Below are analyst updates on our twelve 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 we removed Kate Spade (KATE) from the long side of Investing Ideas this week.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
No update on Exact Sciences (EXAS) for this week's Investing Ideas but, with the stock up more than +80% since we added the company to this newsletter, it is worth reviewing the broader thesis:
- The opportunity to add more providers exists in Cologuard’s core markets of Gastroenterologists, Internal Medicine Physicians and Family Physicians, all of which have low penetration rates.
- Our tracker is projecting more than 11K sequential provider adds in 2Q17 which translates into ~$51.5M in sales compared to consensus of $49.6M.
- Another factor driving Cologaurd test volume is providers reorder rate. This is the most sensitive part of our model which we believe is skewed due to a significant amount of the reported physicians representing dormant accounts.
- Despite this, we think this rate will increase over time as commercial coverage and provider awareness gain more traction. UnitedHealthcare (UNH) recently released updated coverage determination guidelines for preventative care services which included Cologuard.
- UnitedHealthcare's positive coverage decision, effective July 1, 2017, is consistent with our thesis that guideline inclusions will drive commercial adoption. UNH is the largest managed care provider in the United States and provides insurance for ~45M people in the US.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
We have consistently held the view that the antitrust case against this vertical transaction is not very strong and, despite the President’s statements against the deal as a candidate last October, we have always believed a DOJ federal court lawsuit to block the merger was unlikely.
Culture of Independence Reinforced: The current political context becomes another factor that intensifies the potential downside of taking an aggressive stance against the proposed transaction. Even before the outbreak of the President’s latest troubles, we highlighted our view that any appearance of White House meddling in an antitrust investigation, last done during the Nixon years, would be a risk the Administration would not be willing to take.
And since the days of the Nixon Administration, officials working in the Antitrust Division --both career staff and political appointees -- have taken steps to ensure their independence. This culture of independence can only be reinforced in the current context and we continue to anticipate ultimate approval for the AT&T-Time Warner deal.
WMT
Click here to read our analyst's original report.
This week it was reported that Wal-Mart (WMT) is launching a new program squeezing its suppliers by forcing them to deliver on time or face paying a fine. The plan is expected to generate an extra $1bn in revenue by having enhanced product availability in stores.
- The old model was product needed to be shrink-wrapped, paletted, etc…within 5 days +/- of delivery date.
- It totally makes sense to tighten it and fine tune for early delivery now instead of just late.
- Probably more a cash-flow management call then a P&L call.
- But either way WMT does not lose – punk vendors do.
- Though this goes far beyond a little vendor like HBI, it is definitely HBI bearish.
- And it’s not just WMT. Other retailers KSS, JCP, M… etc...likely to follow.
- No new opportunity for TGT since it implemented a similar policy last year.
- WMT will impose a 3% penalty of their value on items that are late or missing over a one month period.
- By February 2018, WMT plans for these deliveries to be On Time, and In Full 95% of the time. The previous target was 90% which results in a 4 day window.
- Procter & Gamble Co. and Unilever, a few of WMT’s larger suppliers, have been hitting a mere 10% target over certain periods.
This is the type of action we like to see from Wal-Mart. It’s pressuring its vendors, but not simply squeezing margin. It’s demanding more from them which will result in better product availability, a better shopping experience, higher customer satisfaction, and higher sales growth.
MIC
Click here to read our analyst's original report.
We’ve updated our model for additional spending, and now have Macquarie Infrastructure (MIC) around FCF break-even in 2017, which means that its ~$450MM dividend will increase the debt balance by an equivalent amount, absent equity issuance. We value MIC at ~$40/share based on our DCF and SOTP analyses. We also note that MIC’s leverage remains elevated, we have the Company at 5.4x debt/EBITDA at YE17.
(Fair Value Estimate: ~$40/share, ~50% Downside)
RLGY
Click here to read our analyst's original report.
Our current outlook is that Realogy will beat the Street's estimates throughout the balance of 2017. Hedgeye estimates for total revenue and GAAP EPS in 2017 are currently +3% and +16% above the Street, respectively. We see a path to $2.95 in earnings by 2019.
DE
Click here to read our analyst's original report.
While some cheered Deere’s (DE) acquisition of Wirtgen, we would caution that deals done by post-peak capital equipment producers often signal further weakness. Deere is not an acquisitive company, and this deal is a major strategy shift.
If Ag Equipment was about to surge back, why wouldn’t DE go after a big Ag and Turf acquisition? Exiting both a core market and a supposedly winning strategy is not a great idea, especially when the deal’s valuation rationale is explained via 2022 synergies. While some saw it as a positive, accretive development, we see it as a piece of confirming evidence that DE cannot rely on its core Ag equipment market as the down-cycle continues.
GEL
Click here to to read our analyst's original report.
As we mentioned in last week's newsletter, in an 8-K filed on 6/29, Genesis Energy (GEL) announced that it had fired its long-time auditor, Deloitte, and replaced it 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 of 15 years…
We remain concerned with the Company’s leverage and believe that, ultimately, the Company will be forced to decide between its balance sheet and distribution. At the subsidiary level (ex. equity investees), GEL has net debt / EBITDA of 7.0x and net debt / EBIT of 14.5x. And with the stock “yielding” close to 10%, GEL won’t be able to continue financing its distribution with equity issuance.
(Fair Value Estimate: ~$15/unit, ~50% Downside)
SNAP
Click here to read our analyst's original report.
It's been a little over a month since we added Snap (SNAP) to our Best Ideas List as a short. It appears that sell-side is piling on to our position, with at least 4 downgrades and 5 estimate cuts since the end of May. Further, news broke this week that SNAP is being sued for copyright infringement, which we suspect was the main reason why SNAP is now below its IPO price.
With sentiment so much in the gutter, we're becoming incrementally more concerned about a potential short squeeze into the next print on anything less than terrible results. We have no view into the 2Q print; our position is based more on the back-half of 2017 into 2018. That said, we're staying short here, but wouldn't be surprised if we gave up some of our recent gains over the next month.
RRR
Click here to read our analyst's original report.
Below is a sneak peek inside our 70-page Red Rock Resorts (RRR) institutional presentation. The slide below shows the four reasons why our Gaming, Lodging & Leisure team remains bullish on Red Rock Resorts.
CERN
Click here to read our analyst's original report.
We recently confirmed that NewYork-Presbyterian (NYP), the 10 hospital, $5.2B revenue organization, has chosen Epic to replace their existing EHR systems.
NewYork-Presbyterian's selection of Epic reflects Cerner's (CERN) failure to expand their existing relationship with NYP beyond the Millennium Lab solution and Siemens Eagle RCM product. NewYork-Presbyterian was one the few remaining $2B+ best-of-breed health systems in the United States and a deal worth well in excess of $70M that will now fall out of Cerner's pipeline.
NYP will continue to use Siemens Eagle RCM product well into the next decade as the initial phase of the Epic transition will focus on the Clinical systems. Cerner has a very strong lab solution and there is no intention to replace it with Epic's analog, Beaker.
WYNN
Click here to read our analyst's original report.
We see long term, sustainable growth in Macau revenues and profits as China remains well underpenetrated, despite strong recent growth. In the near term, Wynn Resorts (WYNN) should continue to outperform from a fundamental perspective given their respective exposures to VIP and premium mass which are the two best performing segments in that order.
HST
Click here to read our analyst's original report.
Below are the three reasons to stay long Host Hotels (HST) from our Gaming, Lodging & Leisure team's institutional presentation on the company.
