Below are analyst updates on our fifteen 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 Domino's Pizza (DPZ) to the short side of Investing Ideas this week.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
As expected, CMS released the Clinical Laboratory Fee Schedule yesterday in time for an advisory panel meeting last week. The price for Exact Sciences' (EXAS) Cologuard® was preliminarily established, subject to a reconsideration request, at $508.87. The rate amounts to a $3.56 reduction or -0.69% from the CY 2017 fee. As we noted in June, in response to Citron’s Research’s short call, the Medicare reimbursement for Cologuard under the new PAMA pricing regime would be heavily influenced by the CY 2017 Clinical Lab Fee Schedule price and that is indeed what happened.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
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.
WYNN
Click here to read our analyst's original report.
Below is a note written by Gaming, Lodging & Leisure analyst Todd Jordan:
Our thoughts are with the people suffering directly and indirectly from this awful event. As you may know, a Nevada man killed at least 50 people with so many more injured, at an outdoor venue on the Strip in Las Vegas near MGM’s Mandalay Bay. The shooter was positioned on the 32nd floor of that property. Many of you may be out in Las Vegas for G2E and we hope you are safe and sound.
People’s lives and well-being are our chief concern today, but the casino stocks will react to the news today. MGM and CZR maintain the most exposure to the Las Vegas Strip with 50-60% of their respective EBITDA derived there. Wynn Resorts (WYNN) generates about 25% of its EBITDA on the Strip with LVS and PENN each below 10%.
Visitation to Las Vegas has been resilient to other tragedies (fires, smaller scale shootings, 9/11 over time, etc.) and we expect the same here, although there could be a near to intermediate term impact.
As we’ve been saying, WYNN’s Q3 should be very strong and while estimates have been rising, we still anticipate a 4% EBITDA beat. Moreover, the forward outlook should be very positive – Golden Week bookings are solid and VIP is still growing sequentially (and way below peak). Of course, WYNN remains the dominant VIP player and the one potential negative we foresee – mass likely underperformed expectations in Q3 – is probably a net positive for WYNN as it means VIP outperformed.
RRR
Click here to read our analyst's original report.
Locals GGR gained 6% in August, following a rise of 13% in July. One or two months does not make a trend, but three consecutive months of total volume growth in the 3-5% range makes us wonder if the Las Vegas locals trends are starting to inflect positively, as we’ve been calling for. Additionally, on a normalized basis, total Locals GGR for the 3QTD (Jul-Aug) is tracking up 4.1% YoY, a massive acceleration from 2Q (+0.8%) and 1Q (+0.4%). Volume comps remain fairly easy for the next 6 months at just +1 or -1%, so we could see the Locals segment pick up some steam as the improving macro, higher construction spend, and positive wealth effect starts to support the GGR environment.
Red Rock Resorts (RRR) remains our top pick given its outsized exposure to the Las Vegas Locals segment.
DE
Click here to read our analyst's original report.
Why So Much Leasing? While a retail term loan has some relatively straight-forward pricing inputs, a lease offers wiggle room on residual value estimates, warranty packages, and hourly usage limits. We believe Deere (DE) has ‘managed the internal side’ to arrive at some accommodative lease assumptions to get ‘equipment out the door’, at least relative to prior periods.
CERN
Click here to read our analyst's original report.
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.
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.
COH
Click here to read our analyst's original report.
Below is a brief note from Hedgeye Retail analyst Brian McGough:
After speaking with Hedgeye clients for three weeks after our Coach (COH) Best Idea Long Black Book, I am absolutely convinced that virtually nobody has done the math on License optionality. Coach has only 4 licenses left. KATE has 22. Consolidation and rate-renegotiation is written in the cosmos. Accelerating EBIT with minimal capital charge = 1,000bp ROIC acceleration and $0.40 earnings beat next year. Remember RL/Farrah in the 2000’s? #HistoryRepeating
HBI
Click here to read our analyst's original report.
