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Takeaway: MLCO, HST, WYNN, TPR, APD, RRR, EXAS, TWX, SBUX, PLAY, DPZ, VIRT, HBI, CERN, DE

Investing Ideas Newsletter - 11.13.2017 surfing bull

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) raised their full-year 2017 revenue guidance from $230-$240M to $254-$257M. EXAS also raised their full-year 2017 completed tests guidance from 550k to 568k-572k and announced 4Q17 guidance of 173k-177k completed tests. The new guidance ranges imply an average revenue per test (ARPT) of $447-$449 for the full-year and an ARPT of $426 in 4Q17 assuming the midpoint of full-year ARPT guidance. In 4Q17 we are forecasting ~184k completed tests, revenue of $77.8M, and believe we are being conservative with our assumptions of 1.82 tests per provider, and an ASP of $426. Also included in our forecast are ~10k provider adds based on our S-Curve adoption model.

TWX

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

Against most expectations, the Justice Department's Antitrust Division is playing hardball with AT&T.  We continue to expect this deal to be completed with a negotiated consent decree although the road has gotten rocky for this vertical transaction.

We understand the criticism of the Comcast-NBC Universal merger conditions and the administrative burdens of monitoring and enforcement.  Those conditions expire next year and Comcast will gain significant operational freedom, especially with the upcoming FCC repeal of strict net neutrality rules.  Pushing for asset divestitures as a condition for approving the AT&T/Time Warner deal represents a more sustainable antitrust remedy if there are legitimate vertical foreclosure concerns.

This may go to court, especially given the chest-thumping on both sides, but whether it's before or after the filing of a lawsuit, we still believe a consent decree is the probable outcome and the deal gets done. 

Apart from speculation about political meddling in an antitrust investigation, the merits of the DOJ case are not an easy sell.  Time Warner content may be "must have" in the current service marketing context, but that does not necessarily mean essential in an antitrust context.  Moreover, Amazon with its expanding base of Prime video subscribers, Google YouTube, Facebook and other tech titans have market entry capabilities -- internally subsidized by dominant positions in the digital advertising market -- that must be considered as part of any litigation.  They, along with Netflix, are shrinking the legacy video subscription base.

The world is changing, and the law does not forbid AT&T to change with it.

WYNN

Click here to read our analyst's original report.

Once again, Macau seems to be exceeding estimates, this time for November.  Week 2 accelerated from the strong start and even we are raising our November forecast, despite being higher than most.  The casinos may have played a little lucky in VIP on the Peninsula but volumes were also apparently strong.  Mass seems better than in October, possible due to an easier (we think) comparison.  Consensus expectations for November and Q4 still look too low and the Street will have to play catch up, again.  The formula of GGR beats = EBITDA beats = higher Macau stock prices should continue.

We generally remain positive on the Macau stocks as the fundamentals continue to exceed expectations.  We still like Wynn Resorts (WYNN) over the near term, which is our go-to horse given the tremendous growth in VIP, lack of cannibalization on Wynn Macau, and big potential ramp from Wynn Palace.  Our modeling suggests MLCO has the highest probability of beating Street estimates due to sustainable margin improvements and may offer the most upside of the Macau stocks over the next year.

RRR 

Click here to read our analyst's original report.

With its 10Q released, we got more positive nuggets from Red Rock Resorts' (RRR) latest quarter.  3Q same-store ADR grew 8% YoY, much higher than Vegas ADR growth of 4%.  RRR has outperformed the Vegas average for the last two years and the spread widened in 2Q and 3Q.  Once occupancy normalizes post Palms renovations and its 60 new hotel rooms, we could see more outsized RevPAR gains.

Latest data is in for our weekend vs. weekday RevPAR analysis. 

The divergence that we’ve seen take place since early 2016 has continued through much of this year, but over the last few months, we have seen the spread narrow, as weekday RevPAR has begun to (dare we say) accelerate.  As we look to the next 6 months, the midweek period will face an average comp of ~2.4% while the prior 6 months faced a comp of 3%, suggesting further lift in the midweek could be warranted.  

