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.
Please note we removed Wal-Mart (WMT) from the long side of Investing Ideas this week. We also added Melco Resorts & Entertainment (MLCO) to the long side and Hanesbrands (HBI) to the short side.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
At $39 the risk/reward in Exact Sciences (EXAS) is less favorable than it has been in previous quarters heading into earnings given the smaller gap between our estimate and consensus' expectations. However, we expect more meaningful beats to re-emerge in 2H17 driven by both ASP and test/provider.
We continue to believe estimates are too low and expect 15-20% upside in the next 6-9 months driven by positive revision trends. Using our 2018 sales estimate of $358M (consensus $321M) we get to a stock price in the high $40s.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. Below is an excerpt from an institutional research note written by Hedgeye Telecom & Media analyst Paul Glenchur:
The new head of the Antitrust Division, Makan Delrahim takes 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.
MIC
Click here to read our analyst's original report.
Macquarie Infrastructure’s (MIC) US FBO business is doing well lately (according to the FAA, business jet flights are +3% YoY in 2017 through May, and were +4.4% YoY in April and May), but it is a cyclical business that is long in the current cycle – probably not the best time to accelerate the roll-up.
RLGY
Click here to read our analyst's original report.
Below is an update on the state of the Housing market and the implications for Realogy (RLGY) from our Housing team:
This week, the NAR released their 2017 Profile of International Home Buying Activity (click here). This profile consists of data collected for the period beginning in April 2016 and ending in March 2017, and the NAR's conclusions are based on home sales and realtor survey data. The survey was conducted in mid-April, 2017.
According to the NAR, International Homebuyers purchased $153bn of US real estate from April 2016 through March 2017, representing an increase of +49% year-over-year. During this period, International Homebuyers accounted for 10% of Existing Home Sale dollar volume. Dollar volume purchased by non-resident foreigners (Non-U.S. citizens with permanent residences outside the U.S.) increased +72% year-over-year to $74.9bn. Five countries: China, Canada, The United Kingdom, Mexico and India accounted for 50% or $77.3bn of the total purchase volume.
China was the largest buyer for the third year in a row, accounting for 20% or $31.7bn of all foreign home purchases during the survey period. Foreign Buyer residential home purchases increased +32% year-over-year to 284.5K units, accounting for 5% of all Existing Home Sales during this period. Sales volume to non-resident foreigners (Non-U.S. citizens with permanent residences outside the U.S.) increased +35% year-over-year to 119.5K sales.
DE
Click here to read our analyst's original report.
We see Deere (DE) as a highly cyclical capital equipment supplier to a mature, zero growth industry. Deere’s key, high margin franchise is large, North American ag equipment. Prior to 2014 or so, that market experienced a decade long surge in equipment sales, driven by soaring crop prices, increasing land values, and comparatively easy credit.
Since peak, these factors have begun to roll over. We expect the hangover – elevated new & used equipment inventories, excess manufacturing capacity, tightening farm credit, and declines in farmer equity – to be a prolonged affair that gradually takes equipment sales below ‘normalized’ demand.
We expect total North American agricultural equipment sales to drop roughly 2/3s peak to trough. Newer downside drivers appear likely to come from tightening credit, decreasing land values, declining farm equity, and lower crop prices. As those factors influence equipment sales, we expect FY17 estimates to move downwards and FY18 estimates to move below FY17.
As investors price in the reflexive unwind in this commodity-related capital equipment industry, we expect to see significant relative downside in shares of DE.
GEL
Click here to to read our analyst's original report.
We remain concerned with Genesis Energy’s (GEL) 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.
SNAP
Click here to read our analyst's original report.
Regarding Snap’s (SNAP) longer-term prospects, we estimate that the company has already captured the lion's share of the low-hanging fruit in terms of NA/EU DAUs, and there are structural headwinds (both internal & external) to broader adoption, especially on a daily basis. That also means it's longer term revenue prospects are in question since the highly-touted monetization delta b/w SNAP and FB isn't nearly as wide as the ARPU metrics suggest. Using North America as a proxy, we estimate the monetization delta is roughly 6x-7x vs. the 12x suggested by the ARPU metrics (calculated on a DAU basis).
RRR
Click here to read our analyst's original report.
Despite having less intra quarter visibility on Red Rock Resorts (RRR), we continue to believe that we have an edge on the long term outlook for the Las Vegas Locals market, and RRR in particular. As we transition into 2H2017, investor attention will soon be focused on the real growth opportunities for RRR, which should be realized in 2018 and 2019.
