Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we removed McDonald's (MCD) from 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.
Below are the three core tenets of our long thesis on Credit Acceptance Corp (CACC):
- SEVERELY BATTERED SENTIMENT + UNDERAPPRECIATED TAILWINDS: Credit Acceptance Corp. is currently among the most reviled companies in the financials space, with both a decimated buyside and sell-side sentiment, partly attributable to a regulatory activist short thesis floated publicly over the course of the last year. Given modest street estimates for 2018-2020, and unaccounted recent sales force growth of 30%, earnings power is on track to exceed expectations over the next 12-18 months and high short interest may find itself at risk for a short squeeze.
- AN IMMUNITY TO THE CHILLING TEMPERATURES OF DEEP SUBPRIME: The all-weather success of the firm is rooted in its ingeniously designed lending formula capable of robustly servicing the credit needs of deep subprime auto buyers across economic cycles. Detailed vintage-level analysis reveals that the firm truly has turned deep subprime auto-lending into a consistently profitable science, and that concerns over the performance of its most recent vintages, amid increasing competitive and economic pressures, are not presently justified.
- MANAGEMENT: GREAT OPERATORS + SEASONED VETERANS: Publicly traded since 1992, the only unprofitable year in the firm’s history was 1999. Moreover, GAAP EPS grew +23% and +113% Y/Y in 2008 and 2009, respectively. CACC’s 28-member management team, averaging 15 years of experience/person, has proven to be good stewards of capital as they have bought back roughly half of the company’s stock back to 2001. In addition, incentive compensation is determined by economic profit: earnings produced in excess of the imputed cost of capital. In sum, CACC’s management is a tried, tested, and proven asset to the firm.
STAY
Click here to read our analyst's original report.
Hurricane Florence is one of the worst storms the Carolina region has faced in years. The storm ended up hitting the shore a little further south than originally anticipated, but the on land disruption and destruction will likely be just as bad – Duke Energy suggests that close to 1-3 million homes could go without power in the Carolinas.
Hoteliers (particularly Extended Stay America [STAY]) are likely to be the most impacted by the Florence. As a reminder, STAY maintains close to 11% of its hotel exposure in the Carolinas and VA, but the majority of that exposure is in NC, which might not be hit as hard as SC.
Depending on how bad it gets, the hurricane could pose as a headwind to RevPAR growth in 3Q, which then could become a tailwind in 4Q and 1Q in the event that citizens are displaced in the region and need a place to stay. Recall, last year the hurricanes were a slight headwind to results in 3Q17, but then STAY got a nice demand lift in 4Q17 and 1Q18 of this year.
GIL
Click here to read our analyst's original report.
Cotton prices are up roughly 20% this year. Gildan Activewear (GIL) passes along higher cotton prices in the screenprint business on a two quarter lag as raw cotton first needs to be processed and spun into yarn before entering its manufacturing plants. Higher prices are generally a tailwind as Gildan’s revenues inflate for the higher prices and fixed costs are leveraged.
Outside dramatic price spikes higher cotton prices do not have meaningful impacts on unit demand in the industry. The best way to illustrate this is to understand the small percentage of costs (~10%) that Gildan’s blank t-shirt represents of the end cost to the consumer. There are other much larger costs in the supply chain that can be reduced before impacting the price to the consumer.
CMG
Click here to read our analyst's original report.
We hosted an institutional Black Book presentation last week to discuss our LONG case for Chipotle Mexican Grill (CMG). We hit on the singles and doubles CMG plans to hit, before they turn on the marketing machine, which is Brian Niccol’s specialty. We believe consensus is far too bearish on the outward looking margin profile of the business! Ultimately, we see CMG getting to 2021 where we have EPS roughly 50% higher than consensus.
CMG’s enabling of technology and mobile ordering is different than when MCD or SBUX tried to do it because they are actually adding capacity! CMG will have the second make-line installed in approximately 1,000 restaurants by the end of 2018 – if CMG was capable of doing $2.5M AUV with one make-line we think it is conceivable they can do $3M+ with two!
This recovery won’t happen in a straight line, but with a vastly improved management team in place, with a plan to succeed in this new operating environment, we believe CMG represents one of the best LONG opportunities in the restaurant space.
MD
Click here to read our analyst's original report.
CAN THEY LAND THE DISMOUNT? Mednax (MD) reported a positive quarter and stuffed several positive announcements into their 2Q18 earnings release. While maternity trends did not provide an extra same unit growth driver as we expected, same unit volume was inline. What appeared to be an initially tepid move in the stock on the earnings release suggests there is lingering doubt management can deliver. Skepticism is warranted based on the margin destruction over the last 2 years, but executing a plan that drives EBITDA well north of $720M from the current run rate of $600M, our visibility into the mid $60s looks very attractive.
Click here or the image below to watch a 7-minute video from a recent edition of The Macro Show in which CEO Keith McCullough and Healthcare analyst Andrew Freedman discuss Mednax, Zimmer Biomet and the broader set-up in Healthcare based on our Macro team's economic outlook.
ZBH
Click here to read our analyst's original report.
