Below are updates on our thirteen 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.
Looking forward to the end of the current COVID-19 Pandemic, while a huge positive for the globe and everyone on it, it presents the risk of ebbing demand from crisis levels, and a negative potential headwind for AMN Healthcare (AMN) and other staffing companies. Also, we expect Hospital Industry fundamentals to be negatively impacted from the economic consequences of COVID-19 through disruption in the labor pool, declines in the commercially insured population, and the subsequently high margin case volume they account for. However, a substantial amount of demand currently deferred because of COVID-19, should rebound on the other side of the crisis. We expect the environment will present a balance of rebounding procedure volume that has been shut in by the COVID-19 crisis, offset by demand destruction due to the ensuing economic environment and fading COVID-19 emergency staffing.
MAR
Click here to read our analyst's original report.
Weekly active user data on mobile platforms from the biggest hotel companies suggests a pretty bleak outlook for the industry and Marriott (MAR). Data was already slowing down into the COVID-19 pandemic, but since late December, trends have only worsened, which not only provides insight on realized demand but also forward booking / shopping activity. Hotel brands have made a significant push into fine tuning their mobile apps and have touted their app downloads and loyalty sign ups, but we haven’t heard much mention of actual app usage.
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.
Navistar reported a loss and another round of stunning order declines. Order compares don’t ease until late summer. This is serious news for CMI, as NAV is a large customer relative to its market share. NAV had shorter lead times, resulting in order activity that would have otherwise been directed towards a PCAR or Daimler. NAV order share is declining, and market share will follow. Inventories are elevated. The outlook on the call doesn’t seem reasonable to us, not that it really matters as the company evaluates TRATON’s bid. For CMI, there isn’t much to see if one is looking ‘through the cycle’. MD electrification and TRATON engines are likely to displace CMI content, with the former lacking an obvious component offset. The Huntsville engine plant is in process, opposing the CMI contention that traditional OEMs are no longer investing in diesel engines. Supply chain issues were also a comment, “We're working closely with our suppliers, including expediting freight and part substitutions in certain circumstances, to maintain our production schedules.”
Insofar as the economy is turning more averse for cyclicals – a core part of themes deck that was evident in the data prior to coronavirus – being bearish on a cyclical business that is over-earning and correcting to the downside with long-term value creation challenges seems straightforward. CMI remains a top short idea for us.
MDLA
THE NEGATIVES FOR MEDALLIA (MDLA):
- TTM subscription billings $2MM below street for FQ420
- Guide for FY21 subscription revenue deceleration from +26% in FY20 to +23% in FY21
- …and our estimate of only high teens % organic
- Guide for FY21 total revenue deceleration from +27% in FY20 to +19% in FY21
- …and our estimate of low to mid-teens % organic
- 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
We stay firm with our short thesis.
SQ
Square (SQ) reported 4Q19 earnings with adjusted EBITDA of $119M and adjusted EPS $0.23, beating street estimates by +2.8% and $0.02, respectively.
Credit where credit is due, the company posted a strong quarter. Adjusted for the sale of Caviar on October 31st, 2019, gross profit increased +42%Y/Y, continuing the strength of the previous quarter.
Moreover, the company's subscription business, increasingly based in revenues from the Cash App, is performing well with expanding gross margins of 82%. Note, Cash App revenues have a 77% gross margin; however, Cash App revenues feature a transaction-based component and thus the margin on subscription and service-related revenues is even higher.
Nonetheless, 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
ATUS
Click here to read our analyst's original report.
The number of better business bureau complaints and negative ratings remains elevated through February for Altice (ATUS). We spoke with the BBB yesterday and because of COVID-19, they expect a delay in processing consumer complaints in March. Meanwhile, the Net Promoter Score (NPS) for ATUS compensation and benefits, and view of senior management continues to trend well below peers. In terms of network stability, the number of comments on downdetector.com suggests that the Suddenlink and Optimum networks are holding up well so far since the national emergency was declared on 3/13.
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 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 Synchrony Financial's (SYF) 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.
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 sell 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
Smartsheet (SMAR) now has 950k paid seats, up from 800k one year earlier, up from 650k one year before that, which was up from ~500k one year before that. What does that smell like? Not acceleration. The increments of paid seat growth aren’t getting easier despite 1) a bigger sales force, 2) a bigger brand, 3) a larger collaborator pool, 4) very small international presence, 5) increasing market awareness, 6) increasing customer installed base, etc. The main thing that is accelerating is incremental bookings per incremental paid seat which hit ~$1,000 in F4Q up from $660 the year earlier and $400+ the year before that, (in part stimulated by the upsell of Capabilities)
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 the business, with advertising budgets often the first to get cut in periods of weak demand.We went short FB on 3/5 with the view that advertising spend would be negatively impacted by COVID-19. Three weeks later, and we can confidently say that we were not bearish enough. We see a 30% downside from here. For 2020, our base case advertising revenue growth estimates for FB is -13% YoY.
PINS
Communications analyst Andrew Freedman sees 50% downside in Pinterest (PINS) in the next 3-months. The sudden stop in worldwide commerce as a result of COVID-19 is having devastating effects on the advertising industry.
The data we are tracking and our checks with agencies have CPMs down 40-50% YoY across paid search and social channels in the last two weeks of March. We are modeling global ex-China digital advertising spend down 30-40% YoY in Q2 and (15-30%) for 2020. Additionally, we anticipate PINS will experience modest share losses as experimental budgets get cut, and it becomes cheaper to advertise on the larger platforms.
