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Takeaway: AMN, MAR, CMI, MDLA, SQ, ATUS, DFS, SYF, PYPL, BABA, SMAR, FB

Investing Ideas Newsletter - 03.19.2020 giant bear cartoon

Below are updates on our twelve current high-conviction long and short ideas. We have added Smartsheet (SMAR) and Facebook (FB) to the short side of Investing Ideas this week. 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.

There are 3.6M registered nurses in the United States according the Current Population Survey with 1% - 2% classified as "Unemployed and Looking."  AMN Healthcare (AMN) had 10,462 nurses out on assignment in 4Q19, or 0.20% of the total population.  Needless to say, COVID disruption is impacting multiples of AMN's FTE volume. COVID-19 disruption for hospitals and patients has already been profound and seems to fall into a few buckets.

  • Replacing staff infected or suspected of being infected for COVID-19 
  • Nurses unwilling or unable to work due to COVID-19 disruption
  • Increased supply of nurses in households under economic pressure and willing to take temporary or travel positions
  • ICU and acute care staff required to care for increasing number of hospitalizations and ICU admissions where ICU staffing ratio is 1:2 versus 1:4 in medical-surgical
  • Reduced demand from cancellations of elective surgery
  • Reduced demand from limitations on patient social distancing

MAR

Click here to read our analyst's original report.

  • Covid-19 is quickly becoming the most significant crisis the lodging industry and Marriott (MAR) has ever experienced 
  • Business update
    • Occupancy starting to bottom out in China
    • Under 30 hotels closed now in China vs a peak of 90+
    • Trends likely to get worse before they get better – expect little improvement  
    • Minimal group cancellations for 2021, decent number of groups have also rebooked for 2H 2020 (tentatively)
  • Have made aggressive changes to cancellation policies so their guests can feel comfortable
  • Helping Franchisees
    • Deferring required FF&E funding, deferring maintenance capex requirements  
    • Stopping all brand audits for now
    • Focused on easing their burden as much as possible from a cash outlay perspective
    • Working with the White House to get tax relief and business interruption insurance  
  • Highly confident they will make it through this crisis – expect that business will begin to recover. Maybe not next month or next quarter but it will happen

CMI

Click here to read our analyst's original report.

It is hard to get good work completed with so much market noise; some ideas play out while we are working on them. Volatility takes a toll. As this virus got started, and even now, many investors argue about whether the coronavirus is *actually* so dangerous or worthy of containment costs. 

Many economic actors, from transit systems to university suppliers, are facing a collapse in demand into 2Q20. Estimates for Cummins (CMI) have moved little since the outbreak of the novel coronavirus in the US and Europe.  Freight rates for trucks are broadly the lowest since 2017… who is out ordering trucks?  Significant preannouncements are likely in the next few weeks. CMI is likely to have EPS less than $10 in 2020 vs. a $12 consensus, given energy, China, and North America truck exposure.

MDLA 

Medallia (MDLA) remains one of Ami Joseph's favorite fundamental shorts. Here's a good summary excerpt from his Institutional Research note that he just published on the MDLA quarter:

  • CEO suggests that Coronavirus won’t affect the implementation or sales process of the Medallia product because most of it can be done remotely
    • His suggestion runs counter to our research and field notes indicating that the core Medallia product is high-touch and deeply integrated with back-end systems. If correct, perhaps the CEO’s comment shows MDLA’s shift to selling lower value, un-integrated products to smaller companies, as well as M&A based revenue which does not require core Medallia integration expertise
    • Also, MDLA revenue skews heavily to USA (76% of revenue in NA and increasing) which suggests that MDLA has not yet seen the negative impacts of Corona in its results
  • The CFO finally divulged the diluted share count (171MM)
    • Recall, in recent quarters MDLA avoided disclosing the diluted share count by claiming 1:1 ratio of basic and diluted owing to Net Losses at the GAAP level. MDLA still has GAAP net losses but maybe now investors can finally start using the right share count
    • Now investors can see MDLA trading ~9x forward recurring revenue and ~7x forward total revenue

We stay firm with our short thesis.

