Below are updates on our eleven current high-conviction long and short ideas. Please note we have added Synchrony Financial (SYF) to the short side of Investing Ideas. We have also removed Guardent Health (GH) and Luckin Coffee (LK) from the long side of Investing Ideas, along with Dine Brands Global (DIN) and Fastenal (FAST) from the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
AMN
Click here to read our analyst's original report.
AMN Healthcare Services (AMN) has been a great long for the Hedgeye Health Care team in recent quarters.The key data set in the thesis for this long, and any staffing companies you follow, is the monthly ADP and BLS Labor Reports. If not familiar, these are released on the first Friday of every month and provide important insights on unemployment and utilization trends both in the aggregate and by industry.
This week’s reports suggest the current utilization environment remains positive, but underlying trends continue to point to deceleration as we progress through 2020. Health Care Labor Demand, both in hours and headcount, remains positive year over year, but in rate of change terms continue to decelerate. Average weekly hours remained flat suggesting the absence of near-term upward pressure on wages and hiring.
DIS
Click here to read the our analyst's original report
Launch of the Disney+/Hulu/ESPN+ bundle on 11/12 is resulting in greater take-up of ESPN+ but has yet to drive an increase in new Hulu subscribers. Hulu adoption of ~35% is flat compared to October 2019. ESPN+ adoption of ~5% is +100bps compared to October 2019.
Disney (DIS) with Disney+ continues to scale exponentially, with an estimated 18M (+/- 2M) U.S. subscribers per our 11/22 survey. Such strong adoption suggests a high paid conversion rate among the reported 10M+ "sign-ups" at launch on 11/12. While we expected Disney+ to launch with a bang, even we are surprised by the rapid pace of adoption. Our original estimate called for 15-30M Disney+ U.S. subscribers in Year 1, and the data suggests we breached the low-end of that estimate in under two-weeks post-launch.
BKNG
Evolve, a US focused vacation rental manager, posted an interesting article discussing the pros and cons of some of the major OTA/Aggregator websites that they use to list their client’s vacation (Alternative Accommodation) rentals.The article looks at the value proposition that each website brings to the table and addresses both the owner’s perspective and the customers perspective, the latter being the more important, in our view. Booking Holdings (BKNG) was featured in the study.
The article indicates that Airbnb screens the best with owners given that they pass on a portion of their “take rate” to the consumer and not to the owner – a tactic that has helped them amass a great portfolio of inventory. However, due to a stealthy lack of transparency on upfront pricing and the added guest fees + service fees that the consumer is forced to pay, Airbnb actually screens below Booking.com and VRBO when looking at the sites from the consumer’s perspective. Booking.com, with its 0% guest fee and exclusive fee to the owner allows for the most transparent pricing for consumers e.g. what you see, is what you get (not always the case in travel these days).
MAR
Click here to read our analyst's original report.
Based on some interesting data compiled by STR, the length of time to complete hotel construction in the U.S. has gone from ~1.5yrs (trailing 10yr average) to ~1.7yrs assuming an equal weighted average of the current pipeline mix. Luxury construction has seen a decent uptick in time to build while UUP hotels have actually experienced a slight decline.
With that in mind, the delays that matter most to Marriott (MAR) are right in the Upscale / Upper Midscale range – key growth driving segments and large components of their domestic pipelines. Those scales are actually facing the largest uptick in the time it takes for projects to be completed, with increases of 13% and 25%, respectively.
Construction delays remain a key risk to the C-Corp unit growth thesis, and we don’t see that risk abating over the near term. MAR remains a Best Idea Short at Hedgeye
GOOS
Click here to read our analyst's original report.
Canada Goose (GOOS) reported an in line Q3 EPS result this past week. The company lowered sales and profit guidance due to the coronavirus in China.
Some companies have been getting a pass by the market from the coronavirus, but there were still several underlying trends in FQ3 that didn’t have any coronavirus impact to be concerned about going forward.
- Asia accounted for nearly all of the revenue growth in the quarter. North America declined 1.3% due to Canada, the company’s oldest and most mature market, declining 11.6%. This was the first quarter Canada was not the largest market, which was inevitable, but marks a different stage in its growth.
- Wholesale was down 8.5%, but better than down mid-teens% guidance. Wholesale consists of the company’s oldest doors which suggests retail store growth is taking from its partners to some degree.
