Below are analyst updates on our nineteen current high-conviction long and short ideas. Please note we removed Wynn Resorts (WYNN) from the long side and Hanesbrands (HBI) from the short side of Investing Ideas this week. We also added O'Reilly Automotive (ORLY) and Mednax (MD) to the long 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.
This week, during AT&T’s earnings call, CEO Randall Stephenson again indicated a willingness to work with the Justice Department to settle the litigation challenge to the Time Warner deal. He also reaffirmed the company’s expectation it will need to fully litigate the case to completion. Also, this week, the Justice Department hired Carl Shapiro, a noted antitrust economist and former DOJ official, as part of its team opposing the AT&T/Time Warner transaction.
If a settlement is possible, it would likely come very close to the trial, currently scheduled to begin on March 19. We continue to believe the economic case against the merger will be an uphill climb for DOJ, particularly as evidence is introduced regarding the changing video services environment and the relatively low entry barriers for alternatives in over-the-top offerings. These factors not only affect the fundamental analysis of market entry today and in the near future, but also affect the incentive and ability of an enlarged AT&T to profit from programming price hikes on rival distributors. The government’s case depends on expectations that squeezing competing video service operators will divert customers to DirecTV, acquired by AT&T a few years ago, more than compensating for the upfront loss of subscription and advertising fees generated from rivals. AT&T will present expert testimony to counter that theory.
As we’ve noted before, the case could have ripple effects on Comcast as the FCC’s conditions on the Comcast-NBC Universal merger have expired and the DOJ consent decree conditions expire in September. Critics of the NBC deal, including a Democratic Senator, have asked for an extension of the consent decree for several years or, alternatively, for an action to break up the company. A Justice Department loss in the AT&T/Time Warner challenge would undermine the substantive case for modifying or extending the consent decree settlement terms.
MLCO
Click here to read our analyst's original report.
January has more than made up for the December GGR “disappointment”. The Macau government just released that gross gaming revenues increased a whopping 36.4% YoY in January. The Street consensus was 21% and the top end of our estimated range was 27%. As typical, no breakdown was given but big beats (or misses) tend to be driven by the volatile VIP segment. We certainly don’t want to discount the mass performance – every segment likely outperformed to generate a beat like this. And mass growth has been accelerating.
We’d venture to guess that VIP hold percentage ran a little high but VIP volumes were still likely up 45-50% which would put mass revenues up 16-20%. Mass revenue growth surprisingly accelerated in Q4 and looks like it’s still going in 2018. As a result of January’s blowout number, we’re raising our 2018 GGR growth forecast to 18%. We reiterate our long call on Melco Resorts (MLCO).
RRR
Click here to read our analyst's original report.
4Q Locals Las Vegas Gross Gaming Revenues (GGR) finished up 5.1% YoY, representing the 2nd consecutive quarter of +5% growth. 2017 Locals GGR finished up 4% YoY. Hold was slightly below normal for a December month, as low slot hold, particularly at Boulder Strip, could not be entirely offset by overall high table hold. Gaming volumes growth remain solid. Slot volumes rose 4% and table volumes gained over 7% in December. Comps for 1Q 2018 (+4%) get more difficult but we still believe the Locals resurgence in same-store sales is intact and 2018 should be another strong growth year.
The macro outlook for the Locals market is bright; the ramp in construction jobs, double digit gains in home prices, and a lower number of mortgages under water are just a few reasons why. We remain positive on Red Rock Resorts (RRR) given its Locals exposure.
DE
Click here to read our analyst's original report.
Securitized Loans Look Less Favorable: The performance on the loans securitized by Deere (DE) (not from the 10-K, but available monthly), have not improved in a similar way from what we have seen.
CERN
Click here to read our analyst's original report.
Cerner (CERN) was selected, on a no-bid, sole source basis, by the Veterans Administration to replace the agency’s aging VistA system in June 2017. The decision was largely based on the VA’s desire to use the same system as the Department of Defense and achieve interoperability with private sector providers that treat veterans under the Choice program. Yet, it is the inability to achieve interoperability that has stalled delivery of a final contract. CERN is unlikely to finalize a contract in 2018 with the VA as currently contemplated.
