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 Host Hotels (HST) to the long side and Starbucks (SBUX) to the short side of Investing Ideas this week. We also removed USG Corporation (USG) from the long side and Darden Restaurants (DRI) from the short side.
IDEAS UPDATES
EXAS
Click here to read our analyst's original report.
Exact Sciences (EXAS) reported 3Q17 results that beat on both top and bottom-line. Revenue growth of +158% to $72.6M was above consensus at $65M and our estimate of $68M. EPS was -$0.23, below both consensus and our estimates of $-0.27 and $-0.33 due to higher than expected volume leverage and operational efficiencies. Test orders per provider increased by +30% YoY to 1.77 versus our estimate of 1.73 which helped drive total completed tests to +161k tests.
We continue to forecast an increasing test per provider ratio into 2018 and believe the additional sales force adds in 3Q17 along with repeat testing at Cologuard's recommended 3-year interval will aid in driving this number higher. We are forecasting a 4Q17 sales beat of $77.8M versus the midpoint of management’s implied guidance of $76.9M, but will be watching consensus numbers closely to see where expectations shake out in the coming weeks.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
To read the special update on Time Warner we sent Investing Ideas subscribers earlier this week click here.
WYNN
Click here to read our analyst's original report.
Macau continued its streak of beating estimates again October. October GGR soared 22% YoY, easily topping the Street (15%) and our estimate (top end of 15%-17% range). The deceleration narrative has dominated investor discussions in recent weeks. Yet, October became the 5th month this year where growth topped 20%, despite facing the most difficult comp since May 2014. While we’ll have more insight into the mix with our October Mass Tracker, VIP probably drove the upside – a trend we see continuing.
Growth accelerated throughout the month which bodes well for November. Could November post another 20% month? Our model gets close but we’re pretty sure the Street will forecast too low – again. We’re raising our Q4 GGR growth estimate to 21% (previously 18%), barely 1% lower than Q3’s 22% growth rate. We’re also raising our 2018 GGR growth estimate to 13% from 12%, previously, and substantially above Street estimates. Deceleration will happen but the Street is already projecting slower growth – overly so in our opinion.
Continued GGR beats should drive Macau stock prices higher from here. Wynn Resorts (WYNN) remains our top pick due to favorable exposure to outsized market VIP growth and the long runway ramp at Palace.
RRR
Click here to read our analyst's original report.
Four months actually do make a trend. The Las Vegas locals market is not only beating expectations, but also generating accelerating growth. On paper, GGR fell 2.5% YoY in September. But Nevada reported GGR doesn’t tell the story. Due to a common accounting quirk, slot revenues earned on Sept 30th shift into October (for NV purposes only) since the 30th was a weekend day. This means September slot revenues are missing a day – and a busy one (Saturday). We estimate under normal hold (slot +table), Locals GGR would have grown 10% in September. An easier way to look at this is through volumes and as the chart below shows, the trend is picking up and exhibited the highest growth since May 2015.
For 3Q, Locals GGR rose 5.5%, better than we anticipated; on a hold-adjusted basis, Locals GGR rose 6.2% YoY. We will be raising our RRR revenue #s for Q3. We think the gaming outperformance can be sustained, particularly as GGR benefits from an influx of construction workers, wage growth, and the eventual return to a positive wealth effect in the region.
Same store revenue growth is the Red Rock Resorts (RRR) story, not 2019 ROI on capital spend. Gaming revenues generated in NV produce the highest flow through (85-90% on slots) in the country due to the low gaming tax rate. It won’t take many more months of strong top line for the Street to start putting their pencils to the paper to calculate what that means for same store EBITDA growth. RRR is a compelling growth story now that GGR is finally catching up to strong macro factors.
DE
Click here to read our analyst's original report.
Upshot Is FY18 Below Estimates: With South American tractor sales accelerating to the downside, weak North American crop prices, and inflated FY18 expectations based off a FY17 with SiteOne gains included, we continue to look forward to Deere's (DE) FY4Q report and FY18 guide as a key downside catalyst. We expect a meaningful decline in FY18 EPS, and expect the street to walk expectations down into the report, a process that may have just kicked-off.
CERN
Click here to read our analyst's original report.
Cerner (CERN) reported 3Q17 results that disappointed across most metrics last week. Management also provided preliminary 2018 guidance below consensus, but in-line with our expectations detailed in the preview note linked above. 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.
TPR
Click here to read our analyst's original report. Coah is now officially trading as Tapestry (TPR).
Tapestry (TPR - formerly Coach) is our Top Long idea, and reports on Tuesday. Consensus expectations are $0.36 and our expectations are slightly higher. Quarters are always dicey for fashion brands, but we feel good about the print. This name is setting up for beat after beat after beat – ultimately hitting our estimates in ’19 that are 40% above the Street.
There is a meaningful license repo/take back/renegotiation story here that mimics RL from the mid 2000s. The name change seems ridiculous…but every time I mention the Coach name to a PM, they usually cringe.
The brand is re-emerging, but do you REALLY want the parent to be named after a brand the world thinks is terminal? Didn’t think so. Should be a sloppy quarter bc of KATE integration, but solid. I’m a big buyer here unless there’s anything that tells me that the fundamental research call has changed. And this call is powerful enough that I’d fall out of my chair if one-quarter derailed it.
HBI
Click here to read our analyst's original report.
