Below are updates on our twenty-two current high-conviction long and short ideas. We have added Nomad Foods (NOMD), Conagra Brands (CAG), and Flowers Foods (FLO) to the long side of Investing Ideas and American Express (AXP) 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.
KR
Kroger (KR) became the first large grocer to announce an end to additional wages to its employees working during the pandemic with the end to its $2 per hour hero bonus. Kroger's average hourly wage is $15, but with benefits, the cost is $20. Kroger said it has hired more than 100,000 new workers over the past two months, representing more than 20% growth. Walmart said it would pay a second cash bonus of $300 to full time employees payable on June 25.
Part-time employees would receive $150. Walmart paid out a similar amount on April 2. The UFCW, the largest food and retail union, exhorted supermarket chains to extend emergency pay and protection. Kroger subsequently added a one time "Thank You Pay" of $400 for full time and $200 for part-time workers paid out on two installments on May 30 and June 18.
Only 25% of employers that required employees on-site offered hazard pay, according to WorldatWork. Workers employed in retail were more likely to receive additional compensation, with 46% of supermarkets offering hazard pay compared to 29% of healthcare employers. Many hospitals are in financial distress because of the drop in non-essential procedures, while grocers are seeing record sales. Kroger warned on its Q1 earnings call that increased hiring and wages would pressure SG&A in Q2. Higher wages are not the only additional cost the company incurred during the pandemic, but the end of the hero bonus should provide more visibility in SG&A in the 2H and provide more control over margins while sales surge.
SFM
Fresh produce sales over the last three weeks point towards elevated grocery spend continuing, driven by the calorie shift to food at home. Fresh vegetable sales grew 23.1% for the week ended May 10, down slightly from 24.0% the previous week. Since the pandemic began from a behavior perspective, fresh vegetable sales have grown over 15% every week except one.
Fresh vegetable sales may indicate a better run rate than other categories because they are more difficult to stockpile and consume later. The produced item that is seeing the strongest gains during the pandemic is potatoes. Fresh fruit sales grew 11.7% for the week ended May 10, similar to the prior week.
Many of the fresh fruit items are down in price, likely reflecting the changed demand conditions. Pineapple prices were 17% lower, peaches were 14% lower, avocados were 13% lower, and melons were 10% lower. Produce sales have been one of the strongest categories for Sprouts Farmers Market (SFM) and the large organic offering is a key differentiator for the stores.
GO
Local grocers have seen an elevated spend that has been fairly consistent since the second week of April. This was due to the initial drawdown of food supplies following the stockpiling in the middle of March, as seen in the following chart from Womply (a CRM provider). The elevated spend points to the calorie shift from food away from home to food at home. The combination of a significant increase in food at home consumption and significantly higher unemployment has created very strong demand for Grocery Outlet’s (GO) value food offering.
TDOC
Since first announced in the United States on January 21, 2020, our team has been very involved in measuring and mapping the caseload data, individual state preparedness, and health care labor trends throughout the effects of the COVID-19 pandemic. As part of that research, we have spoken with many industry heroes including hospital administrators, doctors, and nurses who have helped us build a reasonably good outlook of what health care consumption will look like when we reach a “new normal.”
We have found that while telemedicine has long been on every health care system’s agenda, the pandemic and subsequent closure of society has promptly pushed it to the forefront. By now, nearly 50% of all patient volume is being treated though various telemedicine options such as Teladoc (TDOC).
Rapid adoption has been a strong tailwind for established platforms such as TDOC to this point, but continued utilization will be key to the stock’s long- term prospects. Anecdotes surrounding adoption by older patients, burdensome processes for in-person visits, and lasting fear of infection would support the prospect of continued success in lower acuity specialties.
CHWY
We’ve been positively predisposed to the name since the June IPO, but the current environment is about as good as it can get for Chewy (CHWY). People won’t stop feeding their pets, and the retail economy is rapidly shifting penetration to online, likely with permanence. CHWY sells a better basket of brands than Amazon, and service is arguably better.
Unlike Wayfair, which needs to reacquire each new sale, nearly 70% of CHWY sales come from its auto-ship program, giving it a highly recurring revenue stream. The company is not profitable yet, but there’s growth optionality as the company becomes a ‘pet portal’ and offers products and services like grooming, insurance, and pet meds – which could land the company in the black over a long term duration.
