Below are analyst updates on our eighteen current high-conviction long and short ideas. 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.
AT&T would likely struggle in its effort to present a credible claim that the Justice Department action to block the Time Warner acquisition constitutes selective prosecution, a defense that could have opened the door to documents and other evidence to prove inappropriate White House involvement in the Time Warner antitrust review. Indeed, the court (Judge Richard Leon) rejected the applicability of the defense, undermining the legal basis to seek documents or other evidence of unfair political bias.
Although the government thus succeeds in its effort to block discovery of such politically sensitive internal communications (to the extent they exist), the selective prosecution argument is not critical to AT&T's defense to the economic merits of the antitrust case. The burden of proof remains with the DOJ to demonstrate the transaction would impose significant harm on consumers.
Although the political bias issue is formally removed from the case, AT&T, by raising the issue and seeking relevant documents, may have refined the filter through which Judge Leon will view the evidence that will be offered at trial on the merits of the antitrust case. Excising the political bias issue (by striking the selective prosecution defense), however, incrementally reduces the government's incentive to settle the case in a consent decree.
The case remains on track for the March 19 trial start date. Click here to watch a 10-minute video in which Telecom & Media Policy analyst Paul Glenchur explains why he still thinks the AT&T/Time Warner deal gets done.
RRR
Click here to read our analyst's original report.
While the Boyd Gaming (BYD) print and call pointed to a rather tempered regional gaming outlook, the LV Locals commentary was bullish and the read through to Red Rock Resorts (RRR) positive. Our thesis that this market provides the best top line and profit outlook in the US is unchanged. Specifically, BYD management provided a solid outlook of roughly 4-5% GGR growth for the market for 2018.
We think 4-5% Locals GGR growth could be conservative. Importantly, despite generating positive rev growth and double digit EBITDA growth at every LV property, they admitted that they are actually likely losing a little bit of market share—maybe to RRR. Nevada generally provides the highest flow through of any market in the US so mid-single digit same-store GGR growth could lead to double digit EBITDA growth.
HST
Click here to read our analyst's original report.
After a few rough days for the lodging REITs, marked by interest rate scares and the big miss/tepid guidance out of LHO, it’s good to see a more representative performance of what’s going on in hotel land. The underlying health of the hotel industry looks solid and likely improving, at least that’s what our forward looking data continues to suggest. Host Hotels' (HST) 4Q results and outlook provides corroboration and we think the trade is likely higher for the hotel REITs.
Our initial read is that our positive thesis remains intact with HST and the stock remains our go-to pick in the lodging REIT space. While some may challenge management on the asset acquisition, at least the price, those assets offer a longer and steeper growth tail given the market exposure.
MLCO
Click here to read our analyst's original report.
The Chinese New Year celebration week is upon us and weekly volatility is to be expected. While a tough comp and the unfavorable CNY shift could limit GGR growth to our growth estimate of +7% to +11%, the underlying fundamentals remain very strong. Visitation has been terrific, up double digits among Mainlanders and overall, and YoY GGR growth against the Chinese calendar has been explosive. We are particularly encouraged by acceleration in the mass segment and believe mass revenue growth could exceed expectations, leading to more quarterly beats among the companies.
For Melco Resorts (MLCO), the secular margin story is intact despite falling short of our expectations in Q4 2017. Q4 2017 margin was impacted by the closing of House of Dancing Water for one month and higher property costs. The management shuffle should turn around recent weakness at CoD. The Q2 (possibly May 10th) opening of the Morpheus Tower is a catalyst and should generate meaningful incremental EBITDA growth. MLCO is the cheapest in the group, yet cash flow will accelerate post Morpheus and set up a big shareholder capital return and/or a value enhancing buyout of the MSC minority partner.
TWTR
Click here to read our analyst's original report.
We suspect Twitter (TWTR) management has also been right-sizing its model by slashing legacy CPC ad load, in turn creating more runway for Autoplay video ads, which have a lower engagement threshold and a potentially higher effective CPM. TWTR’s pivot away from CPC means the model is now sustainable.
Looking forward, we suspect TWTR could return to double-digit revenue growth by as early as 1H18. The two factors that we were previously concerned with were user growth and advertiser demand, but we suspect there is a common driver b/w the two in 2018 (events) that should support growth on both those fronts.
KR
Click here to read our analyst's original report.
