Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we added Beyond Meat (BYND) and Cummins (CMI) to the short side of Investing Ideas this week. We also removed HealthEquity (HQY) from the short side. 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's (GIL) revenue growth depends on adding manufacturing capacity. The company’s margin structure requires a near full utilization of its plants. From a revenue perspective Gildan only greenlights construction when it has visibility into filling that capacity. The latest factory expansion was last year at its Rio Nance location which added new fashion basic capacity. Filling the new available capacity would grow revenue by a third. Gildan now projects to fill its available capacity next year while consensus estimates last year implied Gildan would never fill it. Gildan announced in May that it will build a new manufacturing hub in Bangladesh. When the new factory is opened it will add more than $500mm in revenue capacity, supporting Gildan’s growth into the middle of the next decade.
ANTM
Our labor data accurately forecast increased utilization of health care services. The accelerating labor trend of 12% in July v. 9% in June means not only higher same store adjusted admissions at THC and HCA but it also higher medical costs at Anthem (ANTM). That creeping realization got a little boost last week from JPM's regular hospital survey that suggested a similar conclusion. We prefer to rely on labor data than surveys so we will revist our algorithm, how and why it effectively predicts changes to medical care utilization.
TSLA
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Tesla (TLSA) US test drive slots for Model S & X are down about 37% from the second quarter pace at this point in the quarter by our measure. Not surprisingly, perhaps, S & X prices are being slashed. So far, the cuts haven’t worked. We have the best data for the US, and there are some indications that international sales are performing somewhat better. That said, a defeat of the Tesla demand thesis in its core U.S. market despite price cuts and a seasonally decent quarter would be, well, very supportive of the bear thesis.
ROL
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Rollins (ROL) has struggled to explain why profit was down YoY despite efficiency + retention improvements, and acquisitions that should all drive profit higher. 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. We see ROL on its way to being valued like a normal GDP-ish organic growth business. ROL shares looks to be riding out a growth-to-value conversion, with a style air gap to something like high teens.
The most recent earnings 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.
DVA
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We took a look at the extraordinary decline in per treatment costs in 2Q19 for signs it was associated with the deceleration in de novo center openings. We understand new centers are typically “seeded” with commercially insured patients to absorb overhead and labor costs as capacity utilization grows over time. Based on our analysis, it does not look like DaVita (DVA) management's recent shift to slower de novo activity has been a big driver of the per treatment cost trend.
NFLX
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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
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Insperity (NSP) 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
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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.
GOOS
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Luxury brands require distribution control in order to maintain exclusivity, desirability, and status. Luxury buyers do not covet what is common and importantly do not pay a premium for the prevalent.
Demand for Canada Goose (GOOS) jackets has exceeded supply for several years. Management may have been fortunate rather than prescient because they lacked key materials including coyote fur and available sewing capacity in Canada which caused supply shortages. Inventory had been rationed to wholesale partners as the company quickly tried to scale up production. The company’s manufacturing capacity appears to have caught up with demand during the tail end of the 2018-19 winter. Wholesale customers who in the past would receive a small fraction of the orders they placed received greater and greater amounts in early 2019. When wholesale partners have more inventory than they can sell promotions may start and the brand’s heat will quickly cool. We saw this play out most recently for Ugg boots.
APY
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Halliburton Honing in on Artificial Lift..... Apergy's (APY) artificial lift product line appeared to hold up in the quarter, 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%.
PENN
Penn National Gaming's (PENN) Plainridge property’s GGR plunged 18% YoY in July. This is slightly worse than our Q3 estimate for a 17% decline, although the Street and management expectations were looking for better results. Plainridge’s slot volumes tumbled 15% YoY. We’ve mentioned before that Plainridge will feel a lot of pressure from Encore Boston’s opening given overlapping addressable markets and a far superior slot product at Encore Boston. As for Encore Boston, July was disappointing too, as slot revenues were only $21m, substantially below our estimate of ~$30m. It will take some time for Encore Boston to ramp on the slot side, especially as competitors pile on the promotions (particularly Mohegan and Foxwoods). Encore generated $27.2m in table revenues for July – in-line with our expectations. In the Fall and early Winter Encore will likely begin marketing to WYNN’s higher end player database as the service levels get up to standard, which should be a sizeable lever for them to pull going forward.
APHA
Having followed Aphria's (APHA) interim CEO very closely during his tenure as CEO of HAIN, we are very familiar with his ability to make things look better than they appear. For years, Irwin claimed to be building a business, yet everything was more hype than substance. We would also note that on the recent earnings call the interim CEO referenced building “a large US packaged good company.” For background, Mr. Simon was early in organic food growth, but he did not build a company that has lasting value. Operating profits for HAIN have declined 50% over the last 5 years and the future for the company looks bleak. In the end, HAIN was nothing but a classic roll-up story that failed miserably. So why should Mr. Simon have any credibility when he say’s “If we look to the future, Aphria will be a consumer packaged goods company with plenty of options in the U.S. market.” In its current form APHA is basically a Canadian cannabis farmer.
BYND
Hedgeye CEO Keith McCullough added Beyond Meat (BYND) to the short side of Investing Ideas. Below is a brief note.
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As the US economy digs deeper into #Quad4 in Q3, the short selling opportunities get tastier. Tasty Burgers, or not? Howard Penney doesn't buy the Beyond Meat (BYND) FOMO and hype at this price. From a recent Institutional Research note, here are some of Hedgeye Jedi veteran Penney's concerns:
Short today's bounce, KM |
CMI
Hedgeye CEO Keith McCullough added Cummins (CMI) to the short side of Investing Ideas. Below is a brief note.
Looking for ways to broaden your exposure to #Quad4 in Q3 via the Indusrtrials (XLI)? Our Industrial Analyst Jay Van Sciver's latest timely SELL calls (Institutional Research product) has been Cummins (CMI). It's bouncing to lower-highs on #decelerating volume like most things this week too.
Here's a summary excerpt from Jay's independent research view:
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While we get the bull arguments for CMI, from aftermarket to emerging markets, we see too many business and narrative headwinds going into 2020. Cyclicals have a way of genuinely looking ‘cheap’ when in fact expensive; we think shares of CMI are pricier than longs believe. We are removing PCAR as a Best Ideas Long, taking a modest win in the face of declining freight volumes and truckload pricing. We very much like PCAR but want to avoid riding it down during an increasingly obvious industrial deceleration. As for CMI, a deceleration in activity may adversely impact the profitability of suppliers to capital equipment makers. Added to short-term and long-term structural headwinds, as well as fewer emission-related content opportunities in CMI’s key North American market, the next couple of years may prove unusually challenging for CMI. We think the shares have >40% downside risk, with catalysts ranging from truck order backlog drawdowns to high decremental margins in key engine markets. |
Sell on green (so that you dont have to panic on red),
KM
