Below are analyst updates on our sixteen 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 added Coach (COH) to the long side of Investing Ideas this week.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
Last week Exact Sciences (EXAS) reported positive results for 2Q17 and raised their full year 2017 guidance from $195-$205M to $230-240M. EXAS' revenue grew +172% YoY to $57.7M which was above our estimate of $51.6M and consensus at $49.8M. The revenue beat was driven by an increase in test volume of 135K tests, up +150% YoY, driven by a +17% sequential increase in tests per provider to 1.67, the biggest sequential increase since the USPSTF approval back in June of 2016.The other driver of the top line beat was the 11K sequential provider adds which was in line with our Cologuard-Tracker estimate of +10k. Total provider count is now 81k, up +98% YoY.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
As we've noted before, we do not expect a legal challenge to the transaction. Unlike the FCC, the Justice Department cannot simply impose deal conditions that, in the agency's view, benefit the public interest. And, unlike the Comcast-NBC Universal deal, FCC approval is not needed to clear this merger because no FCC licenses are transfering from Time Warner to AT&T (the only broadcast license held by Time Warner was divested).
So here's the backdrop for exploring conditions. If the FCC is not involved to shape, monitor or enforce compliance conditions, the administrative burdens of behavorial or conduct mandates would likely fall on the Justice Department. The appointment of a compliance monitor may be necessary if conditions are imposed. In the Comcast-NBC deal, arbitration requirements for access to NBC programming were handled by the FCC and this was incorporated in the DOJ consent decree.
Generally, the Antitrust Division does not favor behavioral conditions that necessitate constant monitoring and oversight. Antitrust officials prefer structural remedies that force divestitures of operating units that could fill competitive voids created by a merger. With very little overlap in this vertical deal, structural remedies appear unlikely (and there is no antitrust case to force the divestiture of CNN). Thus, going into these regulatory negotiations, the Justice Department may be forced to consider conduct remedies that are not the preferred approach.
Without the FCC's engagement in this merger review, the amorphous public interest standard will not be applied and all proof burdens for regulating (or blocking the deal) fall on the Justice Department. If the case against this merger is weak (and we think it is), the only leverage DOJ has in this context is threatening to go to federal court to enjoin the transaction. This puts the DOJ in a relatively weak position to issue burdensome demands. We continue to anticipate regulatory approval in the months ahead at the takeout price of $107.50 per TWX share.
MIC | GEL
Click here to read our analyst's Macquarie Infrastructure (MIC) report. Click here to to read our analyst's Genesis Energy (GEL) original report.
We're taking the time to dig more deeply into this week's MIC and GEL earnings releases but the short theses we've laid out in the charts below still hold. We'll have a complete earnings analysis writeup for next week's newsletter.
RLGY
Click here to read our analyst's original report.
On Thursday, Realogy (RLGY) announced 2Q earnings that beat both top and bottom line estimates, while raising its full year guidance. The company reported second quarter revenue of $1.8B and EPS of $0.78, beating Street estimates by 3.5% and 6.8%, respectively. From a growth standpoint, 2Q revenue grew by +8% Y/Y while Net Income grew by +18.5% Y/Y.
Realogy is comprised of four operating segments (Cartus, NRT, RFG, TRG), with its Company Owned Brokerage segment (NRT) accounting for the largest share of consolidated revenue (75% of revenue in FY 2016). The company’s NRT segment reported revenue of $1.4bn, an increase of +10% Y/Y. During the second quarter, NRT closed 101,043 homesale sides, a +2.8% Y/Y increase, at an average selling price of $528.5k, an increase of +8.8% Y/Y. Management noted that transaction volume in the $2.5mn+ range increased +29% Y/Y and accounted for 18% of NRT Volume. Realogy also reported that the average broker commission rate declined -1 bps from 2Q 2016 to 2.44%, while Gross Commission Income per side increased +7% Y/Y to $13,625 during the second quarter.
RRR
Click here to read our analyst's original report.