If CERN cannot give the VA the interoperability it wants, a major justification for a no-bid, sole source contract disappears. If CERN does agree to develop full interoperability it faces the daunting task of getting a host of EHR vendors at non-governmental providers to cooperate to an unprecedented degree.
If CERN agrees to provide the interoperability the VA wants – or something very close to it – they face enormous implementation challenges in getting the other EHR providers and hundreds of health care providers to cooperate. In this scenario, a neutral third-party or prime contractor like Leidos may be better suited to manage the process.
With the VA contract, CERN is between a rock and a hard place.
APD
Click here to read our analyst's original report.
There isn’t that much interesting to write about Air Products's (APD) quarter. Instead, well pick on the recent analyst downgrade. For us, the quarter doesn’t matter much. What will matter is when APD buys Linde + PX divestitures or similarly redeploys its capital. That capital redeployment should push profits well above consensus at a high quality franchise. As long as it gets there without a hiccup, we should be good.
Flawed APD Discussion: We have read notes on PX vs. APD favoring PX, but there are reasons to like both. We expect APD to pick up some choice divestitures from PX, while PX shareholders will have to endure the divestiture, closing, and integration process. Who has more risk? This past week's downgrade analysis considers a $5 billion share repurchase, but the actual number is more like $9 billion. Does anyone really think that, albeit unlikely, if APD announced a $9 billion share repurchase that the stock would soar? Or even a $5 billion repurchase? Yeah, us too.
VIRT
Click here to read our analyst's original report.
Below are three key reasons why we reiterate our short thesis on Virtu Financial (VIRT):
HST
Click here to read our analyst's original report.
The beneficiaries of a weaker dollar are fairly obvious in our space: large hotel C-Corps and the Cruise Line’s European business. However, there are indirect beneficiaries of a weaker dollar as well. Most full service Hotel REITs share a large amount of exposure to these key gateway cities (SF, Chicago, NYC) and could see a sizeable ADR lift from inbound customers.
As Hotel News Now laid it out last weekend, for customers out of the Eurozone, UK, China, and Japan, the US is very much on sale, with hotel ADRs some 5-15% cheaper on a YoY basis. Now, there was some debate last year as to why the US lost international visitation. But FX will be a tailwind for international leisure travel into the US this year.
For our favorite stock in the Hotel space, Host Hotels (HST), international room demand represents close to ~10% of their overall room demand, which could translate into a sizeable earnings lift in 2018.
HCA
Click here to read our analyst's original report.
We continue to find it highly unlikely that HCA Healthcare's (HCA) 4Q17 will continue through 2018. While it may be hard to remember, it was not such a long time ago when 2017 consensus EBITDA peaked at $8.8B, versus the final $8.2B reported. 2018 expectations were once $9.5B, versus the current midpoint of 2018 guidance of $8.6B. While 4Q17 held operational positives, HCA's future commitments appear excessive in comparison by committing to a $0.35 quarterly dividend and continued share repurchases, accelerating capital spending, and adding $300M in new employee training and retention costs. We believe the embedded risk for this high debt, high fixed cost business has increased as a result.
CREE
Click here to read our analyst's original report.
We expected a good Cree (CREE) topline and junky everything else. And that’s what we got.
Here are a few things we liked on this results call:
- The LED business is less bad near term and has some long term demand potential.
- The Lighting business stinks but he fired the co-heads and is finally getting CREE’s arms wrapped around this warranty cost issue. He is ramping a channel sales presence, launching new accretive product, with the aim of fixing the business as much as possible before he sells it or cuts it off. The best way to capture value in that segment is to create options!
- Topline beat and guidance for topline beat.
- FCF was neutral and OCF slightly ahead.
DPZ
Click here to read our analyst's original report.
Part of our short thesis on Domino’s Pizza (DPZ) is the competitive impact that more delivery competition is going to have on Domino’s. While DPZ’s management has denied on conference calls that they are seeing an impact from increased competition, and the overall same-store numbers would support that argument, our analysis of the company’s own data suggests otherwise. The carryout business for Domino’s represents 49% of the business as of FY16.
