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.
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.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
According to news reports, the Justice Department is demanding the divestiture of Turner Networks (including CNN) or DirecTV or it will sue to block the transaction. AT&T's Randall Stephenson is signaling the company is willing to go to court to defend their view that the merger does not violate the antitrust laws and that the government's divestiture demand is unreasonable and unnecessary.
Against this backdrop, of course, speculation is swirling that the DOJ's hardball tactics are driven by President Trump's animosity toward CNN. Democrats who have criticized the merits of the merger have also raised concerns about White House political meddling with Justice Department investigation and enforcement actions, particularly because of the President's feud with CNN. We have previously discussed the political perils of even the perception of White House interference with antitrust merger reviews.
If the matter goes to litigation, the case could easily run late into next year. But we still believe negotiations could lead to deal clearance, perhaps with a consent decree worked out after litigation is commenced. This happened with the American Airlines/U.S. Air transaction a few years ago. With the spicy political backdrop and conspiracy speculation associated with this deal, the case could involve unique inquiries and discovery requests.
WYNN
Click here to read our analyst's original report.
The Hedgeye Mass Tracker suggests mass revenues may have grown only in the low to mid-single digit range in October. By our estimate, October's mass comp was the most difficult in 3 years, but growth should’ve been better. The good news is that the November adjusted mass comp is ~+8% so we expect some acceleration.
Of course, sluggish mass growth means that October VIP was off the charts, ~+40% since we already know that total GGR grew 22%, per the government data. As such, we’re sticking with VIP centric Wynn Resorts (WYNN) as our main Macau investment vehicle. Mass growth should re-accelerate and combined with persistent momentum in VIP, we expect the trend of GGR beats to continue to drive estimates and the Macau stocks higher.
RRR
Click here to read our analyst's original report.
Red Rock Resorts (RRR) printed a beat on both the top and bottom line for Q3. And they did it without any EBITDA contribution from the Palms, worse than expected. The good news is that from a disruption standpoint, Q3 should prove to be the worst. What matters to us is what the Palms does after construction, not during, and we’re highly encouraged with the outperformance of the core properties – the key takeaway.
The Locals market revved up in Q3 and RRR did too. RRR same-store sales grew 4%, an acceleration over 2Q’s solid 2% growth. The gaming segment led the way. Red Rock’s same-store casino revenues exploded 6% higher in Q3, its best performance since 2008, and 2% points above our estimate. We think the new 20,000 slots upgrade played a big part in the beat. RRR performed above market average despite having a difficult comp of 6%. Excluding Palace Station, where construction is disruptive, we estimate same-store revenues would have risen 7% YoY.
DE
Click here to read our analyst's original report.
With Deere (DE) 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 the 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.
Among the earnings wreckage of 3Q17, which was not the easy compare many anticipated earlier in 2017 and at far higher prices, the awakening to the Medicare Mix problem was the most notable, in our view. We’ve been suggesting problems will emerge as low margin Medicare provides the vast majority of growth for years to come, and the line of questioning and commentary moved in our direction this quarter.
Meanwhile, decelerating utilization continues to plague the industry, with less fit suffering most, as all pressures on the commercially insured population (ACA, regulatory, cost-shifting) persist). They will share updates from earnings across our favorite longs and shorts, discuss Tax reform, and look at new regulations such as the removal of total knee replacement from the inpatient-only list.
We remain convinced Cerner (CERN) will not be able to grow new client bookings (~30% of total bookings) over a multi-year duration due to a saturated EHR market with limited replacement opportunity.
TPR
Click here to read our analyst's original report. Coah is now officially trading as Tapestry (TPR).
Tapestry (TPR) reported 1Q earnings this week.
There nothing so far to dissuade me from thinking this is not one of the best multi-year longs I can find. There are puts and takes here… but the key is that company already upped the synergy benefits from $50mm to $100-115mm. It’s still 100% too low. It did not mention licensing take-back/renegotiation/fold up angle. That’s the big call here for me – think RL form 2003-2008. It also beat with no change to the full year -- $0.42 vs $0.36 (Q1 actual vs. consensus estimate) – There are puts and takes, but overall it’s bullish. It’s still my favorite name by YE’17 AND ’18 (until I find a better one).
Three positives
- KORS said it would be 66% less promotional in the holiday Q – while TPR said global SSS are positive QTD.
- Management raised the synergy guide form $50mm to $100-$115mm. It is still conservative by at least 100% -- remember that cost synergies are irrelevant and that’s what it is guiding. The ‘running KATE better’ synergies are what really matters.
- All of the department stores noted an improvement in the handbag category in Q3 with several saying it was one of the strongest categories.
Three negatives
- Overall GM was 66.2% contracting 270bps. On the surface it would seem to be a big negative, but Kate was always going to be a drag this year (-130bps). The Coach brand gross margins contracted 140bps and Fx was a 70bps headwind. Last quarter gross margins contracted 150bps in comparison. Women’s footwear in house was -30bps. The other negative impact was from the mix of bags. Management noted that the inventory levels for Kate Spade is higher than where they want it, but let’s give new management some time.
- Global SSS decreased 2%. Negatives were the Chinese festival shift, inventory mix issues and hurricanes and typhoons. International compares are more difficult than N.A. compares so adding international to the reported comp for the first time was going to be a drag. Have returned to global positive comps in FQ2 so far.
