Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note that we added HCA Healthcare (HCA) to the short side and Albemarle (ALB) to the long side of Investing Ideas this week. 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.
This week the Justice Department's Antitrust Division filed a lawsuit in federal court seeking to block AT&T's proposed acquisition of Time Warner. The prospect of a long litigation battle could reinforce recent weakness in Time Warner as what appeared to be a likely approval has now deteriorated into a courtroom battle.
Mergers can be challenged in court and ultimately be resolved in a consent decree. That could easily happen here. As emphasized by AT&T's lead trial counsel at the November 20th press conference, the Justice Department, not AT&T, has the burden of proving its case.
It's a bold DOJ move, but the legal and political context is not favorable for the government. TWX weakness may be an opportunity. We continue to believe the legal and political context favors AT&T.
WYNN
Click here to read our analyst's original report.
Todd Jordan is on his way back from Macau but he offered the following commentary:
For now, suffice it to say that November was a great month as evidenced by the 23% YoY growth rate announced a few hours ago by the government. That number is at the high end of our forecast of 20-23%, but well above consensus (again!) at 18%. Of course, we don’t know the breakdown between VIP and mass but we believe that mass performed much better on a YoY basis in November than October due in part to more difficult comps from Golden Week in Oct 2016. Even so, the level of optimism was so high that we wonder if mass demand may be getting better than the previous few months of data suggested. That is, assuming normalized and consistent comps, could we see a better 2nd derivative in mass? We know the Street is forecasting significant deceleration in overall GGR which presumably is driven by VIP since the comps are getting tougher at a faster rate than mass. The Street is too conservative on VIP, in our opinion, but we may be too conservative on mass. Stay tuned for the results of our November Mass Tracker in a week or so. Maybe Hedgeye needs to go higher on GGR?
We remain positive on the Macau stocks as the fundamentals continue to exceed expectations. We still like 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.
RRR
Click here to read our analyst's original report.
Nevada released gaming revenue data yesterday and Locals GGR posted 13% growth in October. Hold was high as slot revenues for Sept 30 were counted for the month of October due to the reversal of an accounting quirk excluded that day’s slot revs from Sept GGR. Normalizing for hold, October GGR would have grown 3.8% YoY. Combining September’s GGR, two-month GGR grew 5.4%. On a trailing 3 month basis, GGR growth has accelerated to almost 6%. The positive inflection in Locals GGR growth we’ve been calling for may already be in progress, and we see a normalized 5% growth trend rate for the rest of the year and into 2018. Red Rock Resorts (RRR) posted 6% growth in Q3 and similar growth could be the norm. We knew it wouldn’t take long for the Street to start putting pencil to the paper on what positive same store GGR growth means for EBITDA with 80% flow through (on slots). So while there’s been a couple of upgrades, the ratings are still skewed below buy level, earnings estimates don’t reflect mid-single digit same store growth, and the valuation remains discounted. Despite the nice move in the stock, RRR has legs, in our opinion.
DE
Click here to read our analyst's original report.
Obviously, we were surprised by Deere's (DE) FY18 guidance. We didn’t expect DE to guide to up North American Ag & Turf equipment sales on down crop receipts. Why? Because that doesn’t happen, as equipment sales most closely track farm revenue. Does this make us wrong? For now, it absolutely does. Are we wrong on the thesis? We don’t think so.
Farmer Tax Reform Math: There are a few notable omissions in the earnings release. One is the impact of tax reform on demand. Tax reform will increase the after-tax cost of equipment.
Crop Receipts Drive Demand: It is inconsistent with history to project down crop receipts and up equipment sales. Deere doesn’t disclose North America Ag & Turf revenue specifically, but it is very rare for both the Ag & Turf and U.S. & Canada Revenue to both diverge meaningfully from crop receipts.
We reiterate our short call on Deere.
CERN
Click here to read our analyst's original report.
Cerner (CERN) reported 3Q17 results that disappointed across most metrics recently. 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.
Tapestry (TPR) isn’t as dependent on holiday sales as most retailers since customers are generally “self-gifting” the handbags purchased during the quarter. Still Coach and Kate Spade participated in the web and outlet promotions around Black Friday and Cyber Monday like most competitors, as they should be. We do expect to see Tapestry’s brands less aggressive on promotions especially for Kate Spade and in Coach full price stores and website. We expect its competitors to also be less promotional as Michael Kors said it would be 66% less promotional during the holidays.
Looking in the outlet channel, beyond this holiday we see Coach remaining promotional, however we expect the company will be able to engineer its product costs for the outlet channel lower in order to maintain margins.
The outlet channel has remained promotional while the full price stores, websites, and department stores have pulled back on the discounting. The customer overlap between outlet stores and full price stores is very low and the product is significantly different, so we believe it is not a meaningful risk for the health of the brand. Investors will react positively to the inflection in gross margins we expect to see in a couple of quarters and the synergies from the Kate Spade acquisition.
HBI
Click here to read our analyst's original report.
