Below are analyst updates on our thirteen current high-conviction long and short ideas. Please note we added Apergy (APY) to the short side and Wynn Resorts (WYNN) to 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
GIL
Click here to read our analyst's original report.
Gildan (GIL) didn’t exactly knock the cover off the ball in 2Q, but it was definitely a thesis validator for us. The company came in a penny ahead of the Street due to slightly better revs and GM. Nearly everything else was in line – except for the Q3 guide. The company guided to flat 3Q EPS growth on +mid-single digit revenue growth, and then a meaningful acceleration in 4Q – coming in at the higher end of the EPS range for the year.
GIL is rationing capacity to update plants for demand expected to drive 4Q and 2020+. Most importantly, in 4Q we should see an acceleration in top line to a mid-teens rate – on top of a 13.6% rate last 4Q. That sets the stage for meaningful acceleration into 2020, where the consensus numbers should prove low by 15-20%. This is when our thesis takes off.
Importantly, Gildan said it has received confirmation from Walmart that the George private label underwear products that it supplies will receive additional shelf space in Q4. The early momentum for the private label program is a good sign, because there is a much larger amount of shelf space within Walmart currently made by competitors (HBI bearish).
GIL also won space in five of the six countries that Walmex operates in. Ultimately, GIL is teeing up for a big acceleration in top line in 4Q, which should sustain into 2020 and 2021, more than tripling the EPS growth rate we’ve seen over the past five years. This will likely include more private label contract wins that have yet to be announced – both in the US and Int’l.
ANTM
The negative upside in Anthem (ANTM) MLR (Medical Loss Ratio) on 2Q19 was largely attributed to Medicaid re-determinations. We still like the long for the Medicare Advantage opportunity and see the re-emergence of rebate pressure as an opportunity to revisit our UNH short.
Click here to watch a recent webcast hosted by Healthcare analyst Tom Tobin and Health Policy analyst Emily Evans. Tobin and Evans discuss their ANTM long thesis.
WRLD
Our Financials team think World Acceptance Corp (WRLD) is a rich buying opportunity following a significant earnings miss recently that ignited panic selling. Incremental loan growth from riskier borrowers drove provisions well beyond estimates inciting fears over credit quality, which we think are completely overblown.
Looking forward, we expect loan growth to stabilize to the trend present prior to the days of the CFPB and the recent Mexican standoff that should also temper future share gain of new borrowers. Notably, the company’s new long-term incentive plan front-loads related expenses impacting margins by nearly 500bps down to zero over the next 5 years that should normalize and restore WRLD’s earnings power.
In addition, we expect the company to repurchase ~35% of shares outstanding over the next 5 years as indicated by management’s target leverage ratio at 2x and significant capacity following the divestiture of the firm’s Mexican operations.
The bottom-line, based on reasonable and conservative assumptions, WRLD is setup to provide considerable upside over the next 2-5 years.
WYNN
Below is a brief note written by CEO Keith McCullough on why we added Wynn Resorts (WYNN) to Investing Ideas this week:
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Patience continues to be a critical part of the risk management #process. We have plenty of long ideas - we would just prefer that you buy them when they are on sale. One of veteran Gaming analyst Todd Jordan's favorite names (long side) right now is Wynn Resorts (WYNN). It's down -3% today (no China trade deal?) and signaling immediate-term TRADE #oversold within his Bullish @Hedgeye intermediate-term TREND research view. Here's a summary paragraph from Todd's Institutional Research on why: Following a difficult Q1 and maybe with a little push from management, Street estimates for WYNN for 2H 2019 look too conservative for us. We like that set up. For now, Wynn maintains significant top line exposure to the VIP segment, which we think is close to bottoming, but longer term its strategy seems to favor mass and even base mass to some extent. The recent opening of the new Sichuan restaurant within Wynn Palace, the Light Rail (should be ready by Dec 19 at the latest), and other initiatives should support accelerating base mass dynamics for WYNN. Buy on red (don't chase charts), KM |
TSLA
Click here to read our analyst's original report.
U.S Tesla (TSLA) drive activity slowed to a crawl in our data for July. S & X activity has been sustained not far off the lows of our sample. Asia and Europe have looked somewhat better – but it is worth watching to see if ex-US activity slows as pent-up demand is satisfied, even at lower price points. Why is Tesla rallying back after the earnings report? We don’t think it should be.
ROL
Click here to read our analyst's original report.
Reviewing the 2Q19 Rollins (ROL) earnings call, the call was convoluted with excuses like being ‘overstaffed’ for an ‘abnormality’ not matching the data well. What organic growth was ROL expecting? It was about the same as 1Q19, and actually a bit better than we would have guessed given weather trends. As for pricing, if the whole industry thinks “we do not want to lose customer for price because the lifetime value of the customer is the most important thing to us” (Northen 7/24/19) then this industry is probably not set to fair well when faced with competitive entry. It isn’t a razor/blade set-up.
The consolidation story isn’t working, and the pricing gains that had driven margin expansion do not look to be working anymore, wither, as we see it.
DVA
Click here to read our analyst's original report.
