert jurisdiction to review the deal despite the efforts of some deal opponents and a few Democrats on Capitol Hill to persuade the Commission to find a way to get involved in some official capacity. The FCC’s Republican leadership, however, has shown no interest in taking an official role absent an application to transfer a regulated license from Time Warner to AT&T. No such license transfers have been proposed and Time Warner’s only television broadcasting license has been sold to Meredith Corporation.
Assuming the deal is completed (probably in the second half of the year), speculation could increase that other major distributors, like Verizon (VZ), will take a greater interest in acquiring or gaining exclusive rights to major content and studio capabilities. AT&T and Comcast (CMCSA) would control leading content assets and other broadband players could feel the need to diversify as consumers spend less time and money on legacy subscription TV offerings and more time on wired and wireless devices to watch video delivered over Internet connections. CBS (CBS), Disney (DIS) and other content providers have already been the focus of such speculation.
MIC
Click here to read our analyst's original report.
On the 1Q17 Results… Macquarie Infrastructure Corp's (MIC) 1Q17 was in-line quarter with no surprises. Adjusted EBITDA of $180MM (adding back $18MM of manager fees) was ahead of consensus $177MM. EPS of $0.44 missed consensus $0.46. CapEx was $60MM and economic FCF – by our calculations – was $73MM or $0.88/share. 1Q17 economic FCF was +4% YoY.
Business trends at the major assets – IMTT and Atlantic Aviation – were consistent with recent periods and our expectations. IMTT continues to operate at a very high 96% utilization rate. IMTT's average contract life at the end of 1Q17 was 2.2 years, down slightly from 2.3 years at 12/31/2016 and 2.5 years at 3/31/2016. Atlantic Aviation was MIC’s best performer in 1Q17 with segment EBITDA +10% YoY due to acquisitions, increased flight volume (market is growing at ~+1 - 2%), and market share growth. The Power segment was weaker on warmer-than-normal weather and reduced contribution from wind facilities. Hawaii Gas was flat.
No change to our Fair Value estimate for MIC of ~$40/share based on our DCF and SOTP analyses.
WMT
Click here to read our analyst's original report.
Friday's jobs report was a positive indicator for US consumption, and Wal-Mart Stores (WMT) will be a significant beneficiary of accelerating US spending. The set-up remains bullish for WMT. The company is:
- Investing to take share
- Has low consensus expectations
- Has macro tailwind from US growth accelerating
- And is seeing several competitors struggling.
The stock is up 14% in the last 3 months, and we think there is still room to run as the data indicates accelerating trends in the US.
CFG
Click here to read our analyst's original report.
Click here to watch a video of Financials analyst Josh Steiner discussing upcoming catalysts for Bank of America (BAC) and Citizens Financial Group (CFG).
EXAS
Click here to read our analyst's original report.
In 1Q17 Exact Sciences' (EXAS) tests per provider increased to 1.43 from 1.38 in 4Q16 which is directionally positive towards EXAS goal of 1.52-1.65 by the end of 2017. We expect to see steady improvement in tests per provider and project tests per provider of 1.52 by the end of 2017.
Included in our estimate is an expectation that patients tested since the launch of Cologuard begin returning under the 3 year interval starting 2H17, providing a tailwind to the test per provider metric. EXAS’ short interest remains elevated at 29% as of the latest short interest on 4/13. We will be looking closely at the next short interest update for 4/28 which will be released on Tuesday 5/9.
TRIP
Click here to read our analyst's original report.
WE've heard this PUSHBACK ON OUR LONG CALL: "TRIP IS GOING TO MISS ON EBITDA"
Maybe, but that's up to TripAdvisor (TRIP). The only reason why EBITDA would be under pressure this year is because TRIP is planning to reinvest all of its incremental EBITDA growth back into marketing. Otherwise, it wouldn't take much for TRIP to deliver double-digit EBITDA growth this year.
Reason being is that there is no cost associated with reinserting CPC inventory back into the user's clickstream, so all the revenue growth from deemphasizing IB this year would drop down to EBITDA. The focus of that incremental marketing spend will go toward the performance-based channels, which mgmt has suggested has a breakeven ROI. So the math would suggest that TRIP could conceivably double its revenue growth if it reinvests all its incremental EBITDA back into marketing.
We're not making that claim since it's a dumb assumption to make, but the point is that if TRIP misses on EBITDA, it probably means an even bigger revenue beat, and we already estimate that TRIP could beat consensus estimates just by deemphasizing IB alone (assuming no hotel shopper growth). That said, it's possible that mgmt. may not reinvest ALL of its incremental EBITDA into marketing since it really doesn't need to edge out consensus this year. However, we would prefer TRIP to advertise as aggressively as possible.
One other thing, we couldn't imagine any real backlash from the buy-side if TRIP winds up missing on EBITDA because it decides to move forward with a TV ad campaign. Quick question to current TRIP holders: Are you really going to freak out and sell if TRIP announces the TV ad campaign? (We’re serious, let us know). Also, it appears that the street expectation is for a $100M TV ad campaign. What if it’s more in line with past campaigns ($30M-$50M)? Regardless of the amount, the shorts are out of catalysts once it’s announced; we expect any resulting pressure on the stock would be short-lived with short interest at nearly a 3-yr high.