Hanesbrands (HBI) put out an odd press release this week noting it was looking into renegotiating its credit agreement, “odd” because nothing has actually been done yet. It’s no surprise that HBI is ‘initiating the process’ to extend the credit facility given that it is tapped and can’t do more deals without a covenant breach – or meaningful beat in EBITDA (no). The fact that the amendment is planned by the end of 2017 is telling, and may be a read on current business trends. HBI’s credit agreement allows an increased leverage ratio for 4 quarters following the closure of a deal over $250mm. Since the Pacific Brands acquisition closed in July of last year, HBI’s leverage limit was bumped up to 4.5x from 4.0x(Net Debt to LTM EBITDA). The ratio will have to be down below 4.0x by 4Q17. 3Q fell below this level, but with a new acquisition of Alternative Apparel in 4Q, perhaps business trends are pushing the 4.0 limit. We’d need to see VERY meaningful success in a renegotiation here to buy HBI more time. Or rent time.
APD
Click here to read our analyst's original report.
We continue to like Air Products (APD) as a Top Long and recommend rotating into the name. 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.
VIRT
Click here to read our analyst's original report.
We are concerned that Virtu Financial (VIRT) is thinly capitalized and that $1 billion in tangible equity capital is not enough for the very liquidity intensive market making business at Knight. In addition, 84% of trading capital at the NewCo. is now debt financed versus much lower levels at other public brokers.
We have fair value at ~$6-$11 per share or -29% to -65% below current market prices, which we estimate will put the firm's dividend at risk. In an upside scenario, if all goes well, we only model +15% upside to $19, putting risk/reward skewed to a lower equity value.
DPZ
Click here to read our analyst's original report.
When asked about the role that splitting plays on their business, Domino's Pizza (DPZ) CFO Jeff Lawrence said the following, “The idea that splits are somehow a bad thing is overblown. It is not about optimizing the store, but it is really about optimizing the market.” We recently pointed out the fact that splitting is just another term for cannibalization. This comment by the CFO begs the questions, if splitting it not a bad thing then why did Domino’s Pizza Group recently stop reporting same-store sales including splits? When in the history of the restaurant industry did reporting negative same-store sales turn into a positive data point for the company? Historically, consciously cannibalizing sales to grow “retail sales” is a negative for the stock.
We understand that from a business perspective, DPZ gets paid by growing retail sales and thus new units. Additionally, to a certain degree, all must be done to not cede share to competitors, which is what DPZ is attempting to do by splitting. However, the sentiment around the stock is driven by same-store sales growth. The more aggressive the company gets in pursuing retail sales growth (by increased splitting), then the more same-store sales will slow, and we will see a continued erosion in the stock price.
PLAY
Click here to read our analyst's original report.
We were never believers in the long-term opportunity of the Dave & Busters (PLAY) business model, but our view can be hard to defend when the concept is posting mid-single digit same-store sales in the current operating environment.
When PLAY reports earnings on December 5th, estimates suggest the company will report a decline of -1% in same-store sales, which would be its first same-store sales decline as a public company.
Consensus of -1% for 3Q17 is way too optimistic! We would not be surprised if PLAY reports approximately -3% or worse.
The PLAY growth narrative will change thereafter, especially given the universal love for this company by the sell-side (currently has 100% BUY rating).
HST
Click here to read our analyst's original report.
Based on the first 25 days of November, we estimate that Total US RevPAR continues to track up in the mid single digits. For the whole month, RevPAR could finish up mid single digits as well, which would be very strong considering the comp (+5.9%). The calendar appears to be neutral for the month as November loses a Tuesday but gains a Thursday vs. the prior year.
For the rest of November, we expect the pace of RevPAR growth to pick up a little to close out the month as comps ease through the last five days (average of the daily RevPAR growth comps = flattish). Per our recent demand checks, we'd expect further improvement in the trend of RevPAR (calendar adjusted), but the rest of the year will be critical.
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 as it looks poised for RevPAR and earnings beats in the coming quarters.
SBUX
Click here to read the Starbucks (SBUX) stock report Restaurants analyst Howard Penney sent to Investing Ideas subscribers this week.
MLCO
Click here to read the Melco Resorts & Entertainment (MLCO) stock report Gaming, Lodging & Leisure analyst Todd Jordan sent to Investing Ideas subscribers this week.
HCA
Below is a note from CEO Keith McCullough on why we added HCA Healthcare (HCA) to the short side of Investing Ideas:
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"The reason why I came into today with only 1 short in Real-time Alerts is simple - I thought the SP500 had upside to the top-end of the @Hedgeye Risk Range. Now that we've hit that target, it's safer to put some of our Best Idea Shorts (Institutional Research product) back on. HCA Healthcare (HCA) is one of our Healthcare Research team's favorite SELL ideas right now. Here's an excerpt from their latest Institutional Research note: "In the context of an aging population and other structural headwinds, and consistent with HCA's 3Q17 results, low margin Medicare mix increased, high margin Managed Care admissions net of Exchanges/ACA declined, ACA contributions faded, and we remain far more pessimistic and short HCA." Sell green, KM" |
ALB
Below is a brief note from CEO Keith McCullough on why we're adding Albemarle (ALB) to the long side of Investing Ideas today:
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"Looking for Bullish @Hedgeye TREND ideas from my research analysts that are on sale today on relatively low-volume? How about getting long some Lithium via Albemarle (ALB)? Here are 3 bullish bullets from Jay Van Sciver's recent Institutional Research presentation:
Be patient. Wait for things like political headlines to pick your entry points. Buy red, KM" |