This is one of the poster children for a company that will emerge from this crisis stronger than it went in.
nomd
Hedgeye CEO Keith McCullough added Nomad Foods (NOMD) to the long side of Investing Ideas this week. Below is a brief note.
Here's a good example of a stock that my analysts (Penney and Biolsi) like that I've been waiting on for a correction. It has done so, towards the low-end of its @Hedgeye Risk Range, on #decelerating volume. That confirms its Bullish @Hedgeye TREND signal.
Fundamentally, here's my team's update from the recent quarter:
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NOMD’s raised guidance is just the first, more to follow Nomad Foods reported an EPS of €.33 vs. a consensus of €.29. Organic revenue growth was 7.7% with volume/mix up 6.3% and price up 1.4%. Management raised EPS guidance for the year from €1.19-1.21 to €1.24-1.27 and EBITDA guidance from €440-445M to €450-460M. Organic revenue growth is now expected to be up MSD% for the year from +LSD% previously reflecting the upside in Q1 and trends continuing in Q2 while maintaining +LSD% expectations for the 2H. |
cag
Hedgeye CEO Keith McCullough added Conagra Brands (CAG) to the long side of Investing Ideas this week. Below is a brief note.
Some people love to chase price. I love looking for sales.
Conagra Brands (CAG) is on a -2% sale here into the close, signaling immediate-term TRADE #oversold within Consumer Staples analysts (Howard Penney and Daniel Biolsi) Bullish @Hedgeye TREND view.
Here's a little love on that idea from their Institutional Research product:
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Conagra announced on Friday that retail sales for the ten weeks ended May 3 had increased 37.2%. Conagra's grocery and refrigerated sales grew 53.5%, frozen goods grew 29.7%, frozen meals grew 27.1%, and retail snack sales grew by 20.4%. Conagra is different in that the entire COVID-19 period is in a single quarter instead of being split between the stockpiling and elevated spend period. When the company provided the last update at the end of March, QT trends were up 47%. Conagra's sales outperformed in both the stockpiling and elevated spend periods, and market expectations are now aligned. We are adding Conagra to our Long Bias list. Conagra is the fifth-largest food company in the U.S. with only 10% of sales from foodservice companies. We believe there is an upside to consensus estimates driven by the calorie shift to food at home, the strength in the frozen category from COVID-19, and the accelerating growth in snacking during an extended stay at home restrictions. |
flo
Hedgeye CEO Keith McCullough added Flowers Foods (FLO) to the long side of Investing Ideas this week. Below is a brief note.
My Consumables Team (Penney and Biolsi) has been excellent on the long side here in Q2. Buying their names (when they're on sale) has worked out great - and they're not the 5 names people talk about on Old Wall TV every day!
Another name that that like that's for sale on slow-volume today is Flowers Foods (FLO). Here's a summary update from my team on the fundamentals at FLO:
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Flower Foods, the second largest baker, reported Q1 EPS of $.41, beating consensus estimates of $.33. Sales grew 6.8% driven by a 6.5-7.5% boost from COVID-19. Pricing/mix increased 6.2% while volume increased 0.6%. The increased breakfast and lunch consumption at home is a COVID-19 tailwind. The strength in the grocery channel more than offset weakness in the company’s foodservice business (24% of sales). |
MAR
Click here to read our analyst's original report for Marriott.
Big counter trend pop across much of the GLL landscape and Marriott (MAR) was one of the names featured prominently on our daily mover list. Without trying to sound too short term, we do see this week's pop as a great opportunity to sell into, and we continue to see MAR as one of our better short ideas in this environment.
It will continue to get the benefit of the “quality” bid, but the slower progression of RevPAR growth at the upper end of the Limited Service segment and the Full Service segment will be on full display in the weekly data. More important, as each quarter unfolds, analysts will realize that their NUG assumptions need to head lower. We took a closer look at the Street numbers now that most models are updated, and continue to see numbers as much too high for the out years.
RevPAR growth does appear to be more fairly accounted for in the numbers, but the big delta is on net unit growth, and disappointing unit growth will manifest itself as MAR progresses through the year – not just on gross construction adds, but on attrition, deletions, and a lack of conversion uplift. With limited short interest (only ~4%), numbers still inflated, and elevated multiples (on inflated numbers), the risk/reward on our MAR Short still skews favorably.
