Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note that we added Cree (CREE) to the long side of Investing Ideas this week. We also removed Albemarle (ALB) from the long side. 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.
We expect both 4Q17 and full-year 2018 sales estimates to move higher as a result of Exact Sciences' (EXAS) top-line beat this quarter. Current 4Q17 estimates of $77.3M and an ARPT of $439 imply ~176k completed tests in 4Q17, which compares to the mid-point of management's guidance of 175k and is below our estimate of 184k. Also, consensus is currently expecting 2018 revenue of $405.2M and an ARPT of $450 which implies 900k completed tests. We expect consensus numbers to move higher given our 2018 revenue estimate of ~$444M which assumes ~990k completed tests, a projected flat YoY ARPT of $448, and a modest increase in tests per provider to 2.03 by the end of 2018.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
At this week's preliminary hearing, Federal District Judge Richard Leon advised AT&T and Time Warner to extend their merger agreement beyond April 22, allowing sufficient time for a roughly three-week trial beginning March 19. Forget about days off or holiday breaks, he said. All in means all in.
If the case proceeds to a full trial followed by an opinion addressing all of the key issues, the outcome could push beyond Memorial Day, perhaps well into the summer. Judge Leon suggested a 60-90 day extension of the merger agreement. If the case settles, however, an agreement could be reached at any time, even well in advance of April 22.
There was no discussion of discovery parameters, including hints whether AT&T and DOJ will squabble over communications between the White House and the Justice Department regarding anything related to this case. Several weeks ago, when asked about possible communications with the White House related to this matter, Attorney General Jeff Sessions, in congressional testimony, simply replied he cannot discuss such communications. This suggests claims of executive privilege could arise if AT&T seeks discovery that touches on the President's animosity toward CNN and whether it affects DOJ's credibility in bringing this case.
A status conference is scheduled for December 21. Things could heat up if AT&T issues discovery requests to probe the possible political drivers lurking in the background of this litigation. As we've noted before, Judge Leon runs a non-nonsense courtroom and tends to be skeptical when he suspects the government has reached too far.
WYNN
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Junket operator Meg-Star International just launched a new VIP club at Wynn Macau with 5 gaming rooms and 9 tables. We’re seeing more junkets open more VIP rooms as the credit environment remains healthy and VIP volumes remain robust. David Group, another junket, added tables to Wynn Macau at the beginning of this year. We expect Wynn Macau’s VIP share to rise following this launch.
The operators are enjoying very robust growth out of the VIP channel and are confident the VIP growth can continue. Wynn Resorts (WYNN) remains our favorite stock over the near term.
RRR
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Nice to see some sell side raising estimates recently as some on the street realizes the LV Locals story is now and is more important than the big CapEx step up. This market could generate the highest same-store EBITDA growth of any gaming market in the entire US over the next several years. In addition, Red Rock Resorts (RRR) could be a big beneficiary of the capex deductions via potential tax reform.
Meanwhile, the macro environment is doing just fine. Just yesterday, home price data for the US showed that the Las Vegas valley continues to accelerate, becoming the second fastest growing major metro area in terms home price appreciation. With home price growth tracking up 9% YoY in September, we expect further declines in the % of outstanding mortgages under water which will in turn create a positive wealth effect for local residents – for more details see our most recent notes on RRR, and ping us for access to our 70 page slide deck (originally presented in June of this year).
DE
Click here to read our analyst's original report.
We didn’t expect Deere (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. We highlighted it in our DE black book last week, but 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.
CERN
Click here to read our analyst's original report.
While Cerner (CERN) has the upper hand in ambulatory because of their recent selection by Dignity, the probability of athenahealth taking down this business is not zero. Working in favor of athenahealth is two of their largest peers, Ascension and Trinity, who are both operating a dual-vendor model of Cerner inpatient and athenahealth outpatient. Working against athenahealth is Dignity's equity partnership with Optum to build their own ambulatory RCM solution, which we believe resulted in Dignity passing on athenahealth several years ago. Either way, Allscripts likely gets replaced.
TPR
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Two high-level appointments at Tapestry (TPR) (the company formerly known as Coach”. These are new roles – i.e. additive – i.e. playing offense. Kind of like the opposite of UnderArmour which is playing horrible defense and is likely to get scored on. Great companies invest when they ‘should’, not just when they ‘could’. TPR is doing both. TPR is our top long. LULU is #2…
- Fredrik Malm…President of Coach Europe and International. Former President EMEA at Ralph Lauren (and a convert to ‘Team Larsson’). This is a business (outside US) where the Coach Brand has historically flat-out failed. Incentives likely to be linked to Kate and Weitzman – both with much better presence outside US borders.
- Laura Dubin-Wander will join the brand as president, North America. Formerly U.S. president of Givenchy. Prior to that, she held leadership roles at Christian Dior Couture, American Eagle Outfitters, Liz Claiborne and Victoria’s Secret.
HBI
Click here to read our analyst's original report.
