Below are analyst updates on our sixteen current high-conviction long and short ideas. Please note we added Toll Brothers (TOL) and Mohawk Industries (MHK) to the long side and Wayfair (W) and Amazon (AMZN) to the short side of Investing Ideas this week. We also removed Melco Resorts & Entertainment (MLCO) from the long side and Splunk (SPLK) and Microchip Technology (MCHP) from the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
DFRG
Click here to read our analyst's original report.
We see an activist creating value through more appropriate Del Frisco's (DFRG) capital allocation, as the current management team has proven to not be great stewards of shareholder capital. Look no further than the Barteca acquisition as evidence of managements lack of discipline on capital allocation. Management leveraged the company up to 4.6x debt/EBITDA (plans to delever to <3.5x within 2-3 years) to purchase Barteca at a multiple of 2.5x sales or 15.7x TTM EV/EBITDA (10.6x FY18 run-rate adj. EBITDA of $31M) as compared to DFRG’s multiple of 8.3x TTM EV/EBITDA at the time of the deal.
The activist’s playbook should focus more on stronger capital allocation to concentrate on eliminating the massive economic risk inherent in the company’s financials. We agree that the stock is intrinsically undervalued. Our sum-of-the-parts analysis suggest buying the stock today in the $6-$7 range and you are essentially getting Del Frisco's Double Eagle for free! The Double Eagle is a highly prized asset in the restaurant space with strong margins and some growth potential.
We think DFRG stock has the potential to double over the next 12-18 months.
GTBIF
Click here to read our analyst's original report.
It’s clear 2019 is full of potential catalyst for the cannabis industry, in particular for the U.S. operators. From particular states enacting medical and adult-use programs, to the potential for federal legislation such as the STATES Act (which is a blessing and a curse). Although most companies that are participating in the market will be winners in this environment, we are working to pick the winners that will be successful long-term. Green Thumb (GTBIF) is building a platform to solidify their current business while enabling efficient and repeatable future growth.
Green Thumb is our first best idea long in the US space as we feel they are one of the best positioned MSO's to capitalize on the growing market opportunity in the US. There is line of sight to Green Thumb providing a 2-3x return over the next few years.
AMN
Click here to read our analyst's original report.
There continues to be a good long thesis with AMN Healthcare (AMN) despite the disappointing 4Q18 results and 1Q19 guidance. We'd be more concerned if the market dynamics were not as strong as they are; health care wage growth is accelerating, health care hiring and job openings are accelerating, and our model continues to forecast improvement in utilization.
Pricing improved in Nurse and Allied sequentially on a one year and two year basis in 4Q18 as the premium placement trend continues to stabilize. Net of the single client, 1Q19 guidance would have been better than consensus even with the flu comp. When comparing the guidance for Nurse and Allied before and after the problem client, the negative 600 bps swing resulted in 1Q19 revenue forecast to $333M, lower than consensus of $342M. Without the headwind management quoted a +5% growth rate (versus down 1% to 2%) in Nurse and Allied which would have driven guidance well ahead of consensus and our forecast would have been spot on.
OC
Investors, us included, were somewhat scarred by the roofing segment margin collapse in 2014-2015. It looks brief on the chart below, but it wasn’t in real-time. We came away confident that this would remain a reasonably rational business, with volumes driven by storm damage and the like. In the Owens Corning (OC) outlook, we’d bet that (new) management wants a low bar, particularly given recent uncertainty in the housing market. If housing recovers, OC should follow. New management is welcome, as would some changes in investor communication. No one knows what storm damage roofing demand will be in 2019, and transportation costs are likely to decline in 2019 as inflationary comps ease.
