Below are analyst updates on our eleven current high-conviction long and short ideas. 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.
Recent Red Rock Resorts (RRR) stock price underperformance presents a good entry point for new investors as fundamentals remain solid. Despite RRR’s higher leverage profile, investors need not forget about the indirect benefits of higher rates to RRR’s core customer base (retirees that rely on fixed incomes). Additionally, macro drivers remain relentlessly bullish and should continue to flow through to better GGR. Macro drivers include: Home price acceleration, construction spend, construction employment, population growth, local GDP growth.
HST
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While management teams remained conservative on their Q4 conference calls, the writing was on the wall. Our forward looking macro RevPAR model and ADR survey has been suggesting acceleration for a number of months.
In our note last week on Host Hotels (HST), we discussed that the probability of earnings beats and guidance raises was rising, particularly as both March and 1Q RevPAR has surprised to the upside. Now with PEB stepping up and pre-announcing a positive 1Q beat, we're even more confident that our bullish RevPAR thesis is playing out.
We like HST fundamentals and we like the stock. We reiterate our street high RevPAR and EBITDA estimates for 2018 and under a reasonable valuation for accelerating environments (13x) believe the stock has close to 20% upside from current levels.
TWTR
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Twitter’s (TWTR) prior monetization strategy was unsustainable since its two growth drivers were working against each other (user growth & ad load), and the model failed in 2Q 2016. Twitter has since used the restructuring to right-size its model in terms of ad load while also prioritizing Autoplay, which reduces its dependence on ad load and takes pressure off its MAU growth.
In light of these developments, double-digit ad revenue is within reason since CPC will have less of a stranglehold on the model. We’re not trying to emphasize TWTR’s potential Autoplay revenue growth as much as waning impact that Legacy CPC will have on the model now that it’s a smaller portion of the pie.
HCA
Click here to read our analyst's original report.
Health Care employment growth for March 2018 accelerated +5 bps to +1.94% YoY from +1.89% YoY in February 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, which runs 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 appears to be comping the Zika headwind. ATHN claims trend charts agree with HCA's substantial increase in acuity and the source of their 4Q17 earnings beat.
In the aggregate, though, 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.
We reiterate our short call on HCA Healthcare (HCA).
DPZ
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We are confident that the evolving delivery space will hurt Domino’s Pizza (DPZ) in the long run, despite the brand’s current positioning. Pizza is no longer the only option for consumers, and ever-changing consumer preference will hurt DPZ, if it hasn’t already.
In 2016, DPZ invested a shade under $60M in capital expenditures, followed by ~$90M in 2017, and the company expects to invest ~$100M in 2018. With competitive pressure only set to increase over time, and capital expenditures increasing, we can expect for ROIIC to continue to fall from here.
TSLA
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Losing Money, Raising Capital Aren’t Good Short Catalyst: Tesla (TSLA) is going to report horrific 1Q18 results. Further, Tesla will likely issue equity around 3Q18. Both are widely expected. On 1Q18, the threat of a repeal of the US EV tax credit during tax reform pulled purchases if S & X vehicles into 4Q17, while low Model 3 production will just be spectacularly expensive. The Model 3 delay is a point of optimism for holders, who see it as almost certain to get better. Longs probably wish Tesla would get the equity raise over with.
HBI
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Hanesbrands (HBI) opened a Champion brand store on this past Saturday in LA.
The company has outlet stores with weak presentations of all its brands, this is the first store dedicated solely to Champion and properly presenting the brand. Champion is about 16% of sales, with a big portion of that as C9 at TGT.
HBI is trying to capitalize on the brand heat that Champion has seen domestically, driven by influencers like the Kardashians. In the near term, the store makes sense as a way to capture more gross profit while hitting a fashion trend.
An LA location makes sense, based on the demo of the brands new following. The store is on South La Brea Ave across the street from a yoga studio, and sandwiched between a restaurant and an Undefeated sneaker store.
We wonder if this move could be coming too late. Champion is over a year into its ramp, and we don’t think there is a lot of growth left in this brand's fashion bump. Champion is being sold at high prices at URBN, yet is also seen discounted at Dick’s, and being cleared at Costco. HBI’s DTC operation has not been a means of growth for the company either. After 2 years of mid to high single digit declines, it was consolidated with other parts of the business early last year, and still appears to be shrinking.
Overall, it’s a move that makes sense in the near term, but it seems risky to put capital into physical distribution of a brand that is riding a fashion wave that's unlikely to continue in the long run.
UAL
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While United Continental Holdings (UAL) eased its ULCC assault in the post-President’s day period representing more than just an Easter shift, the pressure seems back on. With fuel rising sharply, UAL may well not like the results. Our take is that UAL found it much easier to lower fares than to raise them. They are on the path of least resistance for traffic, not for investors or industry discipline, we think.
SBUX
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We view Starbucks' (SBUX) Roastery concept as merely a distraction from the slowing business trends the company is experiencing. The Roastery also plays two other critical roles:
- Howard Schultz’s new project, which came into focus at a convenient time, as they were transferring the CEO seat to Kevin Johnson.
- The roastery is also an attempt to elevate the price profile of the brand.
SBUX continues to boast about its Roasteries initiative, and there is no doubt that the early Shanghai results are impressive. It is difficult to see how Roasteries will have a meaningful financial impact on the business long-term. They are a marketing diversion used to elevate the brand, but we ask ourselves, “How much more expensive can this brand get?”
In addition, SBUX’s CPG business is continuing to see competition down the aisle, increasing our confidence that the company will be hard-pressed to find meaningful growth.
TUSK
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Our Mammoth Energy Services (TUSK) thesis is centered on its $945MM contract for electrical T&D work in Puerto Rico. Mammoth’s subsidiary, Cobra Energy, is earning a ~40-45% operating profit margin for its work in Puerto Rico, while other more established companies in the T&D space are earning between 0%-10%. Most large utilities sent to the island under mutual aid agreements are working at cost, i.e. no profit. With just ~$30 million in electrical T&D assets, TUSK stands to make a +12x pre-tax return on investment on this contract alone. With PREPA in bankruptcy protection, FEMA (funded with U.S. taxpayer dollars) is paying TUSK hundreds of millions of dollars in exorbitant profits. Since the announcement of this contract TUSK shares have doubled.
At best, we believe TUSK will never see a contract like its current one in Puerto Rico again. The disaster recovery in Puerto Rico was plagued by a litany of factors that resulted in the award of two unprecedented and controversial, no-bid contracts by PREPA to Whitefish Energy and Cobra Energy. At worst, Cobra’s contract remains under scrutiny and could lead to cancellation or amendment.
FL
Click here to read our analyst's original report.
Beyond the long term profitability risk as Nike’s penetration in Foot Locker (FL) doors declines, in the near term we continue to see cyclical industry pressures building that are likely to hurt FL’s same store sales.
Most notably are headwinds caused by the shift in teen sentiment towards streetwear and away from basketball. Vans in particular has been experiencing serious brand heat witnessing 26% growth in 3Q17 and accelerating to 35% growth in 4Q17. We think this momentum has continued in Q1 with Zumiez reporting a comparable store sales increase of 12.6% in March accelerating 340bps from February.
The strength in streetwear brands provides both a topline and gross margin margin headwind at FL. We see evidence of this in Foot Locker’s gross margin contraction of 240bps realized in 2017.
We are also under the assumption that strength at Adidas has posed an additional topline growth problem for FL. Adidas offers a lower ticket sneaker than Nike which means lower sales on the same number of units sold. That equals comparable sells pressure and less fixed cost leverage.