Below is a brief note from Hedgeye Retail analyst Brian McGough:
I presented at a Short Conference in London earlier this week. Topic = Hanesbrands (HBI). When asked for a one-liner as to what our conclusion is, I gave ‘em this. “10-years of misaligned management incentives and bad behavior are unraveling in 2H for a meaningful revenue, EPS and Cash Flow miss, that should re-rate over 12-18 months on a lower EBITDA number to a single digit stock.”
APD
Click here to read our analyst's original report.
On Air Products (APD), Hedgeye Industrials analyst Jay Van Sciver had the following comment about APD post their recently reported quarter:
"As noted in our 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.
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 expect SAVE to benefit as they gain scale and leverage their low cost operating model. We see little risk of mutually assured destruction from disadvantaged higher cost competition.
Additionally, the current headwind from labor challenges shifts to positive catalyst in 2018. We have built several high frequency data trackers that provide granular, quantitative perspectives on industry trends. Lastly, we’ll also provide an industry update exploring the new cash free future compliments of UAL among other noticeable changes as well as the potential for further consolidation. We see significant upside from current levels.
SEMG
Click here to read our analyst's original report.
In our view, SemGroup (SEMG) easily needs another $1B to get its balance sheet in proper shape. Management discussed a deleveraging plan on the call, they are looking at some combination of non-core asset sales, JVs, or structured equity, while characterizing an equity offering as “not preferred nor expected.” 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. While EBITDA will grow in 2018+ due to growth projects and a full year of HOFTCO, the debt balance will also grow due to SEMG's high CapEx and dividend requirements.
UNFI
Click here to read our analyst's original report.
Whole Foods customers are about to get a loyalty program a little sooner than expected as Amazon will integrate Amazon Prime into the POS system to give Prime members special savings and benefits. Also no surprise, Amazon will start to use the four walls to their benefit as well by installing Amazon Lockers in select Whole Foods locations so customers can have products shipped there and also make for easier returns.
Whole Foods may lose their “Whole Paycheck” slogan faster than we had previously thought given how quickly Amazon is taking the bull by its horns. This news is terrible for conventional grocers such as KR and for Whole Food’s primary distributor United Natural Foods (UNFI). We spoke with Bob Ferrari (a highly visible supply chain technology executive, industry analyst, and consultant) on our fireside chat yesterday about this very scenario and he thinks UNFI will be squeezed for further price reductions and doesn’t have much power, given their existence is very dependent on maintaining the contract with Whole Foods.
HQY
Our Healthcare team hosted an institutional conference call recently on Top Short Idea HealthEquity (HQY). They believe it will be difficult for HealthEquity to sustain >20% sales growth in perpetuity with 53% of large employers offering an HDHP/HAS option as of 2016. 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.
Additionally, 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. Given the prevailing growth narrative, 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.
As such, the team is modeling -30% downside from current levels.
VIRT
Click here to read the stock report Hedgeye Financials analyst Jonathan Casteleyn sent Investing Ideas subscribers on Virtu Financial (VIRT).
DPZ
Below is a note from Hedgeye CEO Keith McCullough on why we added Domino's Pizza (DPZ) to the short side of Investing Ideas this week:
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Shorting both the Dow and Domino's today? Yep. Let's stay with the @Hedgeye Risk Management #Process and make sales when consensus is chasing them on green to #overbought signal levels like DPZ is at today. On why Howard Penney thinks Domino's (DPZ) is done going up, it’s safe to say that the food delivery space is getting a lot more competitive:
None of this is good news for Domino’s (DPZ). Especially if its biggest rival, Pizza Hut, can get its act together. When you look at the $1 billion-plus in pizza chain market share shift in the past few years, Pizza Hut has basically ceded all of the market share to Domino’s and Little Caesar’s. Penney doesn't expect this to continue. “This historical context is important to keep in mind if you’re long Domino’s and you think it’s going to continue with 10 or 11% comps,” Penney says. “Implied in that statement is they’re going to gain more market share.” Sell green, Keith R. McCullough |
