Below are analyst updates on our eighteen current high-conviction long and short ideas. Please note we removed Deere (DE) from the short side of Investing Ideas this week. 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.
Several House Democrats have asked Attorney General Jeff Sessions to respond to inquiries and provide relevant documents about potentially inappropriate White House involvement in the Justice Department’s decision to challenge the AT&T/Time Warner merger.
We continue to believe the DOJ antitrust case – on the legal merits – is highly questionable and the case could still settle in a consent decree, allowing the deal to close with acceptable conditions. If it is fully litigated, we think AT&T has the upper hand, particularly as the burden of proof rests with the DOJ. Changing dynamics in the video market, including low barriers to entry for the likes of Netflix and Amazon, moderate the competitive risks of a T/TWX deal.
Speculation about White House interference with the merger investigation has been a topic of interest since October of 2016 when candidate Donald Trump said his Administration would block the transaction.
Just this week, AT&T CEO Randall Stephenson repeated his concern that inappropriate White House interference with an antitrust investigation and enforcement action remains “the elephant in the room” as the trial approaches, now set to begin on March 19. Whether this is a politically-driven enforcement action to punish CNN’s editorial content (critical of President Trump) is not a substantive issue in the case. District Court Judge Richard Leon is limited to making his ultimate determination of antitrust liability on the theories and facts presented in court. But there are lingering concerns about the true government motives for challenging this vertical deal and these concerns could become a filter through which evidence and arguments are evaluated.
The House Democrats have asked the Attorney General to respond by February 22. We would not be surprised if the request triggers a dispute over executive privilege or related doctrines that would justify a refusal to respond to the various requests. If this becomes a high profile dispute, continued litigation could become politically hazardous to the President and this White House.
MLCO
Click here to read our analyst's original report.
While Melco Resorts' (MLCO) headline EBITDA missed consensus, mass hold was very low at City of Dreams Macau. VIP hold was also below normal at the property. We had expected low mass hold – the property’s new GM was fired due in part to some ineffective marketing programs that resulted in 3 straight quarters of low mass hold, culminating in a terrible Q4 hold percentage. We estimate EBITDA was impacted by ~$45m due to low hold.
Our table below shows the quarterly results, including an estimate of hold adjusted (mass and VIP) EBITDA. Management may discuss EBITDA adjusted only for low VIP hold but low mass hold was the bigger drag. As can be seen below, we think normalized EBITDA was $348 million, much higher than the Street at $331 million and Hedgeye at $337 million. Our normalized EBITDA estimate also excludes a one-time reversal of a bad debt of $11 million. Gaming volumes were obviously very strong and margins would’ve followed suit had it not been for the low hold. We estimate property margins would’ve exceeded 30%, higher than Street estimates.
RRR
Click here to read our analyst's original report.
We’ve updated our driver’s license surrender database and the trend remains positive as can be seen in the chart below. This driver’s license dataset has a significant relationship to GGR growth on a long term lead of about 5-6 quarters, which could indicate more robust GGR growth in the long-term as the massive acceleration in surrenders from back in later 2016 and early 2017 could start to have an impact. Although the recent trend of license surrenders has slowed down a touch, we’d blame it on comps, and as evidenced by the chart, the absolute surrender counts are now trending nicely about historical averages.
Population growth is just one of the many demographic factors that are moving in favor of the LV Locals casino market. With both demographic and economic drivers in place, we see accelerating same store Locals GGR growth continuing into 2018. Red Rock Resorts (RRR) remains one of our favorite stocks.
CERN
Click here to read our analyst's original report.
Cerner (CERN) reported 4Q17 results and provided 2018 guidance that disappointed across most metrics. While 4Q17 bookings of $2,329 million came in well ahead of management's guidance of $1,750 - $2,000 million, the upside was driven by long-term service contracts or "Works" deals that are wreaking havoc on Cerner's margins. Meanwhile, higher margin, new client bookings declined -3.6% YoY in 4Q17. Further, 2017 marked the second consecutive year of negative new client bookings growth, with declines accelerating YoY in 2017 to -4.5% YoY from -0.8% YoY in 2016. We continue to believe commercial new client bookings are headed back to $1 billion due to a saturated EHR market with little replacement opportunity.
APD
Click here to read our analyst's original report.
There isn’t that much interesting to write about Air Products' (APD) quarter. Instead, we'll 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.
