Below are analyst updates on our twenty current high-conviction long and short ideas. Please note we added AMN Healthcare Services (AMN) to the short side. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
IDEAS UPDATES
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
With the expiration of FCC conditions, the coming expiration of the DOJ consent decree, and the FCC's repeal of strict net neutrality, a more intense focus on Comcast-NBC is likely. Again, given the President's explicit animosity toward NBC and the conduct of the T/TWX antitrust review, caution is warranted. But we continue to believe DOJ will find Judge Leon a challenging skeptic on the antitrust merits given the dynamic video services market. Renewed complaints about Comcast-NBC simply broaden the ripple effects of the T/TWX disposition.
We continue to question the strength of the Justice Department case against the AT&T/Time Warner deal as current and emerging over-the-top options with a huge increase in original content availability dilute legacy assumptions about the competitive impact of vertical integration with Time Warner programming. Absent settlement, the trial in federal court is scheduled to begin March 19.
WYNN | MLCO
Click here to read our analyst's original Wynn report. Click here to read our analyst's original Melco report.
As we have been addressing since the presentation of our long term deck, “MACAU | THE SOUND BEYOND THE NOISE,” the approach of President Xi’s corruption crackdown has been more refined over the last 18 months vs. the initial shock and awe in 2014-2015. The sell side seems to contend that there has been a pick-up in anti-corruption activity, but we have not been able to find anything to suggest that is true.
Per the most recent data (December 2017 – October 2017 and November 2017 were not released), the number of new corruption cases (that were made public) continue to trend lower and fell ~40% YoY and are down 60%+ vs. the peak monthly run rate back in 2015. Fewer corruption cases means fewer negative headlines and a higher propensity for VIPs and premium mass players to visit Macau. This is good news for our top Hedgeye picks, Wynn Resorts (WYNN), as the VIP leader, and Melco Resorts & Entertainment (MLCO), who is ramping up VIP at MSC.
RRR
Click here to read our analyst's original report.
Last year was among the best ever for Las Vegas home sales despite plunging inventory, according to a new report. A total of 46,598 homes sold in 2017, up 11.7 percent from 2016, making last year’s tally the third-highest on record, according to the Greater Las Vegas Association of Realtors. Prices ended 2017 with a sizable year-over-year increase. Single-family homes — the bulk of the market — sold for a median of $267,900 in December, up 2.6 percent from November and 14 percent from December 2016, reported the GLVAR, which compiles data from its resale-heavy listing service. ARTICLE HERE
Takeaway: LV Local economy continues to power forward with the all important housing industry leading the way. We've statistically determined that housing prices are the most significant macro driver of gaming revenues in most markets in including LV. We remain bullish on Red Rock Resorts (RRR) as the most exposed gaming operator to that market. BYD should also benefit.
DE
Click here to read our analyst's original report.
A Reason Deere (DE) Residual Values Ticked Higher: Interestingly, the term of loans is longer, which pushes residual values down as a percentage of the leasing book, as the equipment is returned when older. The actual lease life stayed substantially shorter, and may be a sign that new leases are cheaper than existing ones, driving lease replacement before initial lease expiration.
CERN
Click here to read our analyst's original report.
We spoke with a former NextGen salesperson that was with the company for nearly a decade and part of the group of senior sales members that defected in 2017. Our contact described a challenging sales environment with little net new opportunity and limited success competing against ambulatory competitors’ athenahealth (ATHN) and eClinicalWorks (private). While the anecdotes below support management's claim that attrition is moderating, we are concerned that significant turnover in the sales force during 2017 could reverse this trend in 2018 and beyond. Meanwhile, hospital acquisitions of physician practices and consolidation remain a significant headwind with Epic and Cerner (CERN)"...cleaning out [NextGen's] customer base."
HBI
Click here to read our analyst's original report.
Our Housing/Financials teams are signaling weakening fundamentals in the Australian housing market.
