Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note we removed short Dave & Busters (PLAY) and long Tapestry (TPR) from Investing Ideas this week. We also added Kroger (KR) to long side 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.
More Fuel in the Tank (Base Case: +25% Upside): At the beginning of 2017, we presented our long thesis on Exact Sciences (EXAS) that commercial coverage would drive physician adoption and translate into higher than expected Cologuard test volume. While the commercial coverage tailwind remains, we believe new tailwinds have emerged that will drive 2018 revenue closer to our estimate of $458M versus consensus at $417M.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
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.
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. The prevailing view on vertical mergers over the past few decades is that they generate consumer-friendly efficiencies and potential issues can be addressed through behavioral or conduct conditions, an approach embraced in the Justice Department's established merger guidelines.
The trial is set for March 19 and could take two to three weeks to complete. We continue to believe settlement is a potential option. If the case is fully litigated, however, testimony and documents could offer useful insights regarding industry trends and emerging developments in the video services market. As we’ve noted before, we believe the T/TWX deal ultimately gets completed.
WYNN | MLCO
Click here to read our analyst's original Wynn report. Click here to read our analyst's original Melco report.
December GGR grew 15% YoY to MOP $22.7 billion, missing expectations of ~20% growth. While this is the 1st time in a while that monthly GGR didn’t hit it out of the park, we would note that run rate revenue expectations had been ratcheted much higher given the consistent GGR beats for most of 2017. For December, we think low VIP hold could be at play and volumes can be volatile. Importantly, foot traffic, particularly on Cotai, was very strong during the holidays which could be good news for mass. We will send our Q4 Mass revenue tracker soon.
Looking ahead, we expect a solid Chinese New Year (CNY). Our room rate survey suggests robust room demand for the peak holiday period. Additionally, based on brief channel checks, it appears that a number of hotels in Macau are sold out for CNY, including Wynn Macau and Palace, MGM Cotai, and the majority of Melco Resorts & Entertainment's (MLCO) hotels as well. CNY this year is on February 16th vs January 28th last year. Given the calendar shift, it is more insightful to analyze January and February 2018 together and we think close to mid-teens growth is doable. We think 2018 will be another year of better than expected GGR and recommend buying Wynn Resorts (WYNN) and MLCO on weakness.
RRR
Click here to read our analyst's original report.
Las Vegas locals GGR fell 1% YoY in November primarily due to very low sportsbook hold (thanks to the Houston Astro’s win over the LA Dodgers). Assuming normal hold, say of the Dodgers beat the Astros in the World Series, GGR would’ve been higher by ~$5 million, or 2%.
Importantly, QTD Locals GGR is still up 6.3% YoY. December GGR comps are easier as 1yr and 2yr comps are -13% and -5%, respectively. Hold in December last year was below normal (5.1%) but December hold is usually low, given that slot revenues on the 31st is not counted due to an accounting quirk. To match Q3’s growth of 5.5%, Locals GGR needs to grow ~4% in December for Q4 GGR to average 5.5%. Encouragingly, gaming volumes remain in a positive trend as shown below. We remain positive on the Locals market and our top pick, Red Rock Resorts (RRR).
DE
Click here to read our analyst's original report.
Leases From FY17 Look Very Cheap: Incredibly, this shift occurred on the addition of FY17 leases – just one year of leases - to a total portfolio of leases stretching out several years. Did leases written in FY17 even cover the depreciation costs? From the disclosure, it seems doubtful. Why would Deere (DE) underprice lease? As we understand it, Deere’s goal is to get the farmer to an affordable monthly payment. Why would Deere even consider doing that? Our understanding is that accountability around residual value estimates is biased in one direction. Second, we suspect Deere is hoping to smooth the cycle and strengthen its competitive position, which assumes that this is a low in the cycle and prolonged new normal. For investors, it raises the question of how much less equipment DE might have produced and sold if leases were priced at higher historical rates.
CERN
Click here to read our analyst's original report.
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 (CERN) has penetrated 75% of their existing client base as of 2016, which is up from 54% in 2013.
HBI
Click here to read our analyst's original report.
We’ve seen another stealth rise in cotton prices – up 17% in the 4th quarter and back up yy. Hanesbrands (HBI) won’t signal it as an issue, implying retail or the consumer will eat the costs, but that is not the case.
A 10% move in cotton prices ends up being about a 50bps hit to HBI margins. The 2016/17 rise is flowing through in early 2018, and if the price continues its track cotton costs will continue to be a margin headwind throughout the year.
