Below are analyst updates on our eighteen current high-conviction long and short ideas. Please note we have removed Gildan Activewear (GIL), Visa (V), and Pinterest (PINS) from the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
VVV
Click here to read our analyst's original report.
A big part of the bull case on Valvoline (VVV) is the new trajectory of store growth for VIOC. Since the IPO out of Ashland, VVV has had the capital freedom to open stores where, how, and at the rate it wants to. That has meant accelerating store growth. At the same time these stores have been performing very well, leading the company to take up its growth targets at the investor day earlier this year. More stores will build awareness, accelerate share gain vs weaker competitors, and seed new markets for even further long term growth. We think the company has the ability to double its store count in North America over the next 5-10 years, while putting up solid positive comps along the way.
AMN
Click here to read our analyst's original report.
Health Care labor trends continue to run tight in 2019 which should bode well for AMN Healthcare Services (AMN) into 3Q19 earnings. The Healthcare team liked AMN as a long in 2018, and initially the stock did very well, but AMN guided lower on a contract loss heading into 1Q19 and the team has been on their back foot ever since. When the company guided lower, AMN was setting up to comp the premium placement headwinds the company experienced in early 2018 and unfortunately the contract loss put the Healthcare team's thesis on hold.
But the data and the anecdotes have held up. Heading into 3Q19 results, we continue to see much of what we anticipated with our original thesis with some additional positives emerging as well. For example, the Kaiser strike scheduled to begin October 1 could be an isolated event, but it could be a sign that worker frustration is boiling over. Healthcare worker average weekly hours continue to climb to multi-year highs putting stress on the system. Also, our tracker data continues to point to accelerating activity well above prior readings.
Given our team’s long-term investment horizon, we continue to be bullish past the near-term quarters.
ROKU
We spoke with a 20-year veteran of the digital media and advertising industry whose background includes 7-years in OTT media sales and launching Roku's ad platform. The purpose of the call was to understand better the state of the market for OTT advertising and the competitive environment that Roku operates. Our contact outlines Roku’s unique position as an independent platform and partner within the OTT space as the streaming wars escalate, addressing Roku’s core competencies and potential competitive concerns.
Competition concerns overblown; "The move to streaming and cord-cutting is not going away, and there are still a lot more Pay-TV subscribers than cord-cutters. The market for linear TV advertising is $70 billion a year, and only 3% of ad-spend is allocated to OTT despite it representing 30% of viewership. That is going to change and change very rapidly. We are starting to see it happen already. Competition is not a problem when you have such a large and growing market that can support 3 or 4 big platforms long-term."
Further points will be discussed by Communications Analyst Andrew Freedman on The Macro Show on 10/8.
BKNG
Click here to read the long Booking Holdings (BKNG) stock report that was sent Investing Ideas subscribers this week.
THC
Despite Tenet Healthcare’s (THC) recent struggles, our data continues to advocate for a price target well into the $30s based on our 2020 EBITDA estimate. Our labor data accurately forecasts increased utilization of health care services. The accelerating labor trend of 12% in July v. 9% in June signals higher same- store adjusted admissions at THC. That conclusion was recently corroborated by JPM's regular hospital survey results. We also believe the new ASC rule for high acuity cases will be a catalyst for net market share gain through the company’s partnership with USPI.
MA
Mastercard (MA) recorded a strong set of results in the second quarter, highlighted by +12.2% Y/Y, above-consensus growth in net revenues and an expanded core operating margin.
Operating expenses were -0.75% lower Y/Y, driven entirely by the $225M litigation provision taken in the prior year quarter. Excluding the decline in litigation provision, operating expenses grew by +14% Y/Y. Accordingly, core operating margin, measured as EBIT ex. litigation provision and irregular/infrequent items as a % of gross revenue, came in at 39.50%, marking a +20 bp linked-quarter expansion, albeit a -90 bp Y/Y contraction.
As a result, operating income increased by +24% Y/Y, with pretax income rising by +31% as a result of higher other income driven by gains recorded on the firm's equity investments in the period. Net income increased +30.5% Y/Y following a +33 bp Y/Y increase in the effective tax rate.
In sum, diluted GAAP and Non-GAAP EPS of $2.00 and $1.89 grew by +33.6% and +13.7% Y/Y, aided by a -2.29% Y/Y reduction in the weighted-average share count and ahead of street estimates for $1.81 and $1.83, respectively.
ROL
Click here to read our analyst's original report.
The current share price of Rollins makes little sense to us, and we expect a significant downward revaluation by the market.
Margin gains have stalled amid increasing competitive intensity in a mature, slow growing market. Attractive markets for growth and acquisitions present less runway and higher transaction prices.
Competition is less of an issue when industry revenues are growing. We see cause for concern. Slowing from weather, housing, or a decelerating economy could bring greater competitive intensity. It won’t be perfect forever, and ROL is priced for perfection.
Acquisitions have filled in during periods of weaker organic growth. This is fine, as long as the acquisitions are reasonably priced and successfully integrated. However, smaller pest companies often have better relationships as acquisitions by larger players destroys culture and employee retention. We estimate that, across the pest control industry, the acquisition price relative to revenues has nearly doubled in the last five years.
NFLX
Click here to read our analyst's original report.
The streaming wars are heating up and Netflix increasingly is looking more like a casualty by the day. Just this week the Wall Street Journal (WSJ) reported that Disney executives plan to restrict Netflix from advertising their content across Disney owned media properties. This comes as Disney is just 38 days away from launching their Disney+ streaming service on November 12th, 2019.
Meanwhile, We believe the launch of Disney+ pre-orders and marketing starting in late August is already having a negative impact on NFLX, and partially explains the weakness we saw in September mobile app downloads in North America (click here for note).
