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 added SemGroup (SEMG) to the short side of Investing Ideas this week. We also removed United Natural Foods (UNFI) from the short side and Wynn Resorts (WYNN) from the long side.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
We recently spoke with both a former Exact Sciences (EXAS) sales representative as well as a high prescribing primary care physician. The physician, who was an early adopter of Cologuard, expects accelerating growth in test volume over the next year due to the increasing number of patients inquiring about Cologuard. Cologuard has displaced FIT within the practice, with incremental growth coming from the noncompliant population.
The EXAS salesperson confirmed (again) the existence of dormant providers within the EXAS quarterly provider count which depresses the test per provider per quarter ratio, which was 1.67 in 2Q17. We see significant upside to Cologuard's test per provider ratio due to the recent sales force expansion, same practice adoption, lapping the 3-year interval, and new providers.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
The merger plan hit a small bump this week when Brazilian competition authorities raised concerns. But there are no show-stoppers here. At most, it's an irritant that AT&T will handle as it nears deal completion.
We expect confirmation in September of a new head of the Antitrust Division. The nominee, Makan Delrahim, said last fall, before Donald Trump won the election, that he did not see major antitrust concerns with the Time Warner acquisition.
AT&T has expressed its willingness to accept conduct conditions. As we've noted before, the DOJ is likely playing with a weak hand as a case to challenge the deal is not compelling. Thus, if conditions are imposed in a consent decree, we expect they would be relatively benign. It is also possible that the deal could win approval without any conditions at all.
It looks to be on track for Justice Department approval by the end of the year.
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 July Existing Home Sales numbers, and these numbers will directly impact Realogy's third quarter revenue.
Existing Home Sales: EHS in July missed official consensus estimates but beat whisper numbers, falling -1.3% sequentially while showing accelerating improvement on a year-over-year basis,
The less convoluted contextualization is that EHS did exactly what they were supposed to do.
PHS (signed contract activity) are inherently a strong lead indicator for closed transaction volume (EHS) and, empirically, short-term dislocations between the two series resolve via EHS recoupling to PHS. EHS fully recoupled to the trend in PHS in July and at +2% Y/Y continue to track largely in-line with our expectation for low-to-mid single digit growth.
Under the hood, the same tight supply-solid demand dynamics that have characterized the TTM+ were persistent. Specifically, with unit inventory down -1% sequentially and accelerating to -9% Y/Y (marking the 26th consecutive month of negative year-over-year price growth), high end sales still growing strong, 1st-time buyer share still marching higher and days on market holding below 30 days for a 4th consecutive month, the preponderance of data continues to point to supply remaining the primary upside constraint.
In short, the headline was modestly underwhelming but largely as expected. We’re more interested in the PHS data for July out next Thursday, 8/31.
RRR
Click here to read our analyst's original report.
As we suspected, Red Rock Resorts' (RRR) quarterly earnings and conference call pushed out the investment story to 2019. From a ROI on capex perspective, that’s true. However, we think accelerating same-store trends in the Las Vegas locals market will make the first leg of the thesis a 2018 story. Nevertheless, since ROI is a part of the long term story, we take a look at other development projects in the company’s history. Our conclusion is that this management team may be spending a lot over the next 12 months, but if history is any guide, ROI should be high.
RRR generally spends more than its peers on renovation / refurbishments / enhancement projects as seen below. But the management team is not afraid to loosen the purse strings as they're confident of generating ROI exceeding that of the industry average of low-to-mid teens.
We expect single digit ROI expectations this year and next before ramping up significantly to mid-teens for 2019 and 20% by 2020. However, given our favorable views on the market and RRR’s operational expertise, our estimates could prove to be conservative.
DE
Click here to read our analyst's original report.
Deere (DE) is not an acquisitive company, and this Wirtgen deal is a major strategy shift. If Ag Equipment was about to surge back, why wouldn’t DE go after a big Ag and Turf acquisition? Exiting both a core market and a supposedly winning strategy is not a great idea, especially when the deal’s valuation rationale is explained via 2022 synergies. While some saw it as a positive, accretive development, we see it as a piece of confirming evidence that DE cannot rely on its core Ag equipment market as the down-cycle continues.
CERN
Click here to read our analyst's original report.
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"We remain very excited about the near-term replacement market, EHR market, there is still 50% of the marketplace that is on a non-currently marketed solution set from our competitors. And so, I think it represents a great opportunity, and the pipeline remains very strong and robust." |
While "50% of the marketplace" may be subject to replacement, the 50% of sites only represent 20% of total Hospital Net Patient Revenue AND the opportunity is half the size today compared to 3-years ago. Based on these stats, the math doesn't support $2B a year or more in new client bookings for Cerner (CERN). If EHR replacement activity was as strong as management described then why were short-term bookings only +5% YoY in 2Q17 and down sequentially from 1Q17? Why did management take down their long-term core growth assumptions through 2020 from 5% to 3% earlier this year? Why does the number of contracts signed appear to be topping out?
COH
Click here to read our analyst's original report.
Coach (COH) issued its 10Q last week.
Its outlets were more promotional in Q4 which led to gross margins contracting 120bps, but for the year gross margins expanded 70bps.
At the same time Coach pulled back wholesale distribution and promotions. Each wholesale door averaged $.18M in F2017, up 33% from F2016 as the number of doors was reduced by 25% to 750. While wholesale is a much smaller percentage of Coach’s business its promotional impressions in the public is much larger than in the financials. Coach wants to be in control of the promotional intensity.
