Below are analyst updates on our fifteen 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.
AMN Healthcare Services (AMN) reported a solid looking quarter but guided 4Q19 below consensus and below our estimate. All the components of a beat were there; Health Care Labor markets remain extremely tight with rising incremental demand. It should be a recipe for accelerating volume and pricing, but so far in the cycle customers have yet to bid up labor rates. AMN's orders are up 20% year over year and accelerating and we expect the inelastic demand for staffing will eventually force labor rates high enough to clear the order book. As long as the DATA UPDATES supports the view, we expect rates to catch up to demand, driving both growth and acceleration to cycle highs.
BKNG
Click here to read our analyst's original report.
The set-up for Booking Holdings (BKNG) falls in our sweet spot here at Hedgeye Gaming, Lodging & Leisure. Investor sentiment leans negative and Sell Side sentiment continues to worsen ahead of next week’s print, but the reasoning is short sighted, and backward looking in our view. Consternation around BKNG continues to be born out of global macro uncertainty and an over focus on room night deceleration, which is missing the bigger point of where this story could be headed.
Within that mix of sentiment, we see a long run top line and earnings bar that has been reset over the last few years and is now beatable. 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 undervalued by the investment community that remains obsessed with the wrong metrics (we’d argue).
ROL
Click here to read our analyst's original report.
With organic growth up 6.4%, it is a big problem that net income was only up 6%. Margins are down, and some of the organic growth can be dismissed as a volume shift from a rainy 2Q19 to 3Q19. We aren’t saying that the shares won’t rally on the (conveniently rounded 20.4 cents to 21.5 cents), but Rollins (ROL) is just different from a year ago.
It has leverage, pricing is no longer an easy driver, and investors are rightly suspicious at these valuations. This could well turn into price-based competition. Management is also aware, as evidenced by the language changes in the release. Margins were lower than in 3Q16, 3Q17 and 3Q18. You know, when Rentokil came in to compete in this market.
NFLX
Click here to read our analyst's original report.
Netflix (NFLX) announced a proposed offering of $2B in 2030 unsecured notes. The offering is consistent with the timing of past issuances and management's approach to funding free cash flow losses by tapping high-yield markets. Given the heightened risks and uncertainty in Netflix's business model, we have a hard time seeing how investors would be willing to lend the company money for ten-years at a cost of capital close to past issuances. Especially right after guiding down Q4/FY subscriber growth and revenue targets, and right as competition in the U.S. escalates to an unprecedented level.
NSP
Click here to read our analyst's original report.
Shares of NSP continue to sport a high valuation as though PEOs were a good business. That said, the higher medical cost trend relative to pricing was partly beaten into NSP shares after 2Q results. 3Q may well be less interesting. Our interest in the group (in addition to a continued run-off of Tax Reform and decelerating employment growth) is the impact of upcoming HRA for individuals.
Ask your friendly neighborhood sell sider that NSP will let into the Q&A to ask about it – it is the most impactful, least covered industry demolishing regulation we’ve seen in a while. The jobs report may result in a bid to the PEOs today even though the share price performance of PEOs in no way correlates well to job market indicators.
MAR
Click here to read our analyst's original report.
Following Marriott (MAR) now two weak quarters in a row and the likelihood of another softy coming up, we still see a disconnect between sentiment and valuation vs industry and company specific catalysts. RevPAR matters, and we’ll begin to see more discussion of how RevPAR could impact MAR’s biggest earnings driver – Net Unit Growth (NUG), and it will, it’s just a matter of time. In the meantime, slower RevPAR growth will, at minimum, continue to keep a lid on sector wide valuations.
Though we understand the bull case for MAR (and other brand companies), expectations for NUG reacceleration, which we view as unlikely, is well reflected in current valuation multiple.
GOOS
Click here to read our analyst's original report.
Canada Goose (GOOS) market position is unique among outerwear/sportswear brands. Canada Goose is priced significantly above other performance/functional brands. In other words a consumer does not have to pay nearly as much as a Canada Goose jacket for a performance ski parka or a coat to keep them warm. Similarly priced coats skew much more into fashion where new designs and branding are key reasons behind the purchase. The reason other brands are not positioned similarly to Canada Goose is that the total addressable market (TAM) is much smaller there.
We believe Canada Goose has penetrated a high percentage of its TAM already. This season The North Face has introduced its biggest innovation platform for jackets in years and the price points are less than half of Canada Goose’s, because that is where the market is largest. GOOS has already penetrated the easy TAM, now growth will either slow, or be more expensive to acquire. We think the latter is the most likely outcome and that street margin estimates are too high.
PENN
Click here to read our analyst's original report.
We don’t love the regional gaming space as we question how much more cost cutting and marketing re-jiggering can be done to leverage a flat top line. However, Penn National Gaming (PENN) managed to meet (lowered) Q3 expectations and provide forward guidance in line with the Street. Is that enough to get excited about?
