Below are updates on our twenty-five current high-conviction long and short ideas. We have added Wingstop (WING), Zoom (ZM) and Nautilus Group (NLS) to the long side of Investing Ideas this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
KR
In the 10th week of our consumer survey, the share of respondents that said their grocery spending was the same as the previous week reached a new high of 44%. At the same time the share of respondents that said they were spending less than the previous week reached a new low.
Grocery sales for companies like Kroger (KR) continue to be elevated as consumers shift their spending from food away from home to food at home. We believe this shift will have a longer duration than is currently reflected in the grocers’ share price.
SFM
Sprouts Farmers Market (SFM) presented at a virtual conference this week. Management said SSS in May are trending +13.1% compared to the 10-11% trend in April when adjusted for the Easter shift. Many of the drivers are similar, but management has seen the trend in health related categories improve. Categories like fresh produce, antibiotic free chicken, and diet (Keto) related categories have accelerated. E-commerce sales have increased dramatically from 4% of the sales mix prior to COVID-19 to 12% in May.
Management said the new, smaller store format with 25% less square footage and build out costs have sales in line with the larger format stores. The acceleration in SSS from consumers spending more on food at home is driving our EPS estimates above consensus. With an improved store format, real estate availability improving dramatically, and management targeting at least 10% store growth the multiple should also expand.
GO
Hellman & Friedman, Grocery Outlet’s (GO) private equity sponsor, will distribute the remainder of its holding to its equity holders. This will complete the exit of Hellman & Friedman’s investment with the remaining 9.6M shares it held. The shares represent 11% of the shares outstanding. We expect the market to absorb the increased float with limited drawdown as the last secondary on April 23 had a short-lived impact, and the final distribution removes the last of the hangover.
The demand for bargain groceries from consumers, as well as future locations from owner/operators couldn’t be any better. It will just come down to execution, but there are additional tailwinds in real estate availability as well as food supplier excess capacity. That should make execution more like swimming with the tide.
TDOC
While the effects of COVID-19 have been largely positive for the established telemedicine platforms to this point, the forced adoption and increasing comfort among practitioners has led to many new entrants in the space. By now, nearly 50% of all patient volume is being treated though various telemedicine options including Teladoc (TDOC). We view this as a developing headwind worth monitoring.
Continued utilization and retention will be essential to the stock’s long- term prospects and continued trajectory. 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
Chewy (CHWY) has been running new commercials as part of a new marketing campaign and is airing on shows/times where it hasn’t been seen as much in the past. The company is capitalizing on attractive marketing pricing (as many other consumer brands pull back on spending) to try to drive high return customer acquisition.
You gotta strike while the iron is hot and consumers are looking for new ways to shop and new categories to take online that it used to do in Brick and Mortar stores. We think this marketing will see high returns given the stickiness of the Chewy model.
As the company continues to drive customer growth we think there is a clear path to profitability and an opportunity to scale the product offerings of its platform to gather more share of wallet from its loyal customer base.
NOMD
Nomad Foods (NOMD) is Europe’s leading frozen food company. In Western Europe, the market size is €27bn and has been growing 2% annually with limited cyclicality. Frozen foods are driven by secular trends in wellness, environmental consciousness, and convenience as outlined in the graphic below.
The company has been outpacing its category. The market has not given Nomad Foods the multiple it deserves for its track record of organic growth, the stability of the category, and its competitive position.
CAG
Conagra (CG) announced last week 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 from most consumer staples companies 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, quarter to date trends were up 47%. Conagra's sales outperformed in both the stockpiling and elevated spend periods, and market expectations are now aligned.
Conagra is the fifth-largest food company in the U.S. with only 10% of sales from foodservice companies. We believe there is 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 extended stay at home restrictions. We also think COVID-19 will change investor's perceptions of the Pinnacle Foods acquisition.
There had been some slippage during the transition, but many of the brands are getting a boost as customers are trialing or re-engaging with them. The reinvigorated growth could change investors' perception of management, the company's strategy, brand strength, and, ultimately, the company's multiple.
FLO
Flower Foods (FLO), the nation’s second largest baker, reported Q1 EPS of $.41 two weeks ago, 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. Management prudently reaffirmed revenue and EPS guidance for the year due to uncertainty from the pandemic. At the same time the guidance is overly conservative given the tailwinds in the business. We are modeling revenue and EPS upside for the remainder of the year. The strength in the grocery channel more than offset weakness in the company’s foodservice business (24% of sales). The foodservice business will only improve from current levels as more restaurants re-open.
