Below are analyst updates on our thirteen current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
On Exact Sciences (EXAS), Google Trends activity for Cologuard in the U.S. supports our tracker, projecting greater than 11K provider adds in the quarter. Additionally, we believe Cologuard's test per provider ratio and average selling price (ASP) will continue their upward trajectory, providing additional leverage to the business model as the benefits of guideline inclusions and commercial coverage decisions materialize. We also expect repeat test orders to drive increased test volume in the back half of 2017, with more meaningful upside in 2018.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
The new head of the Antitrust Division, Makan Delrahim, should soon be confirmed and, unless there is a surprise recusal, take control of the DOJ investigation of the deal. We continue to believe a challenge would be difficult to win in court and expect the transaction to be approved. There is no concurrent review of the deal at the FCC (no regulated Time Warner licenses will transfer to AT&T).
We do not rule out a consent decree that could address possible concerns and expedite conclusion of the process, but an outright litigation effort to stop the deal still seems unlikely. Recently, AT&T CEO Randall Stephenson reaffirmed a willingness to accept consent decree conditions if necessary.
Although we believe the deal is likely to win approval, criticism of the merger could intensify. As the FCC retreats from the rigorous net neutrality rules adopted during the Obama Administration, conditions on mergers represent the best alternative for competitors to impose operating limits on the leading broadband and video service providers.
There has been speculation that divestiture of CNN may be necessary to win DOJ approval given the President's feud with the cable news channel. But there is no antitrust concern that would justify such divestiture and we doubt the Antitrust Division would recommend it. Moreover, as we've noted before, conditioning government approval as retaliation against unfavorable news coverage would raise first amendment issues.
WMT
Click here to read our analyst's original report.
In US retail, Costco (COST) continues to kill it, beating sales expectations again for June which were reported this week, and accelerating for two consecutive months. This is a positive read on retail sales for June as COST sales correlate at 0.81 with Total Retail Sales. That’s bullish for Wal-Mart (WMT) intra-quarter.
Also, keep in mind that WMT owns Sam's club which has 660 stores accounting for $57bn in sales. Sam's runs a similar membership model like that of COST, though with a very different customer. We'll see if Sam's can follow the same positive trend that COST has been reporting.
In addition we saw US nonfarm payrolls beat expectations on Friday morning, the year-over-year growth slowed against a tough comparison last year, but a notable beat nonetheless.
All in, when COST is beating expectations and US nonfarm payrolls are beating expectations, that's a signal of US growth accelerating, increasing the likelihood that WMT will beat sales expectations in 2Q.
MIC
Click here to read our analyst's original report.
Macquarie Infrastructure (MIC) recently increased in 2017 CapEx budget to $500MM from the prior $400MM, largely due expectations of additional FBO acquisitions. While the FBO business is doing well (Business Jet flights are +3% YoY in 2017 through May), it’s a cyclical business that is long in the cycle, not the best time to accelerate acquisition activity.
We’ve updated our model for additional spending, and value MIC at $36/share based on our DCF, and $40/share based on our SOTP. We also note that MIC’s leverage remains elevated, we have the Company at 5.4x debt/EBITDA at YE17.
RLGY
Click here to read our analyst's original report.
This week, we received a couple important data points from the quarterly reports that are released by the various real estate brokerage firms in the New York Metro area.
A recent article (HERE) in the Greenwich Sentinel citing Douglas Elliman notes that 286 homes were sold in Greenwich during the first half of 2017. This represents an increase of +8% from the first half of 2016. A potential bullish read through for Realogy is that home sales above $2mn, the sweet spot for Realogy’s NRT segment, increased by +17 sales (+16%year-over-year) to 124 sales. Since Realogy’s NRT segment is concentrated in California, Florida, and the New York Metro, strong results out of more affluent suburbs like Greenwich have the potential to boost NRT’s earnings to the upside.
Additionally, a report put out by Douglas Elliman and Miller Samuel (HERE) notes that the number of existing homes (apartments, condos, townhouses) in Manhattan that we sold in the second quarter increased +16% year-over-year to 2,597 sales. The report also notes that sales of luxury existing homes (average sales price of $9.28mn, median sales price of $6.84mn) increased +15.3% year-over-year to 316 sales.
This uptick in Greenwich and Manhattan home sales is also supported by the recent trend in high ticket discretionary consumption. We have previously noted that the trend in high end real estate volume comports with the broader rebound in luxury spending nationwide. High ticket discretionary consumption (pleasure boats, aircraft, jewelry and watches - our proxy for the state of luxury consumerism) has grown +7% thus far in 2017, a notable acceleration off of 2016's post-recession low watermark of 1% growth. We see the recent uptick in luxury discretionary spending as positive for the high end housing market, and Realogy (RLGY) specifically.
