Below are analyst updates on our sixteen current high-conviction long and short ideas. 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.
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.
Given our team’s long-term investment horizon, we continue to be bullish past the near-term quarters. Important themes we will continue to follow include: Evidence of accelerating healthcare demand on top of existing tightness, scarcity among unemployed registered nurses, acceleration according to our tracker data, increased nurse supply as a result of NCLEX Pass Rates and the Current Population Survey, and the positive tailwinds brought about in the Hedgeye Macro team's 2H19 Quads.
BKNG
Click here to read our analyst's original report.
Following the solid print and quarter, the set up for Booking Holdings (BKNG) continues to fall right in our sweet spot here at Hedgeye Gaming, Lodging and Leisure. With negative leaning sentiment, the company gaining incremental room nights share globally, and out-year estimates still too low, we see a chance for BKNG’s stock to really take off. BKNG is a company that packs the punch on scale, execution, and positioning within the travel ecosystem and poised to generate significant cash flow – cash flow that is very much underappreciated by the current slate of sell side coverage.
Our work and conversations with the investment community suggest that many investors that could and should be invested in BKNG are just still not there yet. But that could be set to change over the NTM. The GARP and Value crowd remain underinvested in this cash flow generating machine, and we think the stabilization in room nights growth, coupled with stellar FCF conversion, and a robust capital return program could really help drive incremental buyer interest. This process has already started, but in our view, there’s a long way left to go and remains a key catalyst for multiple expansion over the NTM.
With $14.2B remaining on their current repurchase authorization and a very flexible balance sheet, we see capital return as likely to exceed expectations in the coming quarters and believe it will be a major catalyst to drawing in prospective investors.
MA
All in all, the greater Mastercard (MA) story continues: 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.
ROL
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Interesting turn from Rollins (ROL) competitor Rentokil. Rentokil reported its top line quarterly numbers (semi-annual real reports), and suggested decent organic growth in North America. Our take remains that Rentokil is growing at the expense of competitors such as ROL as a sleepy oligopoly squirms under new competitive pressures. Weather hasn’t been great, and we’d expect pricing to be the only tool in an industry with a fairly static customer base.
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 Communications Analyst Andrew Freedman original report.
The set-up into Q3 is classic for Netflix (NFLX) . After missing Q2 subscriber estimates (2.7M actual vs. 5.0M guidance) due to a global deceleration in gross acquisition, management doubled down on their internal forecast calling for "annual global paid net adds to be up year over year." The guidance they gave for Q3 of 7.0M global net paid adds was in-line with consensus estimates, with management expecting "to return to more typical growth in Q3." The company's Q2 investor letter cited stronger growth "in [the] early weeks of Q3" from the release of hit series "Stranger Things" as evidence supporting their forecast.
Looking at the growth rate in Netflix mobile app downloads, we also saw the improvement management was referring to in July and August. However, the benefit from "Stranger Things" and "OISTNB" was short-lived, with growth resuming its slowing trend in September 2019. The growth rate of mobile app downloads finished 3Q19 at 13.0% YoY, compared to the July-August trend of 18.0% YoY.
While the 3Q19 growth rate of 13.0% YoY marks a sequential improvement from 6.5% YoY in 2Q19, it is well below the 29% average growth rate since 2015 and remains one standard deviation below the mean. If management's internal forecast is based on a resumption of the status quo (as their commentary suggests), then it appears the forecast is at-risk given the data we are tracking.
According to management, "Q4 subscriber growth is particularly tough to predict because so much of the growth is back-loaded in the quarter." Further clouding their forecasting ability in Q4 is the launch of Disney+ and Apple TV+ on 11/12 and 11/1, respectively. Reed Hastings, Netflix CEO, was quoted in a Variety article on 9/20:
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“While we’ve been competing with many people in the last decade, it’s a whole new world starting in November…between Apple launching and Disney launching, and of course Amazon’s ramping up,” said Hastings, who also cited NBCUniversal’s coming Peacock service. “It’ll be tough competition. Direct-to-consumer [customers] will have a lot of choice.” |
At 30% annualized churn, we estimate Netflix's annual gross U.S. subscriber additions are 30-33 million. While not all of these subscribers are unique (involuntary + churn and burn), if even a low-single-digit percentage of these subscribers do not subscribe to Netflix in Q4 because their focus is on Disney+ or Apple TV+, it is bad for Netflix's financial model.
NSP
Click here to read our analyst's original report.
If wage pressures increase and Insperity (NSP) tries to raise prices in a slowing economy to cover benefit cost increases, will churn increase? Seems likely. Other PEOs have seen retention increase, and churn is typically procyclical. Higher churn in recessions tends to add to unit costs at an already difficult point in the cycle. NSPs contract with its clients can typically be canceled within 30 days.
In short, we see a return to stagnation (or worse) based on the following:
- Costs per WSEE often decline in robust economies and increase in weak economies, exacerbating cyclicality.
- NSP itself discloses that $5 of the $11 GP/WSEE improvement was due to “changes in cost estimates for benefits and workers compensation.” Those changes can also detract if costs are greater than estimates.
- GP/WSEE gains have been surprisingly modest, although the company cites mix of customer size and other factors.
Ultimately, NSP’s PEO business has also benefited from legislative changes that made employment more complex for about a year. Tax reform was about a year ago. But we think this spurt in activity that benefited NSP won’t last beyond 2Q19.
