Below are analyst updates on our fifteen current high-conviction long and short ideas. Please note added Match Group (MTCH) and Wynn Resorts (WYNN) to the long side of of Investing Ideas this week. We also removed Tapestry (TPR) 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.
Twitter's (TWTR) Heightened revenue acceleration across the board: Well above our expectations and consensus. Total revenue growth accelerated by 19 percentage points. Both Advertising and Data Licensing segments accelerated double-digits, with ad revenues 10% above consensus and core O&O ad revenue growth accelerating by 21 percentage points. Autoplay video ads remained its largest growth driver, but we also estimate that legacy CPC ad revenue also returned to y/y growth.
TWTR guided ahead of the street for 2Q18 on both EBITDA and implied revenue, but cautioned on 2H18 suggesting a return to 2016 seasonality. We don't see this as anything more than managing expectations on the heels of a considerable 1Q18 beat. Note the mid-point of TWTR's implied 2Q18 revenue growth is slightly below its 1Q growth rate despite what should be another quarter of accelerating growth given the tailwind from the Olympics. TWTR's seasonality comments suggest 3Q18 revenues should be largely inline with what appears to be a sandbagged 2Q18 guide, so we suspect mgmt bought itself some breathing room for its 3Q guide as well.
VFC
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VF Corp’s (VFC) Vans is the largest brand in the lifestyle athletic and skate footwear category. The robust growth Vans reported early this decade was dismissed by some as a fashion cycle, but Vans has a growth rate that's been mid-single digits or better since the recession. Zumiez, a teen board sport retailer, reported Q1 earnings this past week. Zumiez was a rare retailer that reported accelerating top line sales in the first quarter after a strong holiday period.
Management called out the footwear category being a sales driver. On Zumiez’s website Vans dominates the “most popular shoe” search results. Genesco also reported earnings this past week and Journey’s, a footwear retailer for teens and young adults, was the company’s top performing brand. Genesco said the retro athletic and lifestyle athletic momentum that Journey’s experienced during the holidays continued into the first quarter and accelerated so far in the second quarter.
After Foot Locker reported earnings two weeks ago we pointed out that Vans was named as a top sales driver by Foot Locker’s management. Vans is just one of more than 30 brands that VF Corp owns, but it is the largest at ~30% of sales and most profitable. The strong results from Vans’ distribution partners improves the visibility we have in our VF Corp. long thesis.
RRC
Click here to read our analyst's original report.
Range Resources (RRC) retains some of the most economic and productive acreage in the US E&P space, with decades of drilling runway. However, the stock is trading down 80% since 2014 highs (short interest at 22%) due to years of value destruction. The worst of which was a $4.4B equity financed acquisition of MRD in 2016. The transaction gave MRD holders 31% of the proforma company and eviscerated $4.2B of RRC’s market value.
Unlike other gas producers, RRC has the assets to dial back CapEx and still grow, profitably. On a 1, 3, & 10-year basis, RRC has proven again and again that it is a top tier producer with quality rock and a long development bench in SW PA. The evidence is in industry-leading (measured against both gas & oil E&Ps) proven developed F&D costs and organic recycle ratios. Yet, RRC trades like a Tier 3 producer. At $15/sh, we believe RRC is pricing in $2.50 Henry Hub and $55 WTI (vs 12-month strips of $2.85 HH and $70 WTI). Even if commodity prices fall from the current strip, we estimate RRC will generate $1.50 – 2.00 per share of FCF in 2020, equating to FCF yield of ~10%. By 2022, FCF/sh could be closer to $4, implying a ~25% FCF yield at current share prices.
CACC
Credit Acceptance Corp (CACC) has been piloting extended-term loans for several years, at maturities far greater than the averages that define its most recent vintages. With several years of collections data originating from these extended-term pilot programs, the firm has closely studied the behavior and performance of these longer-dated loans, conditioning its forecasting methodology accordingly. The firm's seasoned management team, exemplified by the foresight to test extended-term loan performance in anticipation of late cycle phenomena, and its robust risk management framework give us confidence in Credit Acceptance's ability to navigate these heightened, industry-wide risks.
WYNN
Below is a brief note from CEO Keith McCullough on why we added Wynn Resorts (WYNN) to the long side of Investing Ideas earlier this week:
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Wynn Resorts (WYNN) down -5.5% today with some Old Wall analysts saying the VIP Business disappointment in May means they are going to miss the quarter. But our Gaming Ace, Todd Jordan, thinks it's all due to "luck" (at the casino). When the analysts normalize for low hold, it will be a beat. Buy on red, KM |
MTCH
Below is a brief note from CEO Keith McCullough on why we added Match Group (MTCH) to the long side of Investing Ideas earlier this week:
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Given the recent correction on FB fear, our Internet analyst, Hesham Shaaban, is going bullish on Match Group (MTCH). The stock is -5% today signaling immediate-term TRADE oversold within our Bullish @Hedgeye TREND view. Here's an excerpt to Shaaban's Institutional Research note from this week: "We don't see FB as a material risk, but it could remain an overhang on the stock until MTCH shows that it can maintain its current pace of sub adds after FB's dating service goes live. In the interim, we believe 2018 guidance/estimates are relatively conservative, even before considering any product enhancements that the company plans to launch later this year." Buy on red, KM |
TSLA
Click here to read our analyst's original report.
