Below are analyst updates on our twelve current high-conviction long and short ideas. Please note we added Surgery Partners (SGRY) to the short side of Investing Ideas this week. We also removed Twitter (TWTR) from the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
RRC
Click here to read our analyst's original report.
A key reason we were initially attracted to Range Resources (RRC) was the bombed out sentiment in the name: 22% short interest with less than 50% buy ratings from the sell-side. That’s a clear juxtaposition from the company’s industry leading Organic Recycle Ratios and Proved Developed F&D Costs. We think the negative sentiment was well deserved due to the MRD acquisition, low in-basin prices, high leverage, growth at-any-cost, etc. But, we believe that the future looks better than the past. We’ve been asked a number of times whether or not our call on RRC is a call on natural gas. The answer: yes and no. It is difficult to fully decouple an E&P call from commodity prices, but today we think the stock is pricing $2.50 gas and $55 WTI, well below the current strips. If the prevailing “$2.25 - $2.50 gas forever” thesis proves correct, upside would certainly be limited for RRC, but so would downside. Our contention is that with today’s current sentiment ostensibly priced into natural gas levered equities, RRC’s valuation implies that it would be punished more than peers in a lower gas price environment. RRC’s liquids exposure and industry leading full-cycle economics, however, suggest the opposite.
CACC
Click here to read our analyst's original report.
Following our Credit Acceptance Corp (CACC) call, 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.
MTCH
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We’re half kidding on the subtitle. Match Group (MTCH) owns ~45 brands operating in over 190 countries. MTCH is majority-owned by IAC, in turn employs a similar roll-up strategy whereby it either invests behind its acquired properties, or harvests their cash flow after their growth stagnates. It’s a similar to EXPE, but the reason why it works for MTCH is because it’s the industry leader.
BL
Click here to read our analyst's original report.
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, BlackLine (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.
SBUX
Click here to read our analyst's original report.
Starbucks (SBUX) transactions were negative globally, with consolidated transactions down -2% vs. Consensus Metrix -1.4%. Digging into the Americas, the region’s SSS were +1% which was in-line with consensus expectations, but what was troubling was the 4% increase in average ticket. Surely some is due to the attachment of food, but much of it is due to price increases across the menu. Reaching for price while your traffic is decelerating is rarely a good idea! SBUX is an overpriced, over-promoted, over-complicated mess that is spiraling downward, time is ticking for this management team to get their head on straight.
On their supposed “growth engine,” there are clearly deeper problems in China than what SBUX’s management team is letting on. Look no further than MCD’s comments regarding China during their 2Q18 earnings call “There has been an impact within that market on the uncertainty of the trade discussions has -- I mean, clearly, hit the market, which in turn hits consumer confidence. And so we're keeping close to that and adjusting our plans, so we can be competitive there.” SBUX’s problems in China are not just delivery and competition as they state, the economy seems to be facing deeper issues than that.
ADT
Click here to read our analyst's original report.
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.
MCD
Click here to read our analyst's original report.
The change in the first line of the McDonald’s (MCD) quarterly 8-K says it all. In 1Q18, the CEO said, “we continued to build upon the broad-based momentum” and now the 2Q18 press release says, “we’re seeing good performance across our business.” With the sequential slowdown in U.S. same-store sales and negative traffic, the momentum is gone from the text and now the traffic in the stores.
McDonald's reported 2Q18 EPS of $1.99, excluding $0.09 of strategic restructuring charges, exceeding the $1.92 consensus. The company managed the earnings with lower than expected SG&A and an aggressive share repurchase program.
CCL
Click here to read our analyst's original report.
Fundamentals in the cruise-line business obviously matter and here's what Gaming, Lodging & Leisure analysts Todd Jordan and Felix Wang are looking for in the coming weeks (excerpt from our Institutional Research product):
We continue to believe the Caribbean commentary on 2H 2018 will be more cautious than 1H 2018. Hurricane season has started and last week, tropical storm Beryl knocked out power and created widespread flooding to Puerto Rico and the US Virgin Islands. Unfortunately, it just shows how fragile and tenuous the situation still is at some of the most ravaged places.
UNFI
Click here to read our analyst's original report.
How do you make a low and declining margin distribution business even worse? Buy an even lower margin distribution business strangled by debt, mounting pension liabilities, and add in a small dying retail presence!
United Natural Foods (UNFI) announced this morning that they have entered into an agreement to acquire SUPERVALU (SVU) for $32.50 per share in cash or approximately $2.9B (including the assumption of $1.6B in debt) in cash, representing an approximately 67% premium to yesterday’s closing price. This implies that UNFI’s leverage ratio will increase from 1.5x at the end of 3Q18 to roughly 4.5x to 5.0x at the close of the acquisition. Further troubling was the light synergy expectation of $175M (including growth and cost synergies) which represents roughly 1.1% of SVU’s sales (improves to 1.5% of sales if you exclude the Retail Food business). For comparisons purpose, when Sysco proposed the US Foods merger, the synergy expectations were roughly 2.7% of sales. As the advisor, Goldman Sachs and the accounting due diligence teams would have done their best to find as much synergy as possible, making this opportunity look like a disappointment.
ALRM
Click here to read our analyst's original report.
Alarm.com (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 partial 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.
We had been waiting for an opportunity to re-enter a short position in Industrial Supply, and the recent squeeze/rally in shares of W.W. Grainger (GWW) provided such an opportunity.
While many focus on the competitive threat posed by Amazon Business and its ilk, accelerating competitive intensity from independent suppliers and other larger distributors have principally generated headwinds in the last few years.
We believe the volume ramp at GWW has been misattributed to the company’s sales restructuring and market strategy, with the credibility of turnaround efforts likely to suffer later this year.
Distributors will be comping a strong 2H17, supported by tax reform and hurricanes, with headwinds from a decelerating economic backdrop, delayed pricing, high expectations, and cost pressures.
SGRY
Below is a brief note from CEO Keith McCullough on why we added Surgery Partners (SGRY) to the short side of Investing Ideas this week:
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One of our latest Best Idea Shorts (Institutional Research product) is Surgery Partners (SGRY). Here's an excerpt to the intro on that short idea from Tom Tobin's Healthcare team: "While we like the macro trend of inpatient surgeries moving to low-cost ambulatory surgical centers (ASCs), Surgery Partners (SGRY) is not the horse we want to bet on. SGRY's ASC portfolio is low quality compared to peers USPI/THC and SCAI/UNH, and it does not have the balance sheet capacity to make the acquisitions necessary to improve payer and case mix." KM |
