Below are analyst updates on our thirteen current high-conviction long and short ideas. Please note we added Alarm.com (ALRM) to the short side 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 (TWTR) returned to +20% revenue growth in 1Q18, well before even we were expecting. Management concurrently tempered 2018 expectations, guiding to a growth trajectory comparable to the year it restructured, which not only defies typical advertising seasonality from 1Q to 2Q, but doesn’t make sense considering that its “broad-based recovery” didn’t really start until 4Q17.
TWTR should be able to beat estimates barring a sharp deceleration in both Autoplay and legacy CPC growth, especially with nonO&O becoming less of a drag into 2H18 as TWTR anniversaries the TellApart deprecation.
Granted, we’re not sure how long TWTR can sustain its current pace of elevated Autoplay growth, but 2018 sets up favorably.
VFC
Click here to read our analyst's original report.
VF Corp (VFC) reports on July 20th. Consensus estimates EPS of $0.33 in FQ1 while we are modeling a couple of cents of upside. We think the Street is too conservative modeling the contributions from recent acquisitions. The change in the company’s fiscal year also provides an opportunity that consensus has mis-modeled. The Outdoor division has had significant momentum driven by retail store growth, distribution growth, investments in marketing programs, and e-commerce. Several of VF Corp.’s largest customers have also cited strength recently with The North Face and Vans. VF Corp. has one of the best (and most stable) earnings/cash flow upside algorithms in larger cap retail.
RRC
Click here to read our analyst's original report.
On 6/29/19, Ascent Resources announced it had acquired 113,400 net leasehold acres in the Utica Shale for $1.5B from Hess, CNX, Utica Mineral Development LLC., and an undisclosed seller. Ascent’s purchase is the first such acquisition of Marcellus / Utica drilling rights since EQT announced it would acquire Rice Energy in June 2017.
The purchase is significant for Range Resources (RRC) as it establishes a value for northeast gas-weighted assets that an informed third party would pay at current commodity price levels. A mark-to-market transaction is something we outlined as a potential catalyst for Range. This transaction is particularly notable for the company as it looks to get creative with its excessive drilling inventory in its SW PA acreage position.
The bullish acreage valuation bolsters our case for RRC fair value = $25 - $30 / share.
CACC
Click here to read our analyst's original report.
The narrative of Dealer Holdback depletion can be easily dispelled, while extending term risk is an industry-wide phenomenon that Credit Acceptance Corp's (CACC) management is well positioned to deal with. In sum, we remain adamant on the key thesis points as originally outlined.
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
IS BLACKLINE (BL) JUST FACING TYPICAL EARLY ADOPTION HEADWINDS? We pay close attention to market penetration curves; TAMs are often ill-defined either by a paid consultant, or a broad-strokes prognostication, or done as a rough back of the envelope napkin math by companies themselves. In this case, BL is so small, and the problem they solve is so large and so manually driven (historically) that for now we think we will err on the side of management’s Napkin.
HBI
Click here to read our analyst's original report.
In recent discussions with investors, people have been asking whether we think Hanesbrands (HBI) can grow organically in the long run, implying it is more likely today than it was 6-12 months ago. Our answer is decidedly NO.
Management is selling a “sell more, spend less” strategy. That doesn’t really exist in the consumer world, since selling more means creating better products, creating lower cost products, or branding and marketing to make people want your product more than competitors. All of which require investment. That investment is what HBI has foregone as it has done acquisitions.
The company may put up a quarter or 2 of organic growth here or there, but we have high confidence that it will not grow over the long term. HBI’s wholesale distribution doors are declining, and its losing share in the mass channel to branded competitors and private label. The only growth areas are the Champion brand, and Amazon. Champion however, is small relative to the whole, and it now has to try to grow against significant increases in distribution and brand popularity seen in the last 12 months. Amazon has been a growth channel, but now Amazon’s Prime Day is featuring 7 days of sales on its own private label apparel brands, demonstrating its commitment to growing sales in its own brands, which compete with Hanes and Champion on the site.
We continue to think that without a significant change in strategy, which would come with a much lower margin structure, HBI is structurally impaired when it comes to growing its business organically.
SBUX
Click here to read our analyst's original report.
The biggest revelation that came out of the recent Starbucks (SBUX) presentation was the CEO talking about why he is going to be different from the founder. Unfortunately, in the end, he didn’t say much. Kevin Johnson says his tenure as the Starbucks CEO will be different for three reasons.
- “I tend to be much more data driven and analytical, and I'm bringing that to Starbucks. But I'm also very appreciative and respectful of the creative and the emotional aspects of the brand.”