That said, sentiment has shifted drastically negative since Q2 earnings. We have been on the road the last few weeks, and after 50+ buy-side conversations, we have a good sense of where sentiment and expectations are. We continue to see risk to Q3 subscriber estimates and see an additional 30% downside to shares over the next 6-12 months.
Further points will be discussed by Communications Analyst Andrew Freedman on The Macro Show on 10/8.
NSP
Click here to read our analyst's original report.
Many of Insperity’s (NSP) cost items are pro-cyclical and may increase in a weakening economy. Insperity unit metrics track broader employment trends. A tight labor market pulls workers off the sidelines, while driving the need for better benefits. NSP gets a profit benefit if the estimated benefits cost change imbedded in pricing is less than the experienced cost increase. In the past seven years, benefit cost increases have been small to negative, so pricing has been as well. Benefits are often used more when employees are worried about job security. Busy, happy, employees seem to consume fewer benefits.
MAr
Click here to read our analyst's original report.
US HOTELS | SEPTEMBER MIX WAS PRETTY WEAK
Our preliminary September RevPAR estimate for the US Hotel industry is calling for ~1% YoY RevPAR growth with relative weakness coming out of the midweek and weekend periods. Sure, the midweek period did improve sequentially (+1.7% vs +0.7% in August), but when accounting for the Jewish holiday shifts and comparisons on the ‘clean’ weeks, this data is pretty lackluster. Meanwhile weekend RevPAR continues to plunge new lows and by our estimate was flattish in September. Note, to smooth out the monthly volatility, we’re looking at trends on a TTM basis. With breadth of RevPAR growth worsening, and the key corporate customer slowing, the industry continues to look like it’s on shakier footing. We’ll provide some earnings previews on the REITs and C-Corps next week, but generally, we expect this coming earnings season to be pretty dire.
We remain cautious on the hotel REIT and C-Corp space and given the set up currently we’re apt to pound the table on our Marriott (MAR) short call – downside risk remains plentiful.
GOOS
Click here to read our analyst's original report.
In doing our research on RealReal we were surprised to see the quantity of Canada Goose inventory on the site. We’re not sounding the alarm bells here. However, though the fact that goods seem to be priced/selling not far off of full retail is bullish for a read on brand health, the fact remains that units sold for GOOS on RealReal has to mean some unit sales lost at wholesale/retail. We can think of these units as incremental inventory that do not accrue to the sales line for GOOS, but the inventory does mean risks for having to clear product at the end of a season. We think that GOOS’s growth rates relative to demand, and new category expansions, mean for the first time it will have to negotiate a real markdown mechanism, which will not go well and will mean margins significantly underperform expectations.
PENN
Click here to read our analyst's original report.
Penn National Gaming (PENN) remains a short idea for our Gaming, Lodging & Leisure (GLL) analyst Todd Jordan.
As we have said previously (recall, PENN has been on Investing Ideas as a LONG in the past), 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 our analyst's original report.
Having followed APHA’s 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.
Irwin likely has one or two more quarters in which he can find low hanging fruit in order to provide an upside surprise, hence us keeping it on the SHORT bench. But as he continues to sink his teeth into the company we don’t believe it will be a sustainable business model. Looking past the launch of derivative products we think APHA will shape up to be one of the best shorts among the Canadian LP’s. We believe APHA will be a farmer/supplier to more strategic brand focused cannabis companies long-term.
CMI
Click here to read our analyst's original report.
Shares of Cummins (CMI) are down about -18% from their 2018 all-time highs. It is a classic cyclical set-up – a low 9.5x multiple on a local peak in earnings luring investors in to 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
Medallia (MDLA) is a decelerating, boxed-in, aging platform, with rising competitive threats from lighter, more nimble players, as well as from large HCM/ERP vendors already integrated to enterprise systems. MDLA had massively decelerated over the last ~5 years pre-IPO on both incremental dollars of revenue and % growth. This deceleration was not shown in the S-1 document. We attribute this to, among many other factors, a largely limited remaining greenfield addressable opportunity.
DXCM
Click here to read the short DexCom (DXCM) stock report that was sent to Investing Ideas subscribers this week.
BLL
Over the past 18 months shares of Ball (BLL) have moved to an excessive valuation, leaving behind other packaging companies. Reasons include freight costs, misperceptions about the plastic substitutions, input costs, labor, liabilities, and catalysts for revaluation.
Packaging, like commercial services, can seem an attractive hiding place in an industrial slowdown. But we think it is in fact risky at these levels.
Shares of BLL could well underperform peers by 50% as capacity, Rexam accruals/charges, and unrealistic estimates finally impact investor expectations.
AXP
American Express (AXP) reported second quarter GAAP EPS (diluted) of $2.07, up +12.5% Y/Y and +2% above street estimates for $2.03 / share. With pretax income up +6% Y/Y, the remainder of AXP's +12.5% EPS growth was driven by a lower tax provision and lower share count. Regarding consensus estimates, AXP booked a provision expense -14% below street numbers, powering the slight earnings beat.
Observing key operating metrics, non-interest revenues of $8.76B rose +7% Y/Y, in-line with consensus as a +17% growth in net card fees supplemented the +6% growth in discount revenues. Net interest revenues, however, rose +17% Y/Y as the company continues its pivot towards the more capital intensive, cyclical, and lower quality lending business. Provision expense, as stated earlier, registered -14% below street estimates, rising +7% Y/Y. Moreover, led by card member rewards and card member services, total expenses grew +9% Y/Y, one percentage point faster than total revenues, resulting in margin compression.
