Below are analyst updates on our fifteen 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 Snap (SNAP) from the short side of Investing Ideas this week. We also added Air Products & Chemicals (APD) to the long side and United Natural Foods (UNFI) and Tesla (TSLA) to the short side.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
Earlier this week, Exact Sciences (EXAS) reported positive results for 2Q17 and raised their full year 2017 guidance from $195-$205M to $230-240M. While management's guidance is in line with our updated 2017 revenue expectation of ~$240M, we believe we are being conservative with our assumptions while short interest still remains elevated at 18%. We remain long due to our expectation that positive 2017/2018 sales estimate revisions will drive the stock higher from here.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
Published reports suggest AT&T (T) is discussing potential regulatory conditions on its proposed merger with Time Warner (TWX). These reports reinforce the comments of AT&T's chief lobbyist who mentioned weeks ago that discussions about conditions would begin this summer. On yesterday's earnings call, AT&T simply repeated its view that it expects deal approval by the end of the year.
From the day this deal was announced, we have anticipated regulatory approval, noting the antitrust case against the transaction is weak. This remains our view. Moreover, we've always recommended filtering out the political noise surrounding the deal, including President Trump's comments against the merger during the campaign, maintaining the focus on the legal and procedural obstacles facing a potential Justice Department challenge.
As speculation turns to potential regulatory conditions on the deal, conditions that could address the concerns of upstream and downstream industry players, we emphasize that the FCC is not involved in the merger’s review and the Justice Department, unlike the FCC, is generally reluctant to make major administrative commitments to monitor and enforce behavioral or conduct remedies. If the DOJ’s review is not going to lead to a challenge (and we don’t expect a challenge in court), the basis for heavy conditions is relatively weak, raising the odds that the deal can avoid onerous conditions and perhaps dodge regulatory DOJ mandates altogether.
We continue to anticipate regulatory approval at the committed price of $107.50 per TWX share.
MIC
Click here to read our analyst's original report.
No update on Macquarie Infrastructure (MIC) for this week's Investing Ideas but Hedgeye Energy analyst Kevin Kaiser reiterates his short call on the company.
RLGY
Click here to read our analyst's original report.
On Monday, the NAR reported that 5.52 million (SAAR) existing homes were sold in June. This represents a -1.8% sequential decline and increase of +0.7% year-over-year. Regionally, results were mixed as existing home sales increased in the West and Northeast regions, while being flat in the Midwest and South regions. The Western region (+2.5% Y/Y) saw the largest increase, followed by the Northeast (+1.3% Y/Y).
From a pricing standpoint, the Midwest saw the largest increase in median price at +7.7% Y/Y, with the West increasing +7.4%Y/Y, the South increasing +6.2% Y/Y and the Northeast growing at +4.1% Y/Y.
Despite the sequential decline, demand for existing homes continues to be strong, as properties typically remained on the market for just 28 days (vs 34 days in June of last year), and more than 54% of existing homes sold in June were on the market for less than a month.
In addition, Case-Shiller and FHFA reported their home price indices for May this week.
- Case-Shiller 20 City HPI (not seasonally adjusted) increased +5.8% year-over-year in May
- FHFA HPI (not seasonally adjusted) reported that home prices in May appreciated by +6.9% year-over-year
In conjunction with the Corelogic home price index for May that was released earlier this month, home prices nationally are continuing the recent trend of roughly +6% year-over-year appreciation.
With roughly 75% of Realogy's (RLGY) Revenue being derived from Gross Commission Income, the recent uptick in existing home sales and home price appreciation suggest further upside to Realogy’s revenue heading into the 2Q earnings report next week (Thursday, August 3rd).
RRR
Click here to read our analyst's original report.
No update on Red Rock Resorts (RRR) for this week's Investing Ideas but our Gaming, Lodging and Leisure analyst Todd Jordan reiterates his long call on the company. We’ll provide a more in depth update next week ahead of their 2Q earnings release.
DE
Click here to read our analyst's original report.
It can be hard to look at data objectively when the stock is ‘working’, but the data and disclosures in the 10-Q are not supportive of either the “trough” or “cost cut” narratives. We continue to see evidence of weaker farmer finances amid lower crop prices year-on-year. We think Wirtgen is a blinking red light, thrusting Deere (DE) away from its core market and prior non-acquisitive strategy. That is typically a warning sign that a down-cycle will persist, with the company looking to fill a hole in core markets. DE reports August 18th.
GEL
Click here to to read our analyst's original report.
No update on Genesis Energy (GEL) for this week's Investing Ideas but Hedgeye Energy analyst Kevin Kaiser reiterates his short call on the company.
CERN
Click here to read our analyst's original report.