This week we interviewed a former dialysis operator who managed a large number of facilities and a home dialysis program. We believe that home dialysis uptake is structurally impaired by physician incentives. We also took a look at the OIG request from Rep. Katie Porter (CA-45) that was released last week. The headwinds of labor cost, Medicare mix, and commercial payment pressure persist. With the sale of DMG and the balance sheet recap behind DaVita (DVA) and a catalyst calendar heating up, we remain bearish. (We'll have an update on DVA earnings next week.)
Click here to watch a recent webcast hosted by Healthcare analyst Tom Tobin and Health Policy analyst Emily Evans. Tobin and Evans discuss their DVA short thesis.
HQY
We've been short Health Equity (HQY) off and on since 2017. Much of the error in the call initially was the willingness of consensus to view profit generated from a rising yield environment as equivalent in value to their core HDHP business. HQY has a tight correlation to US 2Y yields. Now that economic growth is slowing and Fed is now firmly dovish on yields, we expect the consensus narrative to weight the growth deterioration in the core HDHP business. There is a longer term possibility that HDHP plan penetration resumes an upward trajectory after several years of stalling growth, but we believe this upside risk will remain theoretical until unemployment rates, now at historic lows, tick up significantly.
NFLX
Click here to read our analyst's original report.
While many have seen this day coming, we believe we are finally at the point where Netflix (NFLX) subscriber growth in the U.S. will see negative effects of market saturation. Net U.S. sub-additions of 4-5 million per year will decline to 1-3 million a year faster than what consenus is expecting. Recent and likely future price increases, and increased competition will accelerate this slowing trend. Additionally, we believe our estimate of end-market growth in the number of U.S. internet households may prove optimistic. We assume NFLX captures ~56% of remaining market by 2025.
NSP
Click here to read our analyst's original report.
We aren’t quite sure why Insperity (NSP) shares rallied into decelerating earnings growth, but the shares corrected sharply on Monday. NSP is in a competitive industry that sees a surge of interest following major changes to the complexity of employment. NSP isn’t typically a growthy, highly valued name outside of these periods. By this metric, we would expect the shares to correct by another 30%, give or take. The earnings call tone was downcast, limiting the credibility of the implied 4Q19 snapback.
MAR
Click here to read our analyst's original report.
A key risk for the industry, and particularly Marriott (MAR), is the risk that out-year unit growth will disappoint company and Street expectations. MAR’s Q1 pipeline number posted its first sequential decline in the last 5 years, and when gauged relative to its base (the proper way to measure pipeline) the pipeline slowed to its lowest point since Q1 2017.
While in absolute terms MAR’s pipeline is the largest in the sector, and should allow for a solid pace of gross room additions, the current slow down does not provide much wiggle room to account for deletions, construction delays, etc. Another way to analyze the pipeline is to look at the raw number of (net) units MAR is adding to its pipeline vs the number of units its adding to its actual room base, which we detail in the chart below.
Historically, given MAR’s size rarely will the pipeline expand more than actual room deliveries, but there should be somewhat of a balance as we generally saw prior to 2018 and Q1 2019. As the chart shows, Q1 2019 marks the biggest spread between net room deliveries and pipeline expansion – a clear indication that it’s becoming more difficult for MAR to maintain high unit growth targets and simultaneously replenish their pipeline.
GOOS
Click here to read our analyst's original report.
PETA notched a victory over Canada Goose (GOOS), as the company responded to the FTC false advertising probe into its claims that it ‘only treated animals ethically’ by stealthily removing its’ claims from the website and marketing materials. That doesn’t mean that it no longer kills coyotes and geese, but simply that its no longer lying about how it treats them. If the company was smart it would go synthetic with the fur-lined hoods. Much more consumer-friendly and would likely not even dent sales – could even help. And this company will need all the top line (and especially margin) help it can get over the next year.
As we continue to remind subscribers, the company's business model is going through a transition unlike any other we have seen – not just from a single seasonal product to lifestyle brand, but from consumer durable to non-durable. That transition comes at higher costs and greater risk of a margin collapse. There is a severe disconnect between the ultimate earnings power of this company and its current Enterprise Value – to the tune of 50%.
APY
Below is a brief note written by CEO Keith McCullough on why we added Apergy (APY) to the short side of Investing Ideas this week:
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Energy Stocks continue to be a horrible place to be as the Commodities market prices in a #FullCycleInvesting Strong Dollar during Quad 4 in Q319. One of our favorite Institutional Research Best SELL Ideas in Energy remains Apergy (APY). Here's a summary excerpt from our Energy analyst Al Richard's note post the recent quarter: Takeaway: 2Q19 results soften YoY while the operating environment continues to deteriorate and the competitive set intensifies. Fair value = $20 - $25 / share. Short APY is a Hedgeye Energy Best Idea. On the 2Q19 Results…… Revenue of $306MM came in below consensus estimates of $311MM. EBITDA of $75MM, after adjusting for a ~$3MM impairment & restructuring charge, was in-line with consensus and declined 3% YoY. Production & Automation Technology segment revenue declined 2% YoY while EBITDA declined 5% YoY on lower revenue and higher input costs. Drilling Technologies revenue declined 9% sequentially due to lower drilling activity and seasonal weakness in Canada. Segment EBITDA declined 9% due to lower revenue, while margins remained flat at 38% which the company attributed to cost and productivity initiatives. Sell the bounce to lower-highs, KM |