- “I tend to bring a much more disciplined approach to picking the priorities. And that's because in my experience at scale, if you pick the right priorities and you put the resources and energy behind them, you move the needle.”
- “I believe in a distributed leadership model, transitioning from a hub-and-spoke leadership model to a distributed model where I unleash the creativity, the power and the energy of a world-class leadership team and that we get more parallelism and more agility in the innovation we're bringing to market.”
So, the old Founder/CEO wasn’t analytical, data driven or disciplined? WOW! I would love to know who wrote that part of the speech and if Kevin got a call from Howard last night! The bottom-line is that SBUX needs a CEO that will step up and make some bold changes and that seems to be a long way off!
ADT
Click here to read our analyst's original report.
Aging, levered stocks in our universe with risk of disruption, and that face revenue growth challenges, tend to trade with high FCF yields and low EV/FCF multiples. ADT (ADT) is arguably the riskiest among them due to the cap structure (~86% seller). The stock is now ~17x current year unlevered FCF (using GAAP FCF base) which is actually much closer to the higher end of the range of where this group trades. We see considerable downside risks as easy y/y revenue comps come to an end (2Q), SAC rises, churn improvement slows, the de-levering process takes longer and costs more than bulls appreciate, and GAAP FCF suffers.
MCD
Click here to read our analyst's original report.
A main point on our McDonald’s (MCD) short thesis 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.
CCL
Click here to read our analyst's original report.
In-line with Carnival's (CCL) historical strategy of disposing 1 or 2 of its oldest ships, the company sold its Holland America’s Prinsendam to Phoneix Reisen and according to sources, may have sold P&O UK’s Oriana to an unnamed buyer. The sales prices were not disclosed.
As a result of these transactions, CCL may benefit very slightly in net yield mix starting in July 2019 but given its large scale, it will not materially impact CCL’s profitability. Prinsendam sails in Europe of ¾ of the year and we expect Phoenix Reisen to keep it in Europe year-round once the transition begins in July 2019. Oriana is homeported in Southhampton, sailing to the Med, Canary Islands, and the Baltic.
Most importantly, it’s very unlikely these ships will be scrapped since they’re not that old, which means they don’t impact the accelerating supply growth picture in 2019, particularly for Europe. Our calculations show that Europe industry capacity growth could double from 2018’s growth rate in 2019.
UNFI
The following is a truly remarkable exchange between United Natural Foods' (UNFI) management team that was trying to hide a break down in the business from the Wall Street community:
Edward Kelly of Wells Fargo says: “your guidance went up by about $0.10 and you did not previously contemplate a $0.27 benefit from the accrual change, which basically suggests that the guidance went down by about $0.17…Is that the shortfall in Q3? And is that related to the underlying gross margin? Just some color there I think will be helpful for us.”
At this point of the call, UNFI CFO Michael Zechmeister, was asked numerous questions about an accounting change and was struggling to figure out how to get out of the mess, so he could only repeat what Ed stated: “I think what you suggested is $0.27 in Q3, is that what you're asking?”
Then Edward Kelly of Wells Fargo had to ask the question again: “Well, $20.9 million in incremental EBIT wasn't contemplated in the guidance when you gave it last quarter, right? That's about $0.27. You've raised by $0.10, so it implies about a $0.17 shortfall and I'm just kind of curious as to what's driving that?”
At this point the CFO has a complete break down when he says “Yes, I'm not sure that we see it that way. We see it more as a timing issue than it is anything else.” And then when pushed again, Mr. Zechmeister could only repeat himself: “Well, yes. I'm not sure we look at it that way. And I think that the color that we provided in our script is the color.”
At the end of this exchange, a rational person can only conclude that management was trying to cover up a massive decline in gross margins stemming from significantly higher inbound freight costs, inefficient distribution centers and higher labor costs. Did the management team of UNFI think shareholders and the broader Wall Street community were going to reward them by making a non-cash accounting change?
ALRM
Below is a brief note from CEO Keith McCullough on why we added Alarm.com (ALRM) to the short side of Investing Ideas earlier this week:
|
Looking for "Tech" names to short on green on decelerating volume? Today's @Hedgeye SELL call is brought to you by Technology analyst Ami Joseph and Alarm.com (ALRM). Here's an excerpt of Ami's recent Institutional Research note on ALRM: "The plus is that they are the R&D lab for the industry and they get paid for it. The negative is that they believe AMZN/GOOGL are part of a different market (DIY vs monitoring), and they are falling for the industry’s pivot away from resi (i.e. core business) into SMB (small but has potential)." Sell on green, KM |