APD
Click here to read our analyst's original report.
An initial point in our long thesis is that industrial activity is improving well ahead of estimates. That tailwind is helpful to Air Products (APD) in the near-term. Positive pricing and volumes in North America, and more specifically, enhanced utilization in China should provide continued price improvement on the heels of decent economic growth. Mostly, the environment continues to look more supportive.
VIRT
Click here to read our analyst's original report.
Virtu Financial (VIRT) recently announced the sale of its fixed income trading venue, BondPoint (BP), to the Intercontinental Exchange (ICE). Terms of the transaction were $400 million in cash with a transaction closing targeted for 1Q18.
Broadly, while we think the re-sale amount for BP is healthy (with initial talk of a $300 million value), we think the selling of VIRT best strategic asset signifies defensiveness on the ongoing outcome of the merger with Knight. Most importantly, we think the Street is waking up to the distress that both the HFT and agency market making business is in, with earnings estimates for the upcoming quarter between zero and $0.04 per share (down from $0.19 per share for the quarter prior to our BlackBook call). 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.
HST
Click here to read our analyst's original report.
For last week, we estimate that Top 25 Market RevPAR fell 5.9% and outperformed the Total US which declined 6.7%. Excluding all hurricane impacted markets, Top 25 RevPAR declined an estimated 7.1%, slightly worse than the broader US.
New Year's Eve (NYE) is a critical final data point for December as its RevPAR in dollar contribution terms is substantially higher than that of the rest of the month. NYE for Total US RevPAR $ is ~65% higher vs the rest of December. Hence, we believe December RevPAR will finish ahead of our initial expectations of 4%-4.5% growth.
We continue to reiterate our conviction that a positive 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.
Overall, Health Care employment trends continue to weaken year-over-year, which is in line with our negative view of medical consumption. We believe hospital employment will continue to slow in response to deteriorating admissions trends. The slowing growth supports our short thesis on HCA Healthcare (HCA), and the Health Care Sector more broadly, as we continue to see further downside to growth. The upcoming #ACA2.0 policy changes under repeal and replace, and, to a less extend, tax reform, are largely negative for medical spending and for providers specifically.
CREE
Click here to read our analyst's original report.
Cree (CREE): Growth of demand for new uses of SiC 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.
RDFN
Click here to read the Redfin (RDFN) stock report Housing analyst Josh Steiner sent Investing Ideas subscribers earlier this week.
DPZ
Click here to read our analyst's original report.
Our estimates suggest that the carryout business is growing 22% in 2017, versus 4% for delivery in 2017. With sales trends slowing in 4Q17 and likely further deterioration in 2018, this suggests that the Domino’s Pizza (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.
We would also add that the carryout business is not one of Domino’s strengths, thus one of the reasons the company is making big investments in the asset base and making carryout a major focus of its TV commercials. What happens when Pizza Hut becomes more competitive on price/value and hurts the Domino’s carryout business?
TWTR
Below are the key takeaways on our long Twitter (TWTR) call.
1. BACKGROUND (2014-2016)
We estimate that the series of events that ultimately led TWTR to restructure was the result of self-inflicted wounds on the part of an unsustainable monetization strategy. We will break down the history of its business model to provide context around why we're now getting constructive.
2. WHAT'S CHANGED (2017)
We originally viewed TWTR’s decision to restructure as a cop-out preempting an inevitable decline in ad revenue. Now we realize that mgmt has also been right-sizing its model and pivoting its monetization strategy in the process. We believe the model is now built for sustainable growth.
3. LOOKING FORWARD (2018)
We suspect TWTR could return to double-digit ad revenue growth by 2H18, if not sooner. Further, after vetting what we had previously viewed as the two biggest risks to the story (users and advertiser demand), we now feel more comfortable heading into 2018 given the collective growth driver between the two.
KR
Below is a brief note from CEO Keith McCullough on why we're adding Kroger (KR) to the long side of Investing Ideas this week:
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“In raging bull markets, look for immediate-term #oversold signals in your Best Ideas. One of the Hedgeye Consumer Staples Research Team's best new ideas on the long side is Kroger (KR). They used to have it as a Best Ideas Short! Howard Penney's decision to go long KR combines the fundamental turnaround, MPP actions by the company, and a macro overlay utilizing our Macro team’s proprietary GIP (Growth, Inflation & Policy) model. With the KR -3.3% today on an Old Wall call, we say you buy the damn dip. KM" |