The foundation of the institutional bull Tesla (TSLA) thesis is unwinding. With Elon Musk looking more irascible, truculent, and unhinged, the longs risk losing their Edison. With the brand and Model 3 conflated with the TSLA share price and financial results, institutional longs risk watching the perceived deep pool of demand drain with a weaker brand. The claim of exceptional innovation fails with a dysfunctional factory that was supposed to be the ‘product’, with Model 3 suffering from inferior production quality. Fixing these challenges requires fixing Tesla’s manufacturing, a process that would require years that cash burn, tax credit expiration, and competitive entry do not currently afford.
HBI
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Hanesbrands' (HBI) lack of brand investment and lack of manufacturing competency have put it in a tough spot. It can’t win the sales on the marginal consumer with relative pricing or consumer preference. Hanes has a loyal following of older consumers that are becoming a smaller and smaller portion of consumption.
The next generation of consumer however walks into WMT or TGT and looks at their options; on the margin more will choose Gildan/private label due to the price difference. HBI cannot reduce price to drive sales since it cannot compete on manufacturing, so reduced price would reduce margins without gaining share, especially since competitors would just match any price drop. The only way Hanes can prevent share loss is to make the consumer want to buy its product more than competitors. That means R&D, higher quality materials/manufacturing, marketing, and advertising… all things that Hanes has deliberately not invested in as it did acquisitions, to drive higher margins (and a higher stock price). That is the problem of the strategy for the last 5-10 years. The brand has lost quality and lost relevance. Hanes could maintain or even grow share, but it would have to be at a margin structure much lower than today. A margin structure that would perhaps push it to the edge of bankruptcy.
UAL
Click here to read our analyst's original report.
Below are three takeaways on our United Continental (UAL) short call:
WHAT DOES UAL REALLY EARN? Usually, one would look to LT free cash flow to equity as a sign of underlying earnings. Given likely low quality elements like the lease valuation reserve, advance purchase of miles, one-time item definitions, and FFP account, a high multiple seems unlikely.
MANAGEMENT STABLE GENIUSES? WON LITTLE: Realistically, management finds itself in a winless scenario. That said, a fare war with a company that doesn’t even rely that much on fares is not-so-clever. Is there a clear strategy at UAL? If it is regional flying, isn’t that, partly, reversing moves of prior management who wanted to up-gauge?
THE ENVIRONMENT HAS RARELY BEEN BETTER: If UAL couldn’t turn around in the last 6 years, what makes investors certain it could turn in a less robust environment. Worse, some of the ‘cookies’ on the balance sheet look increasingly depleted. Maybe the next management team will figure it out…
SBUX
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According to The Founder's Mentality, as a company expands, growth creates complexity and complexity is the silent killer of growth. The Starbucks (SBUX) business model is very complex and the company is in the process of removing some complexity from the business model. At the same time, the company is trying to grow the base of heavy users (loyalty members), which accounts for a majority of the SSS growth. This is a delicate balancing act that will take time to unfold. We continue to see risk to SBUX’s financial performance in FY18.
FL
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We presented a black book our Nike (NKE) short idea this week. Generally a weak NKE means a weak Foot Locker (FL), so our negative view on Nike is not good for FL.
One element of the Nike bull case is FL management’s bullishness on product flow and sales in the second half of the year. Management stated the expectation clearly on the 1Q call.
We’d point out, as shown below, that FL management has this exact same bullishness every year. This year is not unique. Sometimes the sales come, and sometimes they don’t. The part to be aware of is that the company has no idea if the sales will come, nobody truly does.
That’s the risk when management is creating the expectation of acceleration with its commentary on something it has no visibility on.
ADT
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Among the research points we uncovered in the last few months of our work on ADT (ADT) is a small but relatively salient point we wanted to share with you. It has come to our attention that the engineers whom ADT was using from 2014-2017 to generate its next generation solutions all ended up working at Amazon while ADT wound up stuck with the very software it was trying to displace.
KSS
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Kohl's (KSS) has seen a big squeeze I recent weeks alongside of much of high short interest retail. We could be seeing some rotation even within consumer (staples and restaurants weaker). Retail’s 2Q should look good with easy compares and help from calendar shift, compares don’t get hard until late July into August. With those hard compares in 2H and a hurt from the calendar shift, one would think you want to be out of owning most retail names before guidance on a 2Q print. KSS looks a lot like it did in early 2015, with the company out on the road selling the story after 1 quarter of great performance (4Q17). Shortly after the stock collapsed when reality set in that comps would not continue at that rate. We think the reality sets in again on KSS in 2H 2018.
GWW
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While valuation of Grainger (GWW) bake in ongoing favorable growth and performance, data continue to support views that the Industrial Distributor market is being disrupted from many different directions. We believe that persistent gross margin pressure will preclude equity outperformance, and that recent share price outperformance is an opportunity to enter a well-supported structural short. From resilient independent distributors, to pricing transparency, to competitive entrants, we doubt that the legacy distributor model will prove relevant in coming years.
MCD
Click here to read our analyst's original report.
McDonald's (MCD) is drifting away from $1 coffee and trying to focus on more premium ‘barista style’ coffee with the roll-out of new espresso machines.
Our other main point is that complexity is the silent killer of growth. The U.K. market is a great example of keeping it simple and that has proved itself as the right thing to do, as the market has 12 years of consecutive positive quarterly comps. Kevin Ozan explained the simplicity of the U.K. market best at a recent conference, “they're not the most innovative. But they're one of the best markets at just executing their plan and so a lot of their plan, someone wouldn't get real excited about because they don't have a ton of new exciting products or anything like that but once they go do something, they just execute against it really well.” Sure, brand equity could be different across countries, but one thing is for sure, the U.S. needs to take note of the simplicity and calculated operations of the U.K. business.
