Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we removed Cerner (CERN) from the short side and Time Warner (TWX) from the long side of Investing Ideas this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
RRR
Click here to read our analyst's original report.
CoreLogic issued their 4Q 2017 homeowners negative equity report yesterday and it revealed the continuation of positive developments in the state of Nevada and for the Las Vegas Locals gaming market. The report indicates that the level of mortgages with negative equity remained in single digit territory and declined QoQ to just 8%. In addition to these findings, CoreLogic indicated that the average equity gain per homeowner was up $27K, which was good for 3rd best across the US.
These developments are undoubtedly positive for the LV Local consumer, and will continue to be positive for the casinos, especially of which Red Rock Resorts (RRR) is firmly positioned to capitalize. Assuming only modest increase in home values across Las Vegas and Nevada, we project that the % of negative equity mortgages will likely drop below 5% later this year, and could approach 0% by the end of 2019.
HST
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The latest weekly STR data indicates that Hotel RevPAR growth was consistent with the industry's recent and improving trend. For the week ended 3/10/18, total US RevPAR grew 3.1% YoY. Independent hotels appeared to be the lone drag on the week, as all other chain scales grew in the 4% range.
As we wrote last week, February trends were choppier than we had expected them to be, with some weeks indicating broad strength and others showing weakness. However, as expected, the month did finish on a solid note, and we estimate February RevPAR grew in the range of 3-4%, which is indicative of underlying strength that we believe is brewing in the lodging industry.
We expect the next two weeks to remain solid and post growth in the 3-4% range, but expect the last week of March to show material weakness due to the anticipated shift in the Easter holiday as Good Friday (March 30th) will compare against a normal Friday in the prior year period. Net net, we are anticipating March to post Total RevPAR growth in the 1-2% range.
The recent sell off has created buying opportunities in some of our favorite hotel REIT stocks, like Host Hotels (HST). We believe that HST is likely to outperform in terms of EBITDA and RevPAR growth in the coming year. As it currently stands, our top down view is unchanged and we still see better RevPAR growth as the more probable outcome.
MLCO
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Melco Resorts (MLCO) remains one of the Macau stocks we favor. The secular margin story is intact despite falling short of our expectation in Q4 2017. Q4 2017 margins at CoD 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
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We view the series of events that ultimately led Twitter (TWTR) to restructure was the result of self-inflicted wounds on the part of an unsustainable monetization strategy in the form of excessive ad load. We think management’s pivot to de-emphasizing legacy CPC ads in favor of Autoplay video ads, as the way forward to higher effective CPM, is a more sustainable long-term growth strategy.
We don’t think it will take much to return to double-digit ad revenue growth in 2018, possibly as soon as 1H18, as the Olympics, World Cup, and mid-term elections all provide more reasons for advertisers to ramp ad spending on TWTR.
ORLY
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Recent data points are bullish for sales for O'Reilly Auto Parts (ORLY) and Auto Parts.
The rough winter has continued in the north east with 3 nor’easters in the last 2 weeks. That tailwind should benefit sales in the upcoming quarter or two as auto wear tends to lead to failure/replacement on a lag.
Also, the heavily delayed tax returns seen in 1Q of 2017 has significantly moderated in 2018 so lapping that headwind should also be a positive for sales y/y.
Despite market concerns about Amazon’s activity in the space creating price pressure and margin, we have not seen evidence of this throughout earnings this quarter.
Revenue trend should drive the stock in the coming quarters, and as noted revenue looks bullish.
COST
Below are some key takeaways on our Costco (COST) long thesis:
- Robust sales figures should prove that this is a retailer in a class of its own, yet many prefer to point to an uncertain future. Given COST’s limited SKU count of roughly 3,800 items per warehouse and strong volumes, they have the ability to negotiate for the best possible price with producers, and they pass most of those savings onto the consumer, creating a value equation that can’t be beat.
- Despite a competitive price environment, COST was able to achieve a relatively flat gross margin YoY at 10.98%, down just 2bps YoY. Equally as impressive was the 22bps improvement in SG&A as a percent of sales, despite investments in ecommerce, as a result of strong sales performance.
- Before getting into the quarter we also want to highlight the improvement in renewal trends, which ticked up 10bps sequentially to 90.1% in the U.S. and Canada and 87.3% worldwide, up from 90.0% and 87.2%, respectively at 2Q end. It is clear to us that COST has plenty of levers to pull to improve the business, and there is a seat reserved for them in the future of food retail.
VIRT
Click here to read our analyst's original report.
Virtu Financial (VIRT) shares have now ascended to asymmetric levels where the stock has historically been a profitable short. 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 precipitously. The fundamental rationale for our continued caution is a combination of both business volatility and also thin levels of capital. In our original Black Book, we outlined 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.
