Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note we added Medallia (MDLA) and Dexcom (DXCM) to the short side of Investing Ideas along with Valvoline (VVV), AMN Healthcare Services (AMN), and Roku (ROKU) on the long side this week. We have also removed Apergy (APY) 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 (GIL) is the biggest beneficiary of the exodus to Western Hemisphere manufacturing and stepped up private label contracts by mass retailers. In ‘capacity growth mode’ to facilitate much more robust top line, which plays out starting in 2H.
Gildan is still ramping up production of fleece as it modifies what each plant manufactures now that the latest Rio Nance 6 plant is operating. Fleece has higher margins than t-shirts, because the selling price is considerably more than the additional cost of cotton and sewing costs are about the same. Despite the concerns the set up for the stock may be better with lower near term expectations for Q3 followed by an analyst day that focuses on the company’s growth prospects shortly afterwards.
Gildan currently makes men’s underwear bottoms and tops for Walmart’s George brand. Due to Walmart’s size winning additional private brand contracts would have an outsized impact for Gildan. For example we estimate Walmart’s undecorated men’s fleece program to represent $300mm at retail. We believe Gildan is well positioned to win further contracts in the future with Walmart and other retailers.
Now the two year growth story turned into a five year growth story. We’re looking at $2 in EPS for this year. If our model is correct, GIL accelerates to $3.00 over two years. We get severe pushback on this number, but it’s in the cards. You win on earnings growth alone on this name, but with this capacity expansion announcement, the ‘winning duration’ just doubled – which is likely to result in a re-rating. That’s your path to a $60 stock over 1-2 years. Reiterate Best Idea Long.
V
Visa (V) posted another round of solid results in the third quarter of its fiscal year, highlighted by +11.5% Y/Y, above-consensus growth in net revenues and an expanded core operating margin.
Service, data processing, and international revenues of $2.41B, $2.66B, $1.98B grew +9.5%, +12.8%, and +8% Y/Y, coming in +1.7%, -0.3%, and +0.51% relative to street estimates, respectively. Other revenues of $342M grew by +49%, surpassing street estimates by +8%. In addition, client incentives of $1.55B, although up +12.5% Y/Y and one percentage point higher than gross revenue growth, registered -5% below consensus, with the contra-revenue figure accounting for 20.93% of gross revenues.
Operating expenses were -18% lower Y/Y, driven entirely by the $600M litigation provision taken in the prior year quarter. Excluding the -99.8% decline in litigation provision, operating expenses grew by +10% Y/Y. Accordingly, core operating margin, measured as EBIT ex. litigation provision and irregular/infrequent items, came in at 52.92%, marking a +0.39% linked-quarter and +0.23% Y/Y expansion.
As a result, operating income increased by +35% Y/Y, with pretax income rising by +37.5% as a result of a lower interest expense, and net income rising by +33% following a higher tax provision.
In sum, diluted GAAP and Non-GAAP EPS of $1.37 grew by +37% Y/Y, aided by a -2.5% Y/Y reduction in the weighted-average share count and ahead of street estimates for $1.32.
Furthermore, during the quarter, Visa generated free cash flow of $2.6B, returning $2.7B to investors through share repurchases of $2.1B, or 12.9MM shares, and dividends of $565MM.
All-in-all, 3QFY19 was very much a standard chapter in the greater Visa story: solid growth in payment volumes, processed transactions, and cross-border spending, driving further solid top-line growth with healthy, sustained operating margins, culminating in rich free cash flow generation enabling strong capital returns in the form of dividends and share repurchases.
vvv
Hedgeye CEO Keith McCullough added Valvoline (VVV) to the long side of Investing Ideas this week. Below is a brief note.
Looking for names that we like that are down on fear of higher Oil? Valvoline (VVV) is for sale today and Brian McGough & Jeremy McLean still like the stock here.
Here's a summary excerpt of a recent Institutional Research note:
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The stock has performed very well since we made it a Best Idea Long on 6/1/19. There are a few things we think are driving the stock higher… the quarter's results, potential activists building their positions, and a possible flight to safety as concerns over macro rise, with VVV being a relatively low cyclicality name within consumer. |
AMN
Hedgeye CEO Keith McCullough added AMN Healthcare Services (AMN) to the long side of Investing Ideas this week. Below is a brief note.
