Below are analyst updates on our eighteen current high-conviction long and short ideas. Please note we added Domino's Pizza (DPZ) to the short side of Investing Ideas this week. We also removed Starbucks (SBUX) 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.
The opportunity to add more providers exists in Cologuard’s core markets of Gastroenterologists, Internal Medicine Physicians and Family Physicians, all of which have low penetration rates. We believe these low penetration rates in their core markets represents an opportunity for Exact Sciences (EXAS) to continue to add providers at a similar rate to its current rate over the next few quarters.
Another factor driving Cologaurd test volume is providers reorder rate. This is the most sensitive part of our model and we think this rate will increase over time as provider and consumer awareness gain more traction.
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, 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 | MLCO
Click here to read our analyst's original Wynn report. Click here to read our analyst's original Melco report.
We’re raising our 2018 GGR growth estimate to 15% from 13% previously. December 2017 revenue pace has been strong to close out the year and our recent visit suggests sequential growth will continue. Assuming zero sequential growth still yields ~8% growth in 2018 so it won’t take much to reach our projection. In fact, we suspect we’ll have to raise numbers again.
We remain above the Street on sustained high VIP growth and incremental mass volumes from the opening of MGM Cotai (Jan 29) and Morpheus at MLCO’s City of Dreams (May 10). After reconciling with our GGR model with our company models, we’re 10% ahead of the Street on Property EBITDA for our favorite names, Melco Resorts & Entertainment (MLCO) and Wynn Resorts (WYNN).
RRR
Click here to read our analyst's original report.
Yes Red Rock Resorts (RRR) is up 45% in the last 3 months, but our new analysis suggests that the stock has a long tail, and is the best story in domestic gaming. We hosted an update call on Thursday which outlined the following key points:
- The last bull cycle in the LV Locals lasted 8 years while RRR (STN at that time) climbed 500% over that period
- Macro/demographics are similar to the beginning of 2000-2008 cycle, with pent up demand a further catalyst
- The wealth effect is no longer an impediment, which seems to be unleashing the positive demand forces – Q3 may have been the positive inflection we’ve been waiting for
- The supply outlook is even better than in 2000 – no new casinos can be built in the market except by RRR
- Tax reform providing a long term stimulus to population growth – thanks CA!
Our valuation analysis supports a $44 stock price.
DE
Click here to read our analyst's original report.
Imbedded Lease Profitability: Deere provides the balance sheet value of leases, the residual value of those leases, and the future payments due on those leases. Future lease payments are required to cover depreciation of the leased equipment, along with other costs, and provide an acceptable risk adjusted return (financing). The amount above future depreciation (lease value – residual value) that future payments will cover is, we think, a decent reference point (i.e. how much more than the cost of equipment depreciation will the lessor receive). This measure of leasing profitability dropped to its lowest level in at least 15 years, and suggests that the current lease book has little imbedded profitability.
CERN
Click here to read our analyst's original report.
Cerner (CERN) reported 3Q17 results that disappointed across most metrics. 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.
While we agree "there are still some large opportunities... many of them accessible through [Cerner's] large existing clients", the opportunity today is significantly smaller than it was several years ago. According to our analysis of the HIMSS Analytics database, Cerner has penetrated 75% of their existing client base as of 2016, which is up from 54% in 2013.
TPR
Click here to read our analyst's original report.
Tapestry (TPR) will likely be repatriating a significant amount of its $1.5B of cash held abroad due to tax reform. The company could make a $3B acquisition comfortably without issuing any equity. We think Tapestry would consider a variety of strategic acquisitions.
We think management prioritizes an aspirational brand that could be global, brings an element to Tapestry that it did not have previously, and could be plugged into the company’s existing global infrastructure. Stuart Weitzman brought to Tapestry category expertise in footwear. This year Coach took back its footwear license to manufacture and design its own footwear. Kate Spade added a younger demographic and experience in licensing a wider variety of product categories.
All three brands can benefit in certain geographies where they had limited presences from the other Tapestry brands where they had built substantially larger operations. We could envision a brand with a larger presence in Europe and a greater mix in softgoods as being particularly attractive to Tapestry. However, Tapestry will be opportunistic. If the Kate Spade integration continues to progress as well as it has to date we think we could hear about another accretive acquisition in less than a year.
HBI
Click here to read our analyst's original report.
Hanesbrands (HBI) followed up on its announcement 3 weeks ago that it was starting the process of amending its credit facility before year end.
