Below are analyst updates on our fifteen current high-conviction long and short ideas. Please note we have removed Mastercard (MA) 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.
AMN Healthcare Services (AMN) continued its march back to the $70’s this week spurred by the heavy data and themes our team presented back in September. Key themes of this Long thesis are tightness in health care labor demand evidenced by accelerating demand, scarcity in unemployed registered nurses, accelerating nurse tracker data, and an increase in nurse supply according to the NCLEX and Current Population Survey.
Forthcoming economic conditions paired with the dynamics of this industry build our confidence that AMN is poised for success.
BKNG
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Despite recessionary macro data, potential for a hard Brexit, and other macro and geopolitical issues, flight bookings for the next 3 months continue to imply that the travel environment is improving in the Euro area. The chart below looks at the YoY change in forward bookings activity in each quarter for the subsequent quarter (per travel data aggregator, ForwardKeys).
This dataset is not the only indicator we track, but one of many including other macro indicators. We’d submit that this data bodes pretty well for Booking Holdings (BKNG) and its potential to maintain bookings growth north of consensus expectations (we think the buy side is lower than sell side). Do we see an acceleration in RN bookings from 2Q’s pace? Unlikely at this point, but the bar of ~9% for both 3Q and 4Q look beatable from our vantage point.
ROL
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A key metric for Rollins (ROL) is the organic growth rate, which theoretically has to combine with acquisitions to get a valuation to even half where the shares trade. We expect the competitive entry of Rentokil, a resurgent (for them) Terminix, and less pricing flexibility to hurt the ROL story, taking it down to a high-teens valuation. Weather was mixed in 3Q (cool as LII noted), but likely won’t be a sequential headwind like it was in 2Q19 (rainiest 2Q in 125 years). While many will look at organic growth, which has been decelerating as the first part of our thesis, we’ll be most interested in pricing and churn this quarter.
NFLX
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We have more conviction in our Netflix (NFLX) short thesis following 3Q19 results and see 20-30% downside in the stock price over the next 3-6 months. While 3Q19 global net new paid subscribers of 6.8M came in better than our expectation of 5-6M, management's below-consensus Q4 guidance and cautious commentary confirmed many of the risks we flagged heading into the print.
Meanwhile, the catalyst set-up is ripe on the short side as we enter a noisy period for competing streaming service launches from Apple TV+ on November 1st to Disney+ on November 12th. Before that, however, we will get details on AT&T's HBO Max streaming service on October 29th. In our view, HBO Max has the most potential to be a Netflix substitute if priced and structured appropriately. Then in 2020, we can look forward to the actual launch of HBO Max, Comcast's Peacock, and Quibi in April. We will continue our primary research efforts and provide data updates as we enter this critical part of the Netflix saga.
NSP
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Employment is decelerating just as regulatory catalysts (ACA, TJCA) fade, making growth and robust pricing more challenging. As confidence fades, benefits utilization might also be expected to increase, impacting profitability in Insperity (NSP) revenue line. HRA reimbursements used to pay individual insurance premiums may weaken the value proposition offered by PEOs, giving smaller employers a simpler alternative to co-employment. This could be a way the health insurance debate is framed into the 2020 election. NSP have traded at a high multiple of cyclically near peak results, a mismatch that becomes evident on unit metrics.
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. 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
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Marriott (MAR) afforded itself some nice cushion in its guidance for Q3 in earning season, so we don’t see them missing the low end of the range, but they’ll be close. With incentive fees under pressure this quarter, and merely in-line unit growth, we’re anticipating few mitigating factors to sluggish RevPAR growth for MAR. As of now, we see Adj. EBITDA coming in at $899 (MM) vs. guidance of $896 – $916 and consensus of $910.
Given the soft Q1, Q2, and now Q3 it is reasonable to assume that MAR lowers its guidance to 0 – 2% vs. the current 1 – 2%, or at least suggesting that the high end is unattainable in its commentary. We don’t expect MAR to lower Adj. EBITDA guidance, but we’re modeling a slight miss of the low end as RevPAR growth in the QTD and forward looking data points to challenging end to the year. Given that MAR is known to be a beat-and-raise type name, we believe this potential RevPAR cut and sluggish EBITDA growth, should continue to be a net negative for the stock.
GOOS
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Macy’s announced that as of the end of this year it will no longer carry fur in its stores. Bloomingdales is a meaningful customer for Canada Goose (GOOS). It is clearly bearish on the margin. This follows California’s announcement late last week that it will ban fur sales in the state starting in 2023. I estimate that approximately 20% of GOOS’ SKUs have fur, but those are its most profitable and well known products. They likely account for closer to 30-40% of sales. The recent momentum PETA has had on banning fur sales highlights the “Blackfish” risk. Blackfish was a documentary that was critical of SeaWorld’s treatment of orcas. If a similar documentary on coyote fur were made it would have a profound impact on demand.
