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.
If you’ve been following the Hedgeye Health Care team, you’ve seen and enjoyed the strong performance AMN Healthcare Services (AMN) has experienced since we began advocating for it. We have been able to surround our LONG thesis with strong catalysts based on the many databases we continually track. An important part of this process is identifying when this new data will be released and instituting it into our models quickly in order to draw conclusions. The faster we can do this, the better positioned our clients will be to anticipate the crowd following behind.
With this process in mind, the first week of every month is a busy time for our team as we work to gather and analyze the new information pertinent to this name.
CNQ
We believe that Canadian Natural Resources’ (CNQ) low-cost 1MMboe/d+ production base provides one of the best risk/rewards in the energy complex.
After a 10+ year investment cycle, CNQ’s asset base is extremely efficient, high margin, and diversified with a solid balance sheet. It generates free cash flow in nearly any commodity price environment. At normalized differentials CNQ’s oil sands mines have better economics than nearly all shale oil-levered E&Ps.
On a full-cycle basis, CNQ’s upgraded mining operations have one of the highest FCF profiles in North America. In 2018, the company earned ~C$5.5B in FCF paid ~C$1.6B in dividends, reduced debt by ~C$1.8B (net of USD gross up), and repurchased C$1.2B of stock. The company recently released its 2020 CapEx and production guidance, which calls for 9% production growth per debt adjusted share on a $4B D&C capital budget. After fulfilling the dividend obligation, the company will have ~$4.8B in adjusted FCF to allocate between share repurchases and debt reductions. By year end 2020, the company should be approaching a net debt/EBITDA ratio of 1.6x. By our estimates, CNQ is one of only a handful of oil-levered upstream businesses that generates FCF at $50 WTI
GH
Click here to read the long Guardant Health (GH) stock report that was sent Investing Ideas subscribers this week.
MAR
Click here to read our analyst's original report.
The bulls will point to the few positives from the quarter – a RevPAR beat that likely resulted in global share gains, and a solid sequential increase in their total pipeline. However, those are superficial and likely transitory points – they just don’t hold water relative to the forward looking issues evident in the release. Yes, RevPAR beat in Q3, but clearly not sustainable as management lowered Q4 guidance. The pipeline expanded more than we thought it would at this time, but barely accrued to the construction pipeline bucket. Moreover, net unit growth was weaker and resulted in lower NUG guidance and incentive fees missed and Marriott (MAR) lowered expectations for Q4. See the trend here? Following MAR’s Q3 report and seeing the stock back up into the high $120’s, we feel compelled to reiterate our Best Idea Short call.
GOOS
Click here to read our analyst's original report.
Canada Goose (GOOS) saw a spike this week with the news that Kering will explore an acquisition of Moncler. The deal probably makes sense for a luxury brand house like Kering. With the TIF acquisition by LVMH, we’re reaching the late cycle luxury consolidation time apparently. What does not make sense though is that GOOS would trade up in sentiment. We’re not sure how many times we will have to say this before we get a definitive answer, but GOOS is not Moncler 2.0. Moncler is a real luxury brand with a real luxury product assortment and real luxury customers. GOOS is a company with a single performance product that became a consumer trend with all types of customers. As GOOS tries to expand beyond the core in knitwear, lighter jackets, and other apparel, we think that non-luxury fact will be revealing itself in GOOS margins and/or growth in the coming 1-3 quarters. We think the luxury houses don’t have any interest in buy GOOS.
APHA
Click here to read our analyst's original report.
Aphria (APHA) CEO Irwin Simon talks a lot about building a long-term sustainable company in the U.S. over the last 25 years. Hain Celestial, the company he built, was merely a roll-up story, that he eventually destroyed through cost cutting, lack of brand investment and an eventual dry up in the well of small fast-growing companies he could tack on top to maintain top-line growth profile.
For now APHA has a decent cash position, but continued cash burn, and unrealistic top and bottom-line expectations for the next 12-months and beyond will come back to bite management.
CMI
Click here to read our analyst's original report.
Cummins (CMI) has had 4Q19 estimates cut from about $3.40 to about $2.50… and the share price has actually gone up! Leaving aside questions of whether an industrial filtration company deserved a high 20s multiple, we’ll flag a few items. First, “peaking levels of equipment production” likely means Truck production and some off-road equipment (ag, for example, given last week’s DE comments). On-road, constant currency sales dropped 11.4% which is, obviously, a lot less attractive that the 2.2% growth reported for the quarter ended July 31, 2019.