The Las Vegas Locals market has long been depressed by the economic turmoil created in the last recession, but as more homes begin building equity, and real wealth is once again created, the gross gaming revenue growth should follow. Additionally, investors need to remember that this future growth should come on top of a base of capped supply, which should really drive Same-Store EBITDA and margin growth.
CERN
Click here to read our analyst's original report.
Below is a video featuring Hedgeye Healthcare analyst Andrew Freedman discussing the set-up for Cerner (CERN) ahead of the company's second quarter earnings results on Thursday, July 27th.
WYNN | MLCO
Click here to read our analyst's original report on Wynn Resorts.
Just last Friday the Macau stocks were hit hard due to a sell side report out of Hong Kong which addressed “liquidity issues” for a key Junket operator in Macau. While the report made for splashy headlines, it was in fact, taken out of context, and via our sources we were able to corroborate that there were zero liquidity issues at said Junket.
In fact, our own analysis suggests that due to consolidation in the junket space over the last few years, there is now far less credit / liquidity risk in the system (Note: ‘Junket’ refers to third party Casino promoters that extend credit to high rollers).
The sell off last week provided a buying opportunity in our top Macau names, Melco Resorts & Entertainment (MLCO) and Wynn Resorts (WYNN). Despite a recent slowdown (due to comps) in the base mass segment, we favor premium mass and VIP operators like MLCO and WYNN into the 2Q prints. For Macau operations in particular, we are modeling MLCO EBITDA 3.4% ahead of consensus, and similarly for WYNN we are modeling EBITDA 7.3% ahead of the street.
HST
Click here to read our analyst's original report.
Host Hotels (HST) is set to report earnings next Tuesday after the close (conference call on Wednesday), and we are expecting acceleration on both top and bottom line vs. relatively depressed street expectations. From a sentiment perspective, we really like the set up into earnings as investors continue to doubt the possibility of RevPAR re-acceleration in the back half of the year.
In conjunction with our Macro team’s views on the US economy, we believe premium operators with favorable market positioning (like HST), should continue to produce better than expected results, as business travel picks back up. Despite the likelihood of a beat on the 2Q print, we believe management will be conservative on the call with respect to industry trends and their own future performance.
Moving forward, HST will be a ‘show me’ stock and if they continue to post better than expected results, we should see multiple expansion and higher estimate revisions, which should drive the stock.
HBI
Click here to read our analyst's original report.
Below are some key talking points from Hedgeye Retail Sector Head Brian McGough's Hanesbrands (HBI) short call held on July 18th.
HBI Black Book | The Descent to Sub-$10:
We think this stock could hit single digits in 18-months. The TAIL call has evolved (strengthened short side), but the puts/takes by quarter have grown more complex – which is likely to make management change its plan, and change its narrative to be more in line with economic reality (ie bad).
Here is a basic outline of how we think the story evolves throughout 2017-2018:
- CFO quits
- Underinvested in PP&E to drive top line, so sales continue to erode
- Levered back up to 4.2x. Busts a covenant at 4.5x
- No longer has the balance sheet to a) do deals, and b) invest in PP&E to grow organically around a shrinking wholesale pipe
- Four months ago it upped dividend by 30% on a $760mm CFFO number. Then missed CFFO by $150mm
- On our CFFO number – which is another $200mm miss, HBI is guaranteeing 60% of its ‘trough capex FCF’ in the form of a dividend after buying back $700mm in stock 30-40% higher.
- Finished goods inventory sitting at historical highs.
- Promised an unrealistic 0-2% organic growth rate when it can’t reverse its (9%) run-rate with biggest customer.
- Amazon not an option – but rather a threat.
- Sales decline by 3-5%
- Gross Margins erode by 200bps, and EBIT by 300-350bps as it deleverages fixed infrastructure.
- CFFO declines another $200mm
- People stop valuing this thing on ‘adjusted EPS and CFFO’ and start valuing it on FCF given leverage and capital structure.
- If it trades back at the multiple of a levered vertically-integrated apparel brand (6x EBITDA) we get a $5-6 stock.
- If it trades at the 3-4x Warren Buffet and VFC have transacted in these businesses in the past (and the price that Sara Lee was willing to bail on) then there’s zero equity value left.
- Is this a Ch11? No. But that does not mean it needs to trade in the equity market.
This company does not need equity value. It is a poster child for a loser in #Retail5.0
