Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we added Grainger (GWW) to Investing Ideas on the short side this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
TWTR
Click here to read our analyst's original report.
Twitter (TWTR) Ad load returned to growth: This was the one blemish from the print. We estimate that the y/y increase in legacy ad revenue came off of an increase in ad load, which is somewhat concerning since we also estimate that legacy CPC remains the overwhelming majority of its ad load, and that surging ad load is what we believe led to its restructuring. That said, this is something we need to monitor moving forward.
NDLS
Click here to read our analyst's original report.
Noodles & Company (NDLS) is hitting on all strides, as they have trimmed their asset base to turn their focus to providing the best experience possible for their guests whether on-premise or off. With off-premise consumption at 50% of sales, management has been intently focused on convenience, highlighted by the improvement of their online ordering platform (now 13% of sales, up 460bps YoY), and installing quick pick-up shelving.
The rising tide of the restaurants space, and strong focus by NDLS management has allowed them to improve top-line performance. SSS at company units were -0.3% vs FactSet -1.0%, and +0.9% at franchise locations vs. FactSet -1.0%. Restaurant level margins came in in-line with consensus at 12.9%, aided by lower than expected cost of sales at 26.7% vs. FactSet 27.2%.
VFC
VF Corp (VFC) is a company built to plug in brand acquisitions as seamlessly as possible.
After VF Corp. acquires a company its entire back office functions in accounting, IT systems, real estate, supply chain, legal, etc are quickly integrated into VF Corp.
This enables the target’s management team to focus on the brand and sales growth.
Then VF Corp. leverages its distribution, customer contacts, e-commerce operations, real estate knowledge, and manufacturing base to drive the acquired brand’s growth globally.
The best example of VF Corp.’s success in acquisitions is Vans which was purchased in 2004 for $396mm. In 2017 Vans reached $3.6bn in sales. In the most recent quarter Vans grew 35%.
VFC is back in acquisition mode, and we see these businesses adding to earnings in year 1, as well as growing organically for future growth as brands like Vans have.
FL
Click here to read our analyst's original report.
Foot Locker (FL) has a history of SG&A underinvestment and a sub 20% ratio is quite simply, unsustainable over the long term. Naturally, the less FL is willing to invest in its own business the more reliant it is on Nike. As in underinvested FL positioned itself to be more exposed to Nike than ever before, with current purchases of Nike product now representing 68% of COGS, a significant increase from the 45% of purchases in 2004.
FL can afford to invest less when the Nike brand is hot and the Nike penetration is heading higher. But as athletic and Nike have faded some in fashion, and Nike is growing outside of wholesale, much more investment is needed to sustain customer traffic. We expect to see continued deleverage on the SG&A line, further pressuring operating margins.
HCA
Click here to read our analyst's original report.
We reiterate our short call on HCA Healthcare (HCA).
The BLS released the Job Openings and Labor Turnover Survey (JOLTS) for March 2018 this week. Health Care & Social Assistance Job Openings accelerated to +13.5% in March but remains 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, as we've outlined over the past few months, a worse flu season, improving maternity trends and higher acuity has led to a divergence.
Historically, demand for labor follows growth in the insured population and medical consumption demand. Health Care Job Openings improved to +5.5% YoY on a rolling 3-month basis through March 2018, below its peak of +38.1% in December of 2014. As a percentage of Health Care Employment, Health Care & Social Assistance Job Openings increased to 7.3%.
DPZ
Click here to read our analyst's original report.
No update on Domino’s Pizza (DPZ) for this week's Investing Ideas this week.
TSLA
Click here to read our analyst's original report.
Something Changed: The Tesla (TSLA) earnings call was exceptional, with Musk cutting off questions from a typically fawning crowd of sell side analysts. Was management avoiding unpleasant realities? Probably. TSLA earnings calls are always weird, but usually in a more endearing way. Erratic behavior at a leveraged, cash burning, money losing company that is regularly dependent on access to capital markets can’t reassure holders. We view Old Wall Street analysts as Musk’s co-conspirators – berating them does not portend an easy road.
HBI
Click here to read our analyst's original report.