Remember that Hanesbrands (HBI) bought Australia’s Pacific Brands for $800mm, at a 12.5x EBITDA multiple. Pacific is the market share leader in Australia and any consumer weakness will be a significant drag on Pacific’s sales and HBI’s International Segment (32% of sales).
International has been the only area driving growth in the last 5 quarters, aided by both acquisition and FX. If the organic growth inflects negatively here, HBI will see even further top line pressure.
We continue to see big earnings and cash flow misses for HBI in 2018 and 2019 driven by negative organic growth and expense deleverage.
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 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 Virtu Financial's (VIRT) 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:
HST
Click here to read our analyst's original report.
US hotels posted a solid week of RevPAR growth that showed outperformance that was buoyed by the Luxury and Economy scales. We are still awaiting the December final numbers but we believe that growth likely surprised to the upside vs. our initial expectations of 4-4.5%. For the month-to-date US RevPAR appears to be tracking at a slower pace than the prior month, but even including the inauguration impact, we believe RevPAR finishes January in the 2-3% range.
For last week, we estimate that Top 25 Market RevPAR lagged the total index and was flattish YoY. Excluding all hurricane impacted markets, Top 25 RevPAR would have been down ~1% or so, which is inconsistent with the recent strength we have been seeing.
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 it looks poised for RevPAR and earnings beats in the coming quarters.
HCA
Click here to read our analyst's original report.
The BLS released the Job Openings and Labor Turnover Survey (JOLTS) for November 2017 last week. Health Care & Social Assistance Job Openings decelerated to -4.6% in November, and well below its most recent peak of +56.9% in December of 2014. We have found a strong relationship between job openings in Health Care to overall medical consumption generally, and hospital same-store admissions specifically.
Historically, demand for labor follows growth in the insured population and medical consumption demand. Health Care Job Openings decelerated to -1.1% YoY on a rolling 3-month basis through November 2017, below its peak of +38.1% in December of 2014. Also, Health Care and Social Assistance baseline turnover is showing an increasing trend over the past several months but decelerated slightly to +2.1% in November.
As a percentage of Health Care Employment, Health Care & Social Assistance Job Openings decreased to 6.3%. We remain short HCA Healthcare (HCA) as the healthcare jobs growth continues to slip.
CREE
Click here to read our analyst's original report.
We admit that Cree (CREE) is an expensive stock on current metrics. As a result we understand that there will be moments of volatility that result as the market evaluates weakness and strength across the platform, and as the new CEO makes his presence felt.
What if the new CEO at Cree is creating a culture of winning? The more we read the more we understand how large the inflection is at Cree; taking a depressed company managed through fear (employees, partners, supply chain), and installing a culture of winning and success across the entire company. The inflection seems palpable notwithstanding the short period of time, and employees seem to be rallying behind the changes. Even the day one acts of selling the jets and removing the head of HR got our attention in a positive light. The swiftness of action shows in many respects that GLOWE landed at Cree with a plan at least partially already in hand.
RDFN
Click here to read our analyst's original report.
Redfin’s (RDFN) IPO stock lock up agreements expire on Jan 23rd, allowing up to an additional 70.8 million shares to be eligible for public sale. This would represent nearly a ~7x increase in the freely traded shares.
DPZ
Click here to read our analyst's original report.
Domino’s Pizza (DPZ) has been a Company we have been very vocal about. With the delivery market constantly expanding and evolving, we remain confident that Domino’s U.S. business will feel the pressure from those entering the space. Competition was a notable topic of discussion, but management was unyielding in their stance that DPZ stands head and shoulders above the rest. According to them, the fact that food delivery is more difficult than meets the eye and DPZ’s ability to keep drivers “busier” are two main reasons why encroachment is highly unlikely.
Additionally, soon after the conclusion of the ICR presentation, DPZ announced the planned departure of CEO Patrick Doyle. Mr. Doyle is expected to formally step down in June, and the Board has named Richard Allison as the CEO-in-waiting and Russell Weiner as COO. No reason was given for Mr. Doyle’s departure, but it definitely raises some questions regarding what is really going on over there in Ann Arbor.
