Below are analyst updates on our sixteen current high-conviction long and short ideas. Please note we have added Casey's General Stores (CASY) to the short side of Investing Ideas and removed Roku (ROKU), Tenet Healthcare (THC), and Valvoline (VVV) from the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
AMN
Click here to read our analyst's original report.
We have reviewed our long call AMN Healthcare Services (AMN). There are several tailwinds we see in the near- term including both solid demand and supply. Beyond core staffing trends, labor disruption may be turning up as well after being only a modest contributor in recent years. Strike activity has been on a decade long hiatus. The recent Kaiser negotiation and settlement, as well as other factors, indicates to us that other local unions will likely continue testing the waters as well. As a result, AMN's labor disruption business will see more demand.
Key Factors Supporting our LONG thesis:
- Health Care Labor Demand remains tight with evidence of accelerating demand
- Unemployed Registered Nurses remain scarce
- Nurse Tracker data is accelerating
- Nurse Supply is rising according to NCLEX and the Current Population Survey
- SEIU-UHW has held a vote and plans to strike Oct. 14-20. Nurses are not part of the strike but may elect not to cross the picket line causing further labor disruption
- Macro Quads and Factors are tailwinds for AMN
We see a path to low $70s for AMN shares.
BKNG
Click here to read our analyst's original report.
Following two years of extended core business deceleration, we’re starting to see a critical phase transition start at Booking Holdings (BKNG). First, stabilization of the core is occurring, and we see a sustained re-acceleration that should attract even more incremental investors. BKNG is a stock that should screen very well with the GARP (and even value) crowd out there, but it may take a few more quarters of that consistent bookings growth, revenue, and FCF growth to really transition the investor base and interest.
Sure, Q2 and a solid Q3 guide are out of the bag, so what’s next? Well, we think the story actually gets even more attractive from here. Though management tempered expectations around early results of their merchant investments and ad leverage, we see the 2H set up as very favorable. While the Q3 room nights comp will be tougher on a 1YR basis, the 2YR stack eases for both Q3 and Q4, and all the while, EU macro and global macro could begin to stabilize in a few months.
MA
Mastercard 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.
Domestic assessments, transaction processing, and cross-border revenues of $1.68B, $2.05B, $1.37B grew +9.3%, +12.19%, and +14.69% Y/Y, coming in -1.2%, -2.3%, and +2.2% relative to street estimates, respectively. Other revenues of $962M grew by +23%, surpassing street estimates by +7%. In addition, client incentives of $1.96B, up +16.1% Y/Y and +2.6 percentage points higher than gross revenue growth, registered in-line with consensus and accounted for 32.23% of gross revenues.
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.
Furthermore, during the quarter, Mastercard returned $1.9B or 7.7MM shares to investors with dividends of $337 MM.
ROL
Click here to read our analyst's original report.
The current share price of Rollins (ROL) makes little sense to us, and we expect a significant downward revaluation by the market.
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.
With GDP-type organic growth rates, housing headwinds, competitive entry, and a feuding family with a controlling stake, one would reasonably expect ROL to trade at a discount to the market. We expect a growth deceleration, consolidation of leases, a host of yellow/red flags, and broader coverage to generate >50% downside, as the S&P 500 addition premium fades from the share price.
NFLX
Click here to read our analyst's original report.
We hosted an institutional call this week presenting our latest thoughts and new analysis on Netflix (NFLX). We also ran through the set-up into Q3 earnings on 10/16. While the stock is down ~28% since we first presented our short thesis on 3/22, we continue to see another 30% downside over the next 6-12 months and a series of negative catalysts to get us there.
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. Meanwhile, the growth rate in mobile app downloads in Q3 suggests a subscriber miss is more likely than not.
NSP
Click here to read our analyst's original report.
Insperity (NSP) is a highly cyclical company. Shares of Insperity are trading as though the PEO (i.e. Professional Employer Organization – providing comprehensive HR solutions for small and mid-size businesses) industry isn’t cyclical and increasingly mature. The cyclical elements extend beyond employment trends to costs, regulations, and marketing.
Economic growth appears to be slowing. The Hedgeye Macro team sees an environment of U.S. Growth Slowing throughout 2019. As we move from US Macro Quad 3 into Quad 4 (both real growth slowing) and Insperity faces more difficult comps, we think shares re-rate downward.
MAR
Click here to read our analyst's original report.
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.
MAR reports their first ever YoY decline in their construction pipeline (it declined sequentially, too), despite missing on Q2 unit growth – this dynamic is cause for concern. Typically, unit growth misses are due to construction slippage into future quarters – not this time.
GOOS
Click here to read our analyst's original report.
Canada Goose (GOOS) currently has 16 stores globally. One of its stores is in Hong Kong’s IFC mall.
The ongoing protests have been a disruption for shopping in the city. This past week luxury companies LVMH and Hugo Boss reported Q3 results. LVMH said its sales in Hong Kong fell 40% in August and September, but were largely made up elsewhere while Hugo Boss said Hong Kong sales 50% and were partly responsible for a sale and profit shortfall. The IFC mall itself has been the center of some protests and has been closed on other dates due to protests.