Inconsistent PX v APD Comparison: Worse, this report compares a pro-forma PX + Linde EV/EBITDA to a current EV/EBITDA for APD. Of course, APD will almost certainly have to buy PX + Linde divestitures in order to close the deal, and will deploy capital to projects like Lu’An. One would really have to pro forma both APD and PX for their respective parts in the deal(s), leaving the presented comparison internally inconsistent. We expect APD to do better redeploying capital compared to repurchasing a quarter of its market cap, but either is pretty good vs. current consensus expectations.
VIRT
Click here to read our analyst's original report.
Virtu Financial (VIRT) Takeaway: With solid expense management and a boost in average daily revenues in 4Q, a huge short covering rally doesn't address our concerns.
Virtu shares have now ascended to asymmetric levels where the stock has historically been a profitable short. With the +25% plus gain in shares yesterday, VIRT stock is now more expensive than exchange operator NASDAQ (NDAQ), a situation that defined Virtu's stock when it first came public with shares then proceeding to drop -40%.
The fundamental rationale for our continued caution is a combination of both business volatility and also thin levels of capital. We have been outlining the high across cycle variability of the newly acquired Knight market making business which has mean quarterly EPS of $0.32 per share against a standard deviation in earnings of $0.71 per share. Conversely, NASDAQ's exchange business has had average quarterly earnings of $0.89 per share against a standard deviation of just $0.11 per share. This substantial operating variability is now being completely ignored by the market with both trailing and forward Virtu earnings multiples now at a premium to the agency exchange business at NDAQ.
HST
Click here to read our analyst's original report.
The latest data is in for our weekend vs. weekday RevPAR analysis. Note, we remove Sunday from the equation, which makes for a much cleaner look at true leisure (weekend) demand and corporate (weekday) demand. Due to monthly swings in the data, we prefer to look at this dataset on TTM basis. The divergence that we’ve seen take place since early 2016 has finally reversed, as the weekday period continues to accelerate to the upside. It is true that hotel activity is generally slower this time of year (even for corporate travel), but these YoY trends are still very encouraging to see.
If the midweek period does continue to improve, this would disproportionately favor the full service REITs, who tend to be more corporate transient/group focused - like our favorite name in the space right now, Host Hotels (HST).
HCA
Click here to read our analyst's original report.
BLS released the Job Openings and Labor Turnover Survey (JOLTS) for December 2017 this morning. Health Care & Social Assistance Job Openings accelerated slightly to -0.3% in December but remains negative 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. However, a worse flu season, improving maternity trends and higher acuity may end up driving a divergence in the fourth quarter. Historically, demand for labor follows growth in the insured population and medical consumption demand. Health Care Job Openings decelerated to -2.8% YoY on a rolling 3-month basis through December 2017, below its peak of +38.1% in December of 2014. Health Care and Social Assistance JOLTS rate of change continues negative to -12.8% in December. As a percentage of Health Care Employment, Health Care & Social Assistance Job Openings increased to 6.7%.
The deceleration in our Insured Medical Consumer model remained intact throughout 2017 and has historically led US Medical consumption by 1-2 quarters. We expect 2018 to be worse than 2017 and our Insured Medical Consumer model now forecasts growth of less than 1% through the end of 2018. We remain convinced that utilization remains under pressure broadly as areas we previously pointed to as positives such as physician office employment appear to be rolling over.
The downward trend in the JOLTS data is in line with our negative outlook for the US Health Care economy and consistent with the deteriorating fundamentals of many healthcare provider and services names. We remain confident in our negative outlook for Health Care and SHORT HCA Healthcare (HCA).
CREE
Click here to read our analyst's original report.
We expected a good topline for Cree (CREE) and junky everything else. And that’s what we got.
Here’s what we liked on this results call:
- 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 (GaAN). 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.
- 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.
The rest was garbage. Do you think our investment thesis hinges on CREE printing $-0.01 versus $0.03? The best I can hope for – the best – is that G.LOWE has a stable topline in place while he tries to fix the fundamental elements of the business. With a decent topline, a good manager can fix the parts.
DPZ
Click here to read our analyst's original report.
Since initiating our Domino’s Pizza (DPZ) short call, the biggest pushback we have received was that incremental competition in the delivery space was not going to hurt DPZ. This, by the way, was also the company’s pitch at its recent investor day! Given the events of yesterday, many DPZ bulls are going to need to re-evaluate their position.