Hanesbrands' (HBI) message is more opaque than ever. 4Q guide down, setting up for another guide down in 4Q – or a flat out miss. We should see this over and over, miss after miss – or one of those visceral 1-day collapses in the stock. Covenant issues. Special charge mean reversion, and margins cut in half. Trading at 11x EBITDA – higher than p/e. That rarely ends well. This is my best short by a country mile.
This print seems very familiar. On the print for 3Q of last year the company guided to the low end of its full year range. The expectation was that 4Q was achievable. After all, revenue compares were very easy and management said they would meet targets... History repeats itself.
With share loss continuing across businesses (perhaps excluding Champion), we think 4Q expectations are high. Management is guiding to 3% organic growth still a bar it has not cleared in a given quarter in 4 years.
Still much more downside for this stock if our research is correct.
APD
Click here to read our analyst's original report.
With both industrial gas companies gapping higher last week, Industrial analyst Jay Van Sciver removed PX as a Top Long idea after a 30%+ move higher since presenting the name below $120/sh in March. While he sees upside to ~$150/sh, the risk/reward setup is not what it once was. We continue to like Air Products (APD) as a Top Long. APD is in a position to buy some of the highest quality assets globally that PX will be forced to divest as part of its integration with Linde and still have substantial upside from here.
SEMG
Click here to read our analyst's original report.
We'll have analysis of SemGroup (SEMG) next week after the company reports earnings Wednesday, November 8. Here's the basic thesis on SemGroup:
- SEMG’s hodgepodge collection of assets is challenged.
- The Company does not earn its cost of capital, has no scale or competitive advantages in its operating areas, and has limited opportunities for organic growth
- Its largest assets have material risks to current cash flows – notably its DJ Basin and Miss Lime-facing businesses.
- SEMG has virtually no exposure to the lowest cost US shale plays, the Permian and Marcellus/Utica.
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.
Bottom Line: SEMG is overly-diversified with no scale or competitive advantage in any particular geography or service; SEMG is a market share donor.
VIRT
Click here to read our analyst's original report.
We highlight that Virtu Financial's (VIRT) business is no longer responding to volatility like it used to and most recent quarterly revenue results are well historical levels per unit of vol. The company is reporting earnings this week on Tuesday November 7th which should outline this fundamental weakness and entail a substantial earnings revision downward. Street estimates have recently fallen apart from $0.19 per share into the print to just $0.04 during the past few weeks. In our BlackBook presentation, we outlined the true earnings opportunity between $0.60-0.90 per share for 2019 versus the Street at $1.33. We think the unveiling of long term fundamental weakness is near (within the next 2 quarters).
DPZ
Click here to read our analyst's original report.
Papa John’s (PZZA), a leading Domino's Pizza (DPZ) competitor, recently had some harsh words for the NFL and how they have handled the recent controversy, which they believe has subsequently battered itsbusiness. Poor NFL ratings has been another headwind that we have been considering for quite some time now, and PZZA’s comments have verified this. We are eager to see how this has impacted the DPZ business, if at all. With increasing competitive pressures, and poor NFL ratings, DPZ could see its business slow even more!
PLAY
Click here to read our analyst's original report.
In Dave & Busters' (PLAY) most recent quarter the company reported very disappointing results that caused the stock price to fall by 7% in early morning trading. As we spoke about in our presentation, the PLAY business is aggressively slowing, as evidenced by SSS of +1.1% vs FactSet +2.6%, and management appears to agree, as the Company updated their FY17 outlook. Among the revisions were same-store sales of +1%-2% (vs prior guidance of 2%-3%) and EBITDA of $270M-$276M (vs prior guidance of $276M-$282M) – we believe these revised estimates may have another step down. Breaking down the comp by category, amusement grew by +4.7% (vs. consensus +5.5%), food was down -3.5% (vs. consensus -1.6%), and lastly beverage was down -3.3% (vs. consensus -3%).
HST
Click here to read our analyst's original report.
Below is a brief note from CEO Keith McCullough on why we added Host Hotels (HST) to the long side of Investing Ideas:
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Host Hotels (HST) is a name Gaming, Lodging & Leisure analyst Todd Jordan likes and it's down on the open because management didn't buy-back any stock during the quarter. The conference call is about to start and we think that A) the fundamental business continues to improve alongside an accelerating US economy and B) that the capital return story is one that is on the come. Buy Red, KM |
SBUX
"In an constant effort to keep what I think are our best ideas fresh, I think Restaurants analyst Howard Penney's bearish view on SBUX is more compelling than DRI," writes Hedgeye CEO Keith McCullough. "Both are shorts – I just think SBUX is a better one."
Below is a brief excerpt from a recent institutional research note written by Penney:
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"We are staying SHORT Starbucks. The company reduced its long-term growth algorithm, but left 2018 EPS estimates unchanged. The announcements the company made yesterday raised the noise in the P&L for 2018. The increased noise level will make it hard to get a true read on how the business will look in 2019 and beyond. It also suggests that the stock will trade at a lower multiple for the time being. While there are a number of moving pieces to the SBUX recovery story, the investment thesis now boils down to this: “We'll have accelerating profitability as we move throughout the year” Scott Maw, CFO, Starbucks All of the initiatives the company talked about yesterday will take time to unfold and some are not new, but are rather recommitments to an old philosophy." |
