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 removed Realogy (RLGY) from the long side of Investing Ideas. We added Wynn Resorts (WYNN) to the long side and Virtu Financial (VIRT) to the short side of Investing Ideas this week.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
We estimated the impact Hurricanes Harvey and Irma had on Cologuard volumes in 3Q17 based on suspended shipping zip codes from FedEx, along with our Cologuard-Tracker data. During Hurricane Harvey and Hurricane Irma, over 3.4k zip codes in Texas, Louisiana, Florida, South Carolina, Georgia, Kentucky, Mississippi, North Carolina, Tenessee, and Alabama saw shipping suspensions for an average of 3 days.
Exact Sciences (EXAS) uses United Parcel Service (UPS) as their shipping partner for Cologuard, but we believe the Fedex data is a good proxy for estimating UPS's shipping suspensions. We estimate that over 11k of EXAS' providers were affected by shipping suspensions over the last month and that the average shipping suspension in their zip codes was 3.2 days.
Despite the material impact the hurricanes will have to the business, we remain long EXAS due to the one-time nature of the event, and our belief that they will continue to beat consensus sales estimates through the back half of 2017 and into 2018.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
This week, the Senate finally confirmed White House Deputy Counsel Makan Delrahim to serve as the head of the Justice Department’s Antitrust Division. Now that he’s officially aboard, he could dig into the AT&T/Time Warner transaction and make near term decisions that could set the tone for merger enforcement policy under his leadership. We continue to believe, however, that an underlying case to enjoin the deal would be a risky move for the DOJ. As we’ve noted before, Mr. Delrahim, before joining the Trump Administration, made statements to the press that he did not believe the T/TWX deal presented major antitrust concerns given it is a vertical transaction that does not eliminate a competitor in any segment of the programming and distribution chain.
We think AT&T can reasonably anticipate closing the deal by year-end. The takeout price in this 50-50 stock/cash deal is $107.50. Time Warner’s stable of content assets should give AT&T greater flexibility to market its various distribution offerings and accelerate the growth of digital advertising revenues for the combined company. Although the imposition of regulatory conditions in a DOJ consent decree remains a possibility, we think the DOJ is in a weak position to make intolerable demands. The FCC is not reviewing the deal and its approval is not necessary to close the transaction.
Winning final approval of the TWX acquisition, along with the likely repeal of common carrier regulation of broadband access, should reinforce a general regulatory trend favoring broadband network providers like AT&T (T), Verizon (VZ), Comcast (CMCSA), Charter (CHTR) and Altice (ATUS). Meanwhile, the political climate in Washington is becoming increasingly hostile to dominant tech players controlling commercial or social media platforms, particularly Amazon (AMZN), Google (GOOGL) and Facebook (FB). The regulatory dogs are sniffing around the tech titans and shifting their attention away from the legacy carriers. Far-reaching action is not imminent, but this is an area of intensifying scrutiny in Congress and at the FTC.
RRR
Click here to read our analyst's original report.
Last week we touched on the Las Vegas Valley’s pent up construction spend that is projected to explode over the next 3 years, spend that could realistically create upwards of 30-40K construction jobs over the next 5 years. In our June RRR deck, we flagged this as a central tenet as to why the Locals casino market was more than likely to head into growth mode. On top of the construction employment catalyst, we presented some in depth work on the wealth effect catalyst, which is best displayed via the % of Mortgages under water (and the YoY change therein).
LV’s recent economic growth has taken place in a time where a large number of homes were under water – even after a number of years of growth in home prices – and as proven by our extensive regressions and data analysis, this has been a hurdle preventing meaningful gaming revenue growth, despite otherwise favorable macro conditions. Based on newly released data, the % of mortgages with negative equity continues to fall at an accelerating rate (on a YoY Change basis) – this factor holds a 0.78 R^2 to Locals GGR on a 6Q lead.
Given that RRR is the best pure play stock with over 85% of its EBITDA coming from the LV Locals market, we’d recommend accumulating the stock on any weakness as we continue to view the first half of the ‘story’ as starting in 2018 where same store, high margin (85%) GGR could surprise to the upside.
DE
Click here to read our analyst's original report.
We see Deere (DE) as a highly cyclical capital equipment supplier to a mature, zero growth industry.
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 FY17 estimates to move downwards and FY18 estimates to move below FY17.
CERN
Click here to read our analyst's original report.
Despite bookings coming in above our expectations, Cerner (CERN) 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.
Since Coach (COH) reported its most recent quarterly results the shares have declined 16% (and are since flat compared to the end of the first day of trading after it reported). The primary concern for investors was the decline in gross margins in the quarter. The largest detractor was more promotions in the outlet store channel. Coach has been more promotional for over a year in the outlet channel as the business needs a level of promotion in order to drive traffic to those stores. Coach has remained less promotional in its other channels though.