Despite Cerner (CERN) bookings coming in above our expectations, Cerner reported uninspiring YoY sales and EPS growth of +6% and +5%, respectively. Management's revised long-term sales growth forecast calls for 7-11% growth and +50bps in operating margin expansion. Driving the strength in bookings was +45% YoY growth in long-term contracts related to IT Works and Managed Services (i.e., Hosting).
We recognize that growth in new client bookings and management's positive commentary regarding EHR replacement activity runs counter to our thesis and expectations heading into the print. However, we are confident in the work we did to analyze the trends in EHR replacement and our conclusion that the remaining EHR market opportunity is small and shrinking.
We continue to believe management's growth algorithm will be challenged by a slowing EHR replacement market and a negative mix shift toward low-margin IT Works deals. Without earnings estimates moving higher and growth reaccelerating, we think it will be difficult for the stock to hold its current multiple.
MLCO
The sell off this week reminds of us of the long bull market in Macau stocks up until corruption clampdown that began in 2014. Stocks traded off on too high expectations for quarterly earnings and new property performance. However, the shear strength of the Macau market made these sell offs fleeting.
We think Macau GGR will continue to exceed expectations throughout this year and next. We’d prefer to see the mass mix make up a higher percentage of the overall market growth but the reality is that mass is still growing double digits YoY. It’s just that VIP is off the charts. The potential for continued GGR remains high as the sell side and buy side alike are playing the 2nd derivative game and assuming significant deceleration.
We’re 2nd derivative guys too but when we see this as consensus and already reflected in estimates, we think even VIP driven GGR beats will continue to drive these stocks higher. If mass growth comprises a bigger piece of the growth pie than the stocks will do even better. Melco Resorts & Entertainment (MLCO) was no exception to the Macau sell off this week, but we do feel pretty good about their results on a luck adjusted basis. Importantly, in Macau, mass table volume actually came ahead of our street high estimates, which is exactly what we want to see, but the offset was the less crucial VIP component (which tends to be more volatile quarter to quarter).
We’d recommend investors take advantage of any further weakness in shares of MLCO, as the market remains on solid footing and consensus expectations might prove to be too conservative for the rest of the year.
WYNN
Click here to read our analyst's original report on Wynn Resorts.
Wynn Resorts (WYNN) beat the Street fairly handily, with or without the luck factor, yet the stock traded down on the report. Buy side expectations were high and the nature of the beat – VIP, not mass, driven – probably disappointed those with the consensus view that VIP growth is likely to decelerate materially later this year. We agree that VIP revenues are less desirable than mass from a margin perspective but cash flow is cash flow and WYNN does drive the highest VIP flow through in the market. Moreover, despite the mass revenue disappointment at Palace, WYNN did grow its overall Macau market share.
We think EBITDA trend is sustainable for WYNN as GGR will likely continue to outperform Street estimates, with possibly a more favorable mix. Moreover, Palace’s Q2 performance, while disconcerting to many, should represent an EBITDA low point and a meaningful mass and EBITDA ramp is in the cards. We think it’s a fairly safe bet that Palace will gain quarterly mass and EBITDA share fairly consistently in the coming quarters (and years). We like the stock on today’s price weakness.
HST
Click here to read our analyst's original report.
We were generally pleased with Host Hotels' (HST) results. Perhaps most importantly, we felt that management did a (much) better job on the call addressing their results and outlook – the tone in the prep remarks and the Q&A portion was absolutely night and day vs. the 1Q call (which we are still shaking our heads at). The stage is set for HST to continue to beat quarterly forecasts. Some additional thoughts from the Q and conference call.
- 2Q RevPAR – Despite having a street high RevPAR estimate, we were confident in HST’s market exposure, despite the calendar shift which was supposed to be a massive drag on results. Outperformance (relative to our expectations) in markets like Boston, San Francisco, New York, Phoenix, Chicago, and Denver are what really drove the beat. Additionally, solid performance in Florida and Hawaii were a nice boost to results
- Margins – Owing to better cost controls, HST property EBITDA margins were 60bps better than we had modeled. Room related expenses were only 1.5% YoY (in line with our model) which kept margins essentially unchanged YoY, but the true drivers of margin improvement were under the hotel departmental and other line items. By posting 31% property margin, HST delivered their best property EBITDA margins (ever). Very impressive under the current RevPAR environment.
- July RevPAR – STR data has been generally weak but management suggested that their data had been “pretty decent compared to internal forecasts” – based on our math, we think HST’s outperformance vs. the Top 25 continued into July
- Starwood / Marriott Benefits – despite the strong margin expansion, management keeps suggesting that the real benefits haven’t even been realized yet. While we won’t get too excited just yet, this bodes well for 2018 and beyond
- Group – 90% of their business is on the books for 2017 which should be a solid base to work around for the rest of the year. But booking pace for all future periods is ahead of where they were last year - exactly what we want to hear
HBI
Click here to read our analyst's original report.
