Below are analyst updates on our eight current high-conviction long and short ideas. Please note that we removed Deere (DE) 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
RRC
Click here to read our analyst's original report.
Factors outside of Range Resources' (RRC) control have further weighed on the market’s perception of the company. These include low benchmark natural gas prices and insufficient midstream takeaway capacity in Appalachia, resulting in wide basis differentials; both of which have improved markedly since the trough of the commodity down cycle. Lastly, fears of Permian associated gas production, driven by oil, not gas economics, continues to be the monster under the bed.
Management, which remains little trusted by the investment community, has stayed on course, investing in its highest return locations, creatively solidifying the balance sheet, and protecting the value of its premier asset base by letting the results speak for themselves. It’s been nearly 2.5 years since the company first announced its acquisition of Memorial Resource Development, but the skeletons of the transaction still haunt the RRC narrative.
We believe guardrails are in place to prevent such an event from happening again should management attempt to veer of track; management hasn’t been paid in three years, the CEO was stripped of the Chairmanship, the COO and CFO have turned over, the stock is 75% off its pre-acquisition levels, and an activist (who owns 17% of the outstanding equity) controls 1/3rd of the Board. We believe the narrative deserves a second look.
SGRY
Click here to read our analyst's original report.
We think margin expansion is going to be very difficult for Surgery Partners (SGRY).
But the core of any balance sheet short is that this company is not earning it’s cost of capital. It continues to burn cash which means that they’re going to have to raise capital at a time where they’re already significantly levered. This company is about 9X levered.
One of the points we made is that they just don’t have enough liquidity given that cash flow is already negative. Leverage is so high it’s going to be difficult for the company to fuel the roll-up strategy and hit consensus numbers. Sources of cash are being drawn down so it’s going to be difficult for the company to do enough acquisitions to close on the pipeline and hit numbers. They need to spend about $150-$200 million in acquisitions to hit 2019 estimates. At the end of 1Q19, at the current pace, they would only have $122 million so there’s a gap that’s emerging.
The company preannounced saying that they’re going to raise additional capital to fund acquisitions going forward. This is really not what you want to see as an equity holder when they probably should be deleveraging, since there is so much risk to this model.
MCHP
Click here to read our analyst's original stock report.
On the long-term side of our Microchip Technology (MCHP) short call, following the most recent earnings release, no one asked about the lawsuit or the risk that Steve might have to recuse himself from the CEO role. The company is fixing MSCC operationally but the ongoing evidence of excess inventory (over 8 months for high-reliability products) only buttresses our view that real growth for MSCC was even worse organically than the feeble numbers we had scrubbed to.
In other words, the point of buying MSCC…is to hurry up and buy another semi company. Steve even noted that his strategy is to buy underperforming semiconductor assets, which is a fine strategy, but does not come with a premium or high performance analog multiple.
GWW
Click here to read our analyst's original report.
While many focus on the competitive threat posed to Grainger (GWW) by Amazon Business and its ilk, accelerating competitive intensity from independent suppliers and other larger distributors have principally generated headwinds in the last few years.
We believe the volume ramp at GWW has been misattributed to the company’s sales restructuring and market strategy, with the credibility of turnaround efforts likely to suffer later this year.
Distributors will be comping a strong 2H17, supported by tax reform and hurricanes, with headwinds from a decelerating economic backdrop, delayed pricing, high expectations, and cost pressures.
AVLR
Click here to read the short Avalara (AVLR) stock report Technology analyst Ami Joseph sent Investing Ideas subscribers earlier this week.
GPS
Click here to read the short GAP (GPS) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
RDFN
Click here to read the short Redfin (RDFN) stock report Housing analysts Josh Steiner and Christian Drake sent Investing Ideas subscribers earlier this week.
TGE
Tallgrass Energy (TGE) contends that growth projects and acquisitions will add an incremental ~$110MM of EBITDA by 2020. Rather than take management at its word, we analyzed each standalone projects’ available financial and operating data. In reality, we estimate that TGE’s EBITDA projection is overstated by ~$75MM.
Despite improvements in the operating environment and simplified corporate structure, we value TGE between $12.00 – $17.00 per share, 30% - 50% lower than current market prices. At this juncture, we see no evidence to support walking away from the short.
