Below are analyst updates on our twelve current high-conviction long and short ideas. Please note we added Tesla (TSLA) and Boyd Gaming (BYD) to the short side of Investing Ideas this week. We also removed Range Resources (RRC) and BlackLine (BL) from the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
CACC
Click here to read our analyst's original report.
Credit Acceptance Corp (CACC) reported second quarter GAAP net income of $151 million with GAAP EPS (diluted) measuring $7.75, both up +52% Y/Y, with EPS coming in well ahead of street estimates for $6.52/share.
Highlight from the quarter (Loan Growth)
With the number of active dealers up +13% Y/Y, unit and dollar loan volumes grew +19.8% and +34.7% Y/Y, respectively. The effects of the firm's recently expanded sales force are clearly manifesting through a higher active dealer count and unit origination volumes; meanwhile, disproportionately higher dollar volume growth is being driven by increasing loan sizes, the combined result of lengthening average loan terms, higher average vehicle selling prices, and the continued emergence of purchased loans as a percentage of total unit volume.
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.
SBUX
Click here to read our analyst's original report.
On Starbucks' (SBUX) 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.
ADT (ADT) has made the case that thanks to lower gross churn % the company can lower SAC $s and still replace the same amount of lost revenue. Unfortunately, it hasn’t worked out so far, and other than a one-quarter pause in SAC spending potentially in June 2018 (which would be felt as lower revenue in the subsequent quarter) we don’t see reason for that to change with rate of churn improvement slower. Net, we are calling b.s. on management’s case for SAC efficiency.
MCD
Click here to read our analyst's original report.
The most important metric in the McDonald’s (MCD) release is the U.S. same-store sales, which increased 2.6% versus Consensus Metrix 3.0%, with a significant decline in traffic. Globally, the MCD trends look solid, but growth is slowing in many markets:
- MCD reported global same-store sales growth of 4.0% and a 0.3% decline in traffic.
- International Lead Markets increased 4.9% vs Consensus Metrix of 4.1%. The release referred to continued strength in the U.K. and France, but Germany was a bright spot in 1Q18.
- High Growth Markets increased 2.4% vs 2.5% Consensus Metrix. China sales have slowed and was called out as having negative traffic in the quarter.
- Foundational Markets increased +6.8% vs Consensus Metrix 5.4%, reflecting an improved performance in Japan.
CCL
Click here to read our analyst's original report.
Fundamentals in the cruise-line business obviously matter and here's what 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.
United Natural Foods (UNFI)
UNFI announced recently 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.
The margin differential between the two entities is drastic, a lot of which (but not all) has to do with the retail business of SVU. For FY19, UNFI’s gross margin is estimated to be about 14.9% while their operating margin is estimated to be 2.4%. Contrasting that against SVU’s estimated gross margin of 9.6% and consolidated operating margin of 1.4% and the operating margin on their Independent business of 1.9%. The rationale of levering up by three-plus turns to acquire a lower margin business with pension liabilities doesn’t hold water. Unless they fear what could happen with the Whole Foods contract (exposure to Whole Foods will decline from 33% of sales to 14%)?
ALRM
Click here to read our analyst's original report.
The outlook for Alarm.com (ALRM) is very mixed. 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 versus monitoring), and they are falling for the industry’s pivot away from residential (i.e. core business) into small and medium businesses.
Peel away some of the layers of Alarm.com’s 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).
GWW
Click here to read our analyst's original report.
While valuation of W.W. Grainger (GWW) bakes in ongoing favorable growth and performance, data continues to support views that the Industrial Distributor market is being disrupted from many different directions.
From resilient independent distributors, to pricing transparency, to competitive entrants, we doubt that the legacy distributor model will prove relevant in coming years. The traditional industry moats are drying-up as customers see an opportunity to switch to competitors. In short, structural pressures are intensifying competition from all sides, while longs cling to the myth of under-penetration.
SGRY
Surgery Partners (SGRY) | BAD HOUSE IN A GREAT NEIGHBORHOOD | 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. Meanwhile, we are several years from total joint procedures being a large enough percentage of total ASC case volume to have a meaningful fundamental impact, despite the favorable policy environment.
From a valuation perspective, we question how much common equity value there is given SGRY's indebted capital structure and lack of free cash flow after minority interest obligations.
TSLA
Click here to read our analyst's original stock report.
Click here to watch a 12-minute video of Industrials analyst Jay Van Sciver's post-earnings Tesla analysis. Below is a brief note from CEO Keith McCullough on why we added Tesla (TSLA) back to the short side of Investing Ideas this week:
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We obviously don't like to come into "event" risk days on Tesla (TSLA) short it after it's under-performed into that event. This is a high short interest SELL idea that needs to be risk managed. Up +10% because the founder said sorry to some journos and continues to tell a story we think is littered with manufacturing and margin risks heading into 2019, sold to whoever wants to chase it here (with no apologies). Jay Van Sciver remains the only public bear to have timed this right to begin with. He reiterated his Bearish @Hedgeye TAIL risk view on this morning’s Macro Show @HedgeyeTV. KM |
BYD
Below is a brief note from CEO Keith McCullough on why we added Boyd Gaming (BYD) to the short side of Investing Ideas this week:
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Given the recent implosion in the casino stocks, are you looking for some ideas on the short side? I am. But you know me, I'm a stickler for waiting for bounces to short on green! Boyd Gaming (BYD) is a name Todd Jordan recently moved from bullish to bearish on. Here's a summary note from his Institutional Research call to sell the stock: "We fear that the story going forward will revert to bad demographics, stiff competition, and wage pressure, all combining to limit EBITDA growth and possibly deflate the multiple." Yours in generating short selling ideas since 2008, KM |