FLO’s sales mix is depicted in the following chart.
WING
Wingstop (WING) has it all. Wingstop is a digitally enabled pop culture brand with a strong management team. There is also room for continued digital expansion, from 39% today.
The company has industry-leading 4-wall unit economics, a highly franchised asset-lite business model, and unit growth beyond the next decade. Industry leading returns will continue to attract owner-operators to build out the chain driving awareness and future sales.
The company was also well positioned for the post COVID-19 environment as detailed below.
zm
Hedgeye CEO Keith McCullough added Zoom (ZM) to the long side of Investing Ideas. Below is a brief note.
It's an interesting macro market day with a lot of action inside a US Equity index that was marked up via SPY FOMO futures pre-open...
There's a big correction going on in the "COVID" winner basket.
From Zoom's (ZM) perspective, quantitatively, it’s just a correction towards the low-end of its Risk Range. Fundamentally, here are some recent thoughts from Technology analyst Ami's Joseph's Institutional Research on the name:
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NLS
Hedgeye CEO Keith McCullough added Nautilus Group (NLS) to the long side of Investing Ideas. Below is a brief note.
No, I don't like SMALL CAP (IWM) as a Factor Exposure... but my Independent Research team has had plenty of great small cap long ideas that have seen demand #accelerate during the US Jobs Depression...
Long Nautilus Group (NLS) is one of those ideas by Retail analysts Brian McGough & Jeremy McLean. It's down over -4% into the close here on decelerating volume within a Bullish @Hedgeye TREND signal.
Here's a brief recap of the idea from the boys:
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MAR & HLT
Click here to read our analyst's original report for Marriott.
In addition to the TSA throughput data, we’ll continue to employ our room rate tracker to predict upcoming STR RevPAR data. Looking out through the final week of June, the data trend looks consistent with the recent lower bound of growth.
Note, the modest rate of change improvement could suggest the gradual improvement will continue, but the implications are for slower growth than being modeled by much of the Street. In this type of environment, solving for occupancy is more critical, and we can’t just assume the room rate growth will = RevPAR growth.
However, given that our survey sources from various online channels, we do believe the intended amount of booked occupancy should be reflected in the room rates data. In the trailing 4 weeks, Full Service ADRs were down ~40% YoY while occupancy rates were down ~70-80%, so it could be deduced that the rate survey depicted below implies a continuation of current trends, for at least another ~5 weeks. Note, we’re focused on the directionality of the below chart and less so on the absolute levels.
Without seeing a more substantial pick up in the out weeks, we have far less confidence that the hotel cycle is imminently ready to reaccelerate towards cashflow neutral levels for the majority of the franchisee base of Marriott (MAR) and Hilton (HLT).
We remain firm the short.
CMI
Click here to read our analyst's original report.
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?
After March net orders that roughly matched the GFC low, April orders came in about a third lower than the GFC low. This is unhelpful for CMI in 2020, as backlogs deplete. It might help push NAV into a TRATON transaction, however. Build rates should be cut further, with March builds at 17,670 – more than 4X April orders. CMI shares are trading at pre-pandemic levels and was in a downturn to start with, along with risks to the MD franchise. It seems an easy place to be bearish.
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 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.
We remain firm the short.
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.
As the company noted during its 1Q20 earnings call, the company's Skip-A-Pay program allows for payment deferrals for up to two month. In addition, as noted in the company's 10-Q, the CARES Act provides financial institutions, like Discover, with the option to temporarily suspend certain accounting requirements related to troubled debt restructurings. As of May 10, 2020, $3.0 billion or 4.2% of credit card receivables have been enrolled in the Skip-a-Pay program, up from $2.4 billion or 3.25% reported at the end of 1Q20. Of the $3.0 billion, 21% has been enrolled in a second month of the Skip-a-Pay program.
We remain firm the short.
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.
In accordance with its credit and collection policies, the Servicer has granted forbearances to certain accounts in connection with the COVID-19 pandemic. Those accounts receiving forbearance relief may not advance to the next delinquency cycle, including eventually to charge-off, in the same timeframe that would have occurred had the forbearance relief not been granted.
