Below are analyst updates on our eighteen current high-conviction long and short ideas. Please note that we added Tesla (TSLA) and Redfin (RDFN) to the short side of Investing Ideas this week. We also removed Domino's Pizza (DPZ) from the short 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.
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.
At the recent 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. Moreover, on the antitrust merits of the government's liability case (whether this merger violates the antitrust laws), he could prove challenging to claims of vertical foreclosure and genuine threats of consumer harm.
We anticipate the T/TWX transaction will ultimately close with the DOJ either settling the matter in a consent decree or losing its case in court. The case could be resolved either way by early summer.
WYNN | MLCO
Click here to read our analyst's original Wynn report. Click here to read our analyst's original Melco Resorts report.
Wynn Resorts (WYNN) and Melco Resorts & Entertainment (MLCO) remain our top Macau ideas. From a top line perspective, we think Wynn is outperforming again this quarter in Macau. VIP growth is surpassing expectations and Wynn remains most leveraged to that segment. Moreover, the Wynn properties seem to be gaining a little share on the mass side as Palace continues to ramp and cannibalization at Wynn Macau remains muted.
For MLCO, the top line strength in the market and the mass bounce back is certainly beneficial. There is a secular margin story at play here as well as we think the Q3 margin gains are likely sustainable. As the Street fails to factor in what we think is sustainable margin improvement, their estimates remain way too low. The derivative effect here is that MLCO remains cheap, as the operationally disadvantaged, poor stepchild. Thus, there is a multiple expansion story also at play.
RRR
Click here to read our analyst's original report.
Perhaps the bigger positive read through from Wynn’s LV land purchase announcement is that another new project in LV will likely result in a more (incremental) demand for construction workers in the local economy which would only build on the existing backlog of construction spend/potential hiring. As we have indicated repeatedly, there has a long standing relationship between the mix of construction employment vs. locals GGR growth (and both are trending higher right now). Given the catalysts for more construction spending and job hiring, we think the LV Locals story has a legs, and Red Rock Resorts (RRR) remains our go-to way to play it, although BYD should also benefit.
LV Strip optimism = more development = more employment and more gambling construction workers = higher Locals GGR.As we have indicated repeatedly, there has a long standing relationship between the mix of construction employment vs. locals GGR growth (and both are trending higher right now). Given the catalysts for more construction spending and job hiring, we think the LV Locals story has a legs, and RRR remains our go-to way to play it, although BYD should also benefit. LV Strip optimism = more development = more employment and more gambling construction workers = higher Locals GGR.
DE
Click here to read our analyst's original report.
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 Deere (DE) black book recently, but tax reform will increase the after-tax cost of equipment. Like it or not, a $300,000 tractor bought by a smaller farmer in Tax Year 2017 under Section 179 will have an after tax cost of $195,000 at a 35% marginal tax rate. A tractor bought in Tax Year 2018, assuming the new corporate tax rate goes into effect January 1, would have an after tax cost of $240,000.
CERN
Click here to read our analyst's original report.
Politico reporting this week that the VA Senate committee may not approve funding for the EHR implementation. VA Secretary David Shulkin needs authorization to repurpose ~$700M from current year budget to sign contract with Cerner (CERN). The below suggests that the VA committee will not approve such request. Therefore, a contract getting signed before year-end appears increasingly unlikely. The street is expecting a contract before year-end and likely reflected in management's lofty, back-end loaded bookings guidance.
From Politico:
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"Democratic senators: VA needs more money for EHR: Sens. Jon Tester and Brian Schatz, who are ranking members on the Senate Veterans Affairs and Veterans Affairs Appropriations Subcommittee, respectively, think the VA needs much more money to implement its new Cerner EHR, the pair said during a call. Schatz said the department needs $15 billion to both implement Cerner and maintain VistA in the interim, and that will require additional funding, he said. The problem is particularly acute for the department given money shortages for its private-sector choice program and staffing shortage, Tester said. He indicated the VA committees will not approve an earlier request from VA Secretary David Shulkin for spending flexibility, which would allow the secretary to reroute money to the EHR implementation." |
TPR
Click here to read our analyst's original report.