DE
Click here to read our analyst's original report.
Below is a note from Hedgeye CEO Keith McCullough on Deere (DE) sent to subscribers earlier this week:
Deere is signaling immediate-term TRADE overbought today and the Managing Director of our Industrials Research Team, Jay Van Sciver, remains bearish on the stock. Here's an excerpt from a recent research note that I thought you'd find interesting:
"Deere did report an uptick in Retail troubled debt restructurings (TDRs) and write-offs, though neither big enough to move the needle. While not a big number, the count may be worth noting. Higher TDRs and write-offs tend to lower delinquencies. Farm credit is not getting better from what we can see, it is getting worse."
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"During the first six months of 2017, the Company identified 226 financing receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $5.2 million pre-modification and $4.2 million post-modification. During the first six months of 2016, there were 46 financing receivable contracts, primarily wholesale receivables…”- DE F2Q 2017 10-Q |
GEL
Click here to to read our analyst's original report.
This week we callout that in an 8-K filed on 6/29, Genesis Energy (GEL) announced that it had fired its long-time auditor, Deloitte, and replaced the firm with Ernst & Young. While no disagreement or issue between GEL and Deloitte was reported, we do find it curious for a Company with, in our opinion, one of the most aggressive set of non-GAAP financials in the entire energy sector, to fire its auditor.
For example, in 1Q17 GEL’s “Maintenance Capital Utilized” metric of $2.8MM was just 5% of reported DD&A, and suggests a useful life of the company’s assets of over 400 years. Further, in 1Q17 GEL reported GAAP net income of $27MM, but its key non-GAAP metric, “Available Cash before Reserves,” was more than 3x higher at $93MM.
In our view, GEL’s net income is a fair measure of the Company’s economic profit. Based on 1Q17 EPS of $0.23/unit, GEL is currently trading at a heady 33x earnings.
SNAP
Click here to read our analyst's original report.
No update on Snap (SNAP) for this week's Investing Ideas but Hedgeye Internet & Media analyst Hesham Shaaban reiterates his short call on the company.
RRR
Click here to read our analyst's original report.
Las Vegas has experienced steady employment growth for the last 3-4 years, but the locals market has yet to see the accompanying GGR growth, primarily due to the limited growth in high paying construction jobs. With several large scale projects in the city’s pipeline, Las Vegas could conceivably add 30K new construction jobs by 2020. Construction workers have historically been known to be reliable, repeat gamblers, and this shift towards a stronger macro environment bodes well for Locals GGR. In the longer term, we expect to see added value to Red Rock Resorts (RRR) as GGR continues to trend higher.
KATE
Kate Spade's (KATE) price has been pegged within a few pennies of the deal price of $18.50. We think this deal will get done, and is likely to be announced before COH reports earnings projected for August 8th.
We'll keep an eye out for any changes in the deal dynamics, but for now it appears on track under the current terms.
CERN
Click here to read our analyst's original report.
On Cerner (CERN) we have been more right than wrong on the fundamentals. Sales and Non-GAAP EPS estimates for 2017 have declined by -4% and -7%, on a -7% reduction in bookings estimates, respectively. Additionally, management lowered their consolidated, long-term sales growth target to 7-11% from 10% partially due to slower core growth of 3% through 2020, compared to their previous 5% target. We continue to believe consensus estimates for 2018 and beyond are too high, especially for EPS, as the core model deteriorates with additional pressure from the negative mix shift toward lower margin IT Works business.
WYNN
Click here to read the Wynn Resorts (WYNN) stock report Gaming, Lodging & Leisure analyst Todd Jordan sent Investing Ideas subscribers earlier this week.
HST
Click here to read our analyst's original report.
Despite recent softness in the weekly lodging data, 2Q and the YTD has been pretty solid for the US industry trends, certainly relative to what industry expectations and annual guidance ranges would have suggested. After 18 months of sluggish lodging data, 2017 looks poised to be a year where hotel REITs (owners of hotels with more operating leverage than the C-Corps), begin to outperform.
Our work suggests that due to Host Hotels' (HST) superior market positioning, favorable brand exposure, and conservative annual guidance, the risk reward set up remains favorable. As it currently stands, our views on HST are unchanged and we see upside to consensus estimates on the upcoming 2Q print.