A week ago the company announced its new credit agreement. The details include:
- Increased capacity of $300mm to $2.25bn
- Lower rates on its revolver and term loans (interest impact will depend on leverage rate)
- Increased leverage ratio limit to 4.5x/5.0x Net Debt to EBITDA vs prior 4.0x/4.5x (ratio increases to higher limit for quarters ending in the 12 month period following the closing of a $200mm+ acquisition)
Our sense is that the amendment means 1 of 3 things:
- The company needs it for a deal to perpetuate the game of buy growth/cash flow and charge-off expenses for 3-4 years.
- Business is awful and HBI needs the higher roof while the market allows it to avoid covenant limits.
- With tax reform likely to drive HBI's tax rate up by 2-3x, it simply needs the higher leverage ceiling to avoid a covenant bust while managing working capital.
Due to timing it would seem number 3 is the most likely scenario, since the original announcement came right around the time the Senate was near passing its version of the tax reform bill.
The conference committee version of the tax bill includes mandatory repatriation of indefinitely deferred foreign earnings, of which HBI holds $3.3bn.
That equates to a $295mm tax bill next year. That’s bad for CFFO, so HBI likely wants the cushion in debt/leverage capacity.
APD
Click here to read our analyst's original report.
We expect Air Products (APD) 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 continue to discuss:
- Capital Redeployment: Likely targets, antitrust-related divestitures, impact on APD in specific regions;
- Drivers Of Organic Growth Acceleration: Elements of a more favorable operating environment;
- Potential Impact of Tax Reform: Repatriation, rate impact considerations;
- Revised Valuation: Alternative scenarios and a strategic approach to the group;
- Out Year Estimate Gap: What current consensus leaves out, more likely outcomes.
All told, 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 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:
PLAY
Click here to read our analyst's original report.
Dave & Busters (PLAY): In 3Q17, the Company reported slightly better same-store sales than we were thinking due to extreme discounting. In 3Q17, PLAY did a “All You Can Eat” Wings promotion for the first six Sundays, Mondays and Thursdays of the NFL season for $19.99 with a $20 Power Card (this was down from $29.99 last year). This level of discounting is a very bad sign for the margin structure of the company!
HST
Click here to read our analyst's original report.
While we're only partly through the month in December, RevPAR growth is tracking in the right direction and looks to be growing ahead our initial expectations of 4% growth. The final numbers for the month of November indicated that US hotels grew RevPAR to the tune of 3.9%, a strong number and the best back to back monthly performance (OCT was +4.1%) we've seen since 2015.
We continue to reiterate our conviction that an inflection in RevPAR is ongoing. Host Hotels (HST) remains one of our top picks in the space as both looked poised for RevPAR and earnings beats in the coming quarters.
HCA
Click here to read our analyst's original report.
We continue to see downside for HCA Healthcare (HCA) as investors adjust to declining Managed Care volumes, ACA disenrollment in both Medicaid and Exchanges, and rising Medicare mix, while their poor competitive positioning we discussed in our December 2016 presentation positioning is leading to more explicitly negative commentary regarding share losses and the need for greater defensive capital investment.
Our expectation continues to include pressure across the P&L from a combination of volume, mix, labor cost pressure, and bad debt. After all, this is a business with 40% exposure to low/negative margin government revenue, single digit net margins, decelerating growth, 4x Net Debt/ EBITDA, 52% debt to EV, accelerating capex, and declining free cash flow.
CREE
Click here to read the Cree (CREE) stock report Technology analyst Ami Joseph sent Investing Ideas subscribers earlier this week.
TSLA
Click here to read our analyst's original report.
Don’t look for Tesla (TSLA) Model 3 reservations to be impacted until the 4th quarter, as the production delays hit the tape in October. But the balance sheet deposit line should show continued declines, which is not a great indicator into 4Q. I suppose the initial Model 3 costs could also be interesting – the units driven by the press and select investors are no doubt fabulously expensive units.
RDFN
Redfin (RDFN)
DPZ
Click here to read our analyst's original report.
Domino’s Pizza (DPZ): Our estimates suggest that the carryout business is growing 22% in 2017, versus only 4% for delivery in 2017. With sales trends slowing in 4Q17 and likely further deterioration in 2018, this suggests that the DPZ delivery business is under significant pressure. Carryout/Dine-in surpassing delivery as a percent of sales in 2017 looks to be a real possibility.
Click here or the image below to watch a brief video of Restaurants analyst Howard Penney laying out the short thesis on Domino's Pizza.
