Below are analyst updates on our eleven current high-conviction long and short ideas. Please note we removed World Acceptance Corp (WRLD) and Wynn Resorts (WYNN) 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
GIL
Click here to read our analyst's original report.
Gildan (GIL) does compete in a commodity market for basic, undecorated apparel, but it earns net margins in the low teens and free cash margins in the mid-teens.
It earns those returns because it is the low cost leader in the industry. Gildan passes on its low costs to its customers which has enabled the growth of the decorated t-shirt industry.
Labor is less than 10% of Gildan’s cost of goods so just moving manufacturing to a low labor cost country will not give a competitor similar unit costs.
The critical factors for Gildan’s low cost advantage now are the volume of its production (market share >70%), the efficiencies developed over time in the factories, and tax and tariff regulations for its manufacturing. That makes it extremely unlikely Gildan will see a competitive threat to its low cost moat.
ANTM
The negative upside in Anthem (ANTM) MLR 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.
Legislation is now emerging which appears even more negative than the withdrawn Rebate Rule. Meanwhile the White House has assumed the role of the wild child to the Senate's "adult in the room," a dynamic that argues for some legislation in September. What that looks like, is still difficult to discern. More to be revealed.
TSLA
Click here to read our analyst's original report.
We think life for Tesla (TSLA) gets worse from here. Lowering ASPs helped to stimulate deliveries but at a sizeable loss.
Capital intensive growth stories typically require Capital Investment, not running the business to conserve cash.
Record unit deliveries combined with the lowest unit SG&A (a metric we thought would be meaningfully higher, and drove 2H18 profits), and yet Tesla still posted a loss.
This is not what fixed cost leverage in manufacturing is supposed to look like. Tesla is facing a demand deficit and is using price to fight that damaging reality, as we see it.
While deposits portend more pain ahead, the launch of subsidized competing vehicles is a bigger negative, we suspect.
And US test drive activity for S & X has never been weaker, and Model 3 is also dire consider the seasonal strength that should be evident in July. Tesla is facing larger losses and ongoing demand challenges in 2H19.
ROL
Click here to read our analyst's original report.
Rollins (ROL) reported the lowest 2Q margin in years, following the lowest 1Q margin in years, following the lowest 4Q margin in years. At some point, the market may well wonder whether this is a structural change in what had been a steady margin expansion. We think it is, partly driven by excessive pricing by ROL and increasing competitive intensity (e.g. Rentokil’s entry). This was the margin compression and decelerating organic growth that formed the catalyst for our short view.
Is July getting better? That’s apparently the message from management, but secondary indicators don’t show a trend reversal.
DVA
Click here to read our analyst's original report.
We are still doing our work on calcimimetics, but were surprised no one asked about CMS’s proposal to terminate the TDAPA if the drug manufacturers failed to submit ASP data to CMS. Apparently some manufacturers have not been submitting data or not submitting it in a timely manner. Their delays result in CMS reimbursing dialysis manufacturers at Wholesale Acquisition Cost which does not include discounts, price concessions, etc.. When CMS pays the TDAPA on the basis of WAC, they are paying more than they should for calcimimetics. For that reason, beginning in 2020, CMS will cancel the TDAPA for a drug for which there is no ASP data submitted or no data submitted in a timely manner.
It is unclear if DaVita's (DVA) main supplier Amgen is implicated in CMS’s new policy, but if they are, an end to the TDAPA would mean that DVA would not be compensated for any calcimimetics expense until the bundle is rebased in, presumably, 2021.
We agree with the Company’s rather sanguine view of home dialysis. As we have noted previously, it is a high mountain to climb given practice patterns, patients preference, education on options., etc.
The company appears to be anticipating a multi-state ballot effort by the SEIU in 2020 which could prove to be more expensive than the $60 million 2018 effort in California.
HQY
Health Equity (HQY) member growth is at risk of incremental deceleration as employment slows given the macroeconomic set up, and possibly declines in a recession scenario. Republican-driven policy to expand HSAs to working Medicare populations are dead in the Potomac River as Capitol Hill remains divided for the for the foreseeable future. While there will be a delay between falling rates and Custodial Yield, the path to lower rates appears all but assured.
