Takeaway: GTBIF, AMN, TOL, CNQ, ITHUF, SGRY, AVLR, CCL, TGT, TSLA, ROL, DVA, MCD, W, AMZN

Investing Ideas Newsletter - 03.14.2019 FED cartoon

Below are analyst updates on our fifteen current high-conviction long and short ideas. Please note we removed Del Frisco's (DFRG) and Mohawk Industries (MHK) 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

GTBIF

Click here to read our analyst's original report.

Brands, brands, brands. You hear it all the time in this industry, “we are going to build a national brand!” But who is actually doing it? Green Thumb (GTBIF) is focused on both a wholesale and retail model. They want to provide the best possible experience to the consumer, so supplying both their own, and third-party brands is critical.

Along those same lines, selling their top-notch brands such as rythm and Dogwalkers through the wholesale market to spread their distribution across more doors is core to their strategy. These are brands that have a consumer appeal and a use case that is very apparent, that’s how large CPG companies build brands, so we are confident this strategy will persevere in this industry.

Another critical component to our diligence process is corporate governance and focus on shareholder value. GTI executives are focused on long-term value of their equity, not on taking huge salaries, they are for the most part seasoned executives with secure financial positions. GTI also displayed a solid understanding and respect for four-wall economics, as traditional restaurant analysts this is music to our ears.

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.

TOL

Click here to read the long Toll Brothers (TOL) stock report Housing analyst Josh Steiner and Christian Drake sent Investing Ideas subscribers earlier this week.

CNQ

On the Canadian Natural Resources (CNQ) 4Q18 & 2018 Results….. Despite differentials of ~$40 / bbl for WCS and $21 / bbl for SCO, CNQ produced ~C$47MM of unlevered FCF in the quarter and ~C$200MM of FCF after working capital and other cash adjustments.

The strength of the company’s updgraded mining operations remained strong, producing 447 Mb/d, ~C$350MM in unlevered FCF, and declining production costs which fell below C$20 / bbl for the first time in the company’s history. In 2018, CNQ generated ~C$5.5B of FCF, paid ~C$1.6B in dividends, reduced debt by ~C$1.8B (net of USD gross up), and repurchased C$1.2B of stock. The company reaffirmed 2019 CapEx and production guidance, increased the quarterly dividend by 12%, and maintained it’s 50% debt reduction / 50% share buyback capital allocation policy.

We reiterate our long call on Canadian Natural Resources.

ITHUF

iAnthus Capital (ITHUF) recently completed the transformational acquisition of MPX Bioceutical on February 5th, which drastically expands their coverage into critical states across the U.S., making iAnthus one of the premier MSO’s. The combined entity now has access to 11 states with rights to build 63 dispensaries, while 21 are operational today, with plans to have 50 open by CY2019 YE.

The acquisition also expands their cultivation and processing square footage from ~210K to ~600K. It is also important to note the industry professionals they are bringing onboard as part of the deal, the most notable of which is Beth Stavola, a cannabis veteran and pioneer in the Arizona market, she will bring aboard critical retail and branding experience that iAnthus needs.

They have a new CMO starting towards the end of March, at that time they will be rolling out a new national retail brand, and we expect them to get more active on the branded product side as well. 

SGRY

Click here to read our analyst's original report.

Surgery Partners (SGRY) reported a mixed quarter full of "less bad" data points that were neutralized by other bad ones.  For example, volume improved second half of 2018 by 400 bps, but "same-store volumes improved from a net decline of -2.7% in the first half of 2018 as compared to second half performance of +1 percentage point of volume growth."  Margins improved year over year, but commercial payor mix declined 200 bps in 4Q18.  SGRY performed more total knee replacements, a high revenue and high margin case, but off an immaterial base. The 15 cases a quarter in 2017 improved to a very modest 100 cases a quarter in 4Q18, and they are "not rolling it out for additional markets in 2019."  The company is "quite pleased with the progress we have made regarding our strategic initiatives around physician recruitment" having "recruited over 500 new physicians that began using our surgical faculties" in 2018, however the company is "not looking to add at this point in time."

"Less bad" isn't good enough to fix SGRY's fundamental problems. We reiterate our short call on SGRY.

AVLR

Click here to read our analyst's original report.

The recent Avalara (AVLR) lawsuit points to an innovation problem inside the company; the M&A path points to the same problem as most of the key functionality of the software has been acquired over time.

The lack of addressable market is real in many ways: AVLR is selling an expensive version of something that is available at cheaper price points with better pricing transparency, and into a market that has a mixed opportunity set of open and closed doors.

Furthermore, the employee disaffection is real and makes us think the December lock-up expiration will be met with jubilatory selling. Employees had been promised an exit for several years prior to the IPO (including a full IPO prep in 2015). Based on our reviews of employee comments, we expect a fair bit of pent up selling.

CCL

Click here to read our analyst's original report.

Carnival (CCL) will likely report Q1 earnings next week and we expect a sizable beat on yields, fueled by growth from China and US-sourced brands in Europe.  Q1 Caribbean yields could be down ~3% but should slightly exceed management guidance.  We’re anticipating another flattish guide for Q2 yield growth, which is below Street estimates, but management is always conservative.   

