Below are analyst updates on our twelve 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 Host Hotels (HST) from the long side of Investing Ideas this week.
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.
Key Takeaway from the Sales Rep: The majority of provider adoption is driven by patients asking their doctor about a Cologuard test. We believe that the current level of advertising will remain in order to drive continued adoption.
Key Takeaway from the Primary Care Physician: Test volume over the last month (as of 8/17) was up +33% YoY and is expected to be up over +50% during the same period next year. Our contact is seeing accelerating growth in the number of Cologuard tests being prescribed due to patients inquiring about Cologuard.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
The President's nominee to head the Antitrust Division, Makan Delrahim, has been held up in the Senate by Sen. Elizabeth Warren (D -MA), but we expect he will win strong bipartian confirmation when his nomination finally hits the Senate floor in September. Meanwhile the Justice Department staff continues to work the transaction and is likely engaged in discussions about possible conditions that could be part of a final consent decree. As we've noted recently, however, we doubt AT&T will need to make dramatic concessions that impair operating flexibility or curtail the deal's strategic upside as a DOJ challenge to enjoin the merger appears relatively weak, limiting the agency's bargaining power.
It is entirely possible that DOJ could clear the deal with no conditions at all, or with very limited, fairly benign conduct requirements. We do not expect the divestiture of major TWX assets.
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. Below are the key takeaways from this week's Pending Home Sales data:
HOUSING: Pending Home Sales | Pending Volatility?
- Takeaway: PHS Growth = Flat, month 19. Harvey, however, may bring rising volatility. We contextualize the setup below.
- Pending Sales capped off an underwhelming rash of housing data for July, falling -0.8% M/M while slipping to -1.27% Y/Y on a seasonally-adjusted basis.
- Importantly, and as it relates to housing specifically, Texas has been ground zero for growth – representing over 14% of Total New Construction activity nationally. Indeed, SF permits in Texas have represented 14.9% of Total National SF permits in 2017 YTD. Houston and Austin – the primary areas affected by Harvey – represent ~62% of the state total with Dallas being the other intrastate heavyweight.
- However, also in relative contrast to New Orleans and Katrina, the underlying factors driving economic dynamism in the area remain in place and should support favorable transition dynamics over the medium term.
- Near-term drag, medium-term boost isn't particularly insightful but that remains the baseline expectation for the procession of impact to reported activity.
It’s been our view that strong demand and accelerating price (alongside still favorable affordability and a backslide in rates) sit as a positive backdrop for housing despite the supply induced upside constraint on volume.
Moreover, market fundamentals should adjust, albeit trudgingly, to prevailing conditions, gradually serving to relieve supply pressures.
RRR
Click here to read our analyst's original report.
RRR/BYD | LV LOCALS - SOLID GGR GROWTH: Las Vegas Locals posted 13% GGR growth in July, its best performance since Nov 2015. July benefited from low slot hold last year. According to an accounting quirk, slot revenues on 7/31/2016 were not counted until August 1st since the month ended on a Sunday. On a slot-hold adjusted basis, Locals GGR still grew 4% YoY in July. In addition, slot and table volumes both grew 3% YoY in July.
While we anticipate Locals GGR growth to accelerate beginning next year, we still like the steady growth gaming environment this year. The best way to play the Locals exposure is to own Red Rock Resorts (RRR), where LV Locals EBITDA accounts for ~82% of its property EBITDA.
DE
Click here to read our analyst's original report.
Given all of the currently ignored challenges for Deere (DE), we think it is well worth continuing to run with our bear thesis. As the sharp rally in South American crop prices fades, SiteOne gains create a difficult GAAP compare, and higher input costs flow through the P&L, we expect the consensus short view to reemerge. The Wirtgen acquisition, to us, looks like an effort to plug a big hole management may expect in FY18 and beyond. Farm credit deterioration should be reflected in Finco financials, which have literally moved the other way.
The reality for DE longs is that the fleet is young, inventories are high, credit is still weakening, and used equipment pricing remains weak (on our screens). Sentiment is quite bullish, by our read, despite many ag headwinds. We remain very bearish on shares of DE.