Obviously, we don’t think NSP’s 2018 surge was merited. NSP’s excessive valuation leaves shares vulnerable to disappointment, too expensive for strategic interest and likely to revert after the tax reform bump fades.
MAR
Click here to read our analyst's original report.
Consistent underperformance in Limited Service coupled with weaker slowing corporate travel, and overall Full-Service RevPAR weakness in the US should keep RevPAR growth below expectations for Q3. After running through Q3 industry data and reconciling prior quarter performance and commentary, we estimate Marriott (MAR) RevPAR will fall short of consensus expectations and guidance of 1 – 2%. International data, too, was particularly weak in the third quarter with Western Europe being the only incremental positive that we came across in our data analysis. Relative to guidance and expectations, we believe MAR is one of the most vulnerable C-Corps heading into earnings season.
GOOS
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The California fur ban passed this week is bearish for Canada Goose (GOOS). California will be the first state to ban the sale and manufacture of new fur products. The fur law bars residents from selling or making clothing, shoes or handbags with fur starting in 2023. The state law comes on the heel of several bans by California cities, and is clearly bearish for Canada Goose. A similar ban is on the table in NYC. If a ban has enough political support to pass as a bill there is likely a larger headwind from likeminded consumers. PETA’s activist campaign presents risk for the brand that are difficult to handicap.
PENN
Click here to read our analyst's original report.
As we have said previously (recall, PENN has been on Investing Ideas as a LONG in the past), Penn National Gaming (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.
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.
Irwin Simon is at it again, Aphria's (APHA) stock popped up as much as ~27% in early trading on 10/17, after being one of the worst performing LP’s in the last month, is this positivity warranted? Not in our opinion. The point many like to bring up is that APHA trades at a significant discount to competition especially given its revenue advantage (most of which is driven by a German distribution business), which is true. But we believe the discount is warranted due to our thinking that APHA will merely be a farmer/distributor long-term and likely supplier to more strategic players in the space. CC Pharma just reported an adjusted gross margin of 12.8% (vs. APHA cannabis gross margin of 49.8% - which is declining) and will represent more than half of sales in CY20. You can’t give a premium multiple to a company that is primarily a distributor in a foreign country.
After the build-out of their current planned capacity is complete, they will have 255,000 kg/yr of capacity in Canada, an amount high enough to support roughly 25% of projected long-term Canadian demand. Yes, European markets can be a near-term region to accept exports, but we don’t deem that to be a viable long-term solution.
CMI
Click here to read our analyst's original report.
While we get the bull arguments for Cummins (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 they are in fact expensive; we think shares of CMI are pricier than longs believe.
We think the shares have >40% downside risk, with catalysts ranging from truck order backlog drawdowns to high decremental margins in key engine markets.
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.
MDLA
Medallia (MDLA) completed its initial public offering of equity in July 2019. Despite being a ~19-year-old company, Medallia showed just two years of financial results to prospective investors in its S-1. Only in the recent investor frenzy for enterprise software IPOs could an omission of this magnitude be dismissed. Even Slack, which was a ~6-year-old company at the time of its’ listing (June 2019), shared more years of financial disclosure in its S-1.
The company reported Q2 earnings, the wheels fell off the bus, the company replaced the auditors, and the stock dropped >40% in a day. (If you haven’t kept up with the PS story, read the last EPS call transcript for the full drama of what management teams should never say or do when they badly miss expectations).
The silly season in software IPOs will only get worse from here. There are ~300 companies in the private realm worth more than $1b and they are looking at Slack’s kazillion times revenue multiple, or MeDulLA oblongata’s successful heap of dung piled onto IPO investors, as a signal-fire indicating it is time to run every piece of you-know-what up the IPO flagpole.
DXCM
Click here to read our analyst's original report.
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. Our team’s app download data continues 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.
Both the claims data and app download data suggest growth has peaked and is decelerating into increasingly difficult comparisons that peak in the first quarter. The results from our analysis, as well as, the recent performance of the stock continues to corroborate our team’s active short position on Dexcom.
BLL
CCK reported after the close, with sales declines across all segments. They also cut 4Q guidance, which was our catalyst with stiffening comps. We’ll need the call to understand the drop, but there is zero evidence of surging demand in the release. They can blame European harvests and Signode (again) but if cans were actually a growth industry, you’d at least see revenues up or a discussion of, I don’t know, volume growth in the release. If the market is in any way rational, Ball Inc. (BLL) should be weaker on this report. We’ll also need clarity on the call with respect to the lower revenue.
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 our analyst's original report.
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.
CASY
Casey's General Stores (CASY) reported EPS of $2.31 vs. consensus $2.01. The headline beat of $0.30 or 15%, is less impressive when highlighting that ~50% of the beat was driven by better than expected operating leverage. A depreciation adjustment related to the useful life of underground storage tanks predominantly offset a $6.6 million inventory accounting headwind.
We remain short CASY and believe shares have downside of 20-25%. We come away from the call feeling more confident in the company’s ability to meet FY20 fuel margin targets given positive QTD trends and the continued expansion of contract fuel purchases. That said, we anticipate continued weakness in gallon growth and do not expect the rate of margin expansion to persist as the fuel margin enhancing initiatives deployed in FY19 will do less to buttress margins as the year progresses.