Much of the multiple deterioration for Kroger (KR) over the last year can be attributed to Amazon's acquisition of Whole Foods, which we believe is overblown. Beyond a year, sales have struggled due to deflation and competitive pressures coupled with a lack of effective change by Kroger. Competition is still and will always be here, but Kroger has woken itself up, while deflation has turned to inflation.
We believe general skepticism surrounding Kroger is dampening forward-looking estimates. There could be significant upside to estimates as the Company works to roll-out its turnaround plan.
ORLY
Click here to read our analyst's original report.
Two of O'Reilly's (ORLY) competitors Genuine Parts and Advance Auto Parts reported earnings this past week. Both companies reported an improving sales trend that likely benefited from more extreme seasonal weather. More extreme seasonal weather can lead to more visits to the auto parts store to replace batteries, wipers, and even shocks.
Advance’s Same Store Sales (SSS) decline was 1% better than consensus estimates and EPS surprised to the upside by 18%. Management said that the first part of 2018 started off well and was even more optimistic about the back half of the year.
Genuine Parts reported that its Napa Auto Parts division had SSS growth of 1%. Management noted that sales started off slowly, but improved in November and December. Management was optimistic for a gradual strengthening of the overall market due to more typical winter weather, the sweet spot of the car repair cycle to stabilize, and growing total fleet size with relatively stable fuel prices.
O’Reilly’s margins have not cracked despite the comp erosion in 2017. With even moderate comp reacceleration in 2018 O’Reilly should see 28-30% incremental margin while currently running at 18%. If we’re right on a 20-21% margin, then we get EBIT accelerating from 1% in ’17 to 11% growth for 2018. The stock will outperform if we see numbers like that.
MD
After holding a negative view on Mednax (MD) for well over a year and close to a -50% decline, we removed it from our active short calls after 3Q17 results. We added Mednax to the long side in January.
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.
CERN
Click here to read our analyst's original report.
Orlando Health announced on 2/6 the hiring of a new CIO, Novel Mattis (Click Here for Press Release). Novel Mattis previously worked for Ascension Information Services (CERN/ATHN shop) and Rex Health (Epic shop). According to the job description (Click Here), the new CIO will manage "the selection and implementation of a new enterprise-wide EMR system" as the organization seeks to move away from its current best-of-breed structure (i.e., Allscripts). We believe Cerner (CERN) and Epic are best suited to deliver an enterprise-wide EMR solution across Orlando Health's 8 acute care hospitals (~2,000 beds), 4 post-acute facilities and ~50 physician practices.
While Orlando Health has an existing relationship with Cerner in lab and through their affiliation with Lakeland Regional Health, we still believe Epic is the likely choice given Epic's popularity among teaching hospitals and robust revenue cycle offering. We estimate a contract value of $250 - $350 million and a final decision to be made in the next 12-18 months.
VIRT
Click here to read our analyst's original report.
We acknowledge that with the new lower tax regime; ongoing expense management; and a higher than expected top line daily average trading yield that out year Virtu Financial (VIRT) earnings now ratchet up to the $1.20 to $1.40 per share levels. We are however not willing to award any exchange like multiple to a principally driven trading firm in this environment and fair value on our new 2019 EPS range sits between 12-14x earnings, putting probabilistic fair value at $14-19 per share. Shares remain on our Best Ideas short list, especially with expectations of all vol being good vol currently and shares now in line with the cheapest agency exchange operator.
HCA
Click here to read our analyst's original report.
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) more specifically.
DPZ
Click here to read our analyst's original report.
Domino’s Pizza (DPZ) reported 4Q17 earnings yesterday before the open, and figures were mixed, with the Company missing top-line by a wide margin but beating bottom-line Consensus estimates on the back of benefits from lower than expected G&A which came in at 11.8% of sales vs. consensus expectations of 12.6% and to a lesser degree a lower tax rate.
Domestic Company SSS came in at +3.8% (2-yr. avg. down 235bps) vs FactSet +6.0%, Domestic Franchise SSS was +4.2% (2-yr. avg. down 250bps) vs FactSet +6.0%, and International SSS was +2.5% (2-yr. avg. down 245bps) vs FactSet +5.2%, worth noting the calendar shift of New Year’s Day, which had a -0.5% impact in 4Q17 which DPZ expects to be a benefit in 1Q18. Unit growth for FY17 was also below expectations, falling ~50 units short of consensus figures (1,045 new units versus expectations of 1,096).
It appears that the issues seen in the Domino’s international business have finally reached Stateside!
TSLA
Click here to read our analyst's original report.