Congress is well underway with its tax reform bill, and the general consensus is that it is great for US corporations as they will see lower taxes.
However there are some companies that will likely have to pay more in tax under the new law due to the rules around foreign subsidiary earnings.
Hanesbrands (HBI) is one of the few consumer non-durables companies that will likely see a higher tax bill.
The company has brought its tax rate down from the mid teens to 4% over the last 5 years. It credits its low taxes to its global supply chain, but it is more related to its transfer pricing and assets held in tax haven nations.
These are the exact tax reduction process that the a new law would likely reverse, meaning likely pressure on the bottom line for HBI.
APD
Click here to read our analyst's original report.
Below is a brief video in which Industrials analyst Jay Van Sciver lays out the broad long thesis on Air Products (APD).
VIRT
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We are concerned that both the legacy high frequency trading business (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 for Virtu Financial (VIRT) is $0.60 - $0.90 per share, -26% to -57% below consensus:
DPZ
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Although Domino's Pizza (DPZ) is putting up a fight to maintain or even grow its share in the global pizza category, the Company is facing a new animal in PH. From 2012 to 2016 DPZ was able to grow its market share amongst $1B+ pizza chains by 560bps, while PH lost 830bps of market share. PH was a poorly managed brand in the past. YUM has implemented a strong management team that is running at full speed to do both simple blocking and tackling, such as delivering consistently hot pizza by deploying new warming bags, and larger scale projects in regards to technology, loyalty and advertising to rebuild brand loyalty. The 800lb. gorilla just woke up!
PLAY
Click here to read our analyst's original report.
Below is a brief video in which Restaurants analyst Howard Penney lays out the broad short thesis on Dave & Busters (PLAY).
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) and PEB remain our top picks in the space as both looked poised for RevPAR and earnings beats in the coming quarters.
While many in the investment community criticize management for its capital allocation policy, 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.
SBUX
Click here to read our analyst's original report.
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
Click here to read our analyst's original report.
Our 2017 and 2018 EBITDA projections exceed consensus by a wide margin, driven by both the top line and margins. The Street giving no credit even for margin expansion already achieved and likely sustainable
- Melco Resorts & Entertainment (MLCO) will benefit from Macau market GGR growth that should continue to exceed the Street's conservative estimates
- Already, MLCO made Q3 progress on margins and we think margin expansion is sustainable with upside at City of Dreams (CoD) Macau and City of Dreams Manila
- The Morpheus project will open in 2018 and we expect a high ROI. With Macau RevPAR in positive territory YoY, the new hotel rooms will drive length of stay and gaming play higher, particularly from the high margin premium mass gaming segment.
- MSC is now firing on all cylinders in both VIP and mass, yet the property metrics leave ample room for growth. The new VIP rooms are paying huge dividends.
- MLCO trades at the lowest valuation among Macau peers
HCA
Click here to read our analyst's original report.
HCA Healthcare (HCA) preannounced their 3Q17 results which incorporated $140M of impact from the hurricanes that hit Texas and Florida during the quarter. Consensus estimates had been falling into the preannouncement and at least in part, reflected the impact of the hurricane. Medicare same facility equivalent admissions were +3.0%, as expected based on our market model, but apparently unaffected by hurricanes. While declining nursing costs are impressive given the already low expense ratios compared to in-market peers, the bigger problem of demographics creates a negative mix shift and we doubt HCA’s ability to "manage through" the problem. Net of the hurricane, the quarter and the guidance cut agree with our longer-term negative thesis on hospitals, and HCA in particular.
On HCA’s earnings call, questions turned to HCA's 2018 expectations, and tentatively pawed at the concept that an aging population does not immediately equate to good things for HCA. We would note consensus 2018 EBITDA growth is +4.8% while management's long-term "algorithm" calls for a range of +4.0% to +6.0%. We are forecasting 2018 revenue and EBITDA -2.1% and -6.3% below consensus and our Same-Store adjusted admissions estimates for 4Q17 and 2018 remain below consensus.
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.
CREE
Below is a brief note from CEO Keith McCullough on why we added Cree (CREE) to the long side of Investing Ideas:
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"Post the recent emotional -2% correction in the Nasdaq (see the move in the VXN, or the VIX of the Nasdaq, for details), we find ourselves with yet another buying opportunity in some of our favorite Tech stocks. One of those remains Cree Inc. (CREE). Here's an excerpt of Ami Joseph's Institutional Research note when he moved it to a Best Idea LONG @Hedgeye: "We have done enough work to get to a point that we think CREE is going to be a great stock, so we are moving it to Best Ideas. We recognize, however, that part of the rally is already behind us, as the stock is up ~50% since the new CEO was appointed on September 25th and ~30% since we added it to the Long Bench." With any stock that's working for the right reasons, our job is to help you "risk manage the range" of that stock's price. When it approaches the low-end of the @Hedgeye Risk Range (like the Nasdaq itself did yesterday) you buy the damn dip." |