- Deborah Lloyd, the former Chief Creative Officer, announced she is resigning. Tapestry announced the appointment of Nicola Glass from Michael Kors as her successor. We don’t expect Deborah Lloyd to be completely out of the picture of a brand she was instrumental in re-imagining though.
HBI
Click here to read our analyst's original report.
Department stores reported this week. On the whole the back to school season was reasonably positive.
This flies in the face of Hanesbrands (HBI) noting that back to school weakness was a major driver of its innerwear segment being down 5% in the quarter.
This means one of two things, either retailers (particularly WMT and TGT) are tightly managing inventory, or HBI is losing share.
We think it’s likely a combination of both.
Management wants investors to think of HBI as a stable consumer product good type company that has stable growth. The truth is it is volatile, and losing share persistently.
We think organic growth remains negative leading to missing financial expectations for the foreseeable future.
APD
Click here to read our analyst's original report.
Overhangs on Air Products (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.
SEMG
Click here to read our analyst's original report.
On the 3Q17 Results……A weak quarter with Adjusted EBITDA of $91MM missing consensus $102MM. Another Maurepas delay, continued negative margins in crude marketing, and weaker QoQ performance in natural gas G&P were the main issues. We also note that SEMG’s 3Q17 Adjusted EBITDA figure adds back $15MM of G&A spent on transactions and $3MM in equity compensation.
HFOTCO Guided Down Again……When SemGroup (SEMG) first announced its acquisition of HFOTCO in June 2017, it guided its contribution to 2017 EBITDA to $60 - $65MM based on an “early third quarter close.” SEMG closed on HFOTCO on 7/17/2017. On 8/7/2017 (3 weeks after closing), SEMG reduced the HFOTCO guidance to $60MM and made sure that everyone knew that “it had everything to do with the timing of the close.” Today, SEMG reduced HFOTCO guidance again, to $55MM, due to “the timing of the transaction close and related closing adjustments.” Hurricane Harvey had no impact. Strangely, SEMG maintained the full-year HFOTCO guidance of $115MM. We also note that SEMG adjusted out of HFOTCO’s 3Q17 results a $1.5MM impairment charge and $1.3MM of M&A transaction-related costs. All-in-all, we’re a bit perplexed as to what’s going on at HFOTCO, and wonder if the asset is underperforming expectations.
Bottom Line: Short SEMG remains a Best Idea, Fair Value ~$15 - $20/share
VIRT
Click here to read our analyst's original report.
We continue to be concerned about Virtu Financial (VIRT) on many fronts and capital resources is at the top of the list as the company is thinly capitalized with only $1 billion in tangible equity capital versus much higher levels at other market making operations like Goldman Sachs (which has over $80 billion in funding available). 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 our analyst's original report.
The plummeting NFL ratings have been the focus of discussion for quite some time now, especially as it relates to big delivery players as Domino's Pizza (DPZ) and PZZA. Adding more fuel to the fire is a report that ad prices are down for most NFL broadcasters, meaning that those once highly coveted commercial spots during NFL games are no longer a hot commodity. According to new data released by research company SQAD, so far this season, among the networks that carry NFL games, only NBC is showing a YoY increase in commercial prices.
PLAY
Click here to read our analyst's original report.
Based on current trends reported in 2Q17, we are confident that Dave & Busters (PLAY) will report negative comps in 3Q17 and likely for the balance of 2017. We see a better than 80% chance that PLAY’s amusement business will post comps down between 3-5%. The current consensus estimate is for the amusement business to comp up 2% in 3Q17 and 4.1% in 4Q17.
HST
Click here to read our analyst's original report.
While many in the investment community criticize management for its capital allocation policy, Host Hotels (HST) continues to outperform operationally. Margins were once again excellent and, despite the meaningful hurricane impact, HST still beat the Street on Q3 EBITDA. Guidance was solid but overly conservative, in our opinion, setting up another beat for Q4. Our data and research suggests that US RevPAR is accelerating already in Q4 and should be sustained well into 2018. We’re certain management’s guidance does not reflect any real demand improvement.
Still, investors are focused on stock buyback, or the lack thereof. We get it – the stock got a lift from a bulge bracket upgrade 2 weeks ago expressing more clarity around capital allocation and the potential for more aggressive repurchases. We’re in that camp and we think it will happen. A new CFO, a ridiculously underleveraged balance sheet, and the generation of excess cash flow as HST now appears to be a net seller of assets elevates the likelihood it will be a net buyer of stock. The Street won’t give them credit until they see it – similar to RevPAR acceleration – and we like that set up. HST remains on our Best Ideas list as a long and any additional weakness sure looks like a buying opportunity.
SBUX
Starbucks (SBUX) remains a Top Short with eroding fundamentals (slowest comp growth in 5yrs) and increasing uncertainty about the company’s future growth trajectory. 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.
If you recall, our Short thesis included the beliefs that technology is no longer a differentiator for the brand and our mounting concerns regarding Kevin Johnson as the new CEO. Both of these concerns were justified on this most recent earnings call, as the Company has gone all in on mobile order & pay, and will be opening the once exclusive program to all customers, not just loyalty members.
By doing this, SBUX has essentially hit the BIG RED PANIC BUTTON, in the hopes that it can once again drive increased adoption and return to the technology juggernaut it once was. Additionally, the company continues to aggressively push its food business, which is margin dilutive as it accounts for an increasing portion of sales mix. Bottom-line, this print and management’s guidance gave us increasing confidence in our Short positioning.
