Takeaway: TWTR, VFC, RRC, CACC, WYNN, MTCH, BL, TSLA, HBI, UAL, SBUX, ADT, MCD, CCL

Investing Ideas Newsletter - 06.20.2018 Russell cartoon

Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we removed Foot Locker (FL), Dave & Buster's (PLAY), Grainger (GWW) and Kohl's (KSS) from the short side of Investing Ideas this week. We also added BlackLine (BL) to the long side. 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

Click here to read our analyst's original report.

Could Adidas be looking to sell Reebok to VF Corp (VFC)? Makes sense. Adi does not need it, and VFC definitely needs a) more footwear exposure and b) a big deal  (and can afford it). I don’t think Adidas would be greedy on price. The only challenge is that Reebok has been German-engineered into Adi’s Infrastructure, which would make for a difficult separation. There are ways around that – so something to consider. I like both stocks here – but for other reasons.  Though it’s bullish for VFC to have M&A targets out there with the scale and global breadth to move the needle should it choose to buy them.

RRC

Click here to read our analyst's original report.

With the Range Resources (RRC) off 80% from the 2014 highs and short interest hovering around ~22%, the market is punitively discounting the corporate governance and macro risks while overlooking the opportunity. At the current price of $15/share, we believe that RRC is pricing in ~$2.50 Henry Hub and ~$55 WTI versus the 12-month strips at $2.85 Henry Hub and $70 WTI. Even if commodity prices fall from the current strip, we estimate that RRC will generate $1.50 - $2.00 per share of FCF in 2020, equating to a FCF yield of ~10%. By 2022, FCF / share could be closer to ~$4.00, a ~25% FCF yield at the current share price.

CACC

Click here to read our analyst's original report.

Following our call on Credit Acceptance Corp (CACC), clients notably inquired about the state of CACC's expected Dealer Holdback payments for its latest Portfolio Program vintages and the increased, unprecedented risk from rising term lengths on loans across both the firm's Portfolio and Purchase Programs. Having directly assessed the prospects of Dealer Holdback payments at the vintage level, and after speaking with management regarding the firm's level of comfort and familiarity with the industry-wide phenomenon of extending term lengths, our findings remain consistent with our original thesis. 

WYNN

No update on Wynn Resorts (WYNN) for this week's Investing Ideas.

MTCH

Click here to read our analyst's original report.

Facebook gave us an entry point on a name that just kept running away from us. Match Group (MTCH) is the industry leader in the dating space with a portfolio of +40 brands.  Most of its business is concentrated around a few brands, particularly Tinder, which may have already achieved escape velocity in terms of its scale, and is also a gamechanger from a monetization perspective.  Further, we expect the online dating industry to expand given both emerging and continuing demographic tailwinds that should collectively increase the lifetime value of MTCH's user base.  Granted, we're not saying that FB isn't a risk, just not to the extent that many would suspect, especially considering that FB doesn't plan to charge for its dating service.

BL

Below is a brief note from CEO Keith McCullough on why we added BlackLine (BL) to the long side of Investing Ideas earlier this week:

Here's another Tech name that we like that is having a #decelerating volume summer-time selloff towards the low-end of its @Hedgeye Risk Range: BlackLine (BL). It's down -2.5% at the time of this signal.

Our Managing Director of Tech Research, Ami Joseph, got more Institutional Investors interested in BL earlier in June when he presented on the long idea for the first time. Here's a summary excerpt from his Institutional Researchnotes:

"Top of the funnel view on BlackLine: Love it. Large new market. DiY (i.e. manual) always the enemy in large new (software) markets. And small disruptors always are told that a large co. will crush them. Doesn’t mean both don’t weigh. They do. But if SAP enters and the market goes to 30% penetration but SAP takes 1/3rd of the market, isn’t that still crazy bullish?"

Parts of Tech is for sale today. I like Ami and I still like Tech!

KM

TSLA

Click here to read our analyst's original report.

With so many critical challenges hanging over Tesla (TSLA) shares, how does the narrative fit the data? We see increasing evidence that the deep pool of demand that Tesla longs rely on is drying up, as product quality problems, competitive entry, and regulatory changes take their toll on a financially vulnerable manufacturer. The recent short squeeze (we look to short squeezes in crowded names) gives us another shot at the largest alpha opportunity in our coverage.

While Mr. Musk may prefer author Iain Banks, we think reading some non-science fiction Faulkner would serve him well. Perhaps As I Lay Dying, in which a character named Cash is slowly building a coffin. Recently, Musk has been terminating employees like the Red Queen, and behaving a bit more like Max on twitter and conference calls. Business pressures look to be driving extreme behavior.