Euphemisms like “UNEVEN” or “UNEVENNESS” make investors feel like management isn’t being entirely straight forward with them. Margin guidance remains wide, we’d guess on mix uncertainty – their FY is 1/3 over as of now. We’d see this as another data point supporting a weakening truck engine market, and perhaps broader equipment markets.
MDLA
Best Idea Short, Medallia (MDLA) reported earnings this week. The company put up a beat on the quarter and the guidance, and gave preliminary guidance for next year that was above street estimates. They also talked very excitedly about how large their market opportunity is and its future acceleration. However, the fun part is that almost everything they said on the call wasn’t accurate.
If you look a little closer, MDLA reported 24% Y/Y billings growth but the math on deferred revenue using calculated deferred revenue rather than reported implied billings growth of 19% Y/Y, 500bps slower. So what’s the difference between calculated and reported DR? M&A. The billings increase is a decel on % terms but more importantly is a reduction on absolute terms as well. The core is slowing. We remain firm on the Short.
DXCM
Click here to read our analyst's original report.
As we continue to introduce additional details to our claims data, such as fields for rendering physician NPI, patient ID (coded and anonymous), and billing entity NPI, we are keeping an eye on the shifting fundamentals and management commentary coming from Dexcom (DXCM). This past week, EVP of Strategy and Corporate Development, Steven Pacelli spoke at the 31st Annual Piper Jaffray Healthcare Conference.
During this appearance, the company doubled down on its ability to double G6 capacity this year (although not earning much margin from it), credited “riding [Abbott’s] coattails” as a key driver for their ability to move their business through the pharmacy in the last 4-6 quarters, and described the “ease of access” focus of the company’s partnership with Walgreens. The Hedgeye Health Care team reiterates its SHORT position on DXCM.
BLL
We repeat. Aluminum cans are not a growth industry. Can sales continue to be lower than a year ago, starting from the first half of 2018. Few cans were shipped, so in 2019 we saw against an easy comp what looks like mid single digit volume growth that kind of confirmed the idea of “cans are a growth industry.” They’re not. Over the 4th quarter and continuing further, we have very tough comps that make the growth story very difficult. Trucking rates are down. Marginal cans have been shipped and on a sequential basis we think it will be shown that it will not be a growth industry for Ball Inc. (BLL).
AXP
Click here to read our analyst's original report.
Pricing pressure continues to mount on American Express (AXP) core business as it bids to gain favor with merchants and defend its target market of affluent, high-income earners from the entrance of large issuers with capital to deploy and greater abilities to compete on rewards.
SQ
We continue to discount the Square (SQ) TAM story, limiting its penetration to smaller merchants with slow international uptake amid heightened competition from new entrants across in-person, online, mobile, and commerce payments solutions. In addition, we see diminished growth tailwinds from the Cash App as the appeal of the company's rewards program flattens out, with user growth inevitably decelerating as competition in the P2P space limits market share gains.
Accordingly, we view the confluence of these factors as highly detrimental to the company's elevated valuation.
DIN
There is so much hot air coming out of the Dine Brands (DIN) management team it’s hard to take them seriously. This quote from the CFO is a great example of what we are talking about.
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“But in response to your question about what's going to take us to the next level for both brands, we see catering as the major opportunity because we think that space has been underserved.” |
Catering is not underserved and every restaurant company has a catering angle! If Chili’s sees accelerating revenues from delivery it’s going to come directly from Applebee’s. We remain firm on our initial #Quad3 short call going forward.
CHEF
Chefs Warehouse (CHEF) is an over-valued food service distribution roll-up story who’s better days are in the rear-view mirror. Since the beginning of 2012, CHEF has acquired 10 businesses and operating margins have gone from 6.0% to 3.2% over the same period.
The central tenant of our CHEF short has always been the sustainability of margins, especially EBIT margins. There is more clarity around that theme after the company reported 3Q19 earnings, which was yet another disappointing quarter. There is no change to our conviction, that given the optimism baked into consensus numbers for CHEF the stock remains a core SHORT.
CMG
In the case of Chipotle (CMG), it’s not surprising to see insider selling given the run-up in the stock, as Pershing sold stock at the end of September. Now at the beginning of November the CEO is selling stock, but why would the CEO fill out the form by hand?
In the digital age, I would imagine that this took more time to do by hand than to do it electronically. If the CEO did fill it out by himself, what does it say about his ability to use technology? Put that in the context that CMG is leading the way for “digitally enabled” restaurant companies, and things just look weird and even a little bush league.
