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 removed United Natural Foods (UNFI) and HealthEquity (HQY) from the short side and Spirit Airlines (SAVE) from the long side of Investing Ideas this week. We also added short Dave & Busters (PLAY) and long USG Corp (USG).
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.
AT&T reported earnings details this week that were not enthusiastically received on the street. Stagnating wireless customer growth, pressure on margins and a decline in legacy video subscribers drove down AT&T stock. The drop in AT&T’s price triggers a collar that has Time Warner stock essentially trading in tandem with AT&T until AT&T clears $37.41 a share.
Under the terms of the AT&T/Time Warner merger agreement, Time Warner shareholders will get 1.437 shares of AT&T if AT&T’s price is below $37.41. At current levels, that implies a takeout price of roughly $103 per TWX share with $53.75 received in cash. In September, AT&T’s stock declined to around $35 but rebounded toward $40 over the following several weeks. If AT&T stock does not rally from here, however, there is an enhanced risk that Time Warner shareholders will receive total compensation below the original purchase price of $107.50 a share (50 percent stock, 50 percent cash).
There are some positive Washington developments coming for AT&T. The FCC plans to end strict net neutrality regulation which should be positive for telco and cable broadband operations and allow greater flexibility to raise broadband prices or explore revenue sharing deals with upstream content players. The ultimate closing of the Time Warner transaction will also create opportunities to expand in the digital advertising space. We continue to believe the deal is on track for regulatory approval and likely before year-end (a time frame that AT&T reaffirmed).
But TWX investors are watching AT&T and whether the price can recover by the time the deal closes. The yield is pushing 6% which offers some price support, but a positive news flow, particularly out of Washington, in increasingly important to TWX holders.
WYNN
Click here to read our analyst's original report.
Wynn Resorts (WYNN) beat the Street fairly handily, with or without the luck factor, yet buy side expectations were high and the stock likely won’t get much of a lift here. We’d be buyers on any weakness. In fact, we like the stock more following the release than before. Why? Wynn Palace is ramping again on the top line with a long tail. Certainly, the property and company will benefit from outsized VIP market growth but mass growth is what impressed us in the quarter. And what the Street will miss is that Palace OpEx is running very high. Not only will top line growth continue to leverage those fixed costs, the costs themselves are likely to be lower in a year’s time. There is huge margin potential at Palace and we think the high end of management’s Analyst Day EBITDA target is actually achievable in a few years.
RRR
Click here to read our analyst's original report.
Red Rock Resorts (RRR) is set to report 3Q earnings in a few weeks and the Gaming, Lodging and Leisure team will provide an earnings preview and follow up. We continue to like this name as the story remains the most compelling in all of regional gaming.
DE
Click here to read our analyst's original report.
South America Downshift: South American tractor demand was a key driver of the squeeze in Deere (DE) shares, as the North American market showed little sign of stabilizing. Despite ongoing inventory builds in Brazil and Argentina, per our understanding, sales have gone into dive mode. This FY17 tailwind becomes a meaningful FY18 headwind, as discussed in our recent DE black book call.
CERN
Click here to read our analyst's original report.
Cerner (CERN) reported 3Q17 results that disappointed across most metrics. Management also provided preliminary 2018 guidance below consensus, but in-line with our expectations detailed. Bookings of $1,111 million fell well short of management's guidance range of $1,450 - $1,600 million, marking the largest absolute surprise in 3-years.
More importantly, new client bookings finally cracked this quarter and confirms our short thesis anchored by a slowing EHR replacement market. New client bookings declined -32% YoY in 3Q17 to more than a 2-year low of $333 million. This decline comes despite an easy prior year comparison of -21% YoY. Year-to-date new client bookings growth is now trending -5% YoY, which is back in-line with our EHR replacement forecast model.
COH
Click here to read our analyst's original report.
Below is a note from Hedgeye Retail analyst Brian McGough:
Selena Gomez’s holiday campaign for Coach (COH) will run next week on print and digital (including COH’s social media) globally. She is featured with the Dinky, COH’s key bag for holiday, crossbody to clutch silhouette that was first introduced in 1973. The truth is that I couldn’t care less about a Dinky, or a Donkey, or whatever. What I do know is that the Street does not care about any optionality ion the Coach brand getting to as point where it’s not down in perpetuity. I have the Coach brand flat in my near-term and long-term model and still get to estimates 3-years out 40% above consensus. This is my favorite multi-year call right now.
