Below are analyst updates on our twelve current high-conviction long and short ideas. Please note we added W.W. Grainger (GWW) to the short side of Investing Ideas this week. We also removed VF Corporation (VFC) from the short 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 (TWTR) has suspended over 70M accounts: The Washington Post reported that TWTR is suspending over 1M accounts per day, which is 2x more than its usual pace. The article also suggests that 2Q18 MAUs may decline as a result of the crackdown, although it also quotes Del Harvey (VP of Trust and Safety) as saying that the crackdown hasn't had "a ton of impact" on TWTR's active users.
Issue likely due to repeat offenders: The reaction in TWTR shares today suggests the street is questioning TWTR's reported percentages of fake/bot accounts and/or assuming a precipitous decline in 2Q18 MAUs given the sheer volume of cancellations. But we have to remember that these account suspensions are likely due to repeat offenders who've likely created and have had multiple accounts suspended. For context, the metrics above suggest TWTR suspended ~45M accounts back in 1Q18 without any discernible impact on either MAUs or DAUs. So while 2Q18 MAUs may decline given the increased pace of suspensions, we wouldn't expect a major gap down; especially since many of those accounts may have already returned under a different handle.
RRC
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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.
Ascent’s purchased acreage is in Ohio, and future drilling will target the Utica Shale. Although the Ohio portion of the Utica is quality rock, it is likely of lower quality than RRC’s Marcellus acreage. This is evidenced by producers with both Marcellus and Utica assets (Antero Resources, EQT, and Range) deciding to cautiously proceed with Utica development while forging full steam ahead in the Marcellus because of its higher returns.
CACC
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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.
MTCH
Click here to read our analyst's original report.
Below is a brief update on our Match Group (MTCH) long thesis:
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1. OWNS THE SPACE: MTCH is the industry leader in the dating space with a portfolio of 45 brands; many of which were promising competitors that MTCH acquired before they could become material threats. However, most of its business is concentrated around a few brands, particularly Tinder, which may have achieved escape velocity in terms of its scale. Tinder is also a TAM expander from a monetization perspective. 2. DEMOGRAPHIC TAILWINDS: We expect the collective online dating pool to expand given both emerging and continuing tailwinds that should collectively increase the lifetime value of MTCH’s subs. Further, Tinder’s pricing structure should create an incremental near-term ARPU tailwind in North America that should stack on top of the Tinder ARPU tailwinds mentioned above. 3. NEAR-TERM SETUP IS FAVORABLE, BUT MURKY: 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. |
BL
Click here to read our analyst's original report.
Our long-term view on BlackLine (BL):
Love it. This is a large new market. DiY (i.e. manual) is always the enemy in large new (software) markets. BlackLine is 1 of 2 or maybe 3 players providing accounting software that automates ledger closing process and significantly decreases the amount of time and manual labor in this process. The company is ~1% along a penetration curve that realistically will take a very long time to conquer but will make BL a much more valuable company down the road, notwithstanding the short-term pluses and minuses.
The road from 1% to 3% penetration is often long and arduous, no different in this case as they must change the behavior of target customers from using a manual approach to relying on software, as well as create a budget line item that did not previously exist.
Still, small disruptors are always told that a large company will crush them. If a company like SAP does enter and the market goes to 30% penetration but SAP takes 1/3rd of the market, isn’t that still crazy bullish for BlackLine?
SBUX
Click here to read our analyst's original report.
Starbucks (SBUX) made a big long-term bet on China and it’s not helping the investment thesis. Over the last 9-months, same-store sales in China have declined from high-single digits to flat/negative. Management attributed the lack of a good delivery partner as the biggest contributor to the current pace of same-store sales. I have a hard time reconciling this with the current macroeconomic issues in China and other operational issues such as cannibalization.
ADT
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The bull case rests on ADT’s (ADT) “contractual recurring revenue” but churn continues to be a problem. The company reported churn of 13.7%, a 200bp improvement sequentially, but again below the high end of guidance and a slowdown in the rate of improvement relative to the first three quarters of the year.
Taking a step back, we looked at the linearity of churn improvement and compared that to the non-linear operating improvements the company is making. Does it smell fishy? It does.
Why do the churn numbers matter so much? Because ADT’s business model doesn’t make much sense. It costs the company >$5 to purchase $1 of incremental new revenue.
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.
CCL
Click here to read our analyst's original report.
Cruise lines are operating in a yield deceleration environment heading into 2019 which is not a good sign for the stocks. There is particular worry on the Caribbean, which is their bread-and-butter business. Aggressive management stock buybacks may be a near-term solution but may not be sufficient. Valuations are still within a yield deceleration range. The higher dollar and higher fuel price headwinds will persist. We remain cautious on the industry and Carnival (CCL).
UNFI
Click here to read our analyst's original report.
United Natural Foods (UNFI) GROSS MARGIN IS DETERIORATING: Gross margin is where all the drama is, as stated above, management tried to slip in a positive $20.9M change in accounting for its revised calculation for its accrual for inventory purchases. UNFI took the benefit mostly from the first 9 months of FY18 and some from FY17 to positively impact a single quarter, and expects the street to run-rate gross margins at this new elevated level. In reality, excluding this non-cash accounting adjustment, gross margins actually declined 84bps (management trying to pitch GM’s down just 6bps) versus consensus estimates expecting a decline of 35bps, this is a huge miss! If you wanted to be generous (we aren’t feeling generous this morning) you could spread the credit for the accounting adjustment across the first three quarters of the year it would be a $7M impact per quarter and would have brought gross margin in 3Q18 to 15.1%, down 32bps YoY.
ALRM
Click here to read our analyst's original report.
Peel away some of the layers of Alarm.com's (ALRM) business and you quickly find less good stuff like lackluster non-M&A growth, or fast growth in subs but little translation into revenue or operating cash flow.
On the not-so-hot side, ALRM has a high concentration of clients, clients made increasingly nervous by a rapidly changing market landscape, and ALRM is a mismatch as long term savior with both unimpressive product cadence + innovation, but also with an economic model that pits them as owners of the subscribers (rather than as a contracted software provider).
The Vivint exit from the platform perhaps shows the justification for grabbing that original position as owner of subscriber versus software provider (much higher economics) however, investors take note, the risk profile of serving this industry as an owner of subscribers places ALRM squarely in the disruption path and the inflated economic position will be vulnerable.
Net, the risk profile on this asset is high, the valuation doesn't make it easy, and on balance this stock shifts from 'previewed Bullish' to strongly Bearish.
GWW
Click here to read our analyst's original report.
This is a brief note from CEO Keith McCullough on why we added W.W. Grainger (GWW) to the short side of Investing Ideas:
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Our independent research view was that GWW would have a good Q2 and then slow in the back half of 2018. That view has not changed. Our Industrials analyst Jay Van Sciver reiterated that on our Morning Call (our team research meeting, daily at 7:45 AM EST). The price of the stock has changed, so I see this as an excellent short-selling opportunity at a much better price. Cover on red; Sell on green. Rinse & Repeat! KM |