With the odds of tax reform legislation passing in the coming weeks increasing we wanted to analyze the impact on Tapestry (TPR).
Tapestry’s effective tax rate is expected to be about 25% this year, but the cash tax rate has been about 20% in recent years. So we do not expect Tapestry to see a meaningful tax rate benefit from the US corporate rate being reduced to 21%. However, we do think Tapestry will benefit from other aspects of the legislation. Tapestry has $1.5B of cash held outside the US. If it were to repatriate the cash as part of the proposed tax reform it would have to pay a one-time 12% tax on the amount. Tapestry would then be able to use the $1.3B to pay down a portion of its $1.9B of debt, repurchase shares, or increase capital investment.
We think Tapestry would likely pursue a combination of all three, but the repatriated cash would also facilitate future domestic acquisitions. We believe Tapestry will continue to acquire brands in the coming years and plug them into its infrastructure and distribution, boosting future growth and returns. Tax reform will enable it to use the profits earned abroad back home in the US.
We continue to think this stock will be one of the biggest winners in retail in 2018 even without multiple expansion.
HBI
Click here to read our analyst's original report.
The bull case around Hanesbrands (HBI) over the past two weeks has been around strength at Champion – which is about 16% of HBI sales. So if the brand globally grows 20% (a stretch), we’re looking at just a ~3% top line tailwind.
Yes, it’s showing up in glorified pajamas at Urban, which is definitely a win. But it just showed up at Costco as well, that’s generally a sign of sacrificing margin for inventory clearance.
The barbell strategy usually doesn’t work in this business.
Domestically, we have seen Activewear fail to grow materially even with Champion brand growth in the last 2 years.
When Amazon launches its private label Activewear line it will most likely slow growth for Champion and Hanes Activewear domestically.
Source: Hedgeye
APD
Click here to read our analyst's original report.
We added Air Products (APD) to the Best Ideas list back in June, and the thesis has progressed reasonably well. We expect the shares to continue to outperform in a more robust operating environment as the company executes on high quality capital deployment opportunities. Estimates for 2018 and 2019 remain well below the company’s potential, with acquired assets and industry tailwinds providing straightforward catalysts. We see ~30% additional upside for APD shares, a rarity in the current market for a well-positioned competitor in a structurally robust industry.
VIRT
Click here to read our analyst's original report.
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 is $0.60 - $0.90 per share, -26% to -57% below consensus.
We have Virtu Financial (VIRT) 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.
PLAY
Click here to read our analyst's original report.
As we've said for some time now, we were never believers in the long-term growth opportunity of the Dave & Busters (PLAY) business model. Increased discounting, competitive intrusion (TopGolf and Main Event) and cannibalization were three factors impacting business trends in 3Q17. Sales and margin trends only get worse from here, and with added pressure from the aforementioned competitors, management continues to be cautious about prospects going forward.
Overall, system-wide SSS came in in-line with expectations at -1.3% vs FactSet -1.3%, and breaking down the comp by category: Food & Beverage was -4.2% (vs Consensus -3.5%) and Amusement & Other was +1.1% (vs Consensus +0.6%). Also, the Company said they were experiencing a significant slowdown in the early part of 4Q17. With SSS turning negative for the first time in PLAY’s history as a public Company, PLAY’s growth narrative will have to shift and management will need to become more proactive if they want to fend off any further competitive intrusion.
HST
Click here to read our analyst's original report.
The inputs for our monthly RevPAR model came through earlier this week, and overall, the data supports our view that investors should view hotel stocks broadly with a bullish bias. Sure, there is the dreaded supply growth argument and the likelihood that something else maybe goes wrong in D.C., but the data leans bullish and supports our positive calls on Host Hotels (HST).
While our monthly model holds a slightly “lower” R^2 to overall RevPAR at 0.77 when compared to our quarterly model which holds a 0.84 R^2, it has been a helpful gauge during the intra quarter periods. For the next 3 months our model is projecting RevPAR growth in 3-4% range. We should be able to provide an update for our quarterly model (which would project 1Q18’s RevPAR) at some point in late January of next year – stay tuned.