Investing Ideas Newsletter - tsla

Sure, Tesla is still tiny relative to total auto sales, but sales growth certainly doesn’t look bearish to investors…even ones who don’t seem to understand accrual accounting. Tesla just needs to show some institutions persuasive progress on margins. They are wondering about margins if this goes up 5x. We doubt the sustained demand; they don’t.

If Tesla shares slide far enough, they are likely just to keep falling, given the need for access to capital markets and the CEOs pledged shares, among other factors.

HBI

Click here to read our analyst's original report.

Hanesbrands (HBI) stock continues to ramp from the bottom.  We think this is a great opportunity to be heavier in this short.  The market is likely pricing in a quality 2Q relative to expectations.  We have expected the second quarter to look “good” all year, as the company has easy compares, a low bar, and healthier wholesale. Sales in retail look good in May/June, which means HBI’s sales probably look fine today.  However as we get into the second have we think organic growth will slow 250-500bps when lapping the Champion acceleration seen in 2H17(chart below) and wholesale ramp in 4Q17 (innerwear grew for the first time in 6 quarters).  And don’t forget HBI lost Bon-Ton and Just my Size brand recently.  That will be a drag in 2H as well.

Investing Ideas Newsletter - hbi

UAL

Click here to read our analyst's original report.

United Continental (UAL) put analysts in the awkward position of having told investors and PMs that doing “X” (e.g. cutting high cost regional flying) is the way forward, only to find a year or two later that doing the opposite (e.g. more regional flying for connectivity) is the way forward.  Basically, UAL told investors they are going to try harder on things like asset utilization and employee productivity. 

It is typically easier to take fares down than back up, particularly if the goal is to drive higher utilization and ASM growth in a higher fuel price environment.  UAL has often been “capacity discipline” for the industry all by itself, and it has exited that roll.  We continue to think that UAL will be trapped by an unpossible dilemma, choosing between lower fares, higher share, and more rapid cash burn versus higher fares, more rapid share loss, and slower cash burn.

SBUX

Click here to read our analyst's original report.

Below is an update on Starbucks from Restaurants analyst Howard Penney:

I have a firm belief that all great restaurant stocks (LONGS) are driven by accelerating return on incremental invested capital and (SHORTS) driven by declining returns. Starbucks (SBUX) CEO Kevin Johnson inherited a company that has increased capital investments by 350% since FY10 (growing at a 21% CAGR), and this excessive growth is causing returns to decline.  The company Kevin inherited is faced with secular changes in consumer tastes as well as operational issues, and he is resistant to the one thing that would solve all his problems - slowing growth!  Instead, his solution is to talk about accelerating growth!

For the CEO to change the narrative he inherited would be a bold move and take real fortitude.  Instead, he is living in the past and not addressing the issues that are right in front of him!  Stop talking about the Roastery’s and Princi, they are meaningless to the investment thesis for the SBUX!

ADT

Click here to read our analyst's original report.

ADT (ADT) management downplayed the threat of Amazon’s new home services security offering indicating that it was just a different strain of what Amazon already does. We see Amazon as taking incremental steps to replicate more and more of the benefits of ADT's offerings at a considerably lower price. We think that this is a threat the needs to be taken more seriously, not less, especially considering Amazon’s recent marketing effort directly targeted at consumers paying monthly monitoring contract fees.

MCD

Click here to read our analyst's original report.

McDonald's (MCD) CFO Kevin Ozan reiterated at a recent conference that their “biggest challenge from a guest count perspective in the U.S. is clearly the breakfast daypart, and it’s not breakfast products because we sell All Day Breakfast now but it’s the daypart of breakfast.”  We have heard from many management teams saying this is the most promotional spending they have seen in a while, and we don’t believe it is over. For instance, Dunkin’ recently (April 2, 2018) launched their ‘Dunkin’ Go2s’ which is a value promotion focused on the breakfast day-part. This is being launched while 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.

CCL

Carnival (CCL) reports FQ2 earnings next Monday. We expect a Q2 beat which should be enough to raise FY yield growth guidance of 2.5% to ~3%. Factset estimates are not always reliable and while the FY yield estimate is 2.6%, a weighted average calculation of its quarterly yield estimates shows something closer to 3%.  According to our proprietary database, we had been seeing strong close-in Q2 pricing for the Carnival brand in the Caribbean.

However, we expect this yield hike could be the last one for 2018 as 2H Caribbean comps get tougher despite the hurricanes last year, as well as political uncertainty and higher dollar from Europe pressuring European-sourced business.  ~30% of CCL’s revenues are sourced from European passengers.  In addition, we think 2H guidance could be weaker than what the Street expects.  3% yield growth (constant-currency) for 2018 is not only a year of deceleration but would also represent the lowest growth year since 2014.  Our early look into 2019 show further yield deceleration mostly due to lackluster same-store pricing growth.