PENN
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Penn National Gaming (PENN) Plainridge property’s GGR plunged 19.4% YoY in September – the second worst in the property’s history and also the worst GGR tally in 30 months. Slot revs were slightly worse than our original estimate that called for a 17% decline, and certainly worse than the Street and management was guiding to a few months back. 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).
APHA
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Aphria (APHA) reported revenues of C$126.1M vs FactSet C$131.1M, the top-line miss was driven by a slowdown in sales at CC Pharma (German distributor). Sequentially from 4Q19, Net revenue was down 1.9%, led by the previously mentioned reduction in distribution sales, down -3.9%, while net cannabis revenue was up +7.6%.
KG equivalent sold were up 7.1%, there was a slight increase in average selling price to $6.02 (before excise tax), from $5.73 last quarter due to a positive mix shift. APHA beat on adjusted EBITDA, C$1.0M vs FactSet -C$1.1M. There was a meaningful spread in consensus estimates for adjusted EBITDA (-C$4.9M to +C$2.7M) headed into the quarter. In typical Irwin Simon fashion, there were no shortages of adjustments in the adjusted EBITDA.
CMI
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It would be difficult for Cummins (CMI) to sound more negative on their own business, with cyclical peaks expected in most markets. Just because management says they can handle it doesn’t mean it will work for investors. Falling volumes are bad, with CMI coming off a couple of very good years. If one thinks the shares were weak following the report, imagine what it would be like if US build rates were being cut. Why hold a classic cyclical in a weakening structural position during a market downturn? Shares of CMI are still near their highs, presumably on a low multiple, but the multiple will typically expand as the shares underperform amid an earnings inflection.
MDLA
The biggest pushback to date on our Medallia (MDLA) Short has been the willingness of investors to put a Qualtrics multiple on Medallia. At said multiple, Medallia would be worth $48. Here is why we think that math is lunacy. In the L3Y pre-IPO Qualtrics growth rate of 48% was 1200bps above Medallia’s trailing L3Y of 36% and Qualtrics net expansion rates were stable, MDLA’s have been volatile.
DXCM
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FreeStyle Libre is a name that should haunt those who dare go long Dexcom (DXCM). The device, which officially became available for sale in 1Q 2018, has seen rapid adoption across the industry demonstrated by its +63.2% YoY revenue growth rate announced in 3Q earnings. Based off last quarter’s performance (ABT +73.2% YoY v DXCM +38.7% YoY), our team is expecting another disappointment for DXCM when they report next month.
With this data in mind, as well as the forecasts produced by our claims and app download data, our team retains its conviction in this Short.
BLL
The Can Manufacturing Institute revised can shipments data. Why? Does anyone care that much? Nonetheless, it shows a decelerating trajectory vs the prior surge in shipments. Consider the growth base rate implied in this chart; compare it to what is implied in the Ball Inc (BLL) valuation.
AXP
Click here to read our analyst's original report.
American Express (AXP) reported third quarter GAAP and adjusted EPS (diluted) of $2.08, up +11% Y/Y and +3% above street estimates for $2.02 / share. With net income up +6% Y/Y, owing to a +7% Y/Y rise in pretax income, the remainder of AXP's +11% EPS growth was driven by lower share count. Regarding consensus estimates, AXP booked a provision expense -13% below street numbers, largely powering the slight earnings beat.
Observing key operating metrics, non-interest revenues of $8.79B rose +7% Y/Y, in-line with consensus as a +19% growth in net card fees supplemented the +6% growth in discount revenues. Net interest income, however, rose +12% 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 -13% below street estimates, rising +8% Y/Y. Moreover, led by card member services, total expenses grew +9% Y/Y, one percentage point faster than total revenues, resulting in margin compression. We reiterate our short call on American Express.
CASY
The Prepared Foods category remains challenged from a topline and margin standpoint for Casey's General Stores (CASY) . In-store traffic remains negative and the company is not taking price in core categories. Contrary to management, we are not believers that a maturing digital platform will be enough to ignite an acceleration in Prepared Food same store sales to meet full-year targets.
From a margin standpoint, higher cheese prices along with an inability to take price should start to pressure the P&L in 2Q. Every $0.10 increase in cheese cost/pound equates to about 30bps of margin headwind. Current spot prices are around $2.07 up about 25% YoY. All in we believe that weaker than anticipated FY20 Prepared Food comps and contracting margins paired alongside sales pressures in the fuel business will lead to a negative revision to FY20 consensus earnings and ultimately a multiple rerating.
