Below are updates on our ten current high-conviction long and short ideas. 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.
Health Care demand remains a tailwind for AMN Healthcare (AMN) and nurse staffing as we’ve been expecting since our data turned positive in September of 2018. However, more than a year past the inflection point, Health Care demand is beginning to slow, and depending on how the trend develops over 2020, it could catch up with AMN. The trend in pricing may already be telling us demand is softening.
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
Click here to read our analyst's original report.
On the surface, EXPE may seem like the sexier story and is receiving praise from some of the sell side. The conference call was energetic and Chairman Barry Diller provided some positive comments regarding the industry and EXPE that we actually view as more for bullish for Booking Holdings (BKNG) in the near term.
But on the attractiveness of the story, we still comfortably favor BKNG after running through the list of key points from the call and model. EXPE is taking the steps necessary to earn back the trust of the investor community, but we’re not in a hurry to jump on the bandwagon, particularly not after today’s likely pop in the stock. The announcements by EXPE are certainly rate-of-change positive, but now comes the hard work for EXPE – we’d rather own the already rate-of-change positive story in BKNG.
- Cost savings? Great, BKNG is already lean and getting ready to leverage its recent cost ramp/investments it has made on the merchant model.
- Marketing retargeting? Great, BKNG already does it the best, and are by far less reliant on areas of lead generation that have seen the most issues recently.
- Growth? Ex. Coronavirus, BKNG is far better situated to drive profitable and faster growth (AsiaPac, core EU, and a superior Alternative Accommodation network effect).
- EBITDA Ramp? Predicated on the above, BKNG, too will be set to drive incremental EBITDA in the coming years driven more by its core top line rather than having to gut a bloated cost structure.
- Capital Return? BKNG already there too; EXPE has bought back ~3.5% of its market cap in 3 months, but BKNG will have likely bought back close to the same amount, and that’s their regular order of business.
Valuation? On our numbers both are trading in the same 16-17x range, cheap relative to history, but we’d rather side with the cleaner growth story.
MAR
Click here to read our analyst's original report.
Accelerating Full Service North America RevPAR should be somewhat hamstrung by the still very weak Limited Service trends that continued on through Q4 + weaker international growth was not accretive to year end ’19 RevPAR – net/net, we estimate Marriott (MAR) RevPAR will fall short of consensus expectations and guidance of 0 – 1% and post growth of 0.3%.
MAR afforded itself some nice cushion in its guidance for Q4, but due to weaker international growth we see them missing the low end of the range. 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.
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 |
MDLA
Medallia (MDLA) reported that the largest retailer in the world with 1.5MM employees took the employee experience module and has grown their account with MDLA by 400% in the last year as they start to migrate to bigger modules. A few problems with this example. If the dollars are material, and we can all make our estimates, then if you back out the 400% growth from one customer it implies all other customers would have had an NRR somewhere lower than the reported 118%.
We stay firm with our short thesis.
SQ
Square's (SQ) management announced its pullback from the marketplace product it had been developing for Eventbrite, stating that while the deal would have brought meaningful incremental volume ( ~$3.4/year), the impact on revenues, due to heavy price concessions, would have been de minimis. We view the pullback from Eventbrite as further signs of the company's struggle to attract merchants of considerable size, previously highlighted by the termination of its unprofitable relationship with Starbucks.
ATUS
Click here to read our analyst's original report.
The most recent data updates (as of 2/7) suggest the problems at Altice (ATUS) have not gotten better. The # of complaints filed with the Better Business Bureau (BBB) ticked up slightly in December 2019, which runs counter to management's "back to normal" commentary (see below). In fact, the # of BBB complaints and negative reviews remains elevated so far in 2020. Meanwhile, the number of reported outages/service problems at Suddenlink and Optimum continues to increase in size and frequency. Finally, the NPS for "employee compensation" and "views of senior management" continue to remain depressed and well below peers.
Altice is rolling out fiber across the Optimum footprint (~60% of ATUS homes passed). As of 2Q19, ~19% of homes passed are fiber, and ~10% ready for service as of 3Q19 (Optimum). The CFOs we spoke with indicated that meaningful cost-savings do not occur until the 30% adoption threshold. With Altice not ramping their go-to-market on Fiber until 2H20, we are years away from seeing any meaningful benefit.
DFS
Discover (DFS) investors have been lulled into a false calm thinking that the firm’s fundamental resilience during the Financial Crisis will ward against meaningful downside risk in the next slowdown. The reality is different, however, as the company’s risk profile has over the last few years risen considerably.
DFS repurchased 4.9MM shares of common stock for $401MM in the quarter, resulting in a -6% Y/Y reduction in share count. In addition, the company paid out $136MM or $0.44 per share in dividends.
Accordingly, Discover Financial remains a Hedgeye Financials Best Ideas Short.
SYF
While bull's 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 Synchrony Financial (SYF) is much more like an ice cube on a hot summer's day with both secular and cyclical headwinds poised to accelerate the melt.
While contract extensions with major store parents are in place, we draw on the experienced insights of the Hedgeye Retail Team to cast serious shadow on the outlook for some of SYF's major brick and mortar partners like JCPenney and GAP; A reminder of late-cycle realities: elevated loan loss rates, increased defaults, higher credit costs, slower loan growth, and highly sensitized investor sentiment to the consumer finance space amid deteriorating economic conditions. With the Hedgeye Macro Team signaling a transition into Quad 4, we highlight SYF's abysmal record under an economic regime characterized by decelerating growth and inflation.
