Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we added Extended Stay America (STAY) and Gildan Activewear (GIL) the long side and Shake Shack (SHAK) 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
CACC
Click here to read our analyst's original report.
In the recently report quarter, Credit Acceptance Corp (CACC) printed adjusted EPS of $6.95, up +33% Y/Y, post a near +7% of street expectations for $6.52. Moreover, economic profit, calculated as the firm's dollar return on invested capital in excess of its cost, increased +24.8% Y/Y in 2Q18, driven primarily by a larger loan book and tax reform effects.
VINTAGE PERFORMANCE:
Using the latest expected collections figures, the resilience and robust nature of the firm's loan book remains ever present.
MTCH
Click here to read our analyst's original report.
As a reminder, we don't see Facebook as a material risk given that online daters tend to use multiple apps, and more importantly, Tinder and anything FB will be debuting will likely be different use cases (no, we don't mean a hook-up app). Still, the next big upside catalyst is refuting that bear case narrative, which we expect to occur when Match Group (MTCH) proves it can sustain its sub-add trajectory after FB's dating service goes live.
STAY
Below is a brief note from CEO Keith McCullough on why we added Extended Stay America (STAY) to the long side of Investing Ideas earlier this week:
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Looking to add to you "Bond Proxy" exposure on red? Extended Stay (STAY) not only has a nice dividend, but Todd Jordan's Leisure and Lodging Research Team likes the stock. Here's an excerpt from his recent Best Idea Blackbook (Institutional Research product): "The valuation disconnect between C-Corp and REIT peers remains a big opportunity for STAY. Under our modeling and estimates out to 2021, SOTP analysis suggests STAY is worth ~$27 today." Buyem on red. Then you don't have to chase them on green, KM |
GIL
Below is a brief note from CEO Keith McCullough on why we added Gildan Activewear (GIL) to the long side of Investing Ideas earlier this week:
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Rather than chasing alongside the crowd on green, here's a stock I've been waiting and watching on that you can buy on red today. Gildan Activewear (GIL) is a name that Brian McGough's Retail/Apparel team recently added to their Best Ideas (Institutional product) list. Here's an excerpt that summarizes the dynamism within GIL's current margin structure: "GIL has recently invested in new capacity that has temporarily lowered RNOA, and is beginning to backfill demand in both its screen printing business (where it has 70% share of t-shirts, for example), as well as in its branded business in US mass channels (displacing HBI along the way). That accelerates growth, lifts margins, and leverages fixed assets. |
SBUX
Click here to read our analyst's original report.
Starbucks (SBUX) | GLOBAL TROUBLES
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.
MCD
Click here to read our analyst's original report.
McDonald’s (MCD) did not change any components in the outlook section of the 8-K.
There was nothing in this quarter to change our short thesis. We believe that the trajectory of sales trends around the world for MCD will continue to slow. Another red flag to be raised is the significant growth in average check (menu mix and price). This is a long-term negative for a value based brand like McDonald’s. The combination of slowing sales trends and a stock trading at 14x NTM EV/EBITDA we remain SHORT MCD.
CCL
Click here to read our analyst's original report.
It has been a rollercoaster ride for the cruise stocks this earnings season. Carnival (CCL) came first with a disastrous outlook on its North America segment, particularly the Caribbean, with lower pricing and occupancy for 2H 2018. Then, RCL made a tremendous intraday reversal from close to its 52-week low on earnings day despite a slight miss on Q2 yield Street expectations and uninspiring Q3 yield guidance as investors focus on the Silversea integration heading into 2019. Finally, NCLH printed the best quarter among the Big 3, raising yield guidance above estimates, stemming mostly from Bliss and their US-sourced business to Europe.
On the cost side, RCL and NCLH sees higher costs in 2018 vs 2017 which is pressuring margins while CCL, for now, is still the cost containment leader among the Big 3. Wage inflation, increased marketing costs and higher dry dock costs are mostly to blame. Lastly, headwinds from high fuel prices and a higher US dollar persist, which will keep 2019 EPS growth contained.
UNFI
Click here to read our analyst's original report.
United Natural Foods (UNFI) announced recently that they have entered into an agreement to acquire SUPERVALU (SVU).
As part of the acquisition, UNFI will also be buying into the food retail business representing roughly 100 stores under the banners of Cub Foods, Shoppers Food & Pharmacy and Hornbacher’s (20% of sales mix at SVU). Although they plan to divest the assets over time in a “thoughtful and economically driven manner” – what does that even mean? Sounds like it will take a while. SVU’s food retail business has been performing horribly and is burdened by multi-employer pension plans.
Given the strength of larger competitors in food retail and the investments in e-commerce that have been made, we feel that the under-invested in brands that SVU has will be difficult to sell. Furthermore, the retail assets could become a cash drain for the broader UNFI organization over time as they require capex of 1.25% to 1.75% of retail sales, whereas UNFI has been run-rating around 0.6% to 0.7% of sales.
