Below are analyst updates on our nineteen current high-conviction long and short ideas. Please note we removed Redfin (RDFN) from 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 Wynn report. Click here to read our analyst's Melco report.
January could be looking at 25% growth on Macau GGR, which would be the highest monthly growth since July 2017. The revenue pace continues to be robust. Wynn reported an excellent Q4 earnings print, which sent the stock surging on Monday.
Macau still has legs in this bull cycle. VIP revenues are ~45% below its peak in early 2014 and with the addition of new VIP rooms popping up and a better credit environment; we believe more high growth is to come. With the surprise of possibly +15% mass growth for Q4, we think double digit mass growth can be sustained in the future, even without much contribution from infrastructure projects (HK-Macau bridge/tunnel, LRT, etc). New hotel rooms are driving length of stay and play higher, and the number of higher quality gamblers is rising.
History suggests multiple expansion toward the higher end of the range is coming, potentially soon.
On Friday, the WSJ released a story regarding a history of sexual misconduct on the part of Steve Wynn, which sent shares sharply lower. We are still awaiting a statement from the company and WYNN himself but have no further comment.
RRR
Click here to read our analyst's original report.
No update this week on Red Rock Resorts (RRR). We continue to like the name as the fundamentals in their stronghold, the Las Vegas Locals market, continue to be robust.
DE
Click here to read our analyst's original report.
Past Dues Mostly Better, Bucking Industry Trend: We have less confidence in Deere's (DE) Deere’s past due metrics given our understanding of loan re-aging, skip payments, and increased leasing. Still, the numbers improved from mid-year highs.
CERN
Click here to read our analyst's original report.
We spoke with two former Cerner (CERN) associates to get a pulse on market demand. From these conversations, we learned management cut commissions to most of the sales team in June 2017. In some cases, commissions were cut by over 50%. Management also raised quotas, effectively asking their sales team to do more while getting paid less. Our contacts described management's approach to compensation as "totally unrealistic" and "unnatural", especially when faced with a saturated market. Further, management's intolerance of bad news is driving a growing expectations gap between "lieutenants in the field" and Kansas City. We believe investors felt the brunt of this dysfunction in 3Q17 when new client bookings declined -32% YoY after management described the near-term EHR replacement opportunity as "robust" only the quarter before.
HBI
Click here to read our analyst's original report.
Hanesbrands (HBI) will report its 4Q on Feb. 8. HBI needs to print a decent quarter. With the success of apparel retail in holiday, the expectation is that traffic and sales were much improved and therefore HBI should see better sales results.
Since tax reform will only hurt the HBI tax rate, the 20% run up in the stock since early November is likely credited to expectations of improving results. We think Champion is seeing sales growth, but is becoming very over distributed, certain accounts like Amazon and Kohl’s are likely increasing sales in Hanes given their revenue success, but we are not sure whether or not it will offset sales pressure in HBI’s top account, Wal-Mart, as Gildan takes unit share.
We like the short into earnings with 2018 EPS expectations way too high. If nothing else, the company will have to guide to a tax rate of upwards of 3x the rate seen in 2017.
APD
Click here to read our analyst's original report.
Praxair and Linde divestitures put the initial capital deployments in sight. The operating improvements over the past few years at Air Products (APD) have been impressive. We do not anticipate management to bungle investments, as their track record with respect to operations has been well disciplined. They certainly won’t get all of $9+ billion wrong, and the initial round should be strong assets divested for regulatory reasons. The low cost of debt is favorable as well. As soon as APD deploys its balance sheet, the market is likely to price in much more – the pathway should be obvious at that point, making it key to enter ahead of it.
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 negative week of RevPAR growth against a tough Trump Inauguration comp, as RevPAR fell -3.2% YoY. Despite the soft headline number, industry-wide performance was aided by strong growth in the Top 25 (ex. D.C.) as RevPAR likely grew ~4%, per our math.
Hotel RevPAR pace has been trending at a slower clip for the MTD than December, tracking in the flat to up low single digits range. However, there are still 11 days left in the month and for that period the average daily comp is only 2-2.5%. As such, we believe RevPAR should still finish the month in the 2-3% range, but likely at the lower end of that range.
For last week, we estimate that Top 25 Market RevPAR outperformed the total index and was down ~1% YoY. Excluding all hurricane impacted markets, Top 25 RevPAR would have been down ~2% or so.
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.
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.
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.
CREE
Click here to read our analyst's original report.
We liked Cree's (CREE) revenue & market trends, and early signs of a turn-around.
Demand for Wolfspeed product is so strong that after the company doubles its capacity they will still need to add more capacity. The TAM is going from ~$300m today to over $4bn in the next decade. CREE has a decade of growth ahead in Wolfspeed.
CEO has no plan to become DRAM. He knows what happens with raw substrate and wafer businesses. He is building the #1 high voltage power electronics business (SiC) and an important piece of RF components for communications infrastructure (GaN). Instead of allowing the large power electronic device companies to manipulate and commoditize him, he will supply them and also compete with them using a lower cost structure.
DPZ
Click here to read our analyst's original report.
The carryout business for Domino’s Pizza (DPZ) represents 49% of the business as of FY16. Importantly, the carryout business is growing significantly faster than the delivery business. On the earnings call, management downplays the importance of carryout when they say, “over time, we've gotten a little more growth out of carryout than out of delivery, but we're getting traction on both fronts domestically.”
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 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.
TWTR
Click here to read our analyst's original report.
We initially thought that the SoFi story was leaked because Noto wanted the official CEO title at Twitter (TWTR) on the heels of its turnaround, especially since he's been the de facto CEO since Costolo left in 2015. However he's officially leaving, which means on our long position is now on a short leash. Noto was also TWTR's longest-tenured C-suite officer; now the company is left with Dorsey, who is also CEO of Square, a relatively new CFO, and no clear successor to the COO (CEO) role. We don't believe this will have an impact on TWTR's 2018 revenue since its monetization head is still in place and the company has a series of exogenous tailwinds in 2018 that should help drive the top-line. However, we're not sure what this means for 2019 and beyond. We originally viewed our TWTR long as a one-year position, which we would reassess thereafter. Now we're pretty sure we'll be out before 2019.
KR
Click here to read our analyst's original report.
Kroger (KR) fundamentals are turning the corner...
Starting with fundamentals (Sales, Gross Margin, EBIT, EPS), where we saw a marked improvement in 3Q17 on a one-year basis. Looking out to CY2018, KR has a favorable setup with easy comparisons due to their poor performance and extreme deflation over the past 18 months. We are looking for sales to improve on the heels of investments into the business which will enable long-term operating profit and EPS growth as they gain greater leverage in their model.
TDOC
Teladoc (TDOC) hit their 4Q17 break-even target reporting positive adjusted EBITDA. Core to the short thesis is that TDOC will never be profitable, and while they are still years from generating positive free cash flow, profitability trends are improving as the business scales. 2018 top-line guidance of $350 - $360 million was a bit light versus consensus of $365 million. However, implies healthy organic growth above management’s 25% target. Overall, good enough to satisfy our base case amid 43% short interest. We also believe there is an element of conservatism in management’s guidance.
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.
We see Tesla (TSLA) underperforming as the company’s exciting concepts transition to mundane execution. Concepts, ideas, and vision can easily win the market’s beauty pageant. Grinding out a cheap version of a high-end platform in a competitive market, with a less tolerant customer and expiring tax credits? That gets ugly.
The goal in a story stock is to anticipate the next chapter. 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.
AMN
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 Healthcare Services (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.
