Below are analyst updates on our fourteen 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 Spirit Airlines (SAVE) to the long side of Investing Ideas this week.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
Reviewing Exact Sciences' (EXAS) recent 2Q17 EPS report:
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.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
In the aftermath of the President's latest political problems, it appears a staff shake-up will lead to the ouster of White House strategist Steve Bannon, a senior official who likely has had input on the policy impact of the proposed AT&T/Time Warner transaction. We suspect the deal has been part of his issue portfolio since the beginning of the Administration.
If Mr. Bannon leaves the White House at least in part as a response to the Charlottesville fallout, it would further enhance the perception of the deal's coming approval and reduce the likelihood that AT&T would feel any pressure to divest CNN as part of the approval process. Published reports have suggested Mr. Bannon has concerns about the deal and such concerns could include criticism of CNN coverage of Donald Trump as a candidate and as President.
Again, we're talking perceptions here. We've explained from the day this deal was announced that the White House, despite candidate Trump's stated opposition to the deal, would have limited if any impact on the Justice Department review process and that DOJ review would likely lead to ultimate approval. Avoiding FCC review (by forgoing the transfer of any FCC-regulated licenses as part of the transaction) also bolsters approval prospects and simplifies the regulatory process.
RLGY
Click here to read our analyst's original report.
Our long call on Realogy (RLGY) plays to both the strengths of luxury consumer spending and the broader housing market. While there were not any company specific updates for Realogy this week, we did receive the following positive data points for the broader housing market:
Builder Confidence: The NAHB reported on Tuesday that headline Builder Confidence increased +4 points in August to a reading of 68, marking the highest reading since May. The survey's three sub-indices (Current Single Family Sales, Next 6M Single Family Sales, and Traffic of Prospective Buyers) each increased on a sequential basis in August. Notably, Current SF Sales increased +4 points sequentially to a reading of 74, and Builder Expectations for SF Sales in the Next 6 Months increased +5 points to a reading of 78, indicating that homebuilders are optimistic about home sales in the next 6 months.
Housing Starts: The Census Bureau reported that Total Housing Starts for July declined -4.8% M/M, and -5.6% Y/Y to 1.155mn starts.
- Single Family Starts declined -0.5% sequentially, while increasing +10.9% year-over-year to 856K starts
- Multi-Family Starts declined -15.3% sequentially and -33.7% year-over-year to 299K starts
UNFI
Click here to read our analyst's original report.
United Natural Foods (UNFI) is down 25% in the YTD period versus the DOW which is up 10%, so why do we still think there is more downside from here? Simply put, UNFI is a low margin distributor with great exposure to high risk food retail concepts with independents accounting for 27% of sales and Whole Foods which accounts for 35% of sales. We are bearish on these segments for UNFI for different reasons.
First on supernatural (i.e. Whole Foods), in the near to medium term we believe this contract will come under pricing pressure which could squeeze margins further for UNFI, while longer-term the very existence of this contract could be under siege as Amazon further builds out their food distribution network.
While on the independent front, these retailers are under severe pressure due to many industry dynamics, with pricing rising to the top of the list. A recent WSJ article (Click HERE) highlighted the struggles independents are facing. Independents are going into bankruptcy and selling their stores to conventional retailers (ex. Marsh and Central Grocers) and likely turning to more captive distribution in the process of conversion.
As the food retail industry increasingly focuses on price despite rising commodity prices, it could be the distributors that loss in the end.
RRR
Click here to read our analyst's original report.
LAS VEGAS | HOUSING MARKET - Fueling the record prices are rising demand, tighter inventory, higher development costs and a focus on building bigger, pricier homes. Higher prices are holding sales totals down, but so are labor shortages, a smaller roster of builders and decreased available land. Other factors include Las Vegas’ long recovery from the recession and more-normal mortgage lending that, unlike last decade, doesn’t let practically anyone buy a house, builders and analysts said.
Las Vegas isn’t alone. There is a supply-demand “imbalance” nationally, making for an “unusual period” in the home-construction industry, National Association of Home Builders chief economist Robert Dietz said. Despite the changed market, sales still are climbing fast in Las Vegas, as the midyear tally was 22 percent above last year’s. Home Builders Research founder Dennis Smith said he hasn’t been surprised by the pace, adding that he expected sales to climb as the economy and consumer confidence improved.
ARTICLE HERE
Takeaway: Better housing conditions and a lower % of homes under water would benefit the LV Locals, particularly Red Rock Resorts (RRR).
DE
Click here to read our analyst's original report.
We're still digging through Deere's (DE) earnings report. But we reiterate our short call on the company. DE bears have endured some unpleasantness in recent quarters. That said, an inflection in results looks imminent as sales growth in South America fades, DE can't pad headline results with the last of the SiteOne gains, crop prices haven’t risen and compares get harder into FY18.
We see 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.
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 investors will price in the reflexive unwind in this commodity-related capital equipment industry.
CERN
Click here to read our analyst's original report.
Reviewing Cerner's (CERN) recent 2Q17 EPS report:
Despite 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. 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.
WYNN
Click here to read our analyst's original report.
Third quarter growth continues to be led by VIP and Wynn Resorts (WYNN) is the major beneficiary of the VIP explosion. We view the recent sell off as a buying opportunity similar to the many sell offs during the 2010-2014 period when GGR mostly exceeded expectations.
Favorable conditions are seemingly in place for long term mass revenue growth in Macau, 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.
COH
Click here to read our analyst's original report.
