Below are updates on our twenty-six current high-conviction long and short ideas. We have added Costco (COST) and 1Life Healthcare (ONEM) to the long side of Investing Ideas this week while removing Teladoc (TDOC). We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
KR, SFM, & GO
Daily spending at local grocery stores, as reported by Womply (a CRM provider), took a hit at the end of May. Sales on May 31 were down 10% YOY. Protests around the country were likely a contributing factor. The days following a large holiday are often lower sales days as well. With few locations in downtown city locations Kroger (KR), Sprouts Farmers Market (SFM), and Grocery Outlet (GO) were likely much less impacted than the local grocers in Womply’s database.
CHWY
Chewy (CHWY) reports 1Q earnings next week. We expect the numbers to be good as the company saw peaking interest around mid Q as consumers shifted sales online during the peak of the pandemic. Interest indicated by google has moderated since Q end (management might try to temper expectations), but the repeating nature of customer acquisition for CHWY means the benefits of increased interest and the online channel shift will be long lasting.
The CHWY model is one that is set up well for the secular shift to online as it has high customer loyalty and a large and growing addressable market with optionality to add international growth in the future too.
NOMD
Take-home food sales in the U.K. increased by 14.3% in the 12 weeks ended May 17. According to Kantar, the growth rate is the highest since records began in 1994. The three month period includes the stockpiling weeks as well as two months of stay at home restrictions. Sales for the latest four weeks grew 17.2%, accelerating from the 9.1% growth in the previous four week period. The trend toward fewer visits, but more spent per visit continued in the latest month. Consumers visited the supermarket 3.5 times per week on average and increased their spending by nearly 50% per trip.
Nomad Foods (NOMD), as the leading frozen food manufacturer in Western Europe, is well-positioned to benefit from the shift in meal consumption. The U.K. is Nomad Foods’ largest market at 31% of sales.
CAG
In the past ten weeks ended May 3 Conagra’s (CAG) frozen retail sales grew 29.7%. There are several drivers behind the growth Conagra is seeing, some temporary and some secular. Frozen foods have been growing faster than center aisle categories of the grocery store due to the growing trends towards freshness and wellness.
Grocery sales are benefiting from a shift to eating at home from away from home. During the stay at home restrictions consumers have also spent more time learning to cook more foods.
More consumers are spending longer periods of time preparing meals, often from scratch. Conagra’s Birds Eye frozen vegetables are a beneficiary of more home cooking. With more companies making remote working arrangements permanent, consumers will be spending more time at home and more time preparing meals.
FLO
Several changes in the executive team have led to an improving margin outlook for the company. Through a combination of lower input costs and an improving sales mix future margins are set to expand, with expansion of 300bps as a projectable goal.
The shift to eating at home from eating away from home is not fully reflected in consensus expectations. Management conservatively set guidance assuming the elevated spend at grocery stores returns to pre-pandemic levels, setting up for earnings upside this year.
Flowers Foods (FLO) is a 3.5% dividend yield, growing the top line at a LSD% and bottom line at a MSD% growth rate. Now it is now accelerating to a MSD% top line and mid-teens% bottom line growing company.
WING
One of the reasons Wingstop (WING) has been so successful and able to earn such high margins is its efficiency. Wingstop has managed to keep its operations simple which requires less labor than its peers. Simple operations also leads to faster cook times and increases the capacity of the kitchens.
Wingstop has been able to drive industry leading same store sales growth without adding to its menu as seen in the chart below. Wingstop’s average check has also grown, but it has largely been driven by its digital initiatives.
ZM
When we presented our Zoom (ZM) Long a few weeks ago we used our Invoice tracker to predict Billings and Revenue growth for Zoom's April + July quarters. The lofty level of our estimates caught the most amount of pushback from clients and yet ZM still put up a billings # that was 2x what we had thought for F1Q and fulfilled our expectations for F3Q billings already in F1Q.
Management decided to guide revenue flat from 2Q into 2H FY which is why the stock is down in a/h but in order to achieve that lowly guidance the company would have to lose over $200MM of quarterly revenue in churn with $0 offset from incremental customer additions, expansions, or upsells.
NLS
Part of our long bias on Nautilus (NLS) is that the company will see elevated demand for a prolonged period of time, and that coupled with lower marketing and pre-covid cost cuts will mean significant margin flow-through on incremental sales.
Re-affirming that view was comments from DKS this week. The commentary implies a demand backlog and more product coming to stores. We think elevated demand continues at least through early holiday season (November) as people continue to need social distanced exercise, which will be tough to do outdoors in November to Feb vs April/May. That means more home fitness equipment sales coming.
DKS CEO: “The fitness business was really a very big part of the business when we -- when the stores closed when the pandemic first hit. And that's still pretty good. We're struggling to keep in stock in that product, although we've got some product down the road, we think we're going to be fine. The bike business was very good.”
COST
Hedgeye CEO Keith McCullough added Costco (COST) to the long side of Investing Ideas this week. Below is a brief note.
In addition to CHWY (see our longer-term Investing Ideas product for details) having a nice ramp today, Retail analyst Brian McGough still likes Costco (COST) and it is for sale today.
I know I'm the crazy contrarian Canadian guy now because I still wait to buy things on sale... but I've been called worse.
Here's a summary excerpt on COST from McGough's Institutional Research:
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"Our restaurant team, led by Howard Penney, has been clear about the spending on food at home reversing years of share loss to restaurants – a trend that will likely extend far beyond a single quarter of pantry stocking. With approximately 54% of COST’s sales coming from food this creates a significant tailwind that does not appear to be represented in consensus estimates." |
ONEM
Hedgeye CEO Keith McCullough added 1Life Healthcare (ONEM) to the long side of Investing Ideas this week. Below is a brief note.
