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

Investing Ideas Newsletter - 11.13.2018 nesting bull and bear cartoon

Below are updates on our thirteen current high-conviction long and short ideas. We have added Pinterest (PINS) 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.

Intensive Care Nurse listings number 3,170 and account for 5% of all AMN listings. In Seattle, New York, Boston, and Los Angeles, the number of listings are all ramping significantly higher in March 2019 compared to a more subdued trend nationally.  If COVID-19 produces 200,000 ICU admissions, which is low by some counts, and ICU beds are staffed at a ratio of 1:2 staffing, Hospitals will need 100,000 ICU nurses incremental to the current population already caring for non-COVID-19 critical care patients.

Estimates are very likely moving higher as COVID-19 spreads across the United States. Whether this is enough to support the shares on a relative or absolute basis is another question.

MAR

Click here to read our analyst's original report.

Looking for more ways to front run the weekly STR data? We are. Since the majority of US restaurants are closed to the public (ex. take-out) we can’t use the OpenTable dataset as a lead in to Urban hotel RevPAR, but our latest data tracking tool has become the TSA Passenger throughput counts (Y/Y Change). The latest datapoint as of 3/24 showed TSA checkpoints down 87% YoY.  We’ll keep tabs on how the data trends over the coming days, but judging by the correlations, we’d expect weekly hotel data releases to maintain the same trajectory as we have seen over the last few weeks.  Until the country begins to open back up, RevPAR down 60-80% YoY is not unreasonable to imagine.   

Among all areas of GLL, hotels (including Marriott (MAR) warrant the most negative bias right now, in our view.

CMI

Click here to read our analyst's original report.

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.  Implied volatility remains very high for airlines, even after pre-announcements. Auto and oil related names have also seen notably increased volatility expectations priced in. 

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:

  • 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

Square's (SQ) growth continues to be largely inspired by the launch of the company's zero cost rewards program in May of 2018. While this program no doubt proved popular among the company's under-banked and young user base, we do not see the same momentum extending into older and more adequately banked segments of the population, especially given the increasing level of competition on rewards among the major card issuing players. Hence, the Cash App will likely struggle from a very difficult comp setup.

In response, Square unveiled the addition of a fractional investing feature to the Cash App, enabling users to buy and sell divisible shares of domestic equities for as little as $1, all without charging a commission. Of course, the firm expects to lose money on this initiative with the ultimate goal of driving greater app engagement and usage, similar to the function of its existing Bitcoin offering. While it is no doubt a novel idea, we view the prospects for increased app engagement as highly limited for a number of reasons, including a limited target market, an offering that runs against conventional investing wisdom, and the existing plethora of low-to-no cost wealth management products available to individuals with investment goals. In contrast, the company's Bitcoin offering was clever in that it leveraged Square's secure perception and strong brand to enable a broad set of interested individuals to seamlessly buy into a brand new, completely foreign asset class, thereby signing up for the Cash App and increasing overall engagement

ATUS

Click here to read our analyst's original report. 

For Altice (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.

The most recent data updates (as of 2/7) suggest 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) CFO John Green previewed the company's forthcoming 10-K disclosure on troubled debt restructurings, with credit card TDRs up +$1.1B or +48% y/y to $3.4B as of December 31, 2019. Combining the 2019 and 2018 ending balances, average TDRs for the year were $2.85B - a near tripling of the $1.0B figure in 2016.

Further down the p&l, expenses came in +7% higher y/y and +2.6% ahead of consensus estimates, with information processing and professional fees combining to produce negative operating leverage and catching the street off guard. The increase in the information processing and communications was driven by investments in infrastructure and analytic capabilities, while the higher professional fees were attributable to a higher level of recoveries stemming from the greatly expanded troubled debt restructuring.

With the company's top-line up +5% y/y, expenses greater by +7% y/y, and a flat tax rate, net income grew +3% y/y, with the +11% per share growth achieved by a -7% reduction in the weighted average, fully diluted share count. 

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 transition firmly into Quad 4, we highlight SYF's abysmal record under an economic regime characterized by decelerating growth and inflation.  

Continue the short.

PYPL

While PayPal's (PYPL) company's total take rate increased sequentially by +4 bps to +2.49%, it remains -9 bps lower y/y. The transaction expense rate, however, increased sequentially by +1 bp to 0.96%, +0.5 bps higher y/y as well.

Net transaction expenses, transaction & loan losses, and customer support & operations expense from the gross total take rate, we see a +3 bp sequential increase to 1.12%; however, on a y/y basis, we see a -8 bp decrease and the continuation of the downward trend in adjusted total transaction margin.

While the transaction & loan loss rate held flat sequentially and improved -3 bp y/y, management expects the day 2 impact of CECL adoption in 2020 to have a -1 pt impact on adjusted EPS growth, suggesting a higher loan loss rate and hence a worsening of the adjusted total transaction margin.

BABA

One of the points China analyst Felix Wang raised in his Alibaba (BABA) short presentation was the potential risk of Softbank unwinding its gigantic position in Alibaba to fulfill a giant stock buyback and other financial changes being pushed by hedge fund, Elliott Management.  Softbank owns ~24% of BABA's outstanding shares or currently ~US$110bn.  In the wee hours of this morning, Softbank announced plans to sell up to $41 billion of assets over the next year. 

Immediately, speculation pointed to the selling of BABA shares.  While the news itself wasn't surprising since the board had pressured Softbank CEO Son to sell BABA shares, the timing of the news was, given BABA was already down 25% from its highs.  Partly because of this news, BABA lagged the market and its peers all day.  Newswires also reported Softbank plans to sale US$14 billion of Alibaba's shares.  That equates to ~79.4 million shares or 4.8x average daily volume.  This is another headache for BABA investors

SMAR 

In the next 3-6 months we see Smartsheet (SMAR) going ‘sideways’. The company will likely experience peak NRR (~136%, higher than F4Q, just math) after ~17 straight quarters of rising, and saturation may become slightly more evident as the company delivered 1Q billings expectations slightly below consensus, ditto 1Q revenue, ditto FY21 revenue.

Point is: the upside potential from rinse and repeat has already been registered in SMAR, 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.

Continue the short

FB

We see downside to Facebook (FB) 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.

pins

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

Now that I'm starting to leg into shorts again, remember that you do this incrementally. Especially for those of you trading individually (i.e. paying NO commissions), averaging into shorts has never been easier. You have no friction costs adding to positions!

Anything I've covered on the short side is a candidate to re-short now. Pinterest (PINS) has immediate-term downside in my Risk Range to $11.27/share.