The combination has a number of impacts on the financial statements which we believe will drive upside to consensus estimates, but there are some moving pieces. The pullback in web flash sales and seasonal promotions will cause Kate Spade sales to decline in the first year, but it is strategic and not a sign of brand weakness. Management has been upfront about pulling back on promotions since it was doing the due diligence on acquiring Kate Spade and even used it to negotiate a lower buyout price. The addition of Kate Spade’s lower gross margins will pressure Coach’s overall gross margins in the first year. We believe it will be additive over time as Coach’s larger infrastructure and buying power will enable Kate Spade to accelerate its growth and leverage its fixed costs.
Ultimately a less promotional handbag market is good for the Kate Spade brand and the competitive environment. We believe Coach has more than enough upside from the integration of Kate Spade to make up for the loss of the most promotional sales it will not repeat this year. The customers’ perception of a more aspirational Kate Spade brand will facilitate its future expansion into additional markets and product lines.
HBI
Click here to read our analyst's original report.
This week Hanesbrands (HBI) announced its new CFO. Current CFO Richard Moss was announced to retire at the end of the year back in April. Now with the new appointment, Moss will be out of the CFO position before the 3Q print. With big 2H expectations and big long term guidance numbers, we think it is notable that Moss will be leaving well before the full year results are in.
We continue to think that HBI will miss its full year targets, starting the downturn in this stock.
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.
SAVE
Click here to read our analyst's original report.
There is still a lack of clarity surrounding the post-hurricane impact to Spirit Airlines (SAVE) and rest of airline industry. However, our long-term view on SAVE remains. We see a better add in 1H18 after pilot contract and airfare pricing issues begin to subside. Spirit is a competitively advantaged, growing airline that is valued more cheaply than non-growth, less profitable peers.
SEMG
Click here to read our analyst's original report.
The midstream sector is coming off of a major boom and organic growth has slowed industry-wide. In this environment it is essential to have a large, integrated footprint (scale) in order to capture new investment opportunities at an attractive return on capital, or steal market share from a competitor. SemGroup (SEMG) is overly-diversified with no scale or competitive advantage in any particular geography or service; SEMG is a market share donor.
Despite these issues, SEMG is trading around 40x 2017 earnings. In our view, SEMG is worth $15/share based on our DCF, SoTP, and earnings-based valuation analyses.
UNFI
Click here to read our analyst's original report.
Insiders are taking advantage of the recent share price increase and getting out while they can. One of the more notable sales was United Natural Foods' (UNFI) COO Sean Griffin selling 8.1K shares at a price of $43.25. It’s not entirely surprising to see executives getting out in waves as the stock price accelerates higher given how dismal their performance has been year to date. We don’t typically make noise when insiders are buying or selling, but when we still believe that the future does not look good for UNFI, seeing management getting out now signifies to us they don’t think these high prices will hold forever.
We continue to like the UNFI short as a long-term play given the pain we believe they will feel across different business segments, namely independents and supernatural as price competition continues to spread across the food retail landscape.
HQY
Low industry barriers to entry have been conducive to heightened competition and service account fee pricing pressure from Health Plans, who increasingly have in-sourced or diversified their Consumer Directed Health Plan (CDHP) offerings. In May 2017, HealthEquity's (HQY) largest customer, Anthem (~8% of accounts), launched a new CDHP/HSA solution branded "Act Wise" as a competing option to HealthEquity. Prior to May 2017, HealthEquity was Anthem's preferred HSA administrator.
WYNN
Click here to read our analyst's original report.
Ahead of the big Golden Week celebration in early October, gaming volumes typically slow in Macau. Yet, last week was strong as mass and VIP volumes drove table revenues higher than expected and should push sell side GGR estimates higher for September and October. As of now, our September, 2017 annual and 2018 GGR estimates for Macau remain higher than the Street. While many investors are focused on decelerating growth, we think GGR and EBITDA outperformance will continue to push some of the Macau stocks higher. The revenue mix may be skewed even more to VIP than anticipated, which bodes well for Wynn Resorts (WYNN) – our top pick in the group.
We’re hearing from sources that many hotels in Macau are already fully booked for the entire Golden Week (Oct 1-8) and others for part of the Golden Week period. Moreover, the hotels looked to be filled with good players. SunCity’s CIO Andrew Lo said that he expects VIP volume to be up 30-35% YoY for the entire month of October (HE: +31%). Remember, Sun City probably controls 50-60% of junket volumes in Macau. We’d venture to say that the Street’s overall GGR estimate for October of up low double digits should prove overly conservative. We’re projecting 16% growth and we could be light.
VIRT
Below is a brief note from Hedgeye CEO Keith McCullough on why we added Virtu Financial (VIRT) to the short side of Investing Ideas today:
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Do you want to be short of The Old Wall? Oh do we have a selling opportunity for you! Our Financials Long/Short guru, Jonathan Casteleyn, will be hosting a BEST IDEAS SELL call (Institutional Research Product) on Virtu (VIRT) tomorrow @HedgeyeTV. His Top 3 bullets on the idea are as follows:
There's always a bear market developing somewhere, KM |
