Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note we added Dave & Buster's (PLAY) to the short side and Carnival (CCL) to the long side of of Investing Ideas 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'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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Canada Goose reported a stellar quarter this week with revenue up 140%. Some may read that as bearish for VF Corp (VFC) given Goose is a North Face competitor. At a basic level this is true, but you have to remember that North Face has a long history battling tough competition with the likes of Columbia, Patagonia, Arc’Teryx and Canada Goose. Strong growing competitors are not new for North Face and VFC. We think soft North Face performance can be expected, but the earnings model will still work and beat expectations via outperformance in VFC’s other brands, while layering on acquisitions that will also exceed expectations. The punchline is GOOS will continue to grow, but we don’t think it’s a concern for VFC’s earnings over the foreseeable future.
RRC
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Within a sector that has earned a reputation for value destruction, Range Resources (RRC) has been one of the worst offenders. In the past 5 years, RRC checked the usual boxes of E&P value destructive behavior such as excessive debt and equity issuance to fund production and reserve growth. But what separates RRC from its peer group was the $4.4B equity financed acquisition of Memorial Resource Development (MRD) in 2016. The transaction gave MRD holders 31% of the proforma company and eviscerated ~$4.2B of RRC’s market value.
Factors outside of Range’s control have further weighed on the market’s perception of the company. These include low benchmark natural gas prices and insufficient midstream takeaway capacity in Appalachia, resulting in wide basis differentials; both of which have improved markedly since the trough of the commodity down cycle. Lastly, fears of Permian associated gas production, driven by oil, not gas economics, continues to be the monster under the bed.
CACC
Click here to read the Credit Acceptance Corp (CACC) stock report Financials analyst Josh Steiner sent Investing Ideas subscribers earlier this week.
WYNN
The big Macau GGR miss for May continues to hit Wynn Resorts (WYNN) the most, driving the stock down again last week as more sell siders lower their estimates for the upcoming quarter. We think the lowering of estimates presents a nice long trade opportunity in shares of WYNN.
You see, WYNN is quite exposed to Macau VIP and that segment is being blamed for May’s shortfall. In addition to the Q2 earnings implications, a narrative that VIP is suddenly contracting is also being formed. Another concern is that the World Cup will hurt VIP volumes in June/July.
But what if the poor VIP performance is mostly due to a low hold percentage? That’s our contention – the casinos, and likely Wynn’s 2 casinos, simply experienced some bad luck on the tables. Hold percentages are disclosed in quarterly earnings press releases and analysts and companies adjust EBITDA to reflect normalized hold and the stocks usually, and appropriately, trade on whether that number was a beat or a miss.
Separately, on the UnionPay issues in Macau that could have some impact on the premium mass side, WYNN is probably the least exposed to any major dislocation we’ll see in total Macau wide GGR (given their high VIP presence).
MTCH
Click here to read the Match Group (MTCH) stock report Internet & Media analyst Hesham Shaaban sent Investing Ideas subscribers earlier this week.
TSLA
Click here to read our analyst's original report.
For consumers, large losses will be associated with the Model 3. Companies losing money are often assumed to cut corners, lacking the financial wherewithal to invest in quality products. If more average consumers worry about Tesla’s survival – and ability to service the vehicle – the downside could accelerate ‘exponentially’. Quality issues have been well reported, and a declining share price would hurt the Tesla brand.
HBI
Click here to read our analyst's original report.
Wal-Mart had an open call event for its suppliers yesterday. The call confirmed WMT’s commitment towards bringing manufacturing back to the US. This initiative was announced 5 years ago. And WMT believes it to be about 90% of where they thought they would be half way through the designated time period.
This is an important callout for Hanesbrands (HBI). We think Wal-Mart will continue looking for private brands that it can source affordably in the US. It seems to have already done this in socks. Furthermore, it would be difficult to bring the core underwear category to the US production due to the variable labor needs, but with such a large commitment by WMT, can it lose more business on the edges like we saw Just My Size?
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.
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.