Looking for names that my analysts like that are signaling immediate-term TRADE #oversold within their Bullish @Hedgeye TREND independent research views?
AMN Healthcare Services (AMN) fits that profile, -1.2% here today...
Here's an summary excerpt from healthcare analyst Tom Tobin's most recent Institutional Research note:
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Conference commentary this week on increased utilization comes as no surprise given what our labor algorithm has been telling us for months. The labor market for nurses has been tight and continues to represent a tailwind for AMN. We've assembled the a number of data series that point to accelerating demand into year end. |
roku
Hedgeye CEO Keith McCullough added Roku (ROKU) to the long side of Investing Ideas this week. Below is a brief note.
Here's a good example of a name we've liked but I don't have to like at every price. Now that ROKU is on sale signaling immediate-term TRADE #oversold, you can step in and buy it on sale.
Here's the summary excerpt from Andrew Freedman's Institutional Research note that just went up on our Independent Research platform:
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We do not view Comcast's revision to its Flex program as a real fundamental threat to Roku's business or our modeling assumptions over our 12-24 month investment horizon. |
TSLA
Click here to read our analyst's original report.
Negative, Price Cuts Propping Up Sales, Entrants Already Hitting S&X: Price cuts to offset weak demand may be the only lever Tesla has left to pull. With competitive entry that retains the US tax credit, Tesla faces a steady headwind for several years. S & X demand declines may just be a preview of what faces the 3 and, if it comes, the Y. Survey data, test drive data, and pricing data all look weaker.
Furthermore…
China Dependence Faces December Tariff, Ulterior Motive Likely In Support: Tesla demand in China looks to have softened as pent-up demand transitioned to flow, along with a step-down in EV subsidies. Tesla hasn’t been exempted from a 25% tariff expected this December on imports, a potentially significant negative. China’s aspiration to be a world leader in EVs may leave it hoping Tesla defaults, allowing the state to acquire Tesla’s factory and assets.
ROL
Click here to read our analyst's original report.
When we first started telling subscribers to short Rollins (ROL), it was trading at 60x Earnings with #PeakMargins. Now it's trading at 47x Earnings!
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.
DVA
Click here to read our analyst's original report.
The American Kidney Fund is threatening to leave California in January if Governor Newsom signs AB290. They believe the bill is in conflict with the OIG's 1997 Advisory Opinion. To accomodate the AKF's concerns, the effective date of the bill is tied to the issuance of an updated OIG Opinion. There is one school of thought, articulated best in Florida Blue's lawsuit against DaVita (DVA), that the AKF's CPA program won't pass muster with the lawyers. In that case, a new opinion could affect CPA throughout the U.S. At Capital Market Day this week, DVA indicated that the AB290 represented a $25-40MM headwind; if applied nationally the number could be $150-$250MM.
NFLX
Click here to read our analyst's original report.
We believe Netflix (NFLX) mobile app downloads are a good proxy for gross subscriber additions based on the high absolute correlation to NFLX's reported metrics. While the data suggests that Q3 net subscriber additions will be much better than Q2, we believe the improvement is more than reflected in management's Q3 guidance of 7 million net new paid subscribers. Overall, we see downside risk to Q3 subscriber estimates if the September slowdown persists and churn remains elevated (we will be launching our quarterly churn survey at month-end).
NSP
Click here to read our analyst's original report.
Implementation of ACA and Tax Cuts & Jobs Act (TCJA) added complexity, helping adoption of PEO relationships temporarily. This occurred in an unusually robust employment environment. This tailwind is now baked into Insperity (NSP) (tough) compares as employment slows.
In January 2020, the administration’s changes to HRAs to permit individual health care insurance premium reimbursements gives small businesses a simple, more flexible alternative to group plans. Group plans are key to the PEO value offering.
