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 Tesla (TSLA) from the short side of Investing Ideas.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
Our Cologuard-Tracker has updated through the end of August and is currently forecasting ~8.5k provider adds in 3Q17 which is a sequentially lower provider add number compared to 2Q17. We would note that we expect our tracker to update one more time before Exact Sciences (EXAS) reports 3Q17 earnings, July and August are typically slower months for providers due to seasonality in their businesses, and our Cologuard-Tracker is not the only method we use to forecast Cologuard providers counts.
The sequentially lower provider adds identified in our Cologuard-Tracker is broad-based across the U.S. with 38 out of 50 states forecasted to add fewer providers in 3Q17 than they did in 2Q17. There were ~1k providers of attrition from the end of June to the end of August with Michigan, New York, and Texas losing 124, 83, and 74 providers which in total account for ~26% of attrition.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
RLGY
Click here to read our analyst's original report.
Realogy’s (RLGY) second quarter boat was lifted by the rising tide of home prices broadly, but especially among the high end segment where it has outsized exposure. Average prices of homes sold at RLGY's owned NRT unit rose by a very impressive +8.8% Y/Y (second strongest growth since 2012) while average prices in the RFG business rose +6.4% Y/Y. Volumes were less impressive, but still positive as RFG grew 1% while NRT grew just under 3%. Commission rates (aka pricing) and margins were resilient and improved, respectively. The company kept the bar low from a guidance standpoint and we find this encouraging as it will help keep expectations from getting out of hand.
The macro housing backdrop remains favorable and the comps remain easy for the foreseeable future. We continue to like this idea given the favorable backdrop, but think much of the mispricing attributable to the high-end's outlook is now better understood and expect the pace of gains going forward to slow.
RRR
Click here to read our analyst's original report.
Construction spend in the Las Vegas metro area is set to explode over the 5 years, and likely peaking in 2019. As we noted in our deep dive Red Rock Resorts (RRR) presentation “RRR | UNCOILING THE SPRING”, the lack of construction spend has been a major drag on gross gaming revenue growth (GGR) in the locals market over the past few years. So much so that GGR growth has lagged strong macro variables over the same time period.
In our presentation we also highlight the wealth effect (represented in part by the % of mortgages still under water) as the other major hurdle to stronger GGR growth. We think both factors turn to tailwinds in 2018 but construction spending turnaround is clearly the more visible of the two. See below.
From the data that we see, construction spend will be up 120-150% in 2017-2020 vs. 2013-2016. While investors are focused on the new Raiders football stadium, not many know about Project Neon, which is the most expensive public works project in the history of the State of Nevada costing over $900 million (and likely more). Much of that spend will occur in 2018 and 2019. The upshot is that more spend means more jobs and more construction jobs, many filled by temporary workers from out of state.
We know historically and statistically, that construction workers are big gamblers in local casinos. Project Neon and other construction spend could be the biggest marginal catalyst but we can’t forget all of the other favorable macro and demographical variables moving the right way: population growth, retiree growth, housing prices, GDP, unemployment, and fixed casino supply. We could be at the cusp of a bright new bull cycle for the Las Vegas locals gaming market.
DE
Click here to read our analyst's original report.
Deere (DE): What Happened With South America, And What Is Next? Crop prices in South America boomed in both local currencies and U.S. dollars. Not shockingly, although we dropped the ball, equipment sales followed. Crop prices are now setting local lows, and equipment sales look to have turned negative. Excess inventory in the market could become the next issue if production isn’t scaled back.
CERN
Click here to read our analyst's original report.
The Affordable Care Act was a financial boon to hospitals, driving incremental volume from the +25 million newly insured and reducing bad debt expense, and by extension, positive for capital spending. The impact from the ACA began just as the EHR Incentive Stimulus program was ending at the end of 2014 and continued through most of 2015.
However, we are now on the downside of the ACA impact, and we expect a material deceleration and decline in healthcare consumption heading into 2017. This will put increased pressure on hospital budgets. As a result, we expect already cautious hospital CFOs to be more selective in IT investment, especially after spending millions of dollars on EHR implementations over the last 5-years.
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.
COH
Click here to read our analyst's original report.
Global Blue is a tourism shopping tax refund company. It assists tourists submitting claims for their VAT rebates which gives it solid data on foreign tourist luxury spending.
Global Blue reported that Chinese tourist spending in Japan grew 112% in August and 91% in July. Japan is Coach’s second largest international market and represented ~13% of sales last year. Coach’s sales in Japan declined 1% in constant currencies last quarter and has been down for several quarters due to a decline in Chinese tourist spend after several years of robust growth.
Coach (COH) also sees a big opportunity for the recently acquired Kate Spade business in Asia. Coach derives ~30% of sales from East Asia and has significant infrastructure investments (19% of its long-lived assets) that it can leverage and utilize to accelerate Kate Spade growth in this region.
Coach’s CEO said in June:
“In the short to medium term, we’re especially excited about the opportunity for that brand (Kate Spade) in Asia. One of the things that excites us about Kate Spade from a positioning perspective is the fact that it has really differentiated… and unique positioning, an attitude that plays much more on being fun, very, very feminine positioning and with a bit of I would say whimsy, a bit of fun whimsy. Which is very different from the Coach proposition. It resonates incredibly well here in the US and resonates incredibly well in Japan. And we believe there’s definite opportunity to bring that to the Chinese customer.”