Industrial analyst Jay Van Sciver presented a critical update on Top Short Idea Tesla (TSLA) recently highlighting positive catalysts that TSLA has not responded well to largely in the rear view and a steady stream of negative catalysts ahead in 2018 including tax credit expiration, broad competitive entry, and platform quality/production issues, we think this is the time to take a closer for those who have been reticent on the short.
In addition, Jay shared feedback on his Black Book from clients that included several additional points of focus including weak January sales in Europe, which is likely driven more by supply than demand, but is also due in part to the US pre-buy ahead of tax reform and could portend the increasingly competitive environment facing Tesla in 2018.
Rising borrowing rates is another dynamic that will prove to be a growing headwind as financing costs rise steeply with the expiration of the tax credit. TSLA’s Automation move may not be so unusual, but constructing and reassembling a whole line seems like a stretch. Too much focus on manufacturing issues and not enough on Model 3 problems, while these issues are hardly mutually exclusive, we stand by our contention that manufacturing issues have pushed TSLA from a first mover to disadvantaged player.
We expect downside acceleration ahead.
MC
Click here to read our analyst's original report.
Moelis (MC) stands at risk from a decline in M&A activity as volatility kicks up and equity values decline. Moelis reported slack in its earnings report this quarter 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.
AMN
Click here to read our analyst's original report.
AMN Healthcare Services (AMN) reported mostly positive results last week although there were marginal negatives, including pricing, in the quarter. Nurse & Allied Staffing, Locum Tenens, and Other Workforce Solutions revenue of $321.4M, $108.1M, and $79.6M beat consensus estimates of $317.8M, $105.5M, and $78.1M. Management cited increased MSP demand and volume in Nurse and Allied, improving momentum for nurse staffing, and an overall market that remains "favorable" despite lower aggregate demand. Locum Tenens +4% YoY saw the average bill rate increase by 6%, the number of days filled drop by 1% and "gross margin at 29.3% was down 150 basis points in the prior year, driven mainly by a lower bill-to-pay spread as physician pay rates have been increasing faster than bill rates." Workforce solutions +5% YoY was driven by lower mix in permanent placement revenue and interim leadership.
HBI
Click here to read our analyst's original report.
Late last week news broke that Walmart has introduced new brands in women, plus-size and children. One particular brand will replace Hanesbrands' (HBI) Just My Size (JMS) inside the store and JMS will be become available online only.
We don’t know the exact size of this brand today (it was launched in 2009), but in 2012 HBI’s presentation implied the brand to be $100mm+ in retail sales. It sells in some other some other stores today, but we think this is roughly a point drag on HBI’s top line, in a mix of innerwear and activewear segments.
Data points keep coming in reaffirming our stance that HBI is facing structural market share risk and will continue to see persistent negative organic sales leading to earnings and cash flow misses for the foreseeable future.
UAL
The recent United Continental (UAL) Investor event was exceptional in that it completely reversed course on many key prior initiatives. It put analysts in the awkward position of having told investors and PMs that doing “X” (e.g. cutting high cost regional flying) is the way forward, only to find a year or two later that doing the opposite (e.g. more regional flying for connectivity) is the way forward. Basically, UAL told investors they are going to try harder on things like asset utilization and employee productivity.
It is typically easier to take fares down than back up, particularly if the goal is to drive higher utilization and ASM growth in a higher fuel price environment. UAL has often been “capacity discipline” for the industry all by itself, and it has exited that roll. We continue to think that UAL will be trapped by an unpossible dilemma, choosing between lower fares, higher share, and more rapid cash burn versus higher fares, more rapid share loss, and slower cash burn.
SBUX
Starbucks (SBUX) – Our top three concerns with Starbucks are:
- Leadership - For a Company like this, a retail operator would be better suited to lead the charge. As we have been saying, “technology may be the future, but they still have to get the coffee in the cup,” and Mr. Johnson has failed to do so, thus far.
- Comps are slowing - 2-year average consolidated SSS have slowed for five consecutive quarters, with consolidated traffic growth flat in the latest quarter. Management continues to tout the roasteries as a growth driver but we believe they are merely an attraction in key cities, that won’t elevate the consumer’s willingness to pay even more for a cup of coffee on a daily basis.
- ROIIC has fallen off a cliff! - With operating cash flow down ~8% YoY and capital expenditures expected to rise over 30% from $1.5B in FY18 to ~$2B in FY18, the question of SBUX’s profitability comes to the forefront.