Based on preliminary data released by STR, it is likely that RevPAR did in fact expand by roughly ~4.5% in October.  While the first two weeks were impact by Jewish holiday shifts, the last day of the month also faced the negative impact of the Halloween shift which essentially halted business travel on the last day of the month, excluding the impact of the Halloween shift we think October could have seen RevPAR growth north of 5%.

DE

Click here to read our analyst's original report.

Industrials analyst Jay Van Sciver presented a critical Top Short Deere (DE) update on Tuesday Nov 14th ahead of its pending FY18 guide when it reports 4Q17 results on Nov 22nd. This company has been a well-documented and challenging Top Short in part because of a surge in sales in Latin America, low quality reporting at Deere Financial, and an exhausted pool of bearish investors; however, we expect DE to provide a unique short alpha opportunity into year end.

The three incremental updates headed into the FY18 guide include;

  1. A complete remodeling of DE by market on forecastable definitions, and key drivers of profitability;
  2. The impact of Tax reform, which is widely assumed to be a positive for DE, but we reviewed what may prove to be a net negative impact; and
  3. Review of sentiment from the road with DE a topic of discussion in many recent meetings, and the skew in sentiment vs. our expectations for guidance.

We see significant downside with shares richly valued and increasingly low quality earnings growth.

CERN

Click here to read our analyst's original report.

We spoke with a Healthcare IT Consultant at a leading national advisory firm, whose clients include some of the largest health systems in the United States. This individual's primary responsibility is advising clients on the replacement of their clinical and financial IT systems. This is a selection of what our contact had to say…

Cerner (CERN) Revenue Cycle

  • "[Cerner] has the functionality now to take on revenue cycle, but they are going to continue to stumble in revenue cycle."
  • "Not impressed with [Cerner's] go-to-market with Millennium revenue cycle."
  • "I got two fairly sizable Cerner clinical projects going well, but the revenue cycle is in the ditch."
  • "It is bad staffing moves that are causing the problem.  Hiring people in senior roles that may have experience in physician office but not acute care.  [Cerner] is going to continue to struggle pretty mightily   In Wisconsin you saw the client lawsuit announced, and I think there will be more of those." 

TPR

Click here to read our analyst's original report. Coah is now officially trading as Tapestry (TPR).

The top reasons we like Tapestry (TPR) long are as follows: synergies from the Kate Spade acquisition – management has already more than doubled the expected synergies; an improving industry backdrop – Michael Kors, a leading competitor, said it expects to be 66% less promotional in the holiday quarter; future growth opportunities with Kate Spade – management has said expanding Kate Spade in Asia where Coach has significant infrastructure is one of the biggest near term opportunities; licensing – the opportunity to renegotiate, take in-house, or add a new licensee; and future acquisitions – the company recently changed its name to Tapestry to reflect that it is a house of brands instead of just the Coach brand, a move that foreshadows more brands to come. Top long idea for YE17, and as of now, YE18 as well.

HBI

Click here to read our analyst's original report.

Wal-Mart managed inventories tightly in 3Q, and that is expected once again in 4Q. Keep in mind that HBI management banking on a ‘4Q restock’. Yet inventory at WMT only up 0.7% on 4.2% growth in sales. Yes, it comped – but we’re willing to bet that per-cap spend increases in underwear didn’t drive the comp.

Additionally looking at the retail earnings season…

  • Wal-Mart had its best comp of this economic cycle.
  • TGT comped up
  • KSS comped positive
  • JCP comped up
  • Amazon North America accelerated
  • And yet HBI US Innerwear was slowed to  negative 5% growth!

If you hear management talking about HBI being a CPG type company with stable growth, LSD organic growth and a loyal customer (minimal share risk), remember these data points.

HBI is facing structural market share risks, sales are not stable, and management does not have command over the top line of the business.

Organic growth will remain negative. 

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.

VIRT

Click here to read our analyst's original report.

While the BP sale will allow the company to reduce its current 5.1x Debt/EBITDA balance with after tax proceeds of this sale, we are still extremely weary of the organic earnings power of these firms and hence the ability to delever and also meet the Street's lofty earnings expectations. 

We are concerned that both the legacy high frequency trading business Virtu Financial (VIRT) and the wholesale market making business (KCG) are facing secular challenges and we outline an earnings opportunity well below consensus. Our probabilistic earnings range in our base and bear cases is $0.60 - $0.90 per share, -26% to -57% below consensus.