Buying things on sale isn't that complicated. Having patience while the crowd has FOMO can be...
Looking for stocks that are down on decelerating volume into the close? 1Life Healthcare (ONEM) is one of Tom Tobin's latest Best Ideas (Institutional Research product).
Here's the summary intro the idea he presented recently:
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ONEM fits the post-COVID re-opening theme we've been working on most recently. COVID-19 will continue to impact how we work, shop, and travel, but may impact how we get medical care most of all. One recent survey suggested 41% of consumers "are concerned about being able to see their doctor in a safe environment" while 11% of physicians will leave medical care altogether. Our thesis is not that ONEM won't be impacted, it will, but as these changes to care patterns emerge, we expect ONEM will be a net beneficiary. As we'll show, the count and penetration of corporate customers in their existing markets remains low and these high income firms will need help to reopen and help keeping employees both safe and feeling safe. We'll also show how we plan to track physicians leaving patient care and the potential to dramatically increase ONEM's market share as well. |
MAR & HLT
Click here to read our analyst's original report for Marriott.
The daily TSA checkpoint data continues to show gradual improvement off a very low base in March, but at least some of the improvement appears to be due to seasonal dynamics. TSA throughput data for the last 7 days through 5/30 fell 88% YoY vs -89% YoY for the prior week days – again, improvement, but not v-shaped recovery type numbers.
As it relates to very soft hotel demand, there continue to be offsets which are driving some outperformance vs what the relationship between air travel and hotel demand would suggest – e.g. drive-to leisure demand in the south and some coastal markets + economy scale demand off of highways and other non-urban areas.
Based on a variety of indicators and the TSA data in particular, the coming weeks and months should show modest improvement, but for now, RevPAR in the range of -70% to -75% should be expected. Many of the hotel stocks like Marriott (MAR) and Hilton (HLT) seem to implying a hotel recovery far more bullish than what we see in the data
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?
Bailouts and central bank intervention are perhaps more aggressive, but the downturn is also vastly deeper and more global. Analogies break down, but the sharp rebound in equities like TW prior to reporting a SINGLE QUARTER of pandemic/unrest/lockdown impacted results is more alarming than emboldening.
MDLA
As vocal bears on Medallia (MDLA) even we didn’t expect 7% Y/Y growth in total billings (from +26% growth in Q4) or 12% Y/Y growth in SaaS billings (from +22% in Q4) or -29% Y/Y growth in RPO billings. The CEO's smooth tones and the CFO's lack of awareness lulled the sellside to sleep and no real questions were asked.
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
Discover's (DFS) 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.
We have been saying for years McDonald's (MCD) needs to simplify its menu. A complex menu requires additional labor and slows down your speed of service which is especially important when two-thirds of your business is with customers in running cars. During the pandemic the company served its customers only out of the drive-thru window. This forced the company to streamline its menu to improve the efficiency of its kitchen.
It also forced the company to finally end its breakfast all day menu. This week Blake Casper, chairman of the National Owners Association, McDonald's independent franchisee association, said that keeping a reduced menu would be his group's top priority. Mr. Casper said, "The limited menu and ease of operations are allowing our teams to focus and provide blazing fast service. We are convinced, keeping our menus simplified is your NOA's number one priority." This would be good news for franchisees!
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 (SYY) presented at a virtual conference a week ago. Management said, “This most recent week was the biggest week over week increase that we have seen since the COVID crisis began.”
Hedgeye’s response - As the restaurants in several states reopen their dining rooms, albeit, at reduced capacity, sales should recover sequentially. The unknown is how much the consumer has shifted spending to food at home, how permanent is that shift, and how many restaurants will close.
Sysco took a $153M reserve last quarter for doubtful accounts. Management said their current collection rate of receivables continues to exceed their projections. Management also said, “We do anticipate some additional reserve impact in Q4.”
Hedgeye’s response – If collections are better, why would additional reserves need to be taken? Is it the duration of the recovery?
From the end of the quarter to the time of the conference call (May 5), Sysco’s sales had recovered 15% points, from -60% to -45%. Management said sales have now recovered 22% points from the low.
Hedgeye’s response - Two weeks later (two-thirds of the quarter) sales have recovered an additional 7% points to -38%. The consensus estimate for FQ4 is for a 39% sales decline while the consensus estimate for the following quarter is -25%.
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
Vegas opened last night, and the usual twitter accounts were highlighting some of the crowds and action last night (HERE, HERE, and HERE). And one rumor even suggested that room bookings at Vegas resorts had so far exceeded all expectations, with occupancies sitting around ~70% for the kick off weekend – pent up demand was going to be real following a 2 month casino hiatus for most of the US. However, we think the real debate hinges on how the recovery finds its footing as the pent up phase slows down a bit.
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.
We are firm on the short thesis.
BABA
While apparel sales haven't normalized yet, May was the first month of growth for the struggling category.
We worry that heavy subsidies from Alibaba (BABA) is driving the GMV growth so it may not translate into substantial revenue growth. Furthermore, BABA is unleashing a record 14bn RMB in subsidies for the 618 festival. Despite the giant May numbers, we estimate Q2 to date core e-commerce revenue growth is trending only 1-2% above Street estimates.
We remain negative on BABA 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.
During the first quarter 2020, the company created a Customer Pandemic Relief Program for customers impacted by COVID-19. Delinquency status is generally frozen at enrollment, and loans that are current at enrollment do not age, regardless of whether payment is made. Upon exiting the program, delinquency aging resumes where it had left off at enrollment.
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.
