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.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
Using Google trends and our s-curve adoption model we are projecting ~12k and ~11k provider adds for Exact Sciences (EXAS) in 3Q17. We believe our three models (Cologuard-Tracker, S-Curve, & Google Trends) will converge and have less variability as we collect more data points through the end of the quarter. Regardless, using our most conservative estimate of ~8.5k provider adds (~89.5k total providers) from our Cologuard-Tracker, we are forecasting 3Q17 revenue of $65.2M compared to consensus at $64.7M based on our assumptions of a $426 price per test and 1.71 tests per provider.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
Final Justice Department approval of the AT&T/Time Warner transaction may be delayed as the Senate has not yet confirmed President Trump’s nominee to head the Antitrust Division, Makan Delrahim. There are published reports, however, that staffers in the Antitrust Division could move ahead and complete negotiations with AT&T before Mr. Delrahim is confirmed. This is indeed possible, particularly if the Justice Department is prepared to clear the deal with or without a consent decree. But this is a high profile deal and the staff could be reluctant to make the final call ahead of Mr. Delrahim’s confirmation.
Apparently, Sen. Elizabeth Warren (D –MA) has put a hold on the nominee to signal concerns that DOJ investigations could be improperly influenced by the White House or senior Administration officials. Although President Trump, as a candidate, vowed that the AT&T/Time Warner deal would not be approved in his Administration, there have been no statements or indications of disapproval from President Trump or other senior officials following the inauguration. In addition, Mr. Delrahim, in an academic capacity before the election, suggested the AT&T/Time Warner merger should not pose significant antitrust problems (as a vertical transaction).
We continue to expect approval before the end of the year at the takeout price of $107.50 per TWX share. The integration of AT&T’s distribution capabilities with Time Warner’s content creativity and established library should bolster existing service offerings and generate new revenue opportunities tied to digital advertising. We also think the repeal or curtailment of stringent FCC net neutrality rules could also expand the combined company’s operational flexibility to diversify revenues and augment the base of customers essential to network cost recovery.
RLGY
Click here to read our analyst's original report.
In the short term there is some modest downside risk to shares of Realogy (RLGY) from Hurricane Irma. This is because Realogy’s owned brokerage business, NRT – which accounts for ~60% of total company EBITDA before intercompany accounting transfers -- derives roughly 10% of its revenue from Florida. At 20.6 million people, Florida’s population is ~6.4% of the United States’ 323 million and so NRT’s 10% share suggests a slightly disproportionate exposure.
While I think that ultimately the market will look through this as something clearly outside of Realogy’s control, in the short-term it could serve to pressure shares as some investors elect to move to the sidelines and wait for the dust to settle.
RRR
Click here to read our analyst's original report.
According to Gaming, Lodging and Leisure analyst Todd Jordan...
The days of 25% ROIs may be gone but with interest rates where they are, Red Rock Resorts (RRR) should create meaningful value even in the mid-teens. This management team has spent wisely in the 20+ years I’ve been following the company. Given the fixed supply and accelerating demand drivers, capital investment in the LV local market seems prudent. We don’t think investors should wait for the ROI story to play out, however. The likelihood of accelerating same-store sales gains, with 80%+ flow through, makes RRR a compelling 2018 story, in our opinion.
DE
Click here to read our analyst's original report.
Click here or the image above to watch this video.
Wall Street paints a largely rosy outlook for agriculture equipment manufacturer Deere (DE). The reality down on the farm is a lot worse.
While sell-side analysts are almost universally bullish or lukewarm on shares of Deere (Buy: 8; Neutral: 14; Sell: 1), we have a differentiated view. There’s pricing pressure in both the used and new ag equipment market that, for whatever reason, Wall Street is missing.
“We don’t have a real turn in used and new inventory. We don’t have a turn in large ag sales. I really don’t see why everyone is so comfortable calling a bottom in Deere,” says Hedgeye Industrials analyst Jay Van Sciver in the video excerpt above from a recent institutional conference call.