Thus, delinquency data set forth in this Form 10-D for the April 2020 Monthly Period and the March 2020 Monthly Period and in the attached Monthly Noteholder's Statements may be impacted by an increased amount of forbearances granted in connection with the COVID-19 pandemic.
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.
McDonald's (MCD), like most of the largest restaurant companies, is highly leveraged. Nobody is prepared for an extended downturn in same-store sales. Importantly there is hidden leverage in the franchise system that complicates the problem. While Mcdonald's will survive the global pandemic, the business model will look vastly different from what investors have come to love from the asset-light companies. The is a high level of complacency in several restaurant companies, especially McDonald's. The contentment stems from:
- The tragic economic impact on the restaurant industry will be unlike anything we have seen in a lifetime. The Restaurant industry is on track to see a decline of 30-35% or $225 billion in sales in 2020.
- The real impact on the income statements and balance sheets is far from being understood.
- The duration of the pandemic will be longer than people believe.
- The magnitude of the loss of jobs has been staggering!
- We are unlikely to see a snap-back to consumption, as we have seen in the past.
- The Cares act will soften the blow, but it is not going to save many franchisees (and independent) restaurants who are already distressed.
- The days of financial engineering to boost stock prices are over.
- McDonald's will need to buy/support distressed franchisees or close stores, and the latter is not an option.
- What will post-social-distancing adjustments be needed to get the consumer back in the dining rooms and how much will it cost?
ITW
Auto sales dropped by about 1/3 sequentially and YoY, a pace that was almost certainly worse toward the end of the month as social distancing efforts increased. According to our Macro team’s Christian Drake, a “primary read-through is to Retail Sales where autos represent ~20% of the Total.” In many ways, the dynamics of this downturn are likely to hit demand for ‘consumer’ exposed companies like Illinois Tool Works (ITW) more than some traditional manufacturing names with transportation, construction, government spending, or defense exposure.
In the end, however, we are hoping to get an entry opportunity in a quarter or two in the ROK’s and other factory automation names that are exposed to fall in automotive capacity utilization (among other categories). As we flagged in our ITW deck, used car prices are likely to fall, potentially impacting financing. Maybe I’ll finally buy a new used car if that happens, replacing a MY2011 vehicle bought in mid-2013 – flagging for the notable lag between new and used troughs.
We remain firm on the short thesis.
SYY
Sysco’s (SYY) most profitable customers are small, independent restaurants. Those customers are also the most vulnerable to going out of business during the pandemic’s restrictions on eating inside restaurants.
Many of the individual restaurants lack the financial resources to withstand a prolonged downturn in sales as seen in the chart below.
Sysco took a reserve last quarter for receivables the company does not expect to recover from its restaurant customers. Management said this week they expect to add to the reserves this quarter as well.
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
Decent quarter given low expectations but shopper growth and mobile conversion continues to decelerate despite a digital boost from COVID-19. We continue to believe Alibaba (BABA) is losing shopper market share, particularly to PDD. Tmall's GMV growth of 10% was better than we expected but still significantly lagged PDD's and JD's while Taobao’s GMV fell around 4%.
Apparel was particularly a weak spot, as we've mentioned multiple times, as well as makeup and auto supplies. On the positive side, BABA is making strides in cutting losses from its new retail initiatives and Cainiao operations. FQ4 take rate was in-line with our expectations given waivers of IT/service fees and large subsidies.
While BABA is generally conservative, their FY 2021 revenue guidance of RMB 650bn was below Street consensus RMB 659bn. We remain negative on BABA in the long-term.
AXP
American Express (AXP) reported first quarter diluted GAAP EPS of $0.41, down -77% y/y due to a +$1.4B (+224%) y/y increase in provision expense, driven by a +$1.6B reserve build related to the economic downturn caused by the Coronavirus pandemic. Interestingly, American Express reported "core" earnings of $1.98 per share. In this case, core excludes reserve-build for higher expected loan losses. We can't recall a precedent example of a lender itemizing loss reserves as non-core.
With roughly two-thirds of total revenue driven by card spending, with net interest income accounting for another quarter, American Express is suffering from the dual impact of depressed consumption and mounting credit worries as the world economy nosedives off the Covid Cliff.