We believe investors will recognize the future impact despite the custodial asset investment structure with substantial earnings headwinds from falling yields. With fundamental pressures mounting, a negative economic backdrop, and a deteriorating Risk Score, high valuation, we remain short HQY and see -30%+ downside from current levels.
NFLX
Click here to read our analyst's original report.
We added Netflix (NFLX) as a short on the belief that investors were overestimating NFLX's pricing power and ability to drive further adoption in key developed markets, especially given the looming competition from legacy media. Our conviction in the short grew following Q1 earnings, and the data we track intra-quarter indicated a material slowdown in gross subscriber additions in Q2.
In 2Q19, NFLX reported the largest net paid subscriber miss since 2016. The weakness was broad-based, with gross subscriber additions missing management's forecast "across all regions" and the U.S. paid subscriber base declining QoQ for the first time in the company's streaming history. Meanwhile, management's 3Q19 global paid net subscriber guidance of 7.0 million looks aggressive and likely sets the stage for another disappointment later in the year. Overall, we believe this is the beginning of the end for the NFLX growth story.
NSP
Click here to read our analyst's original report.
The Insperity (NSP) earnings growth story requires leveraging sales growth, which didn’t happen in the most recent quater. Gross Profit per Worksite Employee (GP/WSEE) declined slightly in an otherwise seemingly good employment environment – an indication that this business is not exclusively tethered to macro employment trends.
Revenue decelerated into 3Q, with web traffic generally supporting a muted near-term growth picture. Backend loaded guidance isn’t particularly credible. For longs that believe the penetration growth story, that has been the bull story for decades at lower valuations.
MAR
Click here to read our analyst's original report.
Following Marriott's (MAR) now back to back weak quarters (and guidance), we still see a disconnect between sentiment and valuation vs industry and company specific catalysts. RevPAR matters folks, even as the bulls point to the much lower impact to EBITDA from RevPAR changes.
Historically, valuation multiples compress dramatically following negative RevPAR pivots. Sure, we’re concerned with the immediate effect of slower RevPAR growth to near term fee growth expectations. However, the bigger issue may be the impact of lower RevPAR and ROI to MAR’s owners and potential owners. We have recently shown that these factors have historically pressured future unit growth.
MAR’s pipeline continues to display some cracks in its foundation – yes, even after putting up a sequentially better total pipeline number, 1H 2019 pipeline growth is moving at its slowest clip in five years, and construction pipeline activity declined on a YoY basis for the first time ever.
The aforementioned are key tenants to our bear thesis, and potentially a big blow to the bull thesis. Though we understand the Bull case for MAR (and other Brands), the expectations for continued beats and a reacceleration of growth are well reflected in current valuation multiples, and we actually view both as unlikely scenarios for the near term.
GOOS
Click here to read our analyst's original report.
Canada Goose (GOOS) will report 1Q20 earnings next week on Wednesday before the open. Street expectations are for a loss of 18 cents per share vs a 12 cent loss last year. That’s a low bar, and this is a very small seasonal quarter, so its impact on real earnings is not material, and just slightly better revenue than expected can mean an easy earnings beat.
What will matter more than the quarter itself is guidance for the future. We think the company is investing in inventory with the expectation of big sales growth in the latter part of the year. When the sales don’t materialize it will mean big margin risk for GOOS. Again a beat is likely this Q, but the stock will likely care more about the outlook on the fall/winter selling season when GOOS does the vast majority of its sales.
APY
In the most recent quarter, Apergy's (APY) artificial lift product line appeared to hold up, and in the Permian basin ESP revenue grew 5%. However, APY noted that its revenue declined outside the Permian, we will get more detail from the 10-Q.
Making matters more interesting, though, is that on its 2Q19 call Halliburton outlined a shift in strategy for a prolonged “change in our customers’ behavior.” The new strategy includes a significant reduction in CapEx, but most importantly, it transitions HAL’s focus from completion related business lines, where competition is intense, to production related business lines such as artificial lift. HAL entered the artificial lift market in earnest in 2017 with the acquisition of Summit ESP, which produces electronic submersible pumps (ESP’s) and largely operates in the Permian.
For financial context, HAL grew its artificial lift revenue by 55% from 1Q18 to 1Q19, and again called out the business line as a positive in 2Q19. During 1H19, APY grew revenue in its Production and Automation Technologies segment by ~1%.
