Takeaway: WYNN, SAVE, COH, APD, RRR, EXAS, TWX, DPZ, VIRT, HQY, UNFI, SEMG, HBI, CERN, DE

Investing Ideas Newsletter - 10.10.2017 bear palm reader cartoon

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. 

IDEAS UPDATES

EXAS

Click here to read our analyst's original report.

Quest Diagnostics (DGX) issued a press release recently announcing a -1.5% reduction in revenue and earnings per share (EPS) due to the hurricanes in Florida and Texas. We recently published our analysis detailing the impact the recent hurricanes will have on Exact Sciences (EXAS) 3Q17 earnings using data from FedEx detailing suspended shipping areas across the US due to the storms.

Using the same methodology but substituting EXAS providers with DGX locations, we successfully backed into DGX’s -1.5% estimated revenue reduction. We estimate that 921 of DGX's facilities (17.76% of total) were impacted by hurricanes Harvey or Irma. These locations had shipping canceled for an average of 7.85 days. This equates to a -8.53% revenue impact in affected areas and an overall revenue impact of -1.52% which is in-line with DGX's estimate of -1.5%. 

TWX

Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. 

We continue to expect government approval of T/TWX before the end of the year.  The new Justice Department antitrust chief, Makan Delrahim, was criticized this week by progressive (liberal) Democrat Sen. Elizabeth Warren, complaining Mr. Delrahim should recuse himself because he previously made statements to the press suggesting the merger did not present major antitrust concerns.  

We do not expect recusal and the Senator's complaint is not a legal or technical basis for it.  In any event, the Senator's public criticism more likely reflects the consensus view that the deal is on track for clearance by year-end.  The acquisition price is 107.50 per share.

WYNN

Click here to read our analyst's original report.

We’re generally positive on Macau and the stocks despite investor consternation about decelerating growth.  Remember:  growth decelerated from the peak in 1H 2010, yet the stocks remained in a bull cycle until 2014.  With MGM pushing the opening of its Cotai property out to Q1, the same store growth profile of Macau improved meaningfully and we believe same store growth will actually accelerate in Q4 – so there is a positive 2nd derivative story after all.  WYNN looks like the best way to play conservative forward estimates and likely consistent GGR and EBITDA beats.

RRR 

Click here to read our analyst's original report.

Key segments in Las Vegas housing, employment, and income growth are all accelerating, but are still well below their previous peaks. Housing inventory levels have finally stabilized and homes are experiencing substantial price growth. More importantly, household income is accelerating, while the cost of living remains contained.

We expect these macro factors to drive GGR growth and believe that Red Rock Resorts (RRR), specifically, is well positioned to absorb these revenues as zoning restrictions will prevent any new gaming supply.

DE

Click here to read our analyst's original report.

Will Underpriced Leases Have A P&L Impact? Residual values are a key lease pricing input.  In FY4Q16, Deere (DE) took a charge for residual values, but indicated that lease returns that quarter would be “the highest peak, from a maturity perspective.”  We doubt it, and further charges for residual values could generate a credibility issue.  Investors should keep in mind that lease depreciation changes on the large leasing portfolio can have a substantial impact on reported (recurring) EPS.

Investing Ideas Newsletter - de dep

CERN

Click here to read our analyst's original report.

Alberta Health Services (AHS) Selects Epic - In 3Q17, AHS selected Epic for a province-wide Health IT System in a deal valued at $459 million (Click Here for News Article). We have been following the procurement at AHS since they first announced their intention to consolidate 1,300 different IT systems onto a single platform 18 months ago.  Epic was the favorite from the beginning, and is currently installed in the Edmonton region.  Cerner (CERN) and Allscripts (MDRX) were also in the running.

This development demonstrates our thesis that, while CERN is the #2 EHR vendor in the U.S., the company is not immune to the challenges of a saturated market with limited replacement opportunity.

COH

Click here to read our analyst's original report.

We published a black book on Coach (COH) this past week that focused on the levers Coach has with licenses.  We are absolutely convinced that virtually nobody is doing the math on potential Licensing optionality. Coach has only 4 licenses left. KATE has 22. Coach can consolidate the licenses between brands, take them back in house, or just renegotiate the terms providing it with future upside.  Accelerating EBIT with minimal capital charge = 1,000bp ROIC acceleration and $0.40 earnings beat next year.

Coach also announced that it will change its name at the end of the month to Tapestry, signifying the company’s transition to multiple brands.  This sets the stage for Coach to ‘buy more stuff.’ Because it bought KATE at $18.50 – instead of the $29 (where it would have still been accretive), it has the room on the balance sheet to do it.  Leverage is 2.2x today.  It should be 1.2x by end of year, and sub 1x next year.  It will likely to be upgraded after the ratings agencies realize they’re wrong on Cash Flow.

Investing Ideas Newsletter - coh

HBI

Click here to read our analyst's original report.

Hanesbrands (HBI) 

It was reported on Friday that Amazon is developing its own private label Activewear brand.

Many are thinking about the impact to the major athletic brands (Nike, Lululemon, UnderArmour, etc), but are missing one of those most at risk… Champion.

Amazon is the only HBI growth channel, and Champion the only notable growing brand. Now Amazon will have private label sitting next to Champion at a better value, maybe better price, with whatever optimized Amazon algorithm targeting of the consumer.

HBI US (25% of revenue) Activewear will struggle to grow in this environment, and HBI will not be able to grow organically while management and the street think it can grow 2-3%.

Investing Ideas Newsletter - hbi 10 13 17

APD

Click here to read our analyst's original report.

Praxair and Linde divestitures put the initial capital deployments in sight. The operating improvements over the past few years at Air Products (APD) have been impressive. We do not anticipate management to bungle investments, as their track record with respect to operations has been well disciplined.  They certainly won’t get all of $9+ billion wrong, and the initial round should be strong assets divested for regulatory reasons.  The low cost of debt is favorable as well. As soon as APD deploys 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.

SAVE

Click here to read our analyst's original report.

Perhaps A Stabilization: So far, the data show what at best is a stabilization in aggressive pricing, with 3Q end looking like a potential low point.  That doesn’t portend great results for initial 4Q pricing, but may well inflect toward the holidays. If Spirit Airlines (SAVE) steps away from some key routes on UAL’s turf in 1Q18, it could well represent the inflection.

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.

UNFI

Click here to read our analyst's original report.

Looking forward we still see downside in United Natural Foods (UNFI), driven by downside in the multiple as the Street fully grasps the negative implications of store closures and slowing unit growth at key customers. Additionally, as food retailers continue to compete on price, and category management at WFM takes its affect, it will squeeze margins for everyone in our opinion and that includes distributors, which will hamper profitability.

HQY

Click here to read the HealthEquity (HQY) stock report we sent Investing Ideas subscribers earlier this week.

VIRT

Click here to read our analyst's original report.

The legacy high frequency trading business (VIRT) and the wholesale market making business (KCG) are facing secular challenges. Virtu Financial's (VIRT) business is no longer responding to volatility like it used to and the most recent quarterly revenue results are well historical levels per unit of vol. Knight's business looks challenged by the recent Ameritrade/Scottrade deal as Scottrade market maker allocations to Knight will go from ~19% before the deal, to ~6% under Ameritrade.

We are also concerned that the company is thinly capitalized and that $1Bn in tangible equity capital is not enough for the very liquidity intensive market making business at Knight. In addition, 84% of trading capital at the NewCo. is now debt financed versus much lower levels at other public brokers. 

DPZ

Click here to read the Domino's Pizza (DPZ) stock report we sent Investing Ideas subscribers earlier this week.