CERN
Click here to read our analyst's original report.
We continue to believe Cerner (CERN) 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
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This past week Coach (COH) featured its collaboration with Selena Gomez at fashion week. Selena Gomez is a 25 year old singer and actress who started her career on a number of Disney programs. She is the most followed user on Instagram. Since announcing the partnership with Coach she has added 14M incremental followers. Selena Gomez was met with long lines of fans waiting to meet her and purchase her new bag at its flagship midtown store. We have never seen such a reception for a product launch at Coach. Coach’s customer base is the oldest of the affordable US luxury brands.
Together with the acquisition of Kate Spade and its much younger customer base we believe Coach will be successful in turning back the clock of its customers, something that is critical to a fashion brand.
HBI
Click here to read our analyst's original report.
After a strong start to the week Hanesbrands (HBI) concluded its weekly trading session flat WoW in comparison to a 1.7% increase in the XRT Index.
HBI presented at a retail conference on Thursday where management opted out of doing presentation, obliging to accept 1 on 1 meetings only. This is a company that has historically leapt at opportunities to preannounce optimistic results. HBI remaining on the quiet side through the conference with a stock pull back on event day could mean investors were not convinced by management that 2H numbers will be easily met.
The company will see a 1-2% FX tailwind in the back half (chart below) and management will likely bake this into its organic guide, but we think revenue numbers will still be a big stretch.
This stock is likely poised for some serious action somewhere between the 3Q and 4Q prints. We’re thinking 4Q will be the big proof point.
TSLA
Click here to read our analyst's original report.
Bounce, Fail? While shares of Tesla (TSLA) have rebounded from their July lows, we see ongoing evidence that the narrative behind this story stock is growing stale. Very few names in our coverage offer such a large differential between a reasonable share price range and where the shares are trading. With tens of billions in misevaluation on the table, getting the thesis and timing in Tesla is critical. Demand growth is core to the Tesla story, and we see many indications of fading interest. We do not believe Tesla will transition to mass production in a reasonable period, impacting subsidy availability and the competitive product set. In our data, the Tesla growth story is showing widening cracks.
APD
Click here to read our analyst's original report.
As noted in our thesis, an improved cyclical backdrop is helpful for the short-term, particularly relative to estimates. While there are odds and ends to be concerned about, not much approaches the likely positive impact of redeploying the Air Products (APD) balance sheet. Once that process starts, we expect investors will look well down that path and price in much of the upside.
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.
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 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 our analyst's original report.
On Friday 9/15, SemGroup (SEMG) priced $300MM of 8.5 year unsecured notes at a 7.5% coupon, a surprisingly high coupon given the Company’s existing long-term had been trading ~6.0 - 6.5% prior to the new issue. SEMG will use the $300MM to pay down its revolving credit facility.
SEMG may also soon issue preferred equity, perhaps with a coupon near 10%.
The Company’s super-aggressive financing of the HFOTCO acquisition has spiked its leverage and cost of capital. This may cause investors to rethink the proposition of owning SEMG common equity at a current dividend yield of just 6.5%.
UNFI
Click here to read our analyst's original report.
Earlier this week (Wednesday, July 13th), United Natural Foods (UNFI) (Best Idea Short – Tier 1) announced 4Q17 and fiscal year 2017 results, in which the Company posted 4Q17 EPS of $0.72 vs. FactSet $0.70 and revenue of $2.34B vs FactSet $2.36B. However, what really caught our attention was when Company CEO , Steven Spinner, said the following in response to a question regarding whether WFM’s market share gains have to come at the expense of UNFI’s conventional and independent channels: “Boy, I wish we could but that’s – we certainly don’t have the answer to that one.”
Mr. Spinner’s response certainly does very little to give investors confidence that UNFI will be able to weather the coming storm. With WFM continuing with price investments in their stores (subsequently lowering prices), it is hard to believe that UNFI’s conventional and independent channels will not feel the brunt of this!