Red Rock Resorts (RRR) reports Q2 earnings after the bell on Tuesday, the 8th. As we noted in our recent presentation/video “RRR | UNCOILING THE SPRING,” we expect another miss on EBITDA due to disruption from the Palace remodel and the food & beverage overhaul. We project Q2 adjusted EBITDA of $120M (Street: $125M). However, we are very bullish on the long term outlook and think RRR is one of the most compelling investments in the casino space.
We think there is a reasonable chance new CFO Steve Cootey “clears the decks” by talking near term numbers down or providing outright guidance. Moreover, we expect a significant hike in capex expectations for 2017 and 2018. Renovations at Palace Station should last until the fall of 2018 and we believe capex targets on the project will be raised during the conference call. Meanwhile, we think the recently acquired Palms property will be redeveloped in 2018 which means more capex. As part of more transparent investor relations effort the Company may also announce an Investor Day at the Palms soon.
We do think investors generally anticipate a soft guide down and certainly a higher capex budget, and therefore a potential sell off might not come to fruition. However, if one does come to fruition, we would recommend buying RRR on weakness. Despite the fact that much of the real EBITDA growth will likely be coming in 2H 2018 and 2019, we think the Locals market could really start to pick up next year, given the favorable economic back drop that we have outlined in detail in prior updates.
DE
Click here to read our analyst's original report.
No update on Deere (DE) for this week's Investing Ideas but Industrials analyst Jay Van Sciver reiterates his short call on the company.
CERN
Click here to read our analyst's original report.
Despite bookings coming in above our expectations, Cerner (CERN) reported uninspiring YoY sales and EPS growth of +6% and +5%, respectively. Driving the strength in bookings was +45% YoY growth in long-term contracts related to IT Works and Managed Services (i.e., Hosting). Overall, we assign very little value to IT Works deals as the contribution margin from re-badging a Hospital's IT Staff (low double-digits) is dilutive to the corporate margin and weighs on EPS growth despite the positive top-line impact.
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 (2Q17 operating margin -75bps YoY). Without earnings estimates moving higher and growth reaccelerating, we think it will be difficult for the stock to hold its current multiple.
WYNN | MLCO
Click here to read our analyst's original report.
So much for growth slowing – July should exceed June’s stellar 26% GGR growth rate and could eclipse 30%. While this summer could represent the peak growth rate, we believe GGR will continue to outpace Street expectations. We get the 2nd derivative, growth slowing argument but if it’s already the consensus view, and Street GGR projections prove low, as we believe, these stocks will have legs. Indeed, in the 2010-2014 Macau bull market, the stocks climbed long after growth had peaked. Current valuations are reasonable even on the conservative EBITDA estimates.
Growth continues to be led be VIP here in July and Wynn Resorts (WYNN) is the major beneficiary of the VIP explosion. We view last week’s sell off as a buying opportunity similar to the many sell offs during the 2010-2014 period when GGR mostly exceeded expectations.
Longer term, we think favorable conditions are in place for long term mass revenue growth in Macau which will benefit both WYNN and Melco Resorts & Entertainment (MLCO) , as we outlined in detail during our recent conference call and presentation, “MACAU | THE SOUND BEYOND THE NOISE.” Sustained same store mass revenue gains should drive even stronger cash flow growth and much higher ROICs as we near the end of the capex cycle.
HST
Click here to read our analyst's original report.
No update on Host Hotels (HST) for this week's Investing Ideas. Click here to read our detailed post-earnings analysis for HST.
HBI
Click here to read our analyst's original report.
The size and scope of the fireworks around this print were remarkably ‘meh’. At face value it comes across as the mother of all in-line quarters. This event was slightly net negative – enough for bulls to believe, and enough for bears to think they ‘missed it’ short side. This name is on a path to breaking in 2H. Zero equity value within 3-years.
No meaningful changes to our model. Still 15% below consensus in 2H, and 40% below in 2018. Dividend cut in '18 after accelerated share loss, and the $1bn operating cash number HBI is hanging its hat on simply melts away. But not like ‘dropped on the floor’ melt (like Sears). More like ‘dropped in a pot of boiling water’ melt.