- Inventory was up 60%. The company didn’t cut price to clear through this winter’s goods. It sounds like that may be pushed through wholesale. We have been saying operating margins are coming down and we are starting to see the evidence with bloated inventory levels. Management doesn’t expect inventory growth to be normalized for several quarters. That suggests gross margins are overstated currently.
- Management raised wholesale guidance for the year from HSD% to 9-11%. We believe accelerating wholesale to be a negative indicator of management’s expectations of DTC growth. Wholesale has been on allocation for several years due to a lack of sufficient production capacity. When wholesale accelerated last year it was an indication of weaker late winter sales. In other words wholesale gets the inventory when DTC doesn’t need it.
CMI
Click here to read our analyst's original report.
Stocks usually respond disproportionately to guidance relative to consensus – not so with Cummins (CMI) this earnings season. We suppose CMI has been a lousy performer into numbers, lagging the market by ~12% since the last report. Maybe investors worry that a rosier outlook would fade – who knows. Nonetheless, we must have missed all of the hope in the Cummins earnings call. It sounded like most regions and product categories were struggling – management was clear that they didn’t think guidance was ‘conservative’, and CMI management (to their absolute credit) doesn’t sugar coat:
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“Let's say one might have said we were a little bit conservative at the start of last year, I think it's just the overall order trend. I mean you look at the pace of freight and the [old] capacity in the industry, and that's where we are now. We're going to need to see a bounce back at some point in orders or the backlog is going to keep just declining. And build rates, you're going to have to adjust. So I don't think we're enormously off now. And again, at some point, we'll get through this and the market start to recover.” – Mark Smith CMI CFO |
Consensus estimates for 2020 for CMI are likely to migrate toward $12 to better match guidance and an ongoing deterioration in truck orders.
MDLA
Medallia’s (MDLA) #1 historical advantage was that their relatively commonplace survey software was fully integrated into the back end of a customer’s IT operations including ERP, CRM, and other business applications. The new products/modules will be separate purchases that are not integrated.
As MDLA buys tiny companies, the acquired products are either too early in development to really win F500 enterprise customers or have product that was never going to intersect competitively with major customers. MDLA will hire sales people until they are blue in the face to stuff product down customer throats but that won’t go so well when dealing with the sophisticated software buyers.
Each acquisition is accretive to revenue growth but also adds a cost structure, pushing profitability and positive cash flow further into the future. We stay firm with our short thesis.
SQ
We continue to discount Square's (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.
ATUS
Click here to read our analyst's original report.
Altice (ATUS) was down ~4% today on sympathy to AT&T/T (Short Bench) 4Q earnings results that showed deteriorating trends in Pay-TV and broadband customers. Following CMCSA earnings and guidance last week, our expectation for 2020 Pay-TV losses to be greater than 2019 is pretty much confirmed.
For ATUS, we expect Pay-TV declines to accelerate through the 1H20 and also weigh on broadband subs. With 60-65% of the Optimum footprint bundled with video/broadband/phone, a cord-cutting decision increases the probability of an outright customer loss. The risk is higher in markets where they compete with Verizon (VZ), who recently began offering Fios internet and video unbundled w/no contracts.
Meanwhile, Altice is trying to pass through the largest Optimum price increase in years effective 2/1. With Verizon seemingly getting more competitive, it is a bold move in our view, and will be interesting to see how it works out for them.
DFS
Discover Financial (DFS) reported 4Q19 EPS of $2.25, in-line with street estimates and marking an increase of +11% y/y.
Total revenue of $2.94 billion grew +5% y/y, missing street expectations by -33 bps. The top-line miss was driven by a -82 bp disappointment in net interest income, which totaled $2.42B for the quarter and registered +5% higher y/y, attributable to +6% loan growth offset by NIM compression. Non-interest revenues of $520 were up +3% y/y and beat estimates by +1.5%; however, with net discount revenues essentially flat y/y due to higher rewards costs, the increase and beat were fueled by a +14% increase in loan fee income, reflecting increased late fees driven by greater incidence and pricing adjustments.
SYF
Hedgeye CEO Keith McCullough added Synchrony Financial (SYF) to the short side of Investing Ideas this week. Below is a brief note.
Hedgeye Financials analyst Josh Steiner has added Synchrony Financial (SYF) to his Best Idea short list:
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"While bulls cite the prospect for new program launches, recent exciting deal wins, the belief of continuing strength in the domestic consumer, and a stronger, more defensible portfolio following Walmart's move to COF, our analysis concludes that SYF is much more like a ice cube on a hot summer's day with both secular and cyclical headwinds poised to accelerate the melt.” |
