Below are analyst updates on our sixteen 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 Darden Restaurants (DRI) to the short side of Investing Ideas this week.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
Last week, we 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.
Despite the latest complaint from merger critic, Sen. Elizabeth Warren (D - MA), we think AT&T/Time Warner remains headed for approval at the acquisition price of $107.50 per TWX share (half cash, half stock). As we noted before, the antitrust case against this vertical transaction is not compelling, suggesting the Justice Department is not in a strong position to make huge demands for conditions in a consent decree.
Sen. Warren expressed concern that Makan Delrahim, the newly-confirmed head of the Antitrust Division, could not objectively review the deal because he previously indicated that he did not see major antitrust problems with the AT&T/Time Warner transaction. He made the comments in an academic capacity before last fall's election. The pre-election comments do not furnish a basis for recusal and, if anything, the Senator's pitch is another indication that critics of the deal are struggling to lay a glove on it as the regulatory process nears completion.
WYNN
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Golden Week was not soft! Investors were warned about the difficult 1H October comp, yet the Macau stocks took a mini-tumble last week. A well followed consultant and a few Hong Kong analysts clouded what was actually a strong Golden Week in absolute terms and now we know the follow through into week 2 was excellent (+29% increase in table revenues). The comps ease considerably – dare we call them easy – in the back half and we expect mid-teens growth off the most difficult monthly comps in years.
So beyond the comps and the near term where do we stand on the stocks? Similar to 2010-2014 we recommend buying on weakness, particularly short term freak outs like last week. GGR should continue to exceed expectations and drive EBITDA higher than the current conservative forecasts. We’d like to see mass comprising a larger percentage of total growth so until that mix changes, we’re sticking with Wynn Resorts (WYNN) as our horse.
RRR
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The Las Vegas Review Journal reported that construction for Resorts World Las Vegas is finally making strides to get the construction site up and running. The project is now expected to be completed in late 2020, but in short order, will have some 1,000 workers on the site. Simultaneously, there are many other projects that are slated to get going or rev up existing operations (LV Convention Center Expansion, Project Neon, and Raiders Stadium). Meanwhile, the construction job market in Las Vegas has already been picking up steam and has accelerated to cycle high of +19.6%. In the YTD, the market has added ~8K construction workers and we see a high likelihood that an additional 30-40K workers will need to be added over the next 24 months.
As construction spending and consequently construction employment ramps up, the LV Locals gaming market should be a prime beneficiary as construction workers have historical been known to be steady, repeat gamblers. As we have said repeatedly, this growth in construction employment should be a major boost to Red Rock Resorts (RRR) and BYD, and we think Macro driver’s like these make RRR a 2018 AND 2019 story…
DE
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While Deere (DE) doesn’t report until November, investors do get reports on credit metrics from the company’s securitized receivables. Those data continue to suggest the worst performance since the financial crisis. One might have expected the 2017 vintage to deteriorate at a more gradual rate, given that there is more flexibility to accommodate weak credits in leasing. Residual values and other levers can help keep the customer in green by ‘managing the internal side’ of the lease pricing equation. If you hear that everything is good at Deere and Deere Financial, be sure to press hard on the actual numbers.
CERN
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Our Healthcare team hosted their 4Q17 Health Care Themes Presentation earlier this week.
Health Care stocks are broadly higher with the S&P 500, but prices are ignoring our negative view. If we are right, EVERYTHING gets hit, and we are sticking with our best short ideas including Cerner (CERN). We see across the board pressure on the U.S. Insured Medical Consumer.
The uninsured population is increasing (driving hospital bad debt higher), cost shifting is increasing with dramatic consequences for spending patterns, Medicare mix deteriorating, and affordability is re-emerging as a headwind after 4 years of improvement under the ACA, to name a few items we’ll cover. Meanwhile, Trump’s executive orders and HHS efforts to curtail exchange enrollment are extra fuel on the fire.
COH
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Below is an update written by Retail analyst Brian McGough:
I have never made a ‘this brand is hot’ call in my life. If I have to bank on consumer fashion preferences, then a call – long or short – it means it’s very very thin. My call on Coach (COH) is based on several factors – most notably KATE License optionality, and a resulting EPS and cash flow algo that is meaningfully above consensus and company sandbagged guidance.
BUT, don’t ignore this Selena deal. She has 128mm Instagram followers. Been #1 since Dec 2015. Coach’s own followers grew more than 50% after Selena was signed. She’s the Coach (brand) poster child, and she’s helping the brand on the margin. The Coach brand being dead is as consensus as KSS traffic under perma-pressure. But COH has a far better chance of comping +5% w GMROI 10%+ than KSS does any day of the week/year -- and it’s not in my above consensus model.
