Below are updates on our eighteen current high-conviction long and short ideas. We have added Teladoc (TDOC) to the long side of Investing Ideas and Boyd Gaming (BYD) to the short side of Investing Ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
KR/GO/SFM
Kroger (KR), Grocery Outlet (GO), and Sprouts Famers Market (SFM) are all positioned to benefit from a shift to food at home spending from food away from home. Consensus estimates still only reflect that shift to last for Q2.
Our weekly consumer survey points to continued increased spending on food at home. Nearly half (48%) of consumers say they are spending more on food at home than before.
Local and independent grocers’ sales reaccelerated to 51.6% YOY on April 25, as seen in the chart below, according to Womply (CRM provider). Local and independent grocers are seeing much larger increases than the large chain grocers due to their smaller sales base. Anecdotally smaller grocers are benefiting from not having the lines to enter the stores that the larger grocers often have. Still the trend points to an elevated level of spend on food at home.
Canada’s largest grocer Loblaw reported Q1 results this week. Q1 food retail SSS increased by 9.6% driven by the two weeks between March 8 through March 21. In the five weeks since the end of Q1, food retail SSS was up 10%.
Management said customers are visiting less often, purchasing more, favoring one-stop stores (Loblaws grocery stores are outperforming its superstores), and are less price-sensitive. Trends are similar in the U.S. with more customers cautious about social distancing choosing to make one large visit to the grocer on average and purchasing fewer general merchandise items (as Target said this week).
TDOC
Hedgeye CEO Keith McCullough added Teladoc (TDOC) to the long side of Investing Ideas this week. Below is a brief note.
So the bulls only "buy stocks" when the Russell is 9-10% higher and sell down here? #Sweet process.
There are sectors and companies in the US economy that we like. I just don't like them at any time and price. We like both the Healthcare Sector Style (XLV) and Teledoc (TDOC) in particular.
Here's a summary excerpt from Healthcare analyst Tom Tobin's Institutional Research note this week:
|
Behavior changes are likely sticky, and estimates have room to move higher. App downloads are backing off the COVID-19 surge highs, but the new run rate is settling into a higher level than pre-COVID and utilization continues to ramp. With the guidance for 2020 went to $800-$825M from the previous $695-$710M and consensus of $726M, but the real focus will turn to 2021 where we think the step up in estimates could be similar to 2020. As of 1Q20, penetration into convertible patient volume is 5.6% leaving substantial upside, even in the face of competition. Without a vaccine we do not expect consumer behavior to change and telemedicine to embed into the delivery system. Importantly guidance does not include a resurgence in COVID-19. As the economy re-opens it is as likely for employers to want a telehealth option as a risk mitigation strategy as it will be for consumers. |
MAR
Click here to read our analyst's original report.
“Is it the frank or the beans?” The epic question (and recurring line) toward the beginning of the comedy movie classic “There’s Something About Mary” was answered with, “…both I guess”. Well, we’d answer the big question circulating amongst some GLL investors of whether NUG or RevPAR is the driver of hotel brand stock performance the same way. It’s both.
The math and a historical look back certainly suggests that both drivers are critical and will matter for the stock performance at different stages of the downturn and the inevitable upcycle. Unfortunately, both will trend lower with RevPAR moves dominating near term stock performance with NUG providing significant tail risk. We remain bearish on RevPAR, the hotel development cycle, and Marriott (MAR).
CMI
Click here to read our analyst's original report.
Cummins' (CMI) earnings ‘beat’ was partly a function of reduced warranty and compensation accruals and a lower than expected tax rate. Collectively, these added >~$0.30 to the quarter’s EPS by our estimate. The lagged effect of closures and some supply chain stocking likely accounts for the rest. With customers closed, 2Q20 guidance was not a management talking point. Given that truckload data is likely to sag in April alongside production shut-ins, the downcycle for CMI is far from over. Recent commodity price declines are likely to add to the difficulties associated with weak truck orders.