Those asking when DPZ will show true signs of wear and tear should look no further than this deal. By the end of 2018 there will be three massive and differing QSR chains offering delivery across the country: MCD, KFC and Taco Bell. These restaurants provide value, breadth of offering, and scale across geographical regions, which DPZ hasn’t been faced with in the delivery space.
TWTR
Click here to read our analyst's original report.
Twitter (TWTR) Takeaway: The turn came quicker than we expected, and TWTR didn't go nuts with its guide, so good to go.
- O&O revenue returned to positive growth: On the heels of a 14 percentage-point acceleration vs. 3Q17. We estimate TWTR did so despite continuing declines in Legacy CPC ad revenue, which should be a waning drag moving through 2018.
- Ad Load continued to decline: Remember TWTR's model was previously reliant on ad load to drive revenue growth, so this a welcome sign. We believe TWTR still has more room to shed ad load while still driving revenue growth since Legacy CPC remains the overwhelming majority of its ad load.
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
Click here to read the Teladoc (TDOC) stock report we sent Investing Ideas subscribers earlier this week.
MC
Moelis (MC) reported slack in its fourth quarter earnings this week with top line revenues of $169 million declining -17% over the 4Q16 period. This decline was flagged by our Boutique Activity Tracker (BAT) as MC specific activity has been trending behind expectations all quarter. From an earnings standpoint, MC reported $0.52 in EPS, which comped to the $0.66 per share from last year in 4Q16. Volatility and equity price declines historically dry up strategic M&A activity so the current environment bears watching for an more intermediate term impact to the mid cap M&A advisors.
TSLA
Click here to read our analyst's original report.
Shares of Tesla (TSLA) have not responded well to positive catalysts in recent months. TSLA’s share price barely moved on the showy introduction of the Tesla Semi and Roadster. Heck, Tesla only inched higher on the SpaceX launch of a Tesla Roadster into space. Negative catalysts have had more sway, such as 4Q17 results. Tesla now faces a steady stream of severe and largely irreversible negative catalysts, including tax credit expiration, broad competitive entry, and platform quality issues.
We now expect downside acceleration. Tesla is not an affordable luxury with endless pricing power. It is a capital goods manufacturer whose core competency is turning $1 into $0.80 while looking cool.
AMN
Click here to read the AMN Healthcare Services (AMN) stock report we sent Investing Ideas subscribers earlier this week.
ORLY
We’re long O'Reilly Automotive (ORLY) because its protective moat (industry leading Do It For Me parts business built organically) means the lowest risk from Amazon and pure play e-commerce competitors. O’Reilly has built the most efficient network in arguably the highest return subsector of retail. O’Reilly will lead the consolidation of the industry and prove that it has not seen peak margins yet.
This past week we got a nice beat and guide up out of ORLY. Definitely holes to poke. i.e. comped 1.3% vs Street at 1.5% (nit pick). But guidance was for flat to +2%. Raised Q1 guide to 3% comp vs 1.5% -- but people will chalk this up to a delayed weather impact – a trend we have seen in the auto dealership earnings reports. In other words, the company showing that it is the best at what it does – but won’t dispel or answer the Amazon debate. This print overall is really a push. I’ve been increasingly concerned that having this on my Best Idea long list is the mother of all consensus long calls. I need to answer the comp/Margin trajectory call – and I will.
MD
Mednax (MD) reported a reasonably positive 4Q17 this morning consistent with our pivot from bear to bull. The one complaint we have, and consensus was only moderately interested in, was the lack of operating leverage from the same unit revenue growth upside. Improving same unit revenue growth and less-worse margins put the company on a path for a positive revision cycle and sequential improvement in 2018. We believe maternity trends will be positive for 2018 as we comp out of Zika. Maternity could be an even bigger driver if we are finally seeing a broader and long overdue recovery. With maternity recovering and management finally tackling productivity problems at American Anesthesiology, the margin opportunity is substantial.
Guidance for 1Q18 same unit revenue growth is 2%-4%, substantially better than 2017 results, EBITDA in line with consensus, and EPS better than consensus at $0.84-$0.89 versus consensus of $0.79, largely due to a lower tax rate of 27.5% versus consensus of 30%. Management guided for a 2018 tax rate of 26-27% for the full year, well below current consensus estimates.
