Below are analyst updates on our thirteen current high-conviction long and short ideas. Please note that we removed Uber Technologies (UBER), Wayfair (W) and Brinker International (EAT) 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
EXP
Click here to read our analyst's original report.
We continue to see significant value to unlock in Eagle Materials (EXP). The large buyback is encouraging, sure. Could EXP do an RMT with Continental, to prevent tax leakage? Could cement be sold at a high enough price that the taxes don’t matter? Could a cement buyer take the whole thing, and sort out wallboard later? IDK, but there are ways that EXP could do this well beyond evasive answers to direct questions on the tax basis of the proppant business.
In fairness, we think this is the rare management team that will try to execute well. In terms of the operations, expect the market to get excited about wallboard PPI in a couple of months. Prices have firmed, from what we see, with improving housing activity. The cement side is basically sold, but it is worth noting that road construction is an area of construction growth.
GIL
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Tariffs the Trump administration has threatened to place on apparel imports from China could be a long term opportunity as more US companies diversify manufacturing away from China. With its shorter shipping times to the US from its low cost manufacturing hub, Gildan Activewear (GIL) is uniquely positioned to benefit from a shift in apparel sourcing. From Central America Gildan can manufacture and export apparel to the US duty free as long as it uses US cotton. Gildan has started shipping three new private label programs this year and is well positioned for further gains with the new potential of additional tariffs. The new Walmart private label program (Gildan produced) that hit shelves this quarter was awarded before apparel tariffs were proposed.
TSLA
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Tesla (TSLA) 2Q19 results particularly on cash flow might be better than expected. With the shares lower, the looming threat of a bounce back / squeeze in TSLA shares merits a careful review of 2Q19 delivery indicators and the 3Q19 outlook. With the step-down in tax credits, reduced Chinese subsidies, and a lack of new lower priced variants & geographies, we see a decent bearish catalyst in the evolution of 3Q19 deliveries. 3Q19 looks like a better bear set-up to us, with an expected low 70s delivery print amid a need to spend cash on the Model Y line.
ROL
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Our work continues to show signs that the tailwinds behind the pest control industry are fading. Pricing trends in the industry suggests rates have been stretched and may now be facing competitive pressures based on our work. Customer counts have stalled, while revenue per customer has ramped significantly over the past five years following Rollins' (ROL) pricing study. Combined with other growth and competitive headwinds, we expect market recognition of pricing and ancillary service limitations to drive a revaluation in ROL shares.
DVA
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At long last the Federal Trade Commission cleared the sale of Davita Medical Group to UNH with some conditions. Those conditions include divesting the HealthCare Partners of Nevada unit in a sale to Intermountain Healthcare. Meanwhile, Intermountain will be required to sell its minority stake in P3 Partners, a Las Vegas area service provider. The divestiture will be handled post close by UNH and the deal price is not reduced.
Since our DaVita (DVA) short thesis has presumed eventual close of the DMG sale, a more important event is the movement of AB 290 through the California Legislature and the Third Party Payment rule under consideration at the White House. With the ~10% of patients who are commercially insured accounting for 110-115% of DVA’s profit, the increased regulation and prohibition of third party payments will be a much bigger deal to DVA than the baked in sale of DMG.
PENN
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Penn National Gaming (PENN) continues to give away revenue market share to focus more on improving margins through identifying and targeting only profitable customers. This strategy should produce fewer bottom line benefits over time as we appear to be in the later innings if its effectiveness.
Revenue expectations (ex Greektown) may still be too high for the rest of 2019 for PENN. As a result, EBITDAR guidance may be cut again later this year despite higher PNK synergies.
UNH
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Earlier than expected, the CMS sent to the White House for review and approval the final rule that would require manufacturer rebates to be shared with Medicare beneficiaries at the point of sale. We expect the rule to delay implementation until mid-2020 instead of the proposed Jan. 1, 2020. UnitedHealth Group (UNH) has aggressively used rebates to manage medical cost trend and keep Medicare Advantage plan premiums consistently low. ANTM on the other hand has not had the benefit of rebates and ceded market share in Medicare Advantage. The playing field will level under the new set of rules. We reiterate our short call on UNH.
HQY
The primary thesis points on our HealthEquity (HQY) short call center on custodial cash yields, spend down, HSA adoption penetration, and recession risks in same customer growth. In addition to the core thesis, The Departments of Labor and Treasury announced an expansion of Health Reimbursement Accounts (HRA) which appears competitive to HDHP-HSA plans. We remain comfortable with the thesis here.
NFLX
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Since Netflix (NFLX) price increases went into effect in April 2019 for existing customers in the U.S., we would not be surprised to see domestic paid subs decline QoQ as attrition increases while gross adds slow. Based on conversations with investors, we believe an in-line print will be viewed as disappointing given NFLX bulls believe management's guidance was conservative. Meanwhile, with worldwide app download growth on track to go negative in 2H19 (growth already negative across 65% of NFLX markets QTD), we see risk to consensus net new paid subscriber estimates of +8.5% YoY in 2H19.
WSM
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West Elm is Williams-Sonoma’s (WSM) only growth concept. In February Walmart launched MoDRN, an exclusive low priced line of modern furniture and décor that targets a similar demographic and aesthetic as West Elm. Initially the line was launched with 650 furniture and décor pieces. MoDRN’s prices are roughly half of West Elm. Online searches could put deflationary pressure on West Elm as customers compare like items at much different prices.
Walmart has put MoDRN across its online platforms which will give it a broad reach. Walmart’s scale in sourcing combined with its distribution network and two-day delivery network could make MoDRN a disruptive competitive threat.
SBUX
Luckin Coffee was founded in November 2017 and is an on-demand food & beverage coffee chain startup that has plans to redefine the coffee market in China. Given the CV of the CEO, and the capital the company is attracting, there will be no stopping Luckin any time soon. As Starbucks (SBUX) will tell you, the potential for the coffee market in China is tremendous and they are creating a path for new competition in the market. It appears that Luckin did not happen by accident, and now celebrity CEO Qian Zhiya (Jenny) has been able to attract a tremendous amount of venture capital to support the company’s growth. Higher-end stores (SBUX) with expensive decor and hand-crafted beverages/bakery and fat margins, will likely suffer with the data centric competitor trying to reverse engineer the coffee experience.
NSP
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Insperity (NSP) is a highly cyclical company. Shares of Insperity are trading as though the PEO (i.e. Professional Employer Organization – providing comprehensive HR solutions for small and mid-size businesses) industry isn’t cyclical and increasingly mature. The cyclical elements extend beyond employment trends to costs, regulations, and marketing.
Economic growth appears to be slowing. The Hedgeye Macro team sees an environment of U.S. Growth slowing throughout 2019. As we move from US Macro Quad 3 into Quad 4 (both real growth slowing) and Insperity faces more difficult comps, we think shares re-rate downward.
Furthermore, with steep comps, intensifying competition, slowing growth, and a lack of incremental tailwinds, investors will likely be just as surprised by the cyclical downside as they were by the post-GFC recovery.
MAR
Click here to read our analyst's original report.
Looking past just 2019 unit growth, Marriott's (MAR) pipeline is showing some cracks in its foundation – a potentially big blow to the bull thesis. The bear case could already be accelerating as MAR will be under a microscope to deliver EBITDA beats and incrementally more positive forward looking commentary with regards to the pipeline and RevPAR outlook. We see longer term top line and EBITDA growth as likely to disappoint with more negative evidence to emerge over the next several quarters. Our call is less about near term EPS, but more about multiple contraction as growth decelerates.