TWTR
Click here to read the long Twitter (TWTR) stock report Internet & Media analyst Hesham Shaaban sent to Investing Ideas subscribers earlier this week.
KR
Click here to read our analyst's original report.
Kroger (KR) is embarking on an aggressive turnaround initiative using data to modify and customize stores for each particular geography. But winning the grocery wars will have to go far beyond getting the shelf sets right. Kroger’s online ordering platform, ‘Clicklist’ recently went through a round of improvements to elevate the visuals and functionality. Kroger is also expanding their efforts in delivery through third party partnerships. As of their 3Q17 earnings conference call they had delivery available in 300 locations and expect to continue to expand this offering in 2018 through a “unique relationship” with Instacart among other partners. KR has been behind on these key initiatives, but we believe KR plays in a sweet spot within conventional supermarkets catering to a wider range of demographics versus its largest competitor, which will allow them to gain considerable traction.
TDOC
We see Teladoc (TDOC) unit pricing and profitability going higher:
- We see channel mix shift to direct and broker/reseller, cross-sell of BestDoctors and growth from the specialty services (behavioral, dermatology, etc.) will contribute to higher unit pricing and profitability over time.
- Renewal of Aetna contract through 2019 eliminates near-term risk with management successfully transitioning contract to shared-savings model and expanding services offered.
- Continue to aggressively scale G&A and sales expense on a per visit basis as utilization increases
MC
Moelis (MC) stands most at risk from an activity decline in its upcoming 4th quarter report. The firm was involved in just 36 assignments worth $38.7 billion this past quarter, essentially flat compared to the 39 deals worth $38.8 billion completed in 3Q17. Most importantly, having completed 52 deals totaling $68.5 billion in 4Q16, MC is set to record the largest year-over-year decline in the M&A subgroup. Hence, our tracker outlines that MC will experience the largest miss in the M&A subgroup for 4Q17 when it reports earnings on February 11th, with consensus looking for $0.60 in EPS or flat year-over-year despite the -30% decline in deal count and the -40% decline in notional deal value year-over-year.
TSLA
Click here to read our analyst's original report.
Tax Reform Divergence: We do expect some soggy equipment U.S. sales in 1H18, but only in categories that experienced a pull forward. That includes U.S. sales for Tesla (TSLA). Tax reform likely pulled equipment sales into late 2017, as the tax shield was greater at a higher tax rate (e.g. shift profits to lower tax 2018 and costs to higher tax 2017). Further, the expensing of used equipment may create greater competition with new equipment, at least until a new equilibrium emerges. Used equipment expensing is a longer-term positive, as it supports residual values and lowers financing costs.
AMN
Below is a brief note from CEO Keith McCullough on why we're adding AMN Healthcare Services (AMN) to the short side of Investing Ideas today:
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Fun times at the all-time highs. I guess everyone's a buyer now that everything in the rear-view mirror is crystal clear. Hash-tag US Growth Accelerating, baby! Our risk management process doesn't "feel" anything about that. When stocks are #overbought, we signal overbought. When they are #oversold, we signal oversold. AMN Healthcare Services (AMN) is signaling immediate-term #overbought within our Healthcare Team's Bearish @Hedgeye TREND view. Here's an excerpt of an Institutional Research note they sent to our subscribers on nurses vs. macro: "The Current Population Survey (CPS) contains data on employment status by occupation, including registered nurses, and the most recent data available from October 2017 shows a -3.6% decline year over year in the number of "Employed - At Work" registered nurses compared to 4Q16 average. The implication for a temporary nurse staffing company such as AMN is negative. Declining employment of registered nurses in the CPS data agrees with the decelerating trend in Health Care Employment broadly and Hospital Employment specifically." Sell on green, |