In 2015, we introduced our "health care deflation" theme and challenged the consensus orthopedic volume and pricing assumptions of 5-7% and (2-3%), respectively. Our view called for implant volumes to decline in the U.S. due to high penetration, and the marginal impact of aging and obesity on growth. The market itself proved more resilient, sustaining 5-7% volume growth with 2-3% declines in ASP, although we believe the acceleration of the insured population under the ACA and other tailwinds were key.
While Zimmer Biomet (ZBH) experienced volume, price, and gross margins pressure over the last three years, it was mostly the result of market share losses from the mismanagement of the Biomet merger and supply problems at one of their manufacturing facilities. ZBH's share losses primarily benefited SYK, which experienced accelerating knee volume over this period.
(Click here to watch a 7-minute video from a recent edition of The Macro Show in which CEO Keith McCullough and Healthcare analyst Andrew Freedman discuss our top stock picks in the healthcare space.)
TPR
Click here to read our analyst's original report.
Logos are back, at least for luxury handbag brands they are. LVMH reported Fashion & Leather Goods division sales growth of 15% in the first half of 2018 while Gucci reported 44% comparable store growth in the first half of the year. The top selling items feature the luxury brands’ logos. Fashion trends are usually led by the luxury brands.
Coach’s management team knows sales growth could be much higher if they increased the mix of logos in the assortment. However, management is hesitant due to the last change in fashion when sales of handbags featuring logos fell precipitously from a peak of 70% of Coach’s handbag mix.
Coach recently reintroduced its signature logo back to about 10% of the assortment and will increase it in a measured way this holiday. That means management has a lever for consistent growth, even if at a lower level. Coach is also adding logos in more discreet ways as the bag to the right shows. Currently logo items are among the top performing items. Increasing the mix of logo goods is just one of several levers Coach has to pull to drive sales growth over the next couple of years.
SBUX
Click here to read our analyst's original report.
Complexity is the silent killer of growth.
Starbucks (SBUX) has increased Breakfast and Baked Goods items by ~36% and ~23%, respectively, from 2015 to 2017. The number of Lunch/Sandwiches SBUX has declined 10.5% due to complexity. They need this day part to drive food sales to their 25% of revenue target. Notably, they have also significantly increased their Tea segment as they broaden their drink offering beyond coffee.
CCL
Click here to read our analyst's original report.
Cruise management teams have consistently messaged the underpenetration of the consumer and for a long time they were right. At a time when supply growth is accelerating, the cruise penetration rate hasn’t moved much the last several years. It’s becoming harder to attract that new, younger cruiser and that’s why this time, supply could matter. We reiterate our short call on Carnival (CCL).
UNFI
Click here to read our analyst's original report.
United Natural Foods (UNFI) is facing long-term structural headwinds to gross margin, headlined by the customer mix shift to lower margin customers, Whole Foods and Conventional. Whole Foods has grown 373bps YoY as a percent of sales from 33.7% of sales in 3Q17 to 37.4% of sales in 3Q18, and is headed north of 40% of sales over time. While sales to independent customers (higher margin customer) are down 182bps YoY as a percent of sales to 25.1% of total sales. Independents will continue to shrink and we believe this customer segment will struggle longer-term in an increasingly price competitive food retail environment.
This all bleeds down to their EPS guidance where this accounting change benefited them by $0.27, which actually implies a reduction in guidance of $0.17 not the growth in guidance of $0.10 that management is trying to sell to investors.
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.
SGRY
Click here to read our analyst's original report.
NOTHING TO WRITE HOME ABOUT | 2H18 EBITDA AT-RISK | 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. Note HCA and THC both saw a sequential improvement in ASC volume in 2Q18, with same-unit growth rates of 1.5% and 3.4%*, respectively. While management said they have recruited "slightly" more physicians year-to-date compared to last year and the productivity of those physicians has "more than doubled," the continued decline in same-unit volume suggests it is not enough to offset ongoing attrition.
(Click here to watch a 7-minute video from a recent edition of The Macro Show in which CEO Keith McCullough and Healthcare analyst Andrew Freedman discuss our top stock picks in the healthcare space.)
TSLA
Click here to read our analyst's original stock report.
Will customers not test drive a Model 3 when the Tesla (TSLA) store calls to set up an appointment just because Elon Musk tweeted something provocative and probably illegal? So far, it doesn’t look that way. Like politics, we suspect Tesla will feel the personal financial situation – when the tax credits, HOV access, and competing models change the buying economics, the consumer will finally pay attention. We also expect build quality of the Model 3 to play a part, but the Model 3 is still a small part of the test drive mix. Sales are also likely to be impacted by declining residual values, which decrease trade-in values and generally increase total cost of ownership.
SHAK
Click here to read our analyst's original Shake Shack report.
Shake Shack's (SHAK) increasing focus on technology is more of an “it’s about time” moment, than one of differentiation, as all their major competitors have apps with mobile order & pay, kiosks, etc. SHAK is at the beginning of their digital revolution, just now testing kiosks and slowly getting people on their app. Which means more money to spend over time just to catch up with the likes of MCD, which is installing Experience of the Future in 1,000 locations per quarter.