MDLA
Medallia (MDLA) CEO Leslie Stretch 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.
Continue the short.
ATUS
Click here to read our analyst's original report.
We updated our data trackers from the Better Business Bureau, Glassdoor.com and Downdetector.com. We spoke with the BBB and they expect a delay in processing consumer complaints. Meanwhile, the Net Promoter Score (NPS) for Altice (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. Meanwhile, the Net Promoter Score (NPS) for ATUS compensation and benefits, and view of senior management continues to trend well below peers.
DFS
Not dissimilar from its consumer lending peers, Discover (DFS) management is trying to focus investor attention on the company's performance during the last downturn, the magnitude and speed of fiscal stimulus, the degree of loan forbearance, and the acute nature of the overarching employment shock. Adding to this, Discover's management emphasized the improved quality of its current loan book evidenced by a lower share of the FICO sub-660 loans, along with mention of its superior liquidity, capital position, and low-cost funding stack. Those who accept this narrative see a stock trading just north of 1x tangible book value - albeit 50% greater than the all-time low of 0.5x reached during the last downturn - with considerable upside.
Beginning with sales volume through April 19th, Discover is facing an accelerating downward spiral in every consumer spending category, excluding groceries, with restaurant and travel expenditure seeing the largest declines.
SYF
Synchrony Financial's (SYF) purchase volumes have fallen precipitously. Purchase volume growth tumbled from +14% Y/Y in the first half of March to -26% Y/Y in the second half of March. Moreover, when asked on the conference call for an update on April, management indicated that purchase volumes had deteriorated further in April and are now running at levels of -30% to -35%. Also interesting is the itemization of the Restaurant, Entertainment, Gas and Travel categories. Together, those four categories accounted for 27% of 2019 retail card consumer world sales for Synchrony. We also find it puzzling why the company chose to break out sales growth for January relative to February/March, which clearly understates the impact of Covid-19.
We stay firm with our short thesis.
FB & PINS
In our view, the moves in these stocks post-earnings are more sentiment-driven on "less than feared" results, than on fundamental trends. Earnings estimates for Facebook (FB) still need to come down, and at current prices, are more expensive today on a materially worse forward outlook than before the downturn. In the very short-term, investors seem to be willing to pay a higher multiple for these businesses than before the crisis because they view flat to down 15% YoY or a 30-40pt decel in growth as a sign of resiliency. That said, we also understand the bull case of operating margin expansion post-cost-cuts on a stronger than expected recovery (not our base case scenario).
To be clear, we view the risk/reward for FB/Pinterest (PINS) as extremely skewed to the downside IF we don't get back to pre-COVID levels of growth by 2H20. That said, it is not our process to make calls purely on valuation, and therefore need to take a step back and rebuild our confidence in the forward outlook for digital ad-spend/share.
MCD
McDonald’s (MCD) reported Q1 earnings this week. The company had pre-announced sales results earlier so global SSS of -3.4% were in line with expectations. EPS on the other hand came in $.14 lower at $1.47 vs. $1.72 a year ago. US SSS of +0.1% were driven by a strong January and February while March declined 13%.
The weakest region was the International Operated Markets which had a comp decline of 6.9% for Q1 driven by March down 35%. March SSS were down 22% globally. Management expects US SSS to decline 20% in April. The breakfast daypart is particularly weak due to the altered work routines of many Americans.
Management said the pace of recovery in China has been slow, not the hoped for V shaped recovery foreshadowing a slower recovery for the rest of McDonald’s markets. SSS in China have improved to down mid-teens% from down 20% in Q1. Consensus expectations for 2020 EPS have fallen from $8.54 prior to the pandemic to $5.65 after the Q1 earnings report.
Our estimates are lower than consensus driven by a slower recovery in sales, additional discounting to drive traffic, sales deleverage on margins, and higher operational costs.