IVZ | BEN
Click here to read the original report on Invesco and here to read the original report on Franklin Resources
No updates on Invesco (IVZ) and Franklin Resources (BEN) for this week's Investing Ideas but Hedgeye Financials analyst Jonathan Casteleyn reiterates his long calls on the companies.
GLW
Our review of Corning (GLW) yields multiple growth drivers across its various business segments, setting up our view of a large cap stock that can grow m-s-d% with a fair bit of consistency in the coming years, whereas the Street sees it as a declining or 0% growth asset.
The bear case revolves entirely around the TV exposure, which makes up ~80% of the Display segment. That division generates 37% of revenue, and last year generated north of 50% of net income.
In our view, there is a natural economic pricing medium for the industry to stimulate growth, and the last five years have seen price declines well in excess of that medium due to the overcapitalization of the display glass industry in the 2008-2012 period.
We believe this hangover is behind the company, as our analysis demonstrates that invested capacity generates less than half of the incremental area growth of the peak in 2011, while TV glass size shipments have only grown, and unit growth may be nearing a tipping point in the long term replacement cycle, setting up for much tighter glass pricing conditions in 2017-2019.
KATE
This week we learned that the handbag space isn’t broken.
COH posted a 3% NA comp even with the Easter shift headwind. We still think that people are not looking at the BIG acceleration we’re likely to see in Kate Spade's (KATE) 2Q. The Street is at a 4% 2Q comp. The company could do as high as 20%. The math below assumes a 400bps sales shift from 1Q to 2Q and a 50bps underlying 2yr slowdown.
Maybe that’s what KATE planned all along...If KATE ran as low as -10% in the final weeks of the first quarter due to Easter – that’s hardly a position of strength. If it’s putting up a high teens – or even a double digit – comp in July, then to say it’s bargaining from a position of strength is a strong understatement.
We still think a KATE deal gets done at a higher price than the consensus and current market price suggests. Even without a deal (which we should see), we’d own the business on its own as we see it today.
RLGY
Realogy's (RLGY) first quarter results were mixed, but on balance positive as revenue grew 6%, ahead of consensus expectations for 2% growth.
NRT, the company owned brokerage segment of Realogy, reported revenue of $897mn, an increase of +7% from 1Q16. During the first quarter, NRT closed 66,570 homesale sides, a +3.6% Y/Y increase, and management commented that sales greater than $2.5mn were up +10% Y/Y in the NRT segment.
MSM
Operating Profit: In MSC Industrial's (MSM) fiscal second quarter earnings, operating income increased on higher sales, an improvement from trends in fiscal 2016. Unfortunately, about $2.5 mil of the $5 million in improved operating income derived from lower amortization as acquired intangibles from a 2006 acquisition became fully amortized.
We would also note that the allowance for doubtful accounts at the end of FY2Q 2016 was $14.7 million on a net $389.4 mil of receivables. At this quarter end, it was $12.7 mil on a larger $429.9 mil in net receivables. While not precisely a sequential allowance release, it could easily add another million or two to operating profit in reduced reserve accrual.
Also, the increased AR line itself was explained as normal (it is an outlier) and related to national accounts (which only increased about $14.2 mil per the 10-Q). This alone is interesting. Still, backing out those two non-operating, accrual accounting items, operating margin would have again declined year-over-year, by our estimates.
HST
Below is a note from Hedgeye CEO Keith McCullough on why we're adding Host Hotels (HST) to Investing Ideas earlier this week. Click here to watch a video of Gaming, Lodging and Leisure analyst Todd Jordan laying out his long thesis on HST.
"Our Lodging (and REITS) team is amped up bullish on Host Hotels (HST), suggesting that last week's selloff is a big buying opportunity. Todd Jordan is the lead analyst on this stock and in his post quarter comments to Institutional Research Subscribers, this is what he wrote:
"Investors are accustomed to companies reporting adjusted earnings, which usually means earnings before bad stuff. In bizzaro world a company provides guidance that excludes good stuff. Is the HST management team operating in bizzaro world? If you were on the phone with your trader following the wet blanket conference call prepared remarks, you missed a generally positive Q&A session. Management basically admitted that their guidance did not factor in any positives. We’re all for conservatism, especially after the consistent guide downs from the hotel REITs last year, but this seems more than just finding the religion of conservatism.
Maybe management overdid it; maybe they want to buy stock now that they completed the debt deal. We’re not exactly sure why management wet blanketed what was a great quarter. However, we see clear signs of RevPAR reacceleration, mostly on the very profitable business transient side. Backing up our acceleration thesis are 4 sets of data points: April STR data, our RevPAR trend model, our forward ADR tracker (through the end of May), and now complete, our Macro RevPAR Leading Indicator Model. All of these suggest calendar adjusted RevPAR acceleration in Q2. If we’re right, HST should post another big beat in Q2 and will be forced to acknowledge improving trends in their commentary and guidance. "