ALRM
Click here to read our analyst's original report.
Alarm.com (ALRM) sits in the eye of market disruption as its leading position in interactive home security systems faces a torrent of new digital systems with innovative business models, customer acquisition, and technology. Meanwhile, the market opportunity for ALRM has exploded in the last few years, but ALRM has not. The stock is expensive on FCF…and OCF/EBITDA improvements in 2017 were mainly inorganic and not repeatable.
GWW
Click here to read our analyst's original report.
Gross Margin Pressure Continues Unabated: MSM reported the lowest gross margin, while W.W. Grainger (GWW) would have had it not juggled its sales force and cut prices (it was the 3rd lowest). This is not an inflection in the business in any way, as we see it. Volume is way up because of a strong demand environment – gross margins should have looked okay.
Just When Everyone Stopped Looking, AMAZON Has Apparently Finally Arrived: Each week in the data series on website transition is showing greater penetration for Amazon. That’s true for GWW, MSM, McMaster-Carr, but not really Fastenal. These are weeks, so it is small gains, but it is uniform… and it is showing up right when Prentis Wilson from Amazon said it would.
Are longs falling for an age old current liabilities trick, with no change in trend to the critical gross margin line? We think yes, and besides, when did SG&A really count in the multiple? Is Amazon finally showing up in the data, just when shorts gave up on the thesis? We think that tough comps and slowing demand growth helps reveal the underlying rot in gross margin, while one mention of Amazon penetration would cause the group to de-rate posthaste.
SGRY
Click here to read the short Surgery Partners (SGRY) stock report Healthcare analyst Tom Tobin sent Investing Ideas subscribers earlier this week.
TSLA
Click here to read our analyst's original stock report.
Financial Results Have Never Really Mattered: After the recent Tesla (TSLA) circus, here is what we think: TSLA isn’t about earning (losses) or financial statements, it is about the brand and the perceived deep pool of buyers if the company can ramp production.
Tesla has guided to profits before, too. With a China tariff, lousy Europe sales trends, and what we think will be an exhaustion of high-end Model 3 demand in 3Q, our 1H 2019 catalysts remain intact and we don’t think it will get too far out of hand.
The most important takeaway from the earnings release, we think, is that the company produced many more Model 3’s and generated about the same loss. Adjusting for the company’s restructuring charge, ZEVs, and currency heavy Other (expense)/income, the pre-tax incremental margin was just around 4%. Most manufacturers would die on that report, but Tesla just doesn’t trade on financials.
If demand and the brand are what really matters, we will just flag 3 items NOT from the earnings report.
More downswings and squeezes are likely. Sales should surge prior to the tax credit step down, for instance. The SEC is unlikely to take Tesla down, and if Tesla is a fraud, they are doing it wrong by reporting a ~$4/share loss. Demand and/or the brand needs to break for a reset – financials just haven’t mattered.
We continue to see a 1H19 catalyst period for a bigger move down on a story failure, with tax credit run-off, competitive entry, and CA HOV restrictions compounding manufacturing and service quality challenges to significantly contract demand. Tesla’s 10-Q should be out shortly, and may be more helpful than the earnings call.
BYD
Click here to read our analyst's original stock report.
Boyd Gaming’s (BYD) 10Q revealed that the company, as expected, lost about ~110bps in gaming market share in the LV Locals in 1H 2018 vs 1H 2017. BYD (and RRR) both report gaming revenues on a net basis (net of promos) while LV Locals revenues is reported on a gross basis. However, before ASC 606, BYD’s promos did not fluctuate much, and we believe that remained the case in 1H 2018; thus, the YoY market share comparison is likely comparable. RRR (including Palms and Palace Station), on the other hand, gained ~150bps YoY in gaming revenue share in 1H 2018, by our estimates. We expect RRR’s market share to improve further once the Palms and Palace Station disruptions dissipate. That’s bad news for BYD.
SHAK
Below is a brief note from CEO Keith McCullough on why we added Shake Shack (SHAK) to the short side of Investing Ideas earlier this week:
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Isn't it amazing to watch? Consensus chart chasers consistently selling on red at the low-end of the @Hedgeye Risk Range, then chasing higher the day after on green, that is… Thank goodness for that. Looking for names (that my analysts don't like) that are green this morning on #decelerating volume? How about the Shake Shack? As Howard Penney wrote recently to our Institutional Research subscribers in a note titled "Top 10 Reasons Why This Is A Disaster": the stock trades at 24x forward EBITDA and 95x P/E – why would you pay that much for a brand that hasn’t grown traffic in eight quarters? Sell the bounces to lower-highs, |