TOL
Below is a note written by CEO Keith McCullough on why we added Toll Brothers (TOL) to the long side of Investing Ideas earlier this week:
|
Looking for more ways to get long our bearish view on US interest rates? We remain long of US Housing (ITB) since we made the #Quad4 in Q4 call in Q4 of 2018. This morning's US Pending Home Sales report was one of the only major #accelerating US economic data points of the year. Toll Brothers (TOL) isn't down -3% on that report. It's down on rates being up today. Here's a chunky excerpt from our Institutional Research note (compliments of my Housing Team) this morning: Today's Focus: January Pending Home Sales We’ve presaged the elevated probability for a pronounced bounce in signed contract activity recurrently over the last month as the first flow through impacts of the retreat in rates manifest in a meaningful increase in Mortgage Purchase Application Volume in January, a development re-confirmed by the increase in Builder Confidence in February where an increase in both Current Sales and Current Traffic was expressly attributed to the decline in rates. Again, the fundamental call here isn’t for some escape velocity, step function style inflection in transaction activity – it’s for a progressive transition to ‘less bad’ as the decline in interest rates, a still strong domestic labor market and progressively easier 2019 comps work to shepherd a path to rate-of-change stabilization for a sector mired in a negative 2nd derivative volume slump for years at this point. In short, it’s a quintessential case study in better/worse defining the investment-scape where the simple absence of further, rampant deterioration is the marginal change of consequence. That’s the pretext for the morning’s PHS data which did, indeed, see a notable rebound as signed contract activity posted its largest sequential increase in 8.5 years while year-over-year growth accelerated ~800 bps. In short, we got the print we were looking for in January and some positive confirmation of emergent stability in existing market demand growth. Buy on red, KM |
MHK
Below is a note written by CEO Keith McCullough on why we added Mohawk Industries (MHK) to the long side of Investing Ideas earlier this week:
|
Staying with the Bullish @Hedgeye TREND call on US Housing, one of Jay Van Sciver's Best Ideas (Institutional Research product) is on sale today: Mohawk (MHK) is -2%. Here's an excerpt from Jay's summary thesis on the name: Early Is A Less Bad Form Of Wrong: For MHK, we had anticipated this inflection to occur in the 4Q18 to 1Q19 period, partly informed by an expectation that inflationary cost pressures and mortgage rate concerns would start to ease as broader economic growth slowed. MHK has deployed a ~$1.1 billion in capex above depreciation, long-term projects that come up to speed in the next year or two that address several deficiencies. MHK’s valuation is already ‘cheaper’ on some cyclically adjusted metrics than it was in the Global Financial Crisis, indicating that the share price reflects a reasonably dire outlook in what we view as a longer cyclical recovery. Buy on red, KM |
SGRY
Click here to read our analyst's original report.
While we like the macro trend of inpatient surgeries moving to low-cost ambulatory surgical centers (ASCs), Surgery Partners (SGRY) is not the horse we want to bet on.
SGRY's ASC portfolio is low quality compared to peers USPI/THC and SCAI/UNH, and it does not have the balance sheet capacity to make the acquisitions necessary to improve payer and case mix. Meanwhile, we are several years from total joint procedures being a large enough percentage of total ASC case volume to have a meaningful fundamental impact, despite the favorable policy environment. From a valuation perspective, we question how much common equity value there is given SGRY's indebted capital structure and lack of free cash flow after minority interest obligations.
AVLR
Click here to read our analyst's original report.
Avalara's (AVLR) recent acquisition of Indix, which management touted has “changed the game” – clearly has not, having been shut down as a product after once boasting to having revolutionized the state of retail… But more important is that Indix’s technology is something that AVLR should have built from the beginning, that is, if they were actually a technology company – and whose existence (in droves of similar startups) shows that the arbitrage of taking publicly available tax laws and running “multiplication” for clients will not be a high dollar draw forever. In other words, if new generation companies can do this with automation, they will get there faster, cheaper, and a heck of a lot more efficiently than Avalara.
CCL
Click here to read our analyst's original report.
Fueled by rising technology and innovation initiative costs, Cruiser CapEx (mostly maintenance) is again heading higher – a trend that began in 2017. NCLH joined the party with its latest forecast. Excluding the impact from FX, we estimate CCL CapEx guidance has surged 39% from Q4 2017 to Q4 2018. No doubt, changes in capacity growth guidance will also impact these figures but they haven’t moved too much.
In an increasingly competitive environment, new and old cruise ships have to spend a lot of dough to attract repeat cruisers and Millennials. For CCL, it’s uncertain what impact this higher spending will have on yield growth. Carnival (CCL) is heading for another year of yield deceleration.