SBUX
Click here to read our analyst's original report.
It is clear that no real recovery has begun at Starbucks (SBUX). Consolidated SSS came in at +2% vs FactSet +3.3%, and this is a 100bps sequential deceleration on the two-year average, which has slowed by 300bps since 4Q16. A similar trend can be seen with regards to Americas SSS, which came in at +2.0% (+3.0% adjusting for the hurricanes) vs FactSet +3.4%; a 100bps deceleration on the two-year average, which has slowed by 300bps since 4Q16.
HCA
Click here to read our analyst's original report.
In 3Q17, births were down -2.5% and NICU volume was flat which is consistent with our maternity tracker. We will continue to update our tracker and expect to see more downside from here. In addition, HCA Healthcare (HCA) failed to call out Orthopedics as a growth driver in the quarter for the first time in some time and we believe the structural shift towards outpatient and the removal of Total Knee Arthroplasty (TKA) will be a headwind to their ortho business going forward.
We continue to expect HIX volume to decline for the balance of 2017 and into 2018 while demographics for the working age and Managed Care population stagnate, even in HCA markets. Same facility Medicaid declined -2.2%, coincident with sequential declines and deceleration in monthly Medicaid enrollment. In addition, we are expecting the current over-enrollment in Medicaid to reverse in the coming months through greater CMS oversight and redeterminations, adding incremental volume and bad debt pressures on the margin.
CREE
Below are four reasons why we like Cree (CREE):
- Growth of demand for new uses of SiC is driving revenue and margin upside
- Slowly healing LED market driving directional change in estimates
- If Lighting execution improves it is night and day impact
- All under the guidance of a new CEO with no magic bullet but a great history of getting it right.
Use weakness to accumulate with a view that P+L, margins, and FCF will trough in front of us but out-year will reflect ongoing growth + turnaround efforts. We see 25-30% downside risk and 50-75% upside risk on a 1-2 year basis at 25x FCF.
TSLA
Click here to read our analyst's original report.
The goal in a story stock is to anticipate the next chapter. Tesla's (TSLA) Tesla’s valuation is silly, and we suspect most sophisticated investors realize it. Short squeezes, as we would characterize the recent move in Tesla shares, often prove attractive short entry points. Currently, many longs are gloating and shorts are no doubt miserable. All this drama comes just ahead of new competition that may permanently degrade Tesla’s growth prospects. Longs should be fearful and shorts greedy, as we see it.
Tesla is a temporarily subsidized maker of capital goods. Established equipment markets have seen almost no competitive entry for decades; important structural hurdles typically preclude entry into markets like automobiles and electrical equipment. As Tesla’s tax credits are exhausted, existing car makers can introduce EV models with as yet unused tax credits, adding to their already substantial edge. If Tesla even survives to profitability, it would be an exceptional accomplishment.
RDFN
Below is a brief note from CEO Keith McCullough on why we added Redfin (RDFN) to the short side of Investing Ideas:
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AFTER the US stock market ramps to all-time highs, HIGH SHORT INTEREST (as an Equity Style Factor) has a central tendency to ramp like this (bears are forced to capitulate and cover high after pressing shorts lower). Obviously with a massive lockup coming off JAN 23, 2018 and RDFN already showing a revenue slow-down from its peak, short sellers have good reason to be on the bear side of this name in particular. Bigger picture, here’s a summary from Josh Steiner and Christian Drake from a recent Institutional Research report: "While the initiatives Redfin is taking are exciting, they come with risk and limited agility to achieving scale. While Mortgage and Redfin Now could end up being exciting businesses for them, it will some time before they are significantly material, assuming Redfin Now makes it out of "experiment" phase. Limited inventory will push demand out of the coastal states and into the middle of the country- something that would not work well for their "1% pricing experiment" given the lower returns per close. This, and constricting affordability, look to be dark backdrops that should pressure agent closings in the out-quarters. |