SQ

GPV growth sequentially decelerated by -73 bps to +24.75% Y/Y, resuming a broader trend of deceleration after having briefly stabilized last quarter. Transaction-based revenue growth of +24.61% Y/Y, however, was up +1 bp sequentially owing to the effects of the company's November pricing change

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. 

We continue our short thesis.

ATUS

Click here to read our analyst's original report. 

We have had a long bias on Altice (ATUS) as management's strategic initiatives were bearing fruit at the same time growth comparisons were easing, and the company was initiating an attractive capital return program.

However, much of what we liked is now becoming a risk to the company's growth algorithm (2-3% revenue growth / 4-5% EBITDA) as we head into 2020. Therefore, we are switching sides and moving ATUS to an active short targeting 20-30% downside in the next 6-9 months.

The problems at ATUS have not gotten better. The number 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. In fact, the number 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.

DFS

Discover Financial (DFS) 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.

We remain with the 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. 

We see the deteriorating value proposition, for both merchants and consumers, of private label cards, evidenced by a declining share of total store spend. A thorough look at the double-edged sword of retailer share arrangements reveals the increasingly lose / lose nature of such arrangements. The private label card model does not translate well in the increasingly dominant world of e-commerce and that's the death of brick and mortar.

PYPL

Total payment volume growth decelerated -500 bps and -309 bps to +22% and +21.85% on a current and constant currency basis. PayPal (PYPL) Management attributes the slowdown in TPV growth to lapping of 2018 acquisitions of iZettle and Hyperwallet, as well as the phasing out of eBay marketplace volume; however, on the former, it is simply time to pay the piper as TPV growth returns to the decelerating trend prior to disruption from the aforementioned acquisitions. Whereas on the latter, management seemed to lean much more heavily on the eBay crutch than it had in prior quarters

BABA

We had already seen some kinks in Alibaba's (BABA) seemingly impenetrable armor before COVID-19 but the virus has greatly amplified the risks ahead for BABA. Sellside is complacent, and consensus calls for a V-shaped recovery in China beginning in March/April. We believe the recovery process will take longer. Even if the virus is contained and demand & supply conditions are normalized, Alibaba will face more difficulties than its peers.

We have finalized our February proprietary GMV data for the Taobao and Tmall platforms. We disclosed preliminary figures in our BABA Short presentation and the results look ugly.  We believe the Street is underestimating the damage caused by COVID-19 for BABA. In addition, we argue the March/April 'recovery' is far from a V-shaped one and demand will normalize to a lower growth level for BABA.  

SMAR 

Hedgeye CEO Keith McCullough added Smartsheet (SMAR) to the short side of Investing Ideas this week. Below is a brief note.

Looking for Tech names to sell on green? I am.

Smartsheet (SMAR) remains a longer-term Software Bubble short. Here's a concluding excerpt from Technology analyst Ami Joseph's Institutional Research note on the name yesterday morning:

Point is: the upside potential from rinse and repeat has already been registered in this stock, and even if perhaps there is a no-COVID rebound, the downside case is more compelling to us for a landlocked company that is good at upselling existing customers but isn't widening out adoption metrics in one of the largest potential markets out there in productivity software and at the best time ever (last few years) for selling into it. 

FB

Hedgeye CEO Keith McCullough added Facebook (FB) to the short side of Investing Ideas this week. Below is a brief note.

We are moving Facebook (FB) to active short in the Hedgeye Communications Position Monitor (previously long bench). We see downside to 1H20 consensus growth estimates as the spread of COVID-19 weighs on global growth and pushes the U.S. deeper into #Quad4 in Q2.

We believe investors don't fully appreciate the cyclical nature of these businesses, with advertising budgets often the first to get cut in periods of weak demand. FB and GOOG represent 66%* of worldwide digital ad-spend (digital ~50%* of total ad spend) and have significant exposure to Europe and Asia ex-China. We expect both companies to report disappointing Q1 results and provide cautious Q2 guidance in the coming months.