Rising CapEx crimps FCF. We project negative FCF for CCL in 2019. Lower FCF is potentially the biggest problem for CCL sentiment. Shareholders have come to expect the cycle of positive FCF, low leverage, and a lot of share repurchases. Something’s gotta give…
TGT
Click here to read our analyst's original report.
Target (TGT) reports earnings and hosts its annual analyst day on Tuesday.
We got holiday sales results already, 5.7% comp was strong, but interestingly with sales above expectation the company did nothing to its EPS guide for the year. We would have expected an increase and or tightening of the range given the sales strength. That implies a rather large range for the quarter, we think that might be for good reason. Free shipping offers were likely a big hit to margins on an already dilutive ecommerce business.
The CFO has announced retirement. It seems odd given she is only 54 and joined the company only about 3.5 years ago, she might be having trouble managing the finances vs expectations when CEO Brian Cornell keeps ramping investment initiatives to drive top line. That is the risk in 2019, that the company calls it another investment year. Expectations are for leverage to begin.
The way we see cost pressures playing out if the company can’t comp at least about 4-5% EBIT won’t grow. That will be difficult with the comparisons and weakening consumer. Inventories will be an important line item, as they have been building and sit at the highest rate seen in a decade. If they aren’t cleaner than last Q there is further risk to gross margin.
TSLA
Click here to read our analyst's original report.
While pretty much every metric we have shows a sharp drop in Tesla (TSLA) US demand, Tesla’s ability to even approach estimates in 1H depend on mining demand in Europe and China. While anecdotal posts on the Model 3 have been mixed at best, they don’t tell us much about unit sales. One data set that provides a hit is App downloads: buy a Tesla => download the Tesla app. The relationships between downloads and sales figures have been directionally correct but too unstable for a particularly good unit ‘nowcast’. That said, the current read is so far outside expectations – where European sales would likely need to double or better – that it is worth flagging as a negative indicator. Maybe the cars are just on their way to customers, but the trend is down and there isn’t that much time left in the first quarter.
Meanwhile, there has been no real change in the Asia data…
ROL
Click here to read our analyst's original report.
With reports of plummeting insect populations, bees dying off, and the risks or low pollinator populations, the risk of increased regulation of pesticides is increasing. In part, the banning of chlordane as a termite treatment caused challenges for the pest control industry in the 1990s. Regulations have mostly helped Rollins (ROL) in recent years, notably the Food Safety Modernization Act. With talk of a Green New Deal now occasionally including bees/pollinators, new regulation isn’t as farfetched as it would have seemed a year ago.
DVA
DaVita (DVA) suggested a number of headwinds other than the demographic headwinds we discussed in our Black Book presentation. Management cited rising opioid deaths as a driver of available organ donors and subsequently a reduction in commercially insured patients who disproportionately receive available kidneys. This may be true, but we have not heard any anecdotes suggesting an uptick in transplants. Second was a reduction in out of network and subsequently high reimbursement patients, something we have heard from facility operators, but assumed DVA was bringing more patients in network at lower rates."
MCD
Click here to read our analyst's original report.
Since 2010, there has been a clear shift in McDonald's (MCD) SSS away from traffic growth and toward price/mix. MCD averages about 2% per year in absolute pricing. Moving the menu toward higher price point items is great for margins but bad for traffic! MCD is no longer the value leader.
In the USA, MCD has lost 500 million transactions since 2012. Every percentage point decrease in guest count translates to about 4,500 fewer transactions a year in each store.
W
Click here to read the short Wayfair (W) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
AMZN
Below is a note written by CEO Keith McCullough on why we added Amazon (AMZN) to the short side of Investing Ideas earlier this week.
|
My Independent Research Team (not to be confused with the conflicted and compromised investment banking and brokered "research" you get pushed all day long on Old Wall TV) has some big ideas for 2019. One of them is Brian McGough and his US Retail team going bearish on Amazon (AMZN). Per the intro his recent Institutional Research note: "When all is said and done, I think that 2019 will go down as the year where Brick & Mortar pushes back against pure-play online – most notably Amazon – which will ultimately be to the detriment of margins across the board." Oh, and AMZN is green today, tapping the top-end of the @Hedgeye Risk Range, KM |