Barron’s is bullish, but it’s for the wrong reasons, and not Bullish enough. To be clear…Selena is not part of my bullish call. But if COH starts to comp 3-5%, that’s the sentiment equivalent of KSS consistently comping 2-3%.
HBI
Click here to read our analyst's original report.
Below is a note from Hedgeye Retail analyst Brian McGough:
Hanesbrands (HBI) dividend declared at 15 cents, continuing the same payout as 1H 2017. Remember the company jacked it by 35% in 1Q to placate Longs before egregiously missing 4Q after blessing targets with just three weeks left to go in the quarter? This dividend is that same one I think HBI will have to cut in 2019.
HBI will report earnings on Wednesday November 1. The company already preannounced that the quarter was in-line with expectations, but the big determining factor is what guidance for 4Q will look like. The probability of it looking bullish appears low, otherwise the company would likely have given that on the pre-announcement. Perhaps it’s a simple reiteration while adding on an acquisition (mildly bearish), but there is a possibility of a guide down (very bearish).
Either way, 4Q is the quarter we’ve pointing to for a material miss for several months now, and Wednesday’s guide will be our first data point on how it will turnout.
APD
Click here to read our analyst's original report.
Helped by successful projects coming online in FY17 along with a strong U.S. economy, Air Products (APD) beat consensus estimates and raised its outlook for next year. APD shares are likely to rerate to the upside as investors begin to recognize its ability to successfully execute on its projects and deploy its balance sheet for acquisitions.
SEMG
Click here to read our analyst's original report.
We reiterate our short call on SemGroup (SEMG). Below is the thesis overview.
VIRT
Click here to read our analyst's original report.
Virtu Financial (VIRT) has announced the sale of its fixed income trading venue, BondPoint (BP), to the Intercontinental Exchange (ICE). Terms of the transaction were $400 million in cash with a transaction closing targeted for 1Q18. VIRT will not hold a conference call regarding the deal but however deferred further detail until its 3Q17 earnings release on November 7th.
Broadly, while we think the re-sale amount for BP is healthy (with initial talk of a $300 million value), we think the selling of VIRT best strategic asset signifies defensiveness on the ongoing outcome of the merger with Knight. Most importantly, we think the Street is waking up to the distress that both the HFT and agency market making business is in, with earnings estimates for the upcoming quarter between zero and $0.04 per share (down from $0.19 per share for the quarter prior to our BlackBook call).
DPZ
Click here to read our analyst's original report.
MCD’s reported 3Q17 earnings earlier this week and the management team provided some very interesting details. According MCD CEO Steve Easterbrook:
“What are the trends we’re seeing? Certainly, [we’re] seeing appeal to the younger consumer. We’re seeing great results around college towns. We see orders later into evenings and overnights. There tends to be more group orders, so we see the average checks between 1.5x – 2x the typical average check in a restaurant."
Such a quote makes it clear with whom MCD is competing with in the delivery space. This paints a grim picture for a brand like Domino's Pizza (DPZ), as MCD is not the only player who is aggressively entering the delivery space!
DRI
Click here to read our analyst's original report.
Darden Restaurants (DRI) has continued to show a slowdown in its To-Go business, along with continued roadblocks regarding its Cheddar’s acquisition. Growth in OG To-Go was 12% this quarter, which is a sequential slowdown of 400bps. The slowdown in OG To-Go is no surprise, as DRI is competing in an ever-changing takeout/delivery environment, one that includes not only casual dining brands, but also quick service companies. Therefore, as the food delivery environment in the United States continues to mature, this will only place more pressure on the DRI business.
USG
Below is a note from Hedgeye CEO Keith McCullough on why we added USG Corporation (USG) to the long side of Investing Ideas:
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"USG was added to Jay Van Sciver's Best Ideas (Institutional Research product) list in August. While this wasn't part of his original thesis, Jay thinks hurricane related building products demand may echo or exceed that of the brisk 2004-2005 hurricane period. If so, product pricing should increase noticeably. With the stock -4% today, it's signaling immediate-term #oversold." |
PLAY
Click here to read our analyst's original report that we sent Investing Ideas subscribers earlier this week.
Dave & Busters (PLAY) is not completely immune to the slowdown in the restaurants space, as system-wide same-store sales has seen a sequential deceleration since 3Q16, and we continue to believe that consensus’ projected reacceleration is unwarranted. More notably, on a two-year average basis, system-wide same-store sales has trended downward since 3Q15 and projections expect this deceleration to continue.