Delta Apparel put up a bullish report this week night echoing what Gildan is saying about the screen print business. The company is looking for strength to continue through the reminder of the year though noted higher cotton prices a 110bp GM headwind. Interesting to note that mgmt was more bullish on private label business as customers look to shift sourcing to the western hemisphere. Note that the strength in screenprinting – which is a $500mm EBIT annuity for Gildan – gives it powder to continue pressure in branded underwear (where it is beating up Hanesbrands (HBI).
More bad news for HBI… Berkshire’s 10Q noted that Fruit of the Loom had lower unit sales in Q1 – on top of an easy compare on a tough 2017. Buffett will only lose share to GIL for so long. HBI Bearish.
HBI will be holding an Investor Day on Tuesday. The first one since 2014. We’ll be listening for any strategic moves that might disrupt our short thesis, but HBI has almost no way out without taking down earnings power via massive reinvestment.
UAL
Click here to read our analyst's original report.
United Continental (UAL) Management Hemorrhaging Credibility? Without doubt, the current management team is a serious upgrade from the prior team. That said the task in front of them was never very feasible. We see UAL failing at, by our count, the 5th cost program since the merger.
UAL A “Hope” Stock No More? Investors have hoped that someone will figure out how to get UAL cost competitive and stem the tide of share loss. The latter has been accomplished at the cost of the former, and investor exhaustion is a likely next step.
SBUX
Click here to read our analyst's original report.
Outspoken Hedgeye Restaurants analyst Howard Penney has been The Bull on Starbucks (SBUX) over the years. But the veteran analyst says the coffee juggernaut has mistakenly moved away from what it does best. He has been recommending investors short the stock and says, “recovery is still a long way off, traffic is declining globally for the brand.”
For starters, Penney maintains that Starbucks is putting too much emphasis on food and complicating its menu. This has put the company in a bad position.
“Complexity kills growth and it’s a theme that I think about for every restaurant company that I like,” Penney explains in this video clip. “As Starbucks has raised the number of items on their menu, sales have slowed. That’s a problem.”
He points specifically to the rise in Starbucks’ breakfast food items and cold coffee items as negatives for the stock.
Click here to watch this video clip.
TUSK
Click here to read our analyst's original report.
In our view, Mammoth Energy Services (TUSK) is operating in Puerto Rico with no room for error - not only is the company still subject to ongoing political oversight, but it is now one mistake away from potentially being asked to leave the island. Cobra’s subcontractor, DGrimm was shown the exit after the last two blackouts…if there is a next time, Cobra will likely be left holding the bag.
ADT
Click here to read our analyst's original report.
ADT (ADT) is a provider of home and business security monitoring services. We are Short ADT because we believe the company is facing heavy pressure due to 1) capital structure 2) competition and 3) inability to grow organically.
KSS
Click here to read the Kohl's (KSS) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
Kohl's has not hit its initial fiscal year guidance for the past five years straight until last year. It took a cold winter season and the strongest holiday in several years for Kohl’s to perform in line with the broader retail market.
The main points in our bearish thesis are the company has over earned for years based on credit income, incremental sub-prime income and aggressive leases, it now has to anniversary last year’s optimal holiday season, and that valuation is stretched. You never want to hear companies blame weather, but the long, cold winter in the Midwest was optimal for selling through winter apparel items with minimal markdowns. Kohl’s management has recently talked down Q1 sales growth, because the cold weather that boosted Q4 results negatively impacted Q1 results.
The table below shows Kohl’s EPS results vs. initial guidance:
GWW
Below is a brief note from CEO Keith McCullough on why we're adding Grainger (GWW) to the short side of Investing Ideas today:
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Apparently Macro Tourists are confusing an inflation #accelerating ramp in Oil prices with a re-acceleration in global demand. Hedgeye Update on Global Growth: it's slowing. With that said, I'm looking to broaden our positioning to our favorite Sector Short - Industrials (XLI). I’ll add Grainger (GWW) to the list this morning as it is signaling immediate-term #overbought. Here's the intro to what Jay Van Sciver wrote to our Institutional Research subscribers: "We’ve been waiting for an opportunity to re-enter a short position in Industrial Supply, and the recent squeeze/rally in shares of GWW provides such an opportunity. While many focus on the competitive threat posed by Amazon Business and its ilk, accelerating competitive intensity from independent suppliers and other larger distributors have principally generated headwinds in the last few years." Make short selling great again, KM |