SBUX
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The Starbucks (SBUX) activism story is gaining traction as the stock has underperformed the S&P by 38% and 23% over the last 1 and 3 years, respectively. On a 5-year basis the stock has outperformed the S&P 500 by 1%, but this is not enough to keep the activist rumors from coming up from time to time.
We believe the best thing that could ever happen to the SBUX CEO, Kevin Johnson, is for an activist to appear! Given the current state of the business (maintaining a complex growth profile, while trying to fix the business), is a recipe for failure, and could potentially mean that Kevin Johnson will not be the CEO of the company by fiscal year 2020.
FL
Click here to read our analyst's original report.
The world’s preeminent soccer tournament began this past week. The major athletic brands all increase their marketing spend to feature their brands, sponsored athletes and new products during the month long World Cup.
Adidas spends $80M to sponsor the World Cup. Nike on the other hand concentrates its marketing spend on the athletes participating in the tournament. 65% of the athletes are estimated to be wearing Nike shoes on the pitch while 27% are estimated to be wearing Adidas. SG&A spend usually deleverages during the World Cup quarter for both companies due to the additional marketing expenditures. Adidas expects to sell more than the 8 million jerseys it sold in 2014. It even expects to sell one million jerseys in the US, despite the fact that the US team failed to qualify. Nike said it received three million preorders for its team Nigeria jersey, overwhelming its inventory.
Foot Locker (FL) does not feature any World Cup or soccer products on its US website and a only a small amount on its European and non-Foot Locker US websites. To the extent that soccer and World Cup marketing becomes the focus for the next month in the sporting world, Foot Locker will not be a beneficiary.
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.
We’ve talked about how ADT is underprepared for the shift in security from service based on labor to service based on software. It doesn’t help when the engineers they were relying on decamp in favor of the biggest existential threat facing their market today.
KSS
Click here to read our analyst's original report.
Credit quality metrics from the credit card trusts are still improving on the margin. COF and SYF both saw rate of change improvements in delinquencies and charge offs in May. Obviously the positive consumer environment is having an impact, low unemployment, high economic growth, and tax cuts are putting more money in the consumer wallet. I don’t think we are about to see an overall reversal in the cycle, however given the comparisons, it could be 5-8 months before credit metrics really start to get worse again.
The improving credit trust metrics mean credit EBIT for Kohl's (KSS) is likely in a holding pattern for now around zero barrier, that’s plus or minus $5mm in a given quarter. No clear tailwind or headwind in the next two quarters, which is bullish on the margin (and in the stock). The focus of the story is all on comp and gross margin trajectory – that’s where I think the company will miss.
GWW
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Highly specialized, service-oriented independent distributors provide superior service and a willingness to accept lower margins to survive. Price sensitive customers without a need for technical expertise are apt to migrate to low touch, Amazon Business/Zoro like services. Grainger (GWW) may be left stranded as the industry evolves.
MCD
Click here to read our analyst's original report.
McDonald's (MCD) has been on a great run from 3Q15 to now, starting with the simplification of their menu, introduction of All Day Breakfast (ADB), the trial of many value platforms, store remodels, and roll-out of Experience of the Future (EOTF), just to name a few things they have been working on. But the thing is, all companies go through cycles, and we believe MCD is about to enter a down-cycle.
PLAY
Click here to read the Dave & Buster's (PLAY) stock report Restaurants analyst Howard Penney sent Investing Ideas subscribers earlier this week.
CCL
Below is a brief note from CEO Keith McCullough on why we added Carnival (CCL) to the short side of Investing Ideas earlier this week:
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Cruise stocks bounced off the Old Wall downgrade last week so now we have a much better spot to send you another SELL signal as Carnival (CCL) bounces to the top-end of the @Hedgeye Risk Range. *Process Note: do not short things on the down-move at the low-end of the @Hedgeye Risk Range! As a reminder for both CCL and RCL, Hedgeye (Todd Jordan and Felix Wang) is below Consensus for 2018/2019 EPS - 2018 and 2019 margins are too high and 2019 yield estimates too aggressive. KM |