The PEO industry (i.e. Professional Employer Organization – providing comprehensive HR solutions for small and mid-size businesses) has hundreds of competitors – it doesn’t look like an industry structured for high profitability. On a WSE basis, NSP's valuation has increased ~3x from early 2016, the last decelerating growth/inflation Quad 4 macro environment.
MAR
Click here to read our analyst's original report.
Following Marriott International'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.
GOOS
Click here to read our analyst's original report.
Canada Goose is often compared to Moncler, even though there are some significant differences. Moncler’s shares traded down this week after the CEO said Hong Kong protests could hurt business this year. “Hong Kong is a situation that’s not great as is also the case for the whole of South Asia including Macao and Taiwan,” Moncler Chief Executive Remo Ruffini said. Asked if he could confirm the company’s growth outlook, Ruffini said “I hope so but the world is complicated.”
The majority of European luxury companies said during the Q2 conference calls that Hong Kong protests did not impact Q2 results as disruptions were largely offset by strength in nearby markets.
However, the protests were more disruptive in the weeks following Q2 and some management teams noted there could be an impact if they continued. This is bearish on the margin for GOOS which has been following the Moncler store opening playbook and has a store in Hong Kong, but a small business in mainland China compared to other luxury companies.
PENN
Penn National Gaming's (PENN) remains a short idea for our Gaming, Lodging & Leisure (GLL) analyst Todd Jordan.
As we have said in the past (recall, PENN has periodically been on Investing Ideas as a LONG), PENN is a premier operator stuck between a rock and a hard place for the likely future. Their cost cutting and margin improvement initiatives appear to be mostly played out, revenue growth and fundamental catalysts are hard to come by for the Regional gaming space. For PENN specifically, their new CEO (former COO) could invoke change regarding capital allocation, but fundamentally we’re seeing more negative catalysts than positive.
Demographic headwinds will keep same store revenues flat at best in most regional gaming markets. With cost cutting and marketing efficiencies mostly met, and competition rearing its ugly head in a few of PENN’s core markets, EBITDA could fall short of investor expectations.
Not good for a very leveraged small cap.
APHA
Click here to read the short Aphria (APHA) stock report Cannabis Analysts Howard Penney and Shayne Laidlaw sent Investing Ideas subscribers.
CMI
Shares of Cummins (CMI) are in a classic cyclical set-up – a low multiple on a local peak in earnings luring investors into a value trap. Even management thinks it’s a peak or near peak across their markets. The potential for the electrification narrative and Traton/ NAV to be a sizeable valuation headwind is substantial. The build rate has been over 3x preliminary July orders (the lowest since the GFC), rates have given up the electronic logging surge, and freight volumes are far from encouraging. Commodity prices and general industrial activity are also near-term headwinds. We doubt there will be any prize for being early for a turn in shares of CMI and think it is a short that is playing out.
MDLA
Hedgeye CEO Keith McCullough added Medallia (MDLA) to the short side of Investing Ideas this week. Below is a brief note.
Staying with the SELL Software (IGV) view and looking to send SELL signals on Ami Joseph's favorite shorts (on bounces) which includes Medallia (MDLA).
Here's a summary excerpt from Ami's latest Institutional Research on the sketchy software name:
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"Remember, the underlying theme of the MDLA IPO was trying to convince investors that all of a sudden this 18 year old company was something nobody thought it was. Leslie (successfully) dressed up Callidus in exactly the same way and sold it to McDermott at SAP. If you are a bull, and you’re playing for an acquisition, just remember there are only so many McDermotts out there who will sign off an $8B acquisition with less than 6 weeks of due diligence." |
DXCM
Hedgeye CEO Keith McCullough added Dexcom (DXCM) to the short side of Investing Ideas this week. Below is a brief note.
Looking for more Healthcare "Growth" Shorts? Our Healthcare analyst Tom Tobin remains bearish on Dexcom (DXCM) that bounced to lower-highs on #decelerating volume this week.
Here's an excerpt from Tom's latest Institutional Research note on the name:
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DXCM- We've been tracking medical claims for interpretation of continuous glucose monitor data along with app downloads. Comparisons are getting tougher from here and through 1Q20. The market freaked out on management commentary about "tough compares" too... |