The market reacted negatively to the Coach (COH) print this week. Though the Coach brand looked solid with a mid-single digit comp, and Stuart Weitzman looked fine, the market was concerned about guidance around Kate Spade.
We are not as concerned.
The big issue here is the TREND – and whether KATE really eroded like management is guiding. The answer is NO. If KATE really rolled (which does NOT happen overnight), why wouldn’t COH -- the only bidder -- have waited another 3 months to buy at a cheaper price. If the Kate Spade guide was very bullish, then any lawsuits around an unfair deal price would have more teeth. Kate Spade NTM EBIT estimates were clocking in around $215mm before the print. Now guidance is for $140mm-ish. The math doesn’t work for us.
Meanwhile, when EPS beats are coming at a greater magnitude on an accelerating EPS/Cash Flow algorithm with ROIC accelerating by 1,000 bps…I get pretty pumped. That’s when sandbags on estimates matter. When nearly every line on the P&L and balance sheet are so bullish and likely to come in so much above consensus, that’s when the name goes from being expensive today to cheaper in 6 months $10-$15 higher.
HST
Click here to read our analyst's original report.
Hotel performance for the week ended 8/12/2017 showed improvement vs. sluggish 3QTD trends, which have largely been softer than what we've seen in 1H 2017. This past week's YoY comp was relatively easy and similar to that of the prior week, and judging by the calendar, there were no nationwide disruptions. This week's results were lifted by the midweek period (Monday-Thursday) where RevPAR expanded +2.6% YoY vs. modest growth on the weekend (Friday-Saturday) of ~+1.2%.
Results in the QTD have been sluggish, however, there are pockets of outperforming markets, to which Host Hotels (HST) has relatively more exposure than its competitors.
Winners and losers for the week include:
- Winners (greater than Top 25 Average Growth): Orlando (+13.2%), Phoenix (+16.7%), Tampa (+12.5%), San Diego (+11.0%)
- Losers (less than Top 25 Average Growth): Minneapolis (-7.9%), Boston (-7.8%), Philadelphia (-6.3%), Chicago (-7.9%)
Markets like San Diego, Phoenix, Orlando, Seattle, Washington DC continue to lead the Top 25, and HST has notable exposure to these markets.
HBI
Click here to read our analyst's original report.
We think investors don’t appreciate the market share risk for Hanesbrands (HBI). Hanes is seeing dozens of new brands pop up on the higher end of the market that provide a better product and experience than HBI for those who can afford it. Historically these brands were unable to enter the market since they didn’t have the scale to get into major distribution where the customer shopped. Now you can get to the customer easily with an online store, facebook, instagram, etc.
Then you have risk from Gildan and Amazon private label at the low end of the market.
Combined, it's not unreasonable to think we could see -5% organic growth or worse for several years as share shifts to these other players.
HBI has now seen 7 straight quarters with negative organic growth, and it has missed organic growth guidance in both 1Q and 2Q this year. HBI is now planning a big ramp in organic growth in the second half of 2017.
As we highlighted last week, Gildan recently 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. This represents accelerated competition for HBI.
So HBI is planning a significant organic growth acceleration, when the research indicates organic growth is more likely to get weaker on the margin.
We think sales expectations will be very difficult to achieve.
TSLA
Click here to read our analyst's original report.
Below are key takeaways from our Tesla (TSLA) short thesis:
- To be clear, Tesla is a temporarily subsidized maker of capital goods.
- We are expecting under-performance as Tesla's exciting concepts transition to mundane execution.
- Established equipment markets have seen almost no competitive entry for decades; important structural hurdles typically preclude entry into markets like automobiles and electrical equipment. As Tesla's tax credits are exhausted, existing car makers can introduce EV models with as yet unused tax credits, adding to their already substantial edge.
- Concepts, ideas, and vision can easily win the market's beauty pageant. Grinding out a cheap version of a high-end platform in a competitive market, with a less tolerant customer and expiring tax credits? That gets ugly.
- The goal in a story stock like Tesla is to anticipate the next chapter.
- Tesla's valuation is silly, and we suspect most sophisticated investors realize it.
- All this drama comes just ahead of new competition that may permanently degrade Tesla's growth prospects.
- Longs should be fearful and shorts greedy, as we see it.
- If Tesla even survives to profitability, it would be an exceptional accomplishment.
APD
Click here to read our analyst's original report.
Macro Catch-Up: An initial point in our Air Products (APD) long thesis was that industrial activity was improving well ahead of estimates. That tailwind was helpful to APD in FY3Q. Pricing was positive in North America and volumes were healthy across the board. More specifically, enhanced utilization in China brought price improvement on the heels of decent economic growth. Mostly, the environment continues to look more supportive.
SAVE
Below is a note from Hedgeye CEO Keith McCullough on why we're adding Spirit Airlines (SAVE) to the long side of Investing Ideas earlier this week:
Buying dips, selling rips. That is the risk management #process @Hedgeye, indeed.
Looking for new names that are:
A) At the low-end of the @Hedgeye Risk Range and have
B) Recently been added to our analyst #like lists?
Enter a recipient of our Reflation Rollover call (lower fuel prices passed on to consumers benefiting from inflation #slowing): Spirit Airlines (SAVE). Per our Industrials guru, Jay Van Sciver
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"Given the recent decline in shares of SAVE, we see an entry opportunity into a major structural change in the airline industry: the rise of the ULCCs. We have waited quite a while for a chance to invest in Spirit, as we think some investors incorrectly specify the market potential for ULCCs. We expect SAVE to benefit as they gain scale and leverage their low cost operating model." |
Buy on red,
KM