Canada Goose only has two other stores in the China region so it is more difficult for sales to be made up elsewhere as LVMH experienced. So the Hong Kong protests present some risk for Canada Goose’s Q3 and Q4 results.
PENN
Click here to read our analyst's original report.
Penn National Gaming (PENN) Plainridge property’s GGR plunged 22% YoY in August. QTD, Plainridge is tracking down 19.5% YoY, which is slightly worse than our original estimate that called for a 17% decline, and certainly worse than the Street. That’s a lot of worsts. Plainridge’s slot volumes tumbled 16% 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 (see slide below).
Elsewhere, the back half of the year should be challenging from a revenue growth perspective, and we see few imminent catalysts to really help drive positive sentiment.
APHA
Click here to read our analyst's original report.
Aphria (APHA) isn't so much a macro driven short. It's a play on the industry and how operators in the industry should look farther term instead of what they look like now. APHA is going to be one of the biggest capacity players in Canada along with a management team that is helmed by Irwin Simon who is highly unreliable.
He previously founded Haines Celestial in the U.S. which quickly became a roll up story with little organic growth despite being a part of organic categories and was constantly making acquisitions both domestically and internationally. We can see the same thing happening with APHA due to their excessively large capacity instead of higher quality grow or lowest price.
CMI
Click here to read our analyst's original report.
With 3Q19 earnings season looming for the sector, the performance dispersion in the sector has picked up. Indications of slowing activity abound, while estimates have remained elevated and largely unmoved. We expect the more cyclical names in the sector to lag most, as estimates tend to be revised lower during earnings reports.
Valuations for names like Cummins (CMI) and with the shares near all-time highs, do not suggest investors have positioned for disappointments. Factor exposure herding has driven some irrational behavior, an important consideration in a more ‘quantimental’ investing environment as it trickles down to individual security selection. Tariffs may yet have a more dramatic impact as higher cost items flow through inventory in a slack demand environment. As markets head into year-end, understanding both the ‘top down’ and ‘bottom up’ of risk exposures has rarely been more critical.
MDLA
Medallia (MDLA) sold the company’s 2011 vintage HQ and broke apart into satellite offices and WeWork office locations. In our work reading countless reviews we discovered that many employees note the only location of positive MDLA culture was at the HQ…MDLA hired Leslie Stretch <1 year ago to be CEO, newly minted from selling CALD to SAP for much more than it should have been worth. MDLA also fired employees (despite having open recs) earlier this year to tidy up the OPEX line.
Clearly 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 our analyst's original report.
This claims data for the physician interpretation of CGM at the time of the patient’s visit appears to be a reliable tool for forecasting quarterly US revenue. The caveat to the claims data we are tracking is the inability to differentiate between Dexcom’s G6 (DXCM) and Abbott’s Freestyle Libre (ABT). Our team’s solution is the use of an adjustment factor which inflates more recent claim counts to account for the lag between patient visit and the filing of a claim, as well as, the lack of Medicare claims data in the underlying source.
The market’s recent rotation away from momentum and negative reaction to Dexcom’s management commentary on tougher comparisons through 1Q20 are not the end of the company’s woes. The app downloads continue to show G6 and Libre splitting the market evenly.
While this stalemate alone would not provide enough of an explanation for DXCM’s decline, the data has shown a sequential step down in the pace of download activity for both systems in the last several weeks. Given that this data is produced on a more frequent basis, our team can better estimate the quarter before it is released.
BLL
The 'opportunity' for increased penetration of cans vs bottles doesn't actually move the needle in terms of the shared price. Shares of CCK are much cheaper on a per can (estimated by excluding non-can segments) valuation. At $0.20-$0.30 of EV per can produced, substrate switching at Ball's (BLL) currents market share is only worth perhaps 10% of EV in its entirety.
We also think BLL is best considered a materials conversion company, limiting upside on growth. We see perhaps 50% relative downside in shares of BLL on a reversal in transport costs, or potentially paired with CCK with 30% valuation differential.
AXP
Click here to read the short American Express (AXP) stock report that our Financial Team sent Investing Ideas subscribers this week.
CASY
Hedgeye CEO Keith McCullough added Casey's General Stores (CASY) to the short side of Investing Ideas this week. Below is a brief note.
Looking for another Consumer Staples (XLP) Sector Style Short that's green today on #decelerating volume? Casey's General Stores (CASY) is a newbie SELL Idea from Howard Penney and Jordan Minello.
It's also a way to play our #InflationAccelerating Macro Theme + #VapeSlowing news:
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We suspect that this vaping crisis will be near-term noise, however the sudden spike of negative news could present a near term traffic headwind to the CASY Grocery & General Merchandise segment. Given that JUUL and vape products only represent a LSD percentage of sales the news in isolation is not likely to derail the CASY story. That said, we believe the read is negative on the margin and is likely to put incremental pressure on in-store traffic, at least in the near term. Management commentary on JUUL and other tobacco products has been quite positive on recent calls and has been helping to drive in-store comps and traffic in the face of eroding cigarette sales. |