A few callouts…
- HBI missed on organic revs…down 3% when HBI is guiding to a big ramp in 2H – the biggest the company will have to have seen in the decade it’s been public. Revs down over 200bps sequentially on 2yr.
- In the second half, the company expects organic growth in each of the Innerwear, Activewear and International segments. Basically, it expects growth in every business. Never been done.
- Took up acquisition impact in guidance by $15mm, implying it's contributing another 25bps to rev for the year, but reiterates 0-2% organic growth while holding full year total revenue.
- HBI comes in at bottom of guide if it does 2.5% organic growth in 3Q and 4Q -- $6.45bn... guidance today implies 1.5% in 3Q, but managment said on call that it will grow 2.5% organically in both 3Q and 4Q? That feels like a revenue guidance revision to me.
- 2Q operating cash was DOWN $100mm. That includes NOT contributing $40mm to pension, and about $100mm+ in working capital timing. Believe management’s spin if you want…cash flow did not improve.
TSLA
Click here to read our analyst's original report.
Follow The Big Down Arrows: While Tesla (TSLA) management claims that demand is strong, the balance sheet doesn’t make “stupid” guesses. The implied deposits for Model S & X units are down…again. TSLA bulls have been rewarded for ignoring financial statements, instead focusing on the story and vision. However, bulls should now consider what the financial statements factually present about the major risks to Tesla’s story: failing demand growth. Reasonable analysts want to focus on Tesla’s losses, cash burn, revenue recognition, and equity raises, but the share price has not responded to those in the past. It probably won’t start now. Tesla shares have responded to weak demand, such as with the disappointing 2Q17 production and deliveries release. As the bulls come to recognize that Tesla ownership is more hobby than disruption, the story should unwind. Story stocks hate dates with reality, and Tesla’s reality is tepid demand growth ahead of expiring subsidies and competitive entry.
UNFI
Click here to read our analyst's original report.
No update on United Natural Foods (UNFI) for this week's Investing Ideas but Consumer Staples analyst Howard Penney reiterates his short call on the company.
APD
While we typically leave it to others to summarize earnings reports, we have received a number of questions on Air Products & Chemicals' (APD) release and review the 10-Q briefly below. While one can quibble about the quarter’s non-GAAP items, the prospects for different regions, mix, and the relevance of new and evolving disclosures at PX and APD, it really isn’t relevant to our view. For APD and the industry more generally, these kinds of items aren’t where the focus should be. The impact of PX + Linde merger and APD’s capital deployment opportunities are likely to become the dominant factors, with the entanglement of those factors (divestitures) potentially evident by year-end.
Focus On Key Questions: For APD, we suspect investors need only ask a few questions. How much capital deployment is currently in earnings expectations? As we see it, not much. That leaves room for a company run by a diligent capital allocator to drive upside relative to current expectations. Is management executing well in the interim? The FY3Q release yet again suggests the answer is yes. Is the macroeconomic backdrop increasingly supportive? It seems so.
COH
Despite the downgrades, the ‘great KATE deal’ consensus, and people not wanting to place a bet long-side on the perennially underperforming Coach after a 32% YTD run – this call is not over. In fact, I’d argue that it’s just beginning.
- The reality is that ‘the space’ is not dead. This is a solid business with high (sustainable) returns and a very defendable per-capita unit consumption story and stable ASPs. It’s like the athletic category – but better. The problem is that it went through a period of overbuilding that is at the back end of a bottoming process.
- In that context, Coach is a survivor – meaning it has terminal value. That’s a simple question that needs to be answered ahead of what should be an extreme bifurcation in multiples – ie we see 6-8x multiples in Retail, and 30-40x – with little in between (kind of like the Nifty Fifty in the 60s and 70s, and the dot.com bubble in the late 1990s). Coach is definitely a survivor – both the Coach brand and more importantly, Coach, Inc.
- The crux of the deck we presented last week is that Coach is setting up to be one of the best accelerating growth and cash flow stories in Retail – with a 40%+ earnings beat over the next two years and RNOA going from 19% to 30%. Have fun shorting that.