ITW
Estimates for Illinois Tool Works (ITW) have yet to reset lower despite increasingly clear headwinds to the conglomerate's core exposures, including automotive, food service equipment, and manufacturing capital investment. ITW’s ~84 business tend to have high operating leverage; in the post GFC period, ITW has also run with more financial leverage than the decade prior. Conglomerates tend to look as though diversification reduces cyclicality, but the current COVID-19 driven downturn is likely to prove unusually challenging for the majority of ITW’s end-markets.
We remain firm the short thesis.
HLT
Long considered bullet proof with recent valuations commensurate with that view, the hotel brand asset light models of Hilton (HLT) are being put to the ultimate test. A bullet proof vest is useless against a head shot and the COVID-19 pandemic might be that gun pointed right at the face of unit growth. Certainly, the asset light vest partially deflects the RevPAR bullet vis a vis a hotel owner, but will unit growth provide the offset to RevPAR degradation?
Occupancy rates in the US could be bottoming at current levels and this past week showed some uptick. China's occupancy rates bottomed out (~10-12%) some 9 weeks ago, so the US could be on the slow path to recovery. As Europe begins to lift its more strict nationwide lock downs, we'd expect some recovery to start taking shape, but through last week, occupancy continued to make new lows in that region.
Continue the short.
SYY
Social distancing restrictions are a nightmare scenario for restaurants. Sysco (SYY) is at the center of the massive disruption in how we consume food shifting from away from home to at home.
Currently there are over one million restaurants in the U.S. Over 20% of the industry faces imminent risk of closure as restrictions on dining in restaurants gets extended. In the longer term many of these customers will not re-open. The smaller independents are at most risk of closing and they are more profitable for Sysco than the larger chains. Sysco’s network has a lot of fixed costs and a unionized workforce that will have significant decremental margins with the loss of customers. So even when the pandemic ebbs Sysco will have a permanently reduced earnings power.
GOLF
We’re reaching the critical time of the year as it relates to golf equipment sales. Usually as the first major tournament of the year (The Masters is usually mid April) rolls around and the weather in the north starts warming up, golfers are ready to hit the links. Yet today, all of the US golf majors are pushed until after August (at least). Additionally, late March to late April is when much of the country has demo days for golfers and club members to try and buy all of the new year's equipment.
Acushnet’s (GOLF) Titleist T-series irons were likely to be a big hit this spring. The problem is many of the golf facilities and stores in the US that facilitate these sales are closed. The current expectation for GOLF’s sales in 2020 is down 6%. And EPS down 30%. Those sales and earnings expectations are still wildly off from what will be reality with a weakening consumer let alone a shutdown golf industry. As a reference in 2009 ELY sales were down 15%, EBIT was down 125%. GOLF is now trading at all time high multiples on that wrong earnings, we think when the earnings profile is realized in the next 3 to 6 month the stock will correct with potential downside of 50% plus.
BYD
Hedgeye CEO Keith McCullough added Boyd Gaming (BYD) to the short side of Investing Ideas this week. Below is a brief note.
Been waiting on a long list of high quality short selling opportunities... and this is one of them: Boyd Gaming (BYD).
Here's a great summary excerpt on why from Gaming, Lodging, and Leisure (GLL) analyst Todd Jordan's recent Institutional Research note on the name:
|
BYD has rebounded sharply, up 125% off the bottom but still down 50% from the February high. The market quickly discounted the Covid-19 risks to the company’s business, and then some. BYD proved this week that it has the liquidity to survive a long time without revenues. Moreover, the catalyst of casino re-opening has helped the positive stock momentum. The first problem with re-opening is timing - already management's expectation of late May or early June openings are looking aggressive, particularly considering the Nevada Governor's comments yesterday. Nevada casinos won't be included until Phase 3 or 4 of re-opening. Sounds to us like 2H of June or July is more in the cards. The second problem is what will casino demand look like after they re-open? We’re focused on the post re-opening world and we’re not sure the risks are appropriately discounted in the stock at 9.4x consensus 2021 EV/EBITDA. |
