Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note added Credit Acceptance Corp (CACC) to the long side of Investing Ideas this week. We also removed Domino's Pizza (DPZ), HCA Healthcare (HCA) and Mammoth Energy (TUSK) from the short side and Noodles (NDLS) from the long side of Investing Ideas. 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.
The Olympics and World Cup were a big driver for 1H 2014 results. We're not expecting comparable growth since Twitter (TWTR) was a much smaller company back then. But if TWTR can reproduce comparable absolute revenues from these events, it would translate to an extra 2% and 5% growth to 1Q 2018 and 2Q 2018 results, respectively; not a tall order considering its user base is ~30% larger now.
VFC
Click here to read our analyst's original report.
VF Corp (VFC) acquired Williamson-Dickie in August 2017 for $820M, just below 1x sales. The combination created a $1.7B workwear business that competes in a $30B segment.
Workwear is a highly fragmented market where VF Corp.’s scale in manufacturing, distribution, product innovation and sales can lead to significant synergies.
The acquisition is accretive to EPS and FCF in the first year. We think Dickie’s will compound at a faster growth rate than management’s initial 3.5% guidance. Additional upside will come from VF Corp. raising Dickie’s operating margins from 7% to low double digits over time. If that seems aggressive it is important to remember that Vans, North Face, and Timberland all had operating margins below 10% and now combined the brands have a high-teens margin.
Since the Williamson-Dickie acquisition VF Corp. has made two additional smaller acquisitions and reached an agreement to divest the Nautica brand which was not growing. The new CEO Steve Rendle was promoted at the beginning of 2017 and will likely continue to reshape the company’s portfolio of brands and create shareholder value.
TPR
Click here to read the Tapestry (TPR) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
RRC
Click here to read the Range Resources (RRC) stock report Energy analyst Alec Richards sent Investing Ideas subscribers earlier this week.
CACC
Below is a note from CEO Keith McCullough on why we added Credit Acceptance Corp (CACC) to the long side of Investing Ideas earlier this week:
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Looking for more long exposure to the Financials post yesterday's smack-down selloff? How about a Specialty Finance company that Financials analyst Josh Steiner likes by the name of Credit Acceptance Corp (CACC)? In the intro to his deep dive Black Book (Institutional Research product), Steiner wrote the following about CACC: "Having admittedly embarked on our study of CACC with a largely negative bias, our findings, much to our surprise, emerged as a strong refutation of the dominant, heavily agreed upon short view of this company. In our call next week, we will tackle this highly controversial, timely, and topical name in the financials space with an analysis that will, at minimum, make the institutional community reconsider the case for a short." Yours in buying on red (not chasing charts on green), KM |
TSLA
Click here to read our analyst's original report.
Watching The Death Of The Tesla (TSLA) Bull Case: Our contention is that great automobile/durable goods brands are a result of high quality design and manufacturing. A quality brand is a byproduct of exceptional manufacturing. Cost effective, high quality mass production requires a skill set that Tesla doesn’t have, and can’t develop in a couple of years. Most Tesla holders have a consumer or technology background, and continue to miss this critical point. Just wait until the Audi, Jaguar, and Porsche marketing departments go after the Tesla brand…
HBI
Click here to read our analyst's original report.
Hanesbrands (HBI) has rallied in recent weeks off the bottom as management bought stock after presenting its plan at its HQ investor day. An important aspect to keep in mind is that management’s strategy is not around re-setting and reinvesting in the brand. Rather it is the opposite, trying to sell more stuff while spending less. This is a good recipe for long term share loss.
HBI is stuck in the middle. It can’t compete on price with the like of private label and Gildan, and it can’t compete with the innovation, branding, and quality of the high end. Therefore there is nothing driving the marginal consumer to want to buy it. That has been the case in recent years, and without a big change in strategy that will remain the status quo. It’s weak strategy position won’t change with management’s current plan.
UAL
Click here to read our analyst's original report.
We continue to see United Continental (UAL) struggling to generate cash in 2018. The company is flailing as it copes with an inferior cost and hub structure in addition to a deteriorating balance sheet. With fuel prices and competitive intensity both looking like headwinds in 2018, we expect shares of UAL to trend lower.
SBUX
Click here to read our analyst's original report on Starbucks.
Restaurants analyst Howard Penney says Starbucks (SBUX) has mistakenly moved away from what it does best. Starbucks is putting too much emphasis on food and complicating its menu. This has put the company in a bad position.
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"Complexity kills growth and it’s a theme that I think about for every restaurant company that I like,” Penney explains in the clip above. “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.
Watch the above clip for more.
FL
Click here to read our analyst's original report.
Foot Locker's (FL) improving sequential comp growth that came in ahead of consensus estimates was largely viewed as a positive on last week’s print. However, we highlight the -190bp deceleration to -1.2% on a two year comparable basis.
On conference calls management outlines sales trends across eleven distinct sales banners. In 1Q, seven of the companies banners comped negatively and five banners slowed sequentially. With ~65% of its store banners comping negatively and +90% of the company’s store base exposed to declining mall traffic environments, we’re inclined to believe that it will be a significant challenge to grow the top line for any sustained period. That’s not to mention that on a net basis FL operated 79 less stores in 1Q18 vs. 1Q17 with management furthering its need to right size the store base through continued store closures.
ADT
Click here to read our analyst's original report.
Our bear case for ADT (ADT) rests on seven key points:
- ADT has a non-existent home security service penetration curve (from ~19% penetration of US homes in 2010 to ~20% in 2017).
- The company’s false alarm problem has not been mitigated, which puts it at a major risk of technological disruption.
- The company cites annual industry growth of 7-8% … meanwhile ADT has grown organically ~1% per year since 2011.
- Each incremental ADT partner and integrator removes the customer’s association with the ADT brand and its benefits.
- The company’s self-proclaimed opportunity to sell sophisticated cybersecurity in the commercial realm is likely out of its reach.
- True FCF is considerably lower than storybook, and cash taxes should be a factor now, as net operating losses can only protect 80% of the annual tax bill.
- Sticky service means growth mainly through acquisition of smaller players and their contracts.
KSS
Click here to read our analyst's original report.
Retailers have clear unavoidable rising cost pressures. Higher wages, short term freight/shipping costs, store/ecommerce investment, higher fuel costs, and higher raw material costs in the supply chain all driving up SG&A and COGS. There are little to no levers to pull to save costs which means companies have to put up revenue growth to avoid deleverage on the earnings line.
Kohl's (KSS) comp of 3.6% in 1Q was a deceleration of 270bps vs 4Q, a 160bps slowdown on the 2 year rate. This seemed like a decent result relative to the 2.6% street number. Then on the call, management notified us that the 3.6% comp was aided by 320bps of help from the 53rd week calendar shift, which brought May promotions into 1Q. The calendar shift takes sales away from 2H, boosting 1H. So looking forward you now have to believe in a very material 2 year comp acceleration for the model to work throughout the rest of the year. We don’t think that happens and we think the associated deleverage of the earnings line will mean earnings misses in the back half of this year.
GWW
Click here to read our analyst's original report.
The data is turning negative and Grainger (GWW) faces tough 2H comps ahead due to tax reform and hurricanes. In addition, expectations continue to overlook data that suggests the Industrial Distributor market is being disrupted from many different directions that will exacerbate persistent gross margin pressure. We expect that by 2H18, decelerating macro, competitive responses, and productivity hurdles hit recovery narrative, sending shares to a ‘normal’ discount. Short interest reductions drove much of the recent upside.
MCD
Click here to read the McDonald's (MCD) stock report Restaurants analyst Howard Penney sent Investing Ideas subscribers earlier this week.