In F2018 Coach’s gross margins will contract due to the combination of the lower margin Kate Spade. We believe the one-two punch of Kate Spade and Michael Kors pulling back on promotions will be a favorable tailwind for Coach on promotional levels next year.
We continue to believe…
The TAIL call on COH looks as good today as it did yesterday – now % EPS upside is greater. Our estimate was 30% above the Street before the print, and will likely be even higher (35%+) when consensus estimates shake out – if people believe guidance (the 15.2% draw down in the stock suggests people fell for it hook, line and stinker).
HST
Click here to read our analyst's original report.
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. Markets like San Diego, Phoenix, Florida, Seattle, and Washington DC continue to lead the Top 25, and HST has notable exposure to these markets. For the QTD we estimate HST's domestic RevPAR is tracking up around 1.4-1.5%
Winners and losers for the week include:
- Winners (greater than Top 25 Average Growth): St. Louis (+18.3%), Nashville (+11.3%), Oahu (+5.7%), Miami (+4.7%) Both St. Louis and Nashville likely got a bump from the Solar Eclipse, given their close proximity to Totality
- Losers (less than Top 25 Average Growth): Philadelphia (-11.1%), New Orleans (-6.2%), San Francisco (-5.9%), Minneapolis (-5.8%)
HBI
Click here to read our analyst's original report.
Below is an update from Retail Sector Head Brian McGough:
Despite Hanesbrands (HBI) 3.5% rally this week our short thesis remains intact. This is a company that we think ultimately has enterprise value, but unfortunately that value is entirely in debt. In other words, the stock is ultimately worth zero.
Do I care about the stock rallying 3.5%. You betcha…We don’t like losing money in a day, week, month, etc… But this is a very high conviction short. Very.
The core business is under severe pressure, and due to 10-years of bad behavior due to misaligned incentives at the time of the Sara-Lee spin off, the company has no way out – financially or operationally. And yet it is trading at 11x EBITDA but is ‘cheap on earnings’ – but that’s only if the street has earnings right – which it dose’nt.
Due to a severe disappointment in 4Q, HBI attempted (and succeeded) to placate the Street but guiding to high-single digit growth by the end of this year. HBI has never achieved this – ever - -and is highly unlikely to do it when wholesale channels are evaporating in the face of accelerated share loss.
HBI has now experienced 7 consecutive quarters of negative organic growth and has missed organic growth guidance in 1Q and 2Q this year. Our math suggests HBI will need to achieve back half organic growth of 3.8% to hit its mid-point 2017 revenue forecast and quite simply, we do not see it happening.
All levered shorts like this usually start to unravel with a sales miss…we think it happens in 2H of this year. That’s otherwise known as ‘now’.
TSLA
Click here to read our analyst's original report.
Discounts Untouched By Unverifiable & Convenient Self-Reported July Demand Surge: Tesla management does appear worried about the perception of demand. It was a primary topic addressed in opening remarks, with a variety of quantitative claims about July that are unverifiable and not really useful analytically. Is Tesla (TSLA) trying to muddle investor perception of demand? If demand was so strong in July for the Model S & X, why didn’t we see a shift in the new vehicle discounts over the period? The way to deal with a long hamburger restaurant line is usually to raise prices. There is no line that we see.
APD
Click here to read our analyst's original report.
What’s Next? When we speak with investors, we hear about a few key anxieties:
- We’ve Been Waiting Forever For Capital Deployment: First, it hasn’t been all that long, but PX+Linde divestitures put the initial deployments in sight. The operating improvements over the past few years at APD have been impressive. A little caution – particularly with a deal like Yingde – is probably in investors’ best interest. Besides, as soon as APD *starts* deploying its balance sheet, the market is likely to price in much more – the pathway should be obvious at that point, making it key to enter ahead of it.
- Limited Growth For A Mature Industry: If the deals work in a well-structured industry, acquisition-led growth can count, we think. Besides, rail road investors didn’t mind relatively stagnant volumes over the last 15 years, as price and efficiency gains filled the gap for investors.
- What If Management Bungles Investments? They might, but Seifi & Co don’t seem sloppy at all. And they certainly won’t get all of $9+ billion wrong, and the initial round should be strong assets divested for regulatory reasons. The cost of debt isn’t exactly a high return bar, either.
- After Initial Deployment, FY18 Estimates Rise: If acquisitions are completed by early FY18, it would be reasonable to expect consensus to migrate north of $7 per share.
SAVE
Click here to read the stock report on Spirit Airlines (SAVE) we sent Investing Ideas subscribers earlier this week.
SEMG
Below is a brief note from Hedgeye CEO Keith McCullough on why we added SemGroup (SEMG) to the short side of Investing Ideas earlier this week:
While it's been entertaining to watch plenty of high profile pundits try to call US stock market "tops" for the last 9 months, it's simply been more profitable to be short "reflation" via levered Energy companies as Oil and Nat Gas prices have deflated.
One of Energy Sector Head Kevin Kaiser's favorite Energy SELL Ideas (Institutional Research Product) remains SemGroup (SEMG) and here's an excerpt of what he wrote about SEMG's recent low quality quarter:
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"SEMG easily needs another $1B to get its balance sheet in proper shape. We estimate that SEMG’s net debt at year end (including the deferred payment to Alinda) will be over $3B, with debt / EBITDA around 8x. In short, material, organic deleveraging is years away (if ever possible), and it will be a grind. What SEMG needs to do is sell assets (SemLogistics and SemMexico is a start), raise equity, and then cut the dividend." |
Sell green,
KM
