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 Macquarie Infrastructure (MIC) and Genesis Energy (GEL) from the short side of Investing Ideas this week.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
On Exact Sciences (EXAS), Hedgeye CEO Keith McCullough offered this in a Real-Time Alert buy signal issued on EXAS earlier this week:
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"Looking for those ABC's of dip-buying again? A) Stocks our analysts like that… B) are signaling immediate-term TRADE oversold within their bullish TREND and ... C) are down on #decelerating volume? A: Exact Sciences (EXAS) remains one of our Healthcare Team's favorite longs. Reviewing the recent Q217 EPS report: Exact Sciences (EXAS) reported positive results for 2Q17 and raised their full year 2017 guidance from $195-$205M to $230-240M. EXAS' new sales guidance is in line with our expectations for the year and we remain long due to our expectation that positive 2017/2018 sales estimate revisions will drive the stock higher from here. 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 increase in tests per provider is consistent with our view that guideline inclusions would drive physician adoption of Cologuard and it more than offset a modest -3% sequential decline in ASP to $428 mainly due to payer mix shift towards commercial payors in the quarter. 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. Buy on red, KM |
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
Speculation swirled this week that AT&T would divest CNN as a condition to win antitrust approval from the Justice Department, but a senior AT&T executive dismissed the idea and reaffirmed AT&T’s interest in retaining CNN as a content and news asset. This was not surprising. We have long expressed our view that there is no antitrust enforcement case to force the divestiture of CNN. We have also believed, despite President Trump’s criticism of CNN, that potential divestiture of the news channel would not be a factor in the approval process.
Meanwhile, Sen. Elizabeth Warren (D – MA) has put a hold on the President’s nominee to head the Antitrust Division, complaining that the nominee, Makan Delrahim, would elevate corporate interests over the public good, suggesting weak antitrust enforcement. This triggered a strong defense of Mr. Delrahim from his former boss, Sen. Orrin Hatch (R –UT) in a speech on the Senate floor. Ultimately, we doubt there is meaningful opposition to Mr. Delrahim’s confirmation and that he will win approval on a strong bipartisan basis when the Senate returns from its recess in September.
The Justice Department staff have likely completed much of the investigative work regarding the proposed AT&T/Time Warner transaction and should be ready to make recommendations to Mr. Delrahim shortly after he arrives to lead the Antitrust Division. This suggests the deal can still win approval before the end of the year, consistent with AT&T’s public expectations. The approval process could lead to conditions in a consent decree, and AT&T has said it is willing to accept some conditions, but we doubt the imposition of major conduct remedies that would hobble AT&T as it evolves its product and service offerings in a converging telecom and media ecosystem.
We also believe that the DOJ’s review has implications for Internet streaming services like Netflix. If, as we expect, the DOJ does not mandate substantial content access for independent over-the-top (OTT) video providers (a remedy imposed on Comcast when it acquired NBC Universal), it could hamper the flexibility of such services to maintain a sufficient program and movie library for their expanding subscriber base or at least significantly raise the cost of doing so.
We believe the transaction remains on track for ultimate government approval.
RLGY
Click here to read our analyst's original report.
Realogy (RLGY) reported on Thursday August 4th that 2Q earnings beat consensus estimates for Revenue and Earnings Per Share. During the second quarter earnings conference call last week, Management provided the following guidance for full year 2017:
Full Year 2017 Guidance:
- Total Transaction Volume (RFG & NRT): an increase of +5% to +7% Y/Y
- RFG Transaction Volume: an increase of +5% to 7% Y/Y
- NRT Transaction Volume: an increase of +6 to +8% Y/Y
- Revenue: $6.1bn to $6.2bn
- Operating EBITDA: $760mn to $770mn
- Free Cash Flow: $500mn to $530mn
Based on Management's FY 2017 guidance, we calculated the growth outlook for 2H relative to 1H17. Growth would be expected to slow from +8.3% in 1H17 to +6.0% in 2H17. That is, if you believe the guidance. We would expect home price growth to remain strong through the back half of this year, but we acknowledge the weakness in the outlook on the volume side. We expect results will likely come in at or just above the high end of their implied 2H17 targets.
UNFI
Click here to read our analyst's original report.
No update on United Natural Foods (UNFI) for this week's Investing Ideas. We reiterate our short call on the company.
RRR
Click here to read our analyst's original report.
Red Rock Resorts' (RRR) Q2 release and conference call was very consistent with what we outlined in our June 28th presentation/video, “RRR UNCOILING THE SPRING.” We thought RRR would miss Q1 estimates and new CFO Steve Cootey would provide more transparency on capex and raise spending expectations considerably. Below the Street guidance was also a possibility and although nothing specific was offered, near term estimate reductions are likely – and we think that’s a good thing.
On Tuesday, RRR printed Q2 EBITDA of $120 million, right in-line with our estimate but below the Street at $125 million. Most of the conference call was indeed focused on capex as management raised the budget on Palace Station by $76 million last night to $191 million and introduced a $146 million capex target for the Palms’ 1st phase. We’re now modeling the following for total capex:
- 2017: $243 million including $60 million at Palms and $131 million at Palace
- 2018: $282 million including $136 million (including a $50 million Phase 2) and $55 million, respectively
- 2019: $107 million: including $7 million at Palms
The sell side narrative will push out the RRR story to 2019 – no need to buy the stock now they’ll say. However, as we discussed during our presentation, the ROI story will indeed reach fruition in 2019. More importantly, however, we see RRR as a long term ROIC story, driven primarily by long term same store revenue growth with 80-90% flow through – the highest in the country. According to our data, that story will begin to come to light in 2018 and will be the real driver of the stock.