This is a high-conviction short call … An egregious incentive structure has resulted in a decade’s worth of bad behavior that made management and shareholders a lot of coin. That’s the same behavior that now poses significant Balance Sheet/P&L risk. Numbers are too high by 40%.
Management has been compensated via metrics that are easily manipulated by bad acquisitions, at any price, and then charging off expenses as non-recurring for years. Throughout the company’s public history the management has done what gets them paid. This is evidenced by the fact that HBI's capex as a % of sales hit its all-time low in the 2 years management was compensated on Free Cash Flow, meaning management didn’t invest because it would boost its near term compensation.
Now the company has a brand that is losing relevance and facing significant negative organic growth headwinds, all while factory utilization is coming off the peak. We think that translates to consistently lower revenue, margins, and cash flow for the foreseeable future as the negative pressure of bad behavior is released.
TSLA
Click here to read our analyst's original report.
Below is a note from Hedgeye CEO Keith McCullough on why we're adding Tesla (TSLA) back to the short side of Investing Ideas:
"Our Managing Director of Industrials Research, Jay Van Sciver, remains The Bear (i.e. the only one in Research Print without a loss, yet!) on Tesla (TSLA) and wrote this recently to our Institutional Subscribers:
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"Given that the Model 3 may prove a ‘make-or-break’ product launch, it is odd that Tesla is focused on pretty much everything else. Tesla has not sold a single Model 3; there isn’t a public production model. But we received guidance this morning that production could ramp from 30 units in July, to 1,500 by September, to maybe 20,000 Model 3s by December. That is apparently a very different schedule from what was asked of suppliers. It seems pretty clear production is behind relative to initial goals. If supplier deliveries are made as below, Tesla would have inventoried parts for an extra 21,000 vehicles sitting around by quarter end on the announced production schedule. “So when we place parts orders with our suppliers, we've told them 1,000 a week in July, 2,000 a week in August, and 4,000 a week in September. These are parts orders.” – Elon Musk 2/22/17 Exponentially higher demand at lower price points and the cost benefits of mass production used to be core to the Tesla story. Is that story failing? Both the hard and soft indicators suggest it is." |
UNFI
Click here to read our analyst's original report.
"With 2017 US stock market bears in a world of hurt again today (fresh all-time highs), we're seeing some of 2017's losers bounce to lower-highs on decelerating volume," writes Hedgeye CEO Keith McCullough. "One of those losers is United Natural Foods (UNFI) which remains on Howard Penney's Best Ideas Institutional SELL List."
Below is an excerpt from a recent institutional research note written by Penney on UNFI:
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"Looking back at UNFI's recent results, we will skip over the pleasantries and get straight down to why UNFI is still a best idea short for us. UNFI continues to harp on the benefit of “new unit openings” as a key driver of growth, while we continue to see slowing new unit growth and closures from critical customers such as Whole Foods (WFM), which makes up 33.7% of their sales. We have been very complimentary of what WFM is doing to improve their future prospects; slow unit growth further, close underperforming stores and category management to get their SKU count and pricing right. In the future there will be a time where the downside of the WFM’s business for UNFI has hit rock bottom, but where that bottom is has not been fully appreciated by the markets at this time. WFM isn’t alone; as KR and SFM (both UNFI customers) among others are also reducing unit growth expectations. Jana’s involvement in WFM also raises some particular risks to the WFM-UNFI agreement. We do not subscribe to the thought that WFM would completely exit their agreement with UNFI, they don’t have the infrastructure to do so, but there could be opportunity for cost savings which would eat into UNFI’s margin." |
APD
During a recent institutional presentation, the Materials Team, led by Sector Head Jay Van Sciver, ran through key points as to why APD is on their Best Ideas List along with the short-term, large project drivers.
Here are some key takeaways from Van Sciver:
- High Quality Capital Deployment Opportunities: We expect outperformance as overhangs fade and high quality capital deployment opportunities finally arrive.
- Favorable Economic Trends: There are many reasons to favor the industrial gas industry at present given the favorable economic and consolidation backdrop.
- Looming APD Overhangs are Behind Us: Overhangs on APD shares, from the not-so-straightforward Yingde deal to changes in the position sizes of certain activist funds, have largely moved out of the picture.
- Available Cash to Invest or Buyback Shares: Maturing projects will allow them to invest substantial amounts of available capital in PX/Linde divestitures, other well-suited deals, or buybacks.
"As projects mature and the company invests substantial available capital in PX/Linde divestitures, other well-suited deals, or buybacks, it becomes hard to avoid well above consensus EPS forecasts," says Hedgeye Sector Head Jay Van Sciver.