CMI
Click here to read our analyst's original report.
Not a terrible quarter but estimates for Cummins' (CMI) have fallen so far that it allowed the company to stumble over consensus. Cummins also engaged in restructuring at the end of last year, helping 1Q20 reported results. EV delays in the medium-duty space, not long-haul, are the real CMI risk. ESG holders must love that conflicted section of the earnings call – diesel is cheap right now…but because transportation demand has fallen off a cliff, and that is somehow a positive? That is a tortured bull story.
MDLA
Medallia (MDLA) was once a pioneer in the voice-of-customer software industry but MDLA’s high professional services touch, complete enterprise back-end integration, and long time to value / long sales cycle, caused the company to fall behind as the market moved to pure software approaches, easy to use, low dollar, fast time to value, with consequently wider adoption.
MDLA has not lost its perch serving large F100 enterprises but those organizations are also using a multitude of other solutions, and incremental customer capture at that level is an uneven phenomenon. We see ongoing organic deceleration for MDLA on dollars and % terms, partly offset by the new CEO spending ~$110MM on M&A in the last 12 months to purchase ~$15-20MM of incremental subscription revenue with acquired solutions unintegrated and delivered from companies that have never scaled.
MDLA's pivot to fast time-to-value modules was necessary. But Medallia’s key differentiating factor has been interconnectivity w/ a customer’s ops & systems, without which, we wonder what kind of differentiation the new quickstart solutions offer relative to other survey tools.
MDLA remains a Hedgeye Technology Best Idea Short.
ATUS
Click here to read our analyst's original report.
Altice (ATUS) has underperformed the broader market since reporting weaker than expected results last week. Pay-TV subscriber trends continue to deteriorate, weighing on overall revenue per residential customer which only grew 0.2% YoY despite a 5% price increase across their base in February. Meanwhile, the company continues to plow all free cash flow into buying back the company’s stock while underinvesting in the core business.
The company repurchased $1B of stock in 1Q20, leaving $700M left under their authorization. Also weighing on shares, was news that top 10 shareholder CPPIB completely sold their position in ATUS in the last week. We continue to view ATUS as a melting ice cube/financial engineering story that will limit the companies future growth prospects (cutting back on fiber deployment). We continue to favor Charter Communications (CHTR) as a better pure-play on cable as the stronger operator over ATUS.
DFS
Not dissimilar from its consumer lending peers, Discover's (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 (SYF) management indicated on a conference call that its reserving levels this quarter assumed a peak rate of unemployment of 10% in the second quarter, followed by an average level of unemployment of 7% in the back half of 2020 followed by a return to 4.5% unemployment in 2021.
We find it interesting that the company built its reserves (ex-CECL) by just $451mn this quarter ($1,667mn provision less $1,125mn NCO less $101mn CECL) to help it weather the downturn. On a loan book of $82.5bn that works out to just 55 bps of additional reserving for an assumed jump in unemployment from 3.5% to 10%. For comparison, JPMorgan reported last week it was built its US Card reserves (ex-CECL) by +$3.8bn on a loan book of $162bn, which equates to 235 bps. In other words, it appears that SYF has baked in ~1/4 of the hit that JPMorgan has assumed.
We think Synchrony remains behind the curve in terms of its provisioning and expect further catch-ups will be necessary in Q2 and likely beyond.
MCD
Click here to read our analyst's original report.
This week labor organizers had McDonald's (MCD) workers in 20 cities plan to strike part of an effort to pressure the fast-food chain into improving what they say are inadequate protections for employees during the COVID-19 pandemic.
Several of McDonald's workers have been diagnosed with COVID-19 in at least 17 states. The strike is supported by the Service Employees International Union and is being organized by the "Fight for $15" minimum-wage labor campaign. In addition to higher wage rate pressure, McDonald’s will also see labor hours increase.
In McDonald's recently released step-by-step guide to reopening its dining rooms the company will require everything from adding protective panels to sanitizing tables and kiosks after every use. Opening the dining rooms will require significantly more labor expense than serving customers through the drive-thru, but it will be a much smaller mix of sales than the 1/3 it was previously.
ITW
Illinois Tool Works (ITW) looks to be at risk of a sizeable 2020 reset on consensus estimates, with very optimistic justifications focusing on bailout (‘cash for clunkers again’) and other stimulus measures. 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 see 30% relative downside in shares of ITW, a name that every few years gets re-rated as a mediocre, discounted conglomerate.