HBI
Click here to read our analyst's original report.
Below is an update written by Retail analyst Brian McGough:
Definite puts and takes on this Hanesbrands (HBI) release this week. Looks shady at face value. In-line pre-announce. Did another deal. Pulling deal cash flow for 2.5 months into 4Q. Said ‘returned to organic growth’ – but the implied guide from last quarter is 6% organic growth…mgmt might have just said “we only grew 0.1% and did a deal to obfuscate it ’. I’m not trying to defend what I’ve said will be the best short of my career just to save face. The timing of this release is shady, the facts are ambiguous, it looks very desperate and pushes one of the most levered balance sheets in retail. I wonder how well the CFO vetted this given that he’s on the job for 2 more weeks. Balloon under water – deep – might burst before it comes up for air.
APD
Click here to read our analyst's original report.
We expect shares of Air Products (APD) to outperform as overhangs fade and high quality capital deployment opportunities finally arrive. Given a favorable economic and consolidation backdrop, there are many straightforward reasons to favor the industrial gas industry at present. Overhangs on 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 become hard to avoid well above consensus EPS forecasts. We will also explore potential destinations for APD capital deployment, a look at the Linde/PX antitrust-related divestitures and related impact on APD in specific regions, margin trends and mix, relevance of further consolidation, opportunities in APD operations, and valuation scenarios and a strategic approach to the group.
SAVE
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As a high quality industrial transport, Spirit Airlines (SAVE) deserves revaluation, legacies do not. In terms of entry, we have waited a long time to issue our long call on SAVE. This is a decent spot to enter a young ULCC, as the data points to sustained ULCC growth. SAVE’s flexibility to compete, relent or acquire to fend off competitors, bodes well for a long-term investment worth ~$60/share, all else being equal
SEMG
Click here to read our analyst's original report.
The next few years will be challenging for White Cliffs, as it will lose volumes to contract step-ups on Saddlehorn, and then its $5.20/bbl tariffs will begin to expire and reprice lower. Saddlehorn recently published a new tariff to move condensate from the DJ to Cushing for $1.50/bbl. In short, material, organic deleveraging is years away (if ever possible), and it will be a grind. What SemGroup (SEMG) needs to do is sell assets (SemLogistics and SemMexico is a start), raise equity, and then cut the dividend.
UNFI
Click here to read our analyst's original report.
Looking forward we still see roughly 25% 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 our analyst's original report.
We believe it will be difficult for HealthEquity (HQY) 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.
VIRT
Click here to read our analyst's original report.
We have reviewed the recent annual investor day presentation for Flow Traders NA, a public Dutch company that is a direct competitor to Virtu Financial (VIRT) in market making and high frequency trading. Flow NA has exactly 25% of its business in North America and is of similar size on a revenue basis to the legacy Virtu business, so we thought that Flow's annual investor day message was especially pertinent.
The Flow investor day presentation specifically calls out an expense and investment build of +15% after 2017 (in 2018) which means FLOW will be aggressive on pricing and gaining market share against VIRT next year. In addition, FLOW’s dividend policy is targeted for ~50% versus the ambitious VIRT goal of a 70% payout. If we are right on a much weaker earnings opportunity for VIRT, we see this payout percentage at risk.
FLOW’s investor day message and payout percentages continues to bolster our Short case on Virtu.
DPZ
Click here to read our analyst's original report.
As we spoke about in our recent Domino's Pizza (DPZ) Black Book, DPZ’s business is under intense competitive pressure globally. The evidence to support this thesis was the decision of the franchisees to slow unit growth so aggressively and the need for the UK to get more aggressive with a value promotion; these speak to the growing issues the company faces around the world. It’s only a matter of time before the competitive pressures globally make it to the USA. At that point the stock will be significantly lower from current levels.
DRI
We are adding Darden Restaurants (DRI) back to the short side of Investing Ideas today.
Below is an excerpt from an institutional research note written by Restaurants analyst Howard Penney on why he remains bearish on the company:
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"Our inherent skepticism concerning multi-branded restaurant companies inclines us to see DRI's recent outperformance as unwarranted, especially given DRI’s acquisition of Cheddar’s Scratch Kitchen back in March. The acquisition brought DRI’s portfolio to eight brands, and even though the Company continues to integrate Cheddar’s into the Darden platform, history tells us that such efforts by multi-branded companies tend to stretch a company thin and create unnecessary distractions. Additionally, and as we have touched on before, Cheddar’s is a brand that directly competes with Olive Garden, so it is unlikely that such an acquisition will add value in the way management is hoping." |