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?
All of this suggests that 2018 is going to be a challenging year for DPZ.
We remain comfortably SHORT DPZ.
TWTR
Click here to read our analyst's original report.
After struggling to sustain ad revenue growth under its model that favored “cost per click” ad units, Twitter (TWTR) has changed its strategy for the better in 2018, according to Hedgeye Internet & Media sector head Hesham Shaaban.
“They were forced to restructure starting in 3Q16 and were forced to de-emphasize [cost per click] in favor of autoplay,” Shaaban says. “That’s what we’re excited about here because it’s a much more sustainable product.”
With the change in strategy, Shaaban sees TWTR bringing in double-digit ad revenue growth as early as 1H18.
KR
Click here to read our analyst's original report.
Kroger (KR) is taking the multi-employer pension plan issue head on:
KR announced that they have withdrawn from the Central States Pension Fund, that was effective on December 10, 2017. The company recorded a one-time non-cash charge of approximately $410M in the fourth quarter, to remove 1,800 active associates from the plan. Although they have more work to do on the pension front, this is a big step in the right direction and the current market environment will put any underfunded pension risk on the back-burner.
TDOC
We believe there is an element of conservatism in Teladoc (TDOC) management’s guidance. By our estimates, organic sales have surpassed the high-end of their range for 2017. Finally, management guided to positive full-year adjusted EBITDA of $7-10 million in 2018. While the guidance range is below the prior consensus of $17 million (estimate range $1 - $30 million), the trend is in the right direction.
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.
Tesla (TSLA): No Progress In Understanding Manufacturing
“As we continue to focus on quality and efficiency rather than simply pushing for the highest possible volume in the shortest period of time…”
Idiotic Excuse: Only a company that really, really, really doesn’t understand world class manufacturing would provide the above excuse for missing production targets. It is the equivalent of an athlete saying that they lost the game because they were focusing on technique and executing plays precisely. Efficiency, quality, and manufacturing speed aren’t trade-offs. That Tesla would imply a trade-off shows a stunning failure to understand the company’s core problem. Tesla is ill-equipped to produce a high quality Model 3 every 40 seconds, every production shift, every year, year-after-year.
AMN
We believe AMN Healthcare Services' (AMN) share price has been supported by tax reform and the obvious benefit from lowering a ~39% tax rate to 21% and a view that 2018 will bring stability and an easy compare to the hospital industry. While the tax rate change will impact earnings positively, AMN's fundamental performance correlates most strongly with EV/Sales, not P/E. At 1.2x, the current EV/Sales is at the high end of the long-term range, and with fundamentals likely to deteriorate further, unsustainable, in our view.
ORLY
Below is a brief note from CEO Keith McCullough on why we added O'Reilly Automotive (ORLY) to the long side of Investing Ideas this week:
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One of my favorite S&P Sector Styles remains US Consumer Discretionary and I'm looking to buy corrections in names that are pure plays on US consumption growth. Recently Brian McGough "launched" new Institutional Research on Auto Parts Retail and O'Reilly Automotive (ORLY) was his Best Idea. Here's a summary excerpt from his Institutional Research note: "ORLY: Best Idea Long. Here’s the quality play, and the world knows that. But numbers are low, and the space is far more defendable than the consensus/market thinks. Key factors that are turning positive that have caused the current slowdown in sales, and it goes beyond Amazon and online competitors." KM |
MD
Below is a brief note written by CEO Keith McCullough explaining why we added Mednax (MD) to the long side of Investing Ideas earlier this week:
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My 1st immediate-term #oversold signal of the day in a long idea is going to be a name Tom Tobin's Healthcare Team just turned bullish on, Mednax (MD). This is a name they didn't like during a -50% decline but they see the fundamentals that drove that decline turning. Per their recent Institutional Research note, their Maternity Tracker data has been forecasting a recovery in birth trends heading into 2018, a positive tailwind for ~50% of MD revenue and likely margins. Buy on red, |