DPZ

Click here to read our analyst's original report.

At this week’s Morgan Stanley Global Consumer & Retail Conference, Domino's Pizza (DPZ) management did a great job of laying out the DPZ story; how the Company was the first to really dive head-first into using technology to enhance the customer experience, how 60% of sales comes from digital channels, how their loyalty program functions as a key differentiator, and how 1 out of every 4 pizzas delivered in the United States is a DPZ pizza. All of these tidbits seem impressive at first glance, but things start to become opaque as you dive deeper and start to ask the right questions.

When looking at their domestic U.S. business, it is important to keep in mind that the third-party delivery segment is still in its infancy, and this is contrary to their CFO’s belief that the restaurant industry is not a zero-sum game.  Therefore, we believe that as the rest of the restaurant industry scales delivery and gains more momentum, DPZ will feel the burn. What we do know is that food delivery in the United States in general has transformed to include various restaurant players, making pizza one of many options available to consumers.

PLAY

Click here to read our analyst's original report.

We could not help but feel a sense of vindication when the management talked about how significant of an impact competition and cannibalization had on sales figures in 2Q17. According to the Company, competition from other amusement-centric restaurants, namely TopGolf and Main Event, was modestly above their expectations. During the quarter, Main Event and TopGolf opened 5 units and 2 units respectively, and it is worth noting that of the combined 7 unit openings, 6 of them were in Dave & Busters (PLAY) markets. Going back in time for a moment, if you recall our PLAY Black Book from September 2016, one of our Key Points was that competitive intruders were attacking PLAY from all angles. Evidently, we were a bit too early with regard to this observation, but it is now clear that we our suspicions were correct. Further, the Company saw continued labor cost and commodity headwinds, with hourly wage inflation up ~5%, which when coupled with a slowing topline, will surely place increasing pressure on the overall business.

Investing Ideas Newsletter - play111

HST

Click here to read our analyst's original report.

Despite the choppy weekly data, calendar shifts, and at times, conflicting conference call commentary, we continue to reiterate our conviction that an inflection in RevPAR could be approaching (is it happening now?). Host Hotels (HST) remains one of our top picks in the space. For more details see our recent notes on the REITs.

US hotels posted a big RevPAR growth week for the week ended 11/11/2017, against a fairly difficult comp (in aggregate).  This week comped against the Election Day of 2016, where RevPAR was sluggish in the midweek, but rose sharply on the weekend period.  As usual, we would caution not to be too reliant on STR's weekly data as they are incomplete; the monthly results are more comprehensive.   

Based on the first 11 days of November, we estimate that Total US RevPAR is tracking up in the mid to high single digits.  For the whole month, RevPAR could exceed 4% growth.

SBUX

If you left it up to the Starbucks (SBUX) management team, they would tell you that things couldn’t be better. But the numbers tell a different story, as the overall business continues to slow. 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. Was loyalty really preventing the adoption of mobile order & pay previously? Will this further complicate the bottleneck that came up just a couple of quarters ago?

When taking into account that SBUX loyalty member growth was up against an easy comp this quarter, the 11% YoY growth figure is not impressive – growth was actually flat sequentially, and has been stuck at the 13.3M member mark for three quarters in a row.

MLCO

Below is a brief note from CEO Keith McCullough explaining why we added Melco Resorts & Entertainment (MLCO) to the long side of Investing Ideas:

In addition to the US growth and profit cycle #accelerating, another big @Hedgeye Research Call has been that Macau Gaming is #accelerating in Q417. Wynn Resorts (WYNN) is still in our longer-term INVESTING IDEAS product, and today I'll signal #oversold in Melco Resorts (MLCO).

Here's our Gaming Ace, Todd Jordan's, recent commentary on Macau:

"Once again, Macau seems to be exceeding estimates, this time for November.  Week 2 accelerated from the strong start and even we are raising our November forecast, despite being higher than most.  The casinos may have played a little lucky in VIP on the Peninsula but volumes were also apparently strong.  Mass seems better than in October, possible due to an easier (we think) comparison.  Consensus expectations for November and Q4 still look too low and the Street will have to play catch up, again.  The formula of GGR beats = EBITDA beats = higher Macau stock prices should continue."

KM