HCA
Click here to read our analyst's original report.
Health CARE EMPLOYMENT +1.9% YOY IN February 2018
Health Care employment growth for February 2018 decelerated -4 bps to +1.95% YoY from +1.99% YoY in January 2018 and remains below the peak of +2.74% YoY in October of 2015, consistent with the peak impact from ACA-related coverage expansion. Hospital Employment continued to improve both in YoY% terms and in rate-of-change terms, the only series to run counter to our negative consumption thesis.
As we highlighted last month, flu and maternity may be driving short term improvement in Hospital Employment. Medicaid enrollment continues to deteriorate as expected. Maternity, which appears to be comping the Zika headwind, and ATHN claims trend charts agree with HCA Healthcare's (HCA) substantial increase in acuity and the source of their 4Q17 earnings beat.
In the aggregate, Health Care employment trends continue to weaken year-over-year, which is consistent with our Insured Medical Consumer model, and our forecast of decelerating medical consumption into 2018.
DPZ
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Competitors Are Revving Their Engines – Domino’s Pizza (DPZ) has operated in a world of their own, dominating the pizza and broader food delivery environment for years. For so long their success has come at the expense of independent pizza shops, Pizza Hut and other restaurants that have not been able to service the delivery market. But this dominance is now over. Though we first saw evidence of the competition for share of delivery spending hit the Domino’s UK business, we have started to see this in the U.S as well.
The UK is a far more developed delivery market than the US, but domestic players have started to catch up. With the help of GrubHub, UberEats, DoorDash, Postmates, and even restaurants delivering for themselves (Panera), restaurants of all different cuisines are getting into delivery. This dynamic, coupled with a strengthening Pizza Hut (time will tell on what GRUB could bring to the table for them), has started to chip away at DPZ’s number one position.
TSLA
Click here to read our analyst's original report.
A Brief Note on Tesla (TSLA): Competitors are now writing the script for this story stock, with huge PR budgets and a steady stream of hyped up products. With iPace sales imminent it is worth considering just how Tesla’s news feed is dominated by a *competitor’s* car. This is still a story stock, and the story is all about demand, demand, demand – ‘people want these cars’. Well, that is now unwinding.
Our thesis has three legs that matter right now – Tesla is a poor manufacturer that will struggle with quality and schedules as it tries to shift to mass production, damaging the brand.
Second is expiration of the tax credit, and we can already read customers complaints that their delivery will occur after tax credit reductions. The final piece is competitive entry by competent manufacturers.
Oddly, interest in the TSLA short case has died down in recent weeks, even though we think the case is just getting stronger.
MC
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For the pending 1Q18 period, our Boutique Activity Tracker (BAT) indicates that the M&A sub-industry is running below pace from a year-over-year standpoint, with first quarter activity in 2018 falling below 1Q17 production levels. While the boutique advisory stocks are pricing in an acceleration in activity due to the new, more favorable corporate tax regime in the United States, simply put, announced M&A activity hasn't responded yet.
Moelis (MC) is again lagging most at this point in the quarter, a status that our tracker picked up in 4Q17 which outlined the biggest year-over-year decline in recent 4Q17 earnings. Thus far in 1Q18, the firm has been involved in just 16 assignments worth $32.3 billion, an absolute decline from the 36 deals worth $38.7 billion last quarter. The first quarter of 2017 for MC was associated with 38 transactions worth $44.3 billion.
Hence, our tracker outlines again that MC is running behind most on a year-over-year comp basis of all the boutique advisors.
HBI
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Cotton prices have be rising over the last 6 months. Prices are up nearly 20% from the middle of 2017.
Hanes downplays its cotton exposure, noting it is only 4% of COGS. That number is actually the % of COGS for cotton manufactured by the company, it does not include cotton items bought from third parties, which is now about 45% of the total. So the real % is more like 6-8%.
Therefore a 10% move in cotton prices is roughly 50-75bps headwind to Hanesbrands (HBI) gross margins.
The price changes take about 12 months to flow through the supply chain and hit the P&L so unless cotton reverts back to trough levels seen in 2016, HBI will continue to face margin pressure from input costs.
With organic growth negative, and no levers to pull on margins with rising cost pressure, we see HBI missing long term earnings and cash flow expectations.
UAL
Click here to read the United Continental (UAL) stock report Industrials analyst Jay Van Sciver sent Investing Ideas subscribers earlier this week.
SBUX
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With the Starbucks (SBUX) annual meeting coming up, we can’t help but think back to a touching moment at the 2017 annual meeting, where Howard Schultz handed Kevin Johnson the key to the Pike Place store, symbolizing an official changing of the guard. Kevin humbly accepted the key, but we could not help but think that he just is not the right person for the job. For a Company like this, an 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.