We remain firm on 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.
SYY
Black Box reported that overall restaurant comp sales were -40% YOY for the week. This represented a 5% increase from last week’s YOY performance. “Looking at casual dining, the top 8 performing states during the week based on comp sales reflect the improvement in states that had dining rooms open during the week. The best performing states (Montana, North Dakota, Utah, Oklahoma, Tennessee, Georgia, Texas and Florida) had a casual dining comp sales average of -34%.
The average for the rest of the country was -52%. Using the largest of these states as a sample for analysis (Tennessee, Georgia, Texas and Florida) dine-in comp sales averaged -68% for casual dining in these 4 states (23 percentage points better than the national benchmark). As dine-in sales are picking up, to-go sales are beginning to slow down in those states that are reopening.
Average to-go comp sales for these states was 192% for the week ending May 10. The average for these states over the last two weeks was 226%. A 40% decline is still a recession for the industry. Sysco’s (SYY) profitability is also tied much more closely with casual dining and independent restaurants which are performing significantly weaker than QSRs.
As dining rooms are starting to open in some states at a reduced capacity the dine-in sales are starting to take from the take-out sales. Sysco is a high fixed cost business so a permanent reduction in the number of restaurants and a long recovery period will prevent earnings from recovering fully.
GOLF
Click here to read our analyst's original report.
Temporary Coverage Restriction Notice – Acushnet Company (GOLF)
From time to time, during the ordinary course of conducting our investing research, circumstances or events outside our control can cause us to temporarily restrict or halt our research coverage of a specific security. It’s inconvenient for Hedgeye analysts and our subscribers.
But we believe it is the appropriate and ethical way to conduct business.
Please be advised that Coverage of Acushnet Company (Ticker: GOLF) has been temporary halted at this time. We hope to resume coverage soon. Unfortunately, we cannot comment further and are unaware of exactly when we will be able to resume coverage.
BYD
With the slower for longer theme in mind, we see 2020 and 2021 under significant pressure for all casino markets in the USA like Boyd Gaming (BYD), but even more so on the Strip and LV Locals markets. We’re projecting 2021 Locals gaming revenues to still reside 22% below 2019 levels. Remember, as a result of the Great Recession of 2008/2009, Locals GGR didn't bottom until 3 years after the peak.
Here’s where we think the pressure will come from:
- Operational restrictions – The Nevada Gaming Control Board already released guidelines for the casinos which include sharp player per table restrictions, only 50% gaming floor utilization, convention attendee restrictions, and a much further delayed re-opening of day and nightclubs to name a few. The player experience is likely to be a less appealing one and the impact on future demand is uncertain.
- Customer demographic – Casino patrons skew much older which is likely to restrict demand as the older set may not feel as comfortable in public places.
We are firm on the short thesis.
BABA
Consensus estimates have dropped by 2-3% since Alibaba's (BABA) FQ3 earnings call. We think it's enough for FQ4 2020, as we're in-line with consensus on revenues and EBITA. A better March partially offset a disastrous February. Billions (RMB) of govt vouchers have certainly helped e-commerce sales recently.
However, we still believe BABA is lagging its main peers, given its exposure to international supply disruptions stemming from COVID-19, market share losses to PDD, JD and other competitors, and overexposure to the lagging apparel category. In addition, BABA is most exposed among the Big 3 on any further tariffs or other punitive measures from President Trump.
axp
Hedgeye CEO Keith McCullough added American Express (AXP) to the short side of Investing Ideas this week. Below is a brief note.
Still looking for short ideas? I certainly hope so!
Financials remains my fav US Equity Sector Style short and American Express (AXP) has moved to the top of my list in terms of priorities (i.e. what stocks are approaching the top-end of my Risk Ranges within their respective Bearish @Hedgeye TREND duration signals).
Here's an excerpt from Financials analyst Josh Steiner on longer-term AXP concerns:
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The larger uncertainties revolve around two fronts. First, how long will T&E activity remain depressed and what will the shape of the recovery ultimately look like? Second, will Covid-19 result in structural changes to business travel and entertainment? Given its exposure to T&E spending due to the travel-heavy appeal of its card products, the company's top-line is likely could be impaired long-beyond a basic resumption of activity. |
