Below are analyst updates on our thirteen current high-conviction long and short ideas. Please note we removed Match Group (MTCH) from the long 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 response to a frequently cited, albeit highly unclear, analysis contained in a public short report positing that Credit Acceptance Corp (CACC) had wiped out the Dealer Holdback on loans originated in 2015, we embarked on our own analysis to test the veracity of this claim.
For any given Portfolio Program vintage, total Dealer Holdback payments can be calculated, ex-post, as the residual interest in the total cash flows collected on the underlying set of loans, net of CACC's servicing fee and the repayment of its advances.
Comparing this threshold against the firm's current collections forecasts for each of its vintages, it becomes readily apparent that expected Dealer Holdback payments remain in good health and any suggestion otherwise would be seemingly ill-founded.
STAY
Click here to read the long Extended Stay America (STAY) stock report Gaming, Lodging & Leisure analyst Todd Jordan sent Investing Ideas subscribers earlier this week.
GIL
Click here to read the long Gildan Activewear (GIL) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
SBUX
Click here to read our analyst's original report.
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!
MCD
Click here to read our analyst's original report.
McDonald’s (MCD) 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.
The most important metric in the 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.
Carnival (CCL) has been more active than usual selling older tonnage this year. With the sale of Pacific Jewel yesterday to an unnamed buyer, 3 CCL branded ships will leave the fleet in 2019 (Pacific Jewel, P&O Oriana, and Holland America Prinsendam). It is the primary reason why CCL’s capacity growth rate of ~5% for 2019 is lower than the industry average of 7.5%. Th gains/losses from these transactions will impact the “other income” line and NCC ex fuel calculation. However, CCL usually removes the ship gains/losses in its adjusted EPS; RCL, on the other hand, doesn’t always do this e.g. Celebrity Galaxy. Keep in mind that these old ships are not retired or scrapped; instead, they will likely reemerge under a new brand. Thus, the capacity growth headwinds in 2019/2020 is unchanged.
In other news, we’re keeping a close eye on Category 4 Hurricane Lane. It is expected to be the biggest hurricane Hawaii has faced since 1994. CCL and RCL both increased their Hawaii exposure recently, and NCLH leads the way with its 4% Hawaii exposure via its ship, Pride of America.
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).
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%)?
Overall, we view this as a very troubling acquisition, that could cause problems for the company going forward. We believe this could be the beginning of an even greater downfall in the stock as the potential for missing targets and complications with integration mount.
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.
How Did W.W. Grainger (GWW) Beat? SG&A! Well, this looks completely normal:
Cookie Monster? While supposedly ‘no one cares’ about earnings quality in this market, and a little bit of it is leverage on sales growth, we’d bet the exceptional drop in accrued expenses played a role. Just maybe… If so, the SG&A line is unlikely to hold in 2H and longs better hope for Gross Margin gains (Gross Margin is doomed, in our opinion).
SGRY
Click here to read our analyst's original report.
Surgery Partners (SGRY) reported 2Q18 revenue of $448.8M, which beat consensus expectations of $428.9M on sequentially higher revenue per case of 4.5% YoY (3.8% in 1Q18) and a stronger contribution from acquisitions. However, same-unit case volume continues to run negative at -1.4% YoY, in-line with our view that SGRY will have a challenging time recruiting docs and improving case mix, which is heavily Medicare. We believe the sequential improvement in same-unit volume is mostly attributable to seasonality, combined with a stronger utilization environment.
TSLA
Click here to read our analyst's original stock report.
“The worst is yet to come,” embattled Tesla CEO Elon Musk told the New York Times recently.
We agree.
That’s why we hosted a special Tesla webcast with outspoken Tesla critic Chris Irons, founder of Quoth the Raven Research, and Hedgeye Industrials analyst Jay Van Sciver to discuss what lies ahead for Tesla.
Click here or the image below to watch the webcast replay.
BYD
Click here to read our analyst's original stock report.
In our recent short Boyd Gaming (BYD) presentation we explained why we think 2Q18 could be peak in fundamentals. When BYD was a fresh idea, cost cutting opportunities were abundant, the macro was accelerating, and the valuation didn’t reflect the levers to unlock real estate value and free cash flow. Sky high consumer confidence and accelerating GDP, yet SS regional revenues aren’t seeing much of a lift.
A major part of our BYD bull thesis a few years ago was that BYD should close the margin gap with its peers, and that has happened. Unfortunately, the easy stuff is done and the further cost cutting opportunities may be few. Wage pressure does not seem to be reflected in Street 2018/2019 estimates. Hedgeye Macro is projecting higher than expected wage inflation. 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.
SHAK
Click here to read the short Shake Shack (SHAK) stock report Restaurants analyst Howard Penney sent Investing Ideas subscribers this week.
