Below are analyst updates on our twelve current high-conviction long and short ideas. Please note we removed Hanesbrands (HBI) from 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) Long Thesis Summary:
- Business Model: Primarily a CPC ad model, which requires user interaction with ads to generate revenue (excluding Autoplay, which is more of a CPM product).
- Analysis: TWTR’s CPC model became structurally defunct after pushing too many of its users away with surging ad load. TWTR was forced to restructure, in turn deemphasizing CPC in favor of Autoplay.
- Outlook: The restructuring created more runway for Autoplay, which we estimate monetizes at a higher effective CPM and requires less ad load. Further, Legacy CPC should become less of a drag in 2018.
- Setup: The recent surge in the stock leaves little room for anything but another big beat on the 2Q print/3Q guide. We expect to be the case.
- Position: Long likely through 2018, reassess after
Model Now Built for Sustainable Growth: TWTR’s prior monetization strategy was unsustainable since its two growth drivers were working against each other (user growth & ad load), and the model failed in 2Q16. TWTR has since used the restructuring to right-size its model in terms of ad load while also prioritizing Autoplay, which reduces its dependence on ad load and takes pressure off its MAU growth.
VFC
Click here to read our analyst's original report.
VF Corp (VFC) reports 1Q18 earnings next Friday. We’re keeping VFC on a short leash given recent price and sentiment changes, but remain bullish heading into the print. Two additional sell side analysts upgraded the stock this week heading into the earnings. We continue to have confidence in VF Corp’s ability to beat and raise EPS expectations and we remain ahead of consensus numbers for the upcoming quarters. Although not the crux of our call, we think that VFC will remain on the offensive and look to be active in the M&A market. VFC has done six deals since May 2017 and we aren’t one to bet against VFC when it’s in deal mode. What if VFC were to divest Lee/ Wrangler jeans to GIL? There’s a thought.
RRC
Click here to read our analyst's original report.
Concern about gas prices has been a common refrain among investors about our Range Resources (RRC) long thesis. Much has been discussed about the wave of associated gas coming out of the Permian Basin and also increased production in Appalachia.
While we’d acknowledge the point on the Permian, we’d contend that there are serious logistical constraints to get that production to market until at least late 2019 when KMI’s Gulf Coast Express pipeline comes online. Since our call, the data points out of the Permian continue to support this - see Plains, C&J Energy Services, Kinder Morgan, and Halcon Resources recent announcements, which include rig drops, deferring delivery of frac fleets, construction of a 1MMb/d crude pipeline, construction of a 2 Bcf/d gas pipeline.
We think these issues keep a lid on Permian gas production over the near and medium-term. Furthermore, natural gas storage levels remain well below 5 year averages, despite gas production growing ~12% YoY, illustrating the impact LNG exports are already having on the US natural gas market. Demand should only increase as more trains come online over the next 24 months and should provide support for gas prices even amidst a wave of Permian gas.
CACC
Click here to read our analyst's original report.
Credit Acceptance Corp (CACC) is currently among the most reviled companies in the financials space, with both a decimated buyside and sell-side sentiment, partly attributable to a regulatory activist short thesis floated publicly over the course of the last year. Given modest street estimates for 2018-2020, and unaccounted recent sales force growth of 30%, earnings power is on track to exceed expectations over the next 12-18 months and high short interest may find itself at risk for a short squeeze.
MTCH
Click here to read our analyst's original report.
Match Group (MTCH) Long Thesis Summary:
- Business Model: MTCH offers an online dating service via a freemium model, which restricts certain functionality only to paying users. MTCH’s primary brand is Tinder.
- Analysis: Dating has limited barriers to entry, but MTCH has a near oligopoly in the space via its 45 brands, and it generally attempts to roll up promising competitors. However, Tinder itself may have already achieved escape velocity.
- Outlook: Demographic tailwinds should progressively expand its TAM on both a subscriber and ARPU basis over the next +5 years. FB is a risk, but not a death knell.
- Setup: MTCH has a favorable near-term fundamental setup given what we estimate to be relatively conservative 2018 guidance/estimates, but FB will be a near-term overhang.
- Position: Long TAIL bias, but will trade around the setup.
MTCH May Be One of the Better Tail Stories in the Space: MTCH is the industry leader in what is becoming an increasingly tighter oligopoly. However, we suspect Tinder scaled to the point where it has achieved escape velocity, with FB as its only credible threat. Time will tell there, but given FB’s history with its random ancillary ventures, we see its entrance into Dating as a show-me story.
BL
Click here to read the long BlackLine (BL) stock report Technology analyst Ami Joseph sent Investing Ideas subscribers earlier this week.
SBUX
Click here to read our analyst's original report.
Below is a note 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.
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.
MCD
Click here to read our analyst's original report.
McDonald’s (MCD) | THE #1 RULE IN RESTAURANTS – DON’T GET PEOPLE SICK!
The Iowa Department of Public Health (link) is investigating an increase in Cyclospora infections that appear to be connected to consumption of McDonald’s salads. As we have seen with chains in the past, any news about food-borne illness being caused by your restaurant is not good news, even if it is supposedly isolated to a non-core product. This period of time is very critical for MCD as they are working to launch their fresh beef patty. Time will tell to see if this causes a serious disruption in sales, but one thing for sure is that it won’t help them achieve what we believe are lofty consensus estimates!
CCL
Click here to read our analyst's original report.
The growth engine for Carnival's (CCL) North America segment seems to have stalled recently. As we have talked about in our recent cruise presentations, the outlook from our 28,000 itinerary proprietary database for CCL Caribbean 2H 2018 suggests a softer pricing environment than 1H 2018.
There’s a list of reasons why:
- A more crowded Caribbean market
- Tougher comps; and
- A more aggressive promotional environment.
- In addition, consumers may be more hesitant than usual to book for the Caribbean this Fall given what happened with the hurricanes last year.
UNFI
Click here to read the short United Natural Foods (UNFI) stock report Consumer Staples analyst Howard Penney sent Investing Ideas subscribers earlier this week.
ALRM
Click here to read the short Alarm.com (ALRM) stock report Technology analyst Ami Joseph sent Investing Ideas subscribers earlier this week.