DE
Click here to read our analyst's original report.
No update on Deere (DE) for this week's Investing Ideas newsletter. The company reports financial results next Friday. We reiterate our short call on the company.
CERN
Click here to read our analyst's original report.
Here's the good and the bad from Cerner's (CERN) recently reported 2Q17 results.
THE GOOD
- Consolidated bookings increased +16% YoY to $1.64B, far exceeding consensus expectations of flat and management's guidance of -7% to +7% YoY
- Long-term bookings +45% YoY driven by strong contribution from IT Works, including the pull-forward of one IT Works deal from 2H17, and large hosting contracts
- New client bookings +10% YoY is much better than our expectation for negative growth and management had very strong commentary related to the near-term EHR replacement market and pipeline
THE BAD
- Short-term bookings of +5% YoY slowed sequentially from +7% YoY in 1Q17; short-term bookings are more sensitive to 3-5 year licensed software purchases and associated professional services revenue for implementation
- Consolidated revenue growth decelerated to +6% YoY in 2Q17 from +11% YoY in 1Q17
- Adjusted operating margin declined -75bps YoY mostly due to a +85bps YoY increase in sales and client service expense as a percentage of revenue
- Management narrowed their sales guidance range to $5.15B - $5.25B, implying limited upside in 2H17 despite strong 1H17 bookings growth of +12% YoY; We expect the low-end of FY17 EPS guidance of $2.46 - $2.54 given the negative services mix-shift. (Note: Management had previously suggested they could hit their guidance with very little bookings growth)
- 2Q17 backlog growth of +12% YoY is up modestly from +11% YoY in 1Q17, but does not support a reacceleration in revenue growth; backlog increase reflects longer duration bookings from IT Works contracts that include 7-10 years of maintenance and support revenue, where traditionally the backlog only reflects 1-year.
Measuring the balance of good and bad, we're sticking with our Cerner short call.
WYNN
Click here to read our analyst's original report.
We think growth continues to be led by VIP in Q3 and Wynn Resorts (WYNN) is the major beneficiary of the VIP explosion. Our thesis is that with the Street already anticipating decelerating growth – with Q2 the peak – continued monthly GGR beats will force revenue and EBITDA estimates higher, and provide the catalysts for stock appreciation. Indeed, in the 2010-2014 Macau bull market, the stocks climbed long after growth had peaked early in the cycle. Current valuations are reasonable even on the conservative EBITDA estimates. We view the recent sell off as a buying opportunity
COH
Click here to read the Coach (COH) stock report we sent Investing Ideas subscribers earlier this week.
HST
Click here to read our analyst's original report.
Hotel stocks (both REIT and C-Corps) took a beating this week, as RevPAR continued to come in below expectations for the month of July and now for the beginning of August. With our views on where the cycle is headed, we’d welcome the opportunity to gain more exposure to a name like HST, which despite upping their full year guidance in 2Q, likely has the potential to produce stronger than expected results going forward.
As for valuation, Host Hotels (HST) is now trading below its below historical range, and we think there is ample opportunity for multiples to expand as RevPAR growth starts outperform in the coming months.
HBI
Click here to read our analyst's original report.
Gildan reported earnings last week and announced its share in men's underwear units. It was up 270bps yy to 11.7%, keeping the rate of share gain steady with last quarter. We think at least half of this share gain is coming at the expense of Hanes.
Recently Gildan has gone from being in the "valley" of shelves in 1100 Wal-Marts in the US to now being in the valley in all Wal-Marts. Gildan will be competing directly with Hanesbrands (HBI) for unit velocity on the shelves while having a lower sticker price and an arguably better product. That means share gain is likely to accelerate in the coming 4 quarters.
With HBI management planning 2H organic sales to be about +3%, and the company losing share via its largest distribution channels, we think HBI will miss organic sales targets significantly through year end.
TSLA
Click here to read our analyst's original report.
Execution remains paramount to this story stock and Top Short Tesla's (TSLA) print recently suggests it’s falling down on that measure. With both deliveries and implied deposits down in 2Q17, this is not the exponential demand growth story investors are looking for. Hope remains with the stock reacting favorably recently, but we think bulls should consider what the financial statement factually present about the risks to TSLA’s story – failing demand growth.
As the bulls come to recognize that TSLA ownership is more hobby than disruption, the story should unwind. Among several points of interest, we found the production scapegoat for weak 2Q17 deliveries noteworthy – particularly since production significantly exceeded deliveries suggesting that wasn’t in fact the issue. So is management misinformed, or untrustworthy?
Neither is satisfactory. It doesn’t help that on the same call, CEO Musk revised the Model 3 reservation number from 500k down to 455k a number the CEO ought to know. This is not an encouraging fact pattern. If demand is slack in 2Q17, with full subsidies and little to no competition, we think the critical catalyst is how well TSLA weathers the pending storm with expiring subsidies and abundant subsidized competition starting in 2H17.
APD
Click here to read the Air Products (APD) stock report we sent Investing Ideas subscribers earlier this week.