CERN
Click here to read our analyst's original report.
BIG PICTURE: Cerner (CERN) is the #2 EHR vendor in the U.S. and #1 Healthcare IT vendor in the world. While we don't believe this will change anytime soon, we also don't believe they are immune to the challenges of a saturated market with limited replacement opportunity. Simply put, Cerner is a nice house in the bad neighborhood, that is, the EHR industry.
KEY TAKEAWAY FROM 2Q EARNINGS: 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.
COH
Click here to read our analyst's original report.
We have previously mentioned the opportunities Coach (COH) has with the Kate Spade brand. Coach also has many growth opportunities for its core brand.
- Coach has significant market potential in product categories like outerwear, men’s goods, and footwear that are natural extensions for the brand and have low penetration rates currently.
- Europe is a $9B handbags market of which Coach only has $135M and few direct competitors at its affordable luxury price points.
- Handbags are an attractive category with relatively high margins requiring smaller store footprints.
- Seasonality in handbags is relatively low and one size fits all which limits the amount that needs to be cleared.
- In the minds of consumers handbags are seen as having higher utility and can be worn much more often than apparel.
- Many consumers view handbags as a wardrobe investment so the cost of the handbag will often surpass the cost of the rest of a day’s outfit.
Contrary to popular opinion women are not buying fewer handbags, as shown in the chart below. It was the promotions from the competition growing too aggressively that caused the downturn. As Coach and the competition have pulled back on promotions and inventory purchases we should continue to see improving sales and margins in the sector.
HBI
Click here to read our analyst's original report.
The increased competition Hanesbrands (HBI) is facing from Gildan in core men’s underwear is pretty well signaled and understood. After all, GIL is updating its unit share in this category on every conference call . The piece that is less understood is the risk in other categories and from other competitors.
Bras account about 16% of Hanes sales. Gildan just got into the category indirectly via an acquisition. At the same time, Amazon is making headlines with its new private label bra initiative.
Also, both Gildan and Amazon are working to grow share in nearly all categories where Hanes operates, and Hanes is not invested to compete over the long run.
It is becoming more and more apparent that structural changes in this industry are enabling accelerated competition and Hanes shares will go nowhere but down, meaning persistent negative organic growth.
TSLA
Click here to read our analyst's original report.
Stupid or Not Truthful? Tesla (TSLA) blamed a battery production problem for weak 2Q17 deliveries. However, production significantly exceeded deliveries, estimated S & X deposits declined sequentially, and vehicles in transit declined sequentially. There was notably no update on these production difficulties, or explanation of how those items can co-exist with the production problem explanation (it is almost certain that they cannot).
APD
Click here to read our analyst's original report.
A Few Items Of Note In The Air Products (APD) 10-Q
EfW: The disclosure on the energy-from-waste exit was, well, fuller in the 10-Q this quarter and vs. the press release. There is a nod to potential “additional exit costs in future periods related to [unspecified] other outstanding commitments.” (Well, that certainly clears it up.) We wouldn’t look for anything particularly material, but the language probably didn’t change because of all the good news.
Latin America Pain: Given the impairment and unenthusiastic description, we are reminded that PX+Linde may divest South American assets to satisfy regulators. What could be better for future reported profits than impairments followed by a series of acquisitions that improve the profitability of the division? If the added scale might have precluded the impairment, it may prove helpful. We’ll need to see how large and proximate required divestitures are to judge. It does seem clear that PX was negatively impacted relative to APD in the quarter by its larger exposure to South America.
Asia Equipment Sales: “Old China” activity looks set to slow in 2H17, and equipment sales may be impacted. While regional equipment sales may or may not prove sustainable, inclusion implies uncertainty at best.
SAVE
Click here to read our analyst's original report.
Given the recent decline in shares of Spirit Airlines (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.
SEMG
Click here to read the stock report on SemGroup (SEMG) we sent Investing Ideas subscribers earlier this week.