Not for us. While PENN has proven to be a very good operator, better than most, it also faces more new competition than other gaming operators. We don’t have a call on the stock but would certainly fade any relief rally here.
APHA
Click here to read our analyst's original report.
Aphria (APHA) somehow getting expedited approval of cultivation facility, but management said HC didn’t contact them to discuss vape, while we know HC has contacted other LP’s. We are not believers that HC has not reached out to APHA (it’s just easier for management to say, “no we haven’t heard anything from them”), and this sends a more cautionary tone on vape in the near-term in our opinion.
Management reported a current market share of 12% (extrapolating off of Ontario data), the legal cannabis sales market is currently run-rating at C$1.3B and the illegal market is estimated at C$4B, for a total of C$5.3B. Let’s assume for fun that all black-market sales convert to the legal market in the next 12-month, we do not endorse this thought at all! For APHA to achieve C$1B in sales they would need to grow market share from 12% to 19% in an increasingly competitive environment where everyone is increasing capacity and improving execution. Not to mention that over that time (and certainly beyond that time-frame), average selling price will decline, hurting that $1B expectation for APHA. Layer on the lack of door growth, excise tax (=higher prices than black market) and restrictive derivative product regulations, this number looks increasingly difficult to achieve.
CMI
Click here to read our analyst's original report.
Cummins (CMI) is one quarter into a downturn in its markets, and two quarters into cutting guidance. The release reads exactly what a negative earnings report in machinery reads like – no 2020 hope, lower sales and margins, and a sense that weakening is ongoing. Components and engine sales were both down. Chinese sales were notably weak.
MDLA
This update was discussed by Technology Analyst Ami Joseph on The Macro Show this week.
Medallia (MDLA) went public at the peak of the excess bubble in enterprise software. This bubble was built over years alongside the IPO bubble built over months and Medallia timed it perfectly at the height of it all. MDLA was offered pre-IPO with the price range of $16-18 dollars per share, we thought was a bit rich in relation to what we believe to be the sustaining growth rate for this company over the next two years.
This moment and heat of enterprise software that MDLA launched into, caused people to not perform due diligence with any work and simply said that “it’s the second coming of Qualtrics.” So they just put a Qualtrics take out multiple from SAP and that got them to right about where the stock peaked and around where we shorted it. There appears to be a ton of downside here. We wouldn’t be surprised if the stock gets cut in half over the next year and a half.
DXCM
Click here to read our analyst's original report.
Due to report on Wednesday, November 6, our team remains confident in our SHORT position into the print on Dexcom (DXCM). We support this position through both a data and fundamental approach. First, the claims and app download data that have shown a sequential step down in the pace of download activity for both systems in the last several weeks. This evidence paired with our team’s deep fundamental analysis demonstrates that DexCom, Inc. will continue to suffer from strong competition within the space and weak end markets.
BLL
Ball Inc (BLL) earnings and sales were shy of consensus, and the comps only get harder in 4Q19. If BLL were inventory/capacity constrained amid surging demand, it probably wouldn’t have “returned over $900 million to shareholders” on YTD free cash flow of (CFFOA – CAPEX) of ~$230 million vs. ~$400 mil last year.
They’d have built capacity, and not cup capacity. Aluminum cans aren’t a growth story, a point we think it self-evident. Cans have been a comp beneficiary in 2019, as we see it. That South America posted only 5% volume growth on a -2.7% comp should just be alarming. This isn’t a 38x growth story; it is a 15x materials conversion business in a structurally misunderstood ‘meh’ industry.
AXP
Click here to read our analyst's original report.
Consistent with our original short thesis, competitive pressures continue to drive American Express (AXP) core pricing power lower, and with slowing growth in its global billed business, the company is increasingly drawing earnings growth from its lending business, thereby augmenting its risk profile in the face of late-cycle phenomena such as weakening consumer confidence, greater market volatility, yield curve inversion, and sluggish luxury goods consumption.
Accordingly, American Express remains a Hedgeye Financials Best Ideas Short.
CASY
Casey's General Stores (CASY) closed up 4.8% over the last two trading days of the week after competitor MUSA reported strong earnings results on Thursday. The strong results at MUSA were driven by better than anticipated fuel margins which have been a consistent area of strength at CASY over the past six quarters. The headline read in relation to CASY is bullish and is corroborated by the ensuing stock move.
Our thesis here remains very much in tact as we have seen a solid news flow of a weakening Midwest consumer, vape headwinds and promotions/ discounting from competitors. The company is also in a period where they are lapping last years strategic price increases on in-store pizza and doughnuts and will be purchasing cheese at spot prices ~20% higher than last year. The combination of factors lead us to believe that weaker than expected FY20 Prepared Food comps and contracting margins will lead to negative earnings revisions and ultimately a multiple rerating.
