Below are analyst updates on our seven current high-conviction long and short ideas. Please note we removed Mednax (MD), Chipotle (CMG), Gildan Activewear (GIL), Credit Acceptance Corp (CACC) and Tapestry (TPR) from the long side and Carnival (CCL) from the short side of Investing Ideas this week. We also added Darden Restaurants (DRI) to the short side.
We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
ZBH
Click here to read our analyst's original report.
Why do we like Zimmer Biomet Holdings (ZBH), and Healthcare stocks more broadly, on the long side?
Our economic outlook is that U.S. economic growth and inflation slow in the fourth quarter (i.e. Quad 4 in our Growth, Inflation, Policy model).
The key takeaway here is that typically in #Quad4 you want to be playing defense and downshifting your beta. In the chart below we show the relative outperformance historically for Healthcare as a sector versus Technology stocks when the U.S. economy is in Quad 4. Also below is our GIP Risk Management Overlay for more on what works in each of the four quadrants.
UNFI
Click here to read our analyst's original report.
We continue to think this business, along with their acquisition of SVU, will be challenged.
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. This business is truly falling apart across the financial statements. UNFI is turning into a long term structural short in which margin upside will prove very difficult given the customer mix shift and pricing pressure headwinds.
SGRY
Click here to read our analyst's original report.
Surgery Partners (SGRY) pre-announced adjusted EBITDA range that bracketed consensus (the number that matters). "Modest" same unit volume growth on an easier compare from hurricane impact last year... still suggests structural issues persist. Big increase in revenue per case to get to 9-11% same store growth. Will have to wait for the Q to get more clarity on that, whether it was one time payment or mix that drove strength. Note that the base comparison on 2017 is really messy due to acquisition and hurricane impact, so I am reluctant to read to much into it. That said, we do expect a better utilization environment into 2H18, which we will discuss on Monday and this announcement is somewhat consistent with my comments on morning call yesterday.
However, the pre announcement comes because they have to raise additional capital! That was one of the major points our Healthcare team made when they first went bearish in July. SGRY is a cash burning machine and there is nothing for equity holders. So taking on additional variable rate interest debt to feed a roll up strategy in order to hit consensus numbers when you are already 9x levered and have looming debt payments is not a good thing. Q4 is the big ramp in EBITDA and they are clearly feeling pressure to hit numbers and need to raise capital and buy stuff to do so. More capital will have to be raised next year.
TSLA
Click here to read our analyst's original stock report.
We hosted a special Tesla (TSLA) webcast between WSJ investing journalist Charley Grant and Hedgeye Industrials analyst Jay Van Sciver as part of our 1st annual "Hedgeye Investing Summit." Below is access to the entire 46-minute interview.
DE
Deere (DE) is facing a challenging market with rising input costs, lower US crop prices, and elevated expectations. Wholesale sales have tracked ahead of retail, and pricing has been flat in recent quarters.
In recent quarters, equipment sales price realization has been flat. Heading into 2019, DE will likely need to reverse pricing trends. In addition, while total inventories are down from peak, relative to current sales inventories remain elevated. Notably we think DE is artificially inflated – as investors fled from General Electric, DE and other large, liquid industrial sector constituents tended to rally.
We continue to see evidence that Deere Financial has offered accommodating lease terms and payment terms, supporting volumes during the industry downswing with costs potentially recognized on a lag.
All in, we expect shares of DE to reprice downward as the company is pinched between sales volume pressure and higher input costs amid weak pricing. We expect 25%+ downside in shares of DE into FY19.
LW
Lamb Weston (LW) put up a strong quarter, but all the drivers of growth will continue to slow and the issues that are impacting its European JV’s are only just beginning:
- Adjusted diluted EPS was $0.73, up $0.16 YoY (and beat consensus by $0.05). Importantly, $0.10 or 62% of the increase benefited from applying a lower tax rate YoY.
- Despite the strong quarter, adjusted EBITDA (including unconsolidated joint ventures) to be in the range of $860 million to $870 million. Despite beating consensus estimates across the board for revenues and EBITDA in 1Q there is no upside to estimates.
- European joint venture earnings being pressured, and the news flow will continue to be disappointing.
- The imposition of new tariffs remains a risk.
- Sales growth will slow significantly in the back half of FY19 as they lap significant FY18 tailwinds.
- Yes, the restaurant industry had a great summer, but sales trends will slow over the next 6-months.
- Still some potential issues around the potato crop as they hit the storage facilities.
- Operating environment in Europe is going to volatile.
As a commodity CPG company, LW is priced for perfection and the pressures on revenue continue to grow.
DRI
Below is a note from CEO Keith McCullough on why we're adding Darden Restaurants (DRI) to the short side of Investing Ideas:
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Looking for some Consumer Discretionary (XLY) exposure on the short side? Howard Penney is bearish on Darden Restaurants (DRI). Evidently with both the CEO and COO selling stock in the last month, they might be going a little bearish too! Why? Per Penney: "Introduction of pasta and breadsticks at Applebee’s is more of a reason to SHORT DRI, than to do anything with DIN. Yesterday, Applebee’s introduced four new pastas (with breadsticks) to launch at a promotional price of $11.99, just at the tail end of DRI’s 8-week ‘Never Ending Past Bowl’ promotion. We think the 5.3% comp Olive Garden posted in 1Q19 is going to be as good as it can get for them. As we pass through easy compares (during the summer months) for the entire casual dining industry, and into 4Q18 and 2019, we think the road ahead will get more difficult for casual dining in general." Sell on green, KM |