The key question is will CCL raise FY yield growth guidance to 1.5% or simply reaffirm the 1%?  We think the probability they hike is higher than 50% but certainly not 100%.  Despite a Q1 beat, CCL may still be cautious on the European demand environment and may wait for a few more months of visibility before raising FY yield guidance.  Investors may not appreciate that uncertainty. 

The good news is that CCL’s Caribbean pricing has improved, particularly in the last four weeks; thus, we expect management’s tone on this bread-and-butter market to be more positive.  Whisper expectations for CCL yield growth remain above 2%, which would still be a 50% slowdown from 2018’s growth rate.  Furthermore, FX has been a slightly bigger headwind vs guidance, although the pound has recently surged on the no Brexit voting, while average fuel prices are now ~10% higher than three months ago.  As a result, CCL may lower the top end of its 2019 EPS guidance of $4.50-4.80.  We estimate CCL bought back ~5m shares in Q1. 

TGT

Click here to read our analyst's original report.

1Q guidance was reasonable for Target (TGT), it’s the other three quarters that look difficult to meet expectations.  Yet there may be less upside in sales/earnings than people think in 1Q.  Just about every retailer, especially those in apparel, is tempering 1Q sales expectations and noting a slow start to the year.  That is despite the hugely consensus bull case of “much bigger tax refunds” YY and the fact that 1Q is the easiest compare of the year by far for nearly every retailer.  That begs the question what will be driving the underlying acceleration in 2Q and beyond that seems implied in the full year guidance of most?  TGT has one of the highest comp expectations in 2Q and beyond with some of the most difficult comparisons in all of retail.  Any material slowdown in a the US consumer means TGT will be highly unlikely to hit its earnings numbers.

TSLA

Click here to read our analyst's original report.

If Tesla (TSLA) continues to close stores, the drive data we collect may close with it.  The latest as-yet-complete sample shows a very poor response to the price cuts.  Is that why Mr. Musk announced the Model Y last Sunday? We think so, but the Model Y introduction could be counter-productive. Model 3 buyers may wait for the new Model Y.  We continue to see more limited demand for the Model 3 than current consensus – limited demand is our most important downside catalyst.

Imagine cutting prices as much as Tesla just did, and not seeing a surge in demand! Store closures send a mixed message to would-be buyers, while terminating and disincentivizing sales staff could stall the usual quarter-end sales push.

From our view, Tesla is flailing, with management uncertain how best to respond to weakening US demand.  Tesla may well have to curtail Model 3 production, which we suspect would be a crushing blow to the ‘infinite demand, volume lowers costs’ long thesis.

ROL

Click here to read our analyst's original report.

Rollins' (ROL) 10-K was filed on the first, and we’d note a few things. We were again struck by Rentokil’s aggressive positioning in the US market, with acquisition led topline growth.  While Rentokil may want both $1.5 bil in revenue and an 18% margin by 2021, we think they will be lucky to keep their current 13.7% margin.  Competitive intensity is increasing for talent, customers, and attention.  Rentokil’s acquisition strategy seems to be overpaying for deals in pursuit of a misguided growth strategy. 

DVA

Since we presented our short thesis on DaVita (DVA), things have gone from bad to worse. The 2019 guide included many of our assumptions about rising labor costs and their impact on patient care expense but surprised us to the downside with lower than expected organic patient volume of +0.5 percent. The price action yesterday keeps hope alive for DMG sale...or not. Theories welcome. Meanwhile the federal government is looking to open up new channels of patient care and reduce its reliance on the duopoly of DVA and FMS.

It all makes us wonder, how bad can it get?

We think DVA a ~$40 stock. The sale of DMG and the consequential stock repurchases will not be sufficient to overcome the combined forces of accelerating labor costs, organic growth headwinds, little capacity for inorganic growth and a federal policy that aims to limit progression of kidney disease.

MCD

Click here to read our analyst's original report.

McDonald's (MCD) just reported its worst traffic count since 2014. Traffic has now declined 5 of the last 6 years, and two of the three years under the current CEO! The stock is doing too well for Steve Easterbrook to get fired, but he is on a short leash. He will clearly face increased scrutiny in 2019, as it looks like 2019 will be another year of the same.

We believe that it's going to be a challenge for MCD to grow SSS greater than 2% in 2019 and there is a real possibility that sales turn negative in 2H19. Outside of the USA, MCD is seeing better results, but the evidence is mounting that we will see a deceleration in key operating regions around the world. MCD will miss sales and EPS in 2019.

W

Click here to read our analyst's original report.

Competitive intensity for Wayfair (W) is growing. Our discussions with key vendors suggest that AMZN is cutting prices with a clear bulls-eye on Wayfair, while simultaneously building alliances with furniture brands. At the same time we’re seeing W’s success attract competition from players that have on-line capabilities on top of brick & mortar dominance. Walmart’s new furniture line is a risk, Ikea creating an online furniture marketplace is a dark horse disruptor, and #oldretail laggards like Target, Bed Bath & Beyond and Pier 1 are getting flat-out desperate. As competition intensifies, we’re seeing Street estimates for W incremental share gain ACCELERATE by 800bps to new historical peak. That is not likely to happen, which means big risk of a revenue miss, or a margin dropoff should W spend up for its growth.

AMZN

Click here to read the short Amazon (AMZN) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.