“We’re going to be focused on helping them do that while driving especially, we believe, tremendous opportunity to help them with cost development and quality engineering… leveraging the know-how and the infrastructure that we have within the Coach brand.”
We think international expansion will be an accretive growth lever for COH in the next few years, and improving spending trends give us more confidence in COH’s ability to beat earnings estimates in FY18.
HBI
Click here to read our analyst's original report.
This week Hanesbrands (HBI) caught a sell side downgrade and traded down about 3%.
The downgrade was based on a overextended valuation and 4Q industry concerns.
We agree the stock is overvalued at 11.5x an over estimated street EBITDA number, and we also have concerns about the industry in 4Q. However bears are not bearish enough on this name.
What we think is highly unappreciated is the increasing competitive threats from Gildan hitting the valley in all WMT stores in the second half of this year, at the same time Amazon and departments stores are committing to growing private label in underwear/intimates.
There is overconfidence in the forecast accuracy for a company that has missed revenue estimates 7 of the last 10 quarters, and missed organic growth estimates for 3 quarters straight.
The 2016 acquisitions are all being lapped this quarter, so organic growth alone will have to prove out in 4Q.
Even with an FX tailwind, we don’t think growth will be strong enough for HBI to hit revenue targets in 2H.
APD
Click here to read our analyst's original report.
Given a favorable economic and consolidation backdrop, there are many straightforward reasons to favor the industrial gas industry at present. Overhangs on Air Products (APD) shares, from the not-so-straightforward Yingde deal to changes to the position sizes of certain activist funds, have largely moved out of the picture. As projects mature and the company invests substantial available capital in PX/Linde divestitures, other well-suited deals, or buybacks, it becomes hard to avoid well above consensus EPS forecasts.
As noted in our June APD black book, an improved cyclical backdrop is helpful in the short-term relative to estimates. While there are odds and ends to be concerned about, not much approaches the likely dominant positive impact of redeploying the APD balance sheet. Once that process starts, we expect investors will look well down that path and price in much of the upside.
SAVE
Click here to read our analyst's original report.
“Legacy players have consistently lost share,” says Hedgeye Industrials analyst Jay Van Sciver in a recent institutional conference call. In particular, the highest cost players, like United Continental (UAL), have a real problem. “They are basically ceding share to keep pricing high,” Van Sciver says.
Meanwhile, Spirit Airlines (SAVE) is gaining share. “What’s important is that they’ve grown market share in this exponential way while also expanding margins. That is a good model,” Van Sciver says. “If you can take share, grow quickly, and expand margins, that suggests you have something figured out.”
SEMG
Click here to read our analyst's original report.
Recently, SemGroup (SEMG) filed audited financials for Houston Fuel Oil Terminal Company (HFOTCO) for the years 2014, 2015, and 2016, and the first 6 months of 2017. SEMG acquired HFOTCO for $2.1B in July 2017. In a recent newsletter, we explained why HFOTCO is a solid business, though SEMG probably overpaid.
Here’s more from HFOTCO’s reported financials:
- Revenue and EBITDA growth stalled in 1H17. 2015 and 2016 were strong growth years, but in the first 6 months of 2017 revenues were (2)% YoY and EBITDA was (6)% YoY.
- 1H17 EBITDA was $55MM, so SEMG’s guidance for HFOTCO’s EBITDA in 2017 of $115MM assumes growth in the back half of ‘17, which may be challenged by Harvey interruptions.
- As we already knew, HFOTCO is highly-levered at 6.7x EBITDA.
- Since 2014, HFOTCO’s aggregate FCF is negative due to high CapEx. Annual CapEx averaged $61MM in the years 2014 – 2016, more than 2x depreciation, without a major expansion project underway. In 1H17, CapEx was higher at $55MM ($110MM annualized) due to the construction of dock #5 and another 1.45 MMbbls of crude tanks. Still, the CapEx spent in this business since 2014 makes us dubious of management’s claim that “maintenance CapEx” is only around $5MM per year.
- HFOTCO’s pension plan is under funded by $10MM.
UNFI
Click here to read our analyst's original report.
UNFI underwent an extensive investment period in 2014 and 2015 in order to build and improve capacity throughout their network, and during this time ROIIC has steadily declined. Although ROIIC has recently seen a bit of a recovery due to the utilization of previous investments, the overall trend continues to be unfavorable. Additionally, we believe the prevailing industry headwinds will likely push the stock lower.
HQY
We believe it will be difficult for HealthEquity (HQY), a provider of Health Savings Accounts (HSAs), to sustain > 20% sales growth in perpetuity with 53% of large* employers offering an HDHP/HSA option as of 2016. These large businesses represent 47% of private sector employment in the United States and 24% of covered employees. Our HSA adoption model projects annualized HSA account growth of 10-13% market-wide through 2020, a significant deceleration from the 23% CAGR from 2013-2016.
Combine this with heightened competition and we believe it will be difficult for the stock to hold its premium multiple (27x 2018 EBITDA / 71x 2018 EPS) in the face of slowing revenue growth due to a maturing market, higher attrition, and pricing pressure.
