Below are updates on our twenty-four current high-conviction long and short ideas. We have removed Wingstop (WING), Kroger (KR), and Costco (COST) from the long side of Investing Ideas this week. We have added International Flavors & Fragrances (IFF), Huya (HUYA), and Slack (WORK) We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
Fresh produce has grown double digits in 11 of the last 12 weeks, according to the Produce Marketing Association. Since the beginning of the year, the industry has sold $2.7B more fresh produce at retail, representing 944M pounds.
In the week ended May 31, fresh produce growth decelerated 100bps week over week to 13.2%, similar to the deceleration for the past three weeks, as seen in the following chart. Fresh fruit is more of an impulse purchase, and the drop in time spent at the grocery store could be responsible for the slower growth compared to vegetables.
Produce is a higher than average margin category for grocers, so the robust growth has been a boon to grocers. Fresh produce has been a key category for Sprouts Farmers Market (SFM) during the pandemic.
CHWY
We got May US retail sales results this week, and despite headlines of ‘record’ retail sales that were referring to the month over month bounce off the April crash, the vast majority of retail sub categories simply saw roughly the second worst YY performance ever. However the one area we can confidently say is putting up record numbers is nonstore retail (where ecommerce is booked).
Non-store retail in May was up 31%, accelerating from 23% in April. So even as retailers are re-opening, ecommerce was still accelerating. We think this is a long term shift Chewy (CHWY) will be a bit long term winner within that new paradigm.
NOMD
Using its free cash flow to acquire other food companies has been part of Nomad Foods’ (NOMD) strategy from the beginning. It has been a key aspect of management’s value creation. So far the company’s acquisitions have all been in European frozen food.
However, management has said in the future the company could acquire a food company that was not in frozen foods or a North American frozen food company. A Western European frozen food company is still the most likely target, but it really depends upon the opportunity. The company’s leverage is the lowest it has been and will fall below 2.0x if it did not make another acquisition this year. We expect an acquisition in the next 18 months.
CAG
It’s always important for investors to understand management’s incentives. The low end of Conagra’s (CAG) executive team’s performance share awards depends upon reaching the minimum of $2.28 in EPS next year. Consensus EPS estimates for next year are also at $2.28.
Current sales trends as measured by Nielsen are tracking up over 30% compared to the company’s long term sales algorithm of 1-2% annual growth.
There are some adjustments to make to the point of sales data like the extra week in FQ4 and sell in vs. sell through, but the company appears to be tracking well above expectations due to the continued elevated spending at grocery stores.
That momentum has continued into the new fiscal year and management should be able to hit its performance targets next year.
$2.28 represents 25% of the executive team compensation plan while $2.50 represents 100% of the target.
FLO
In the first few weeks of stay at home orders quarantine baking was one of the more popular pastimes. The sudden increase led to shortages of a variety of baking items like yeast and flour.
As all states are in different phases of re-opening the trend seems to have subsided. According to the USDA the prices for baking flour and eggs, items that were frequently sold out at the beginning of quarantine, have dropped.
Baking your own bread is one of the more time consuming cooking activities, while bread in the grocery store is inexpensive. It’s not the monetary savings of substituting a meal at a restaurant with eating at home.
Sandwiches are one of the quickest and cheapest meals to make at home as well, which should continue to perform well in a recession.
Flower Foods (FLO) is the second largest producer and marketer of packaged baker foods in the US and is well positioned to benefit for the continued strength in the grocery channel.
ZM
Management decided to guide revenue flat from 2Q into 2H FY which is why the stock was down in a/h post EPS 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.
We can theoretically argue peak as much as we want but as long as ZM is making higher highs in billings we aren't there. We were hoping to hear more about the success of Zoom (ZM) phone but it seems at this point the company is just trying to manage the demand in core meetings before dedicating resources or attention to what comes next.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
Nautilus (NLS) seeing a breakout this week. With the virus spread accelerating perhaps the market is realizing that demand can remain elevated for several months, getting home fitness equipment was not just an initial lockdown phenomenon.
Consumers will be searching for home exercise options, especially as they start to think about exercise in the winter. Bowflex just debuted a new adjustable barbell and curl bar, and there is likely demand for it. Many retailers remain low or out of stock on fitness equipment of all kinds, including free weights and weight plates.
Dick’s Sporting Goods talked about this on their last earnings call, and searching the site it seems inventory is still low across many products, even as they were soon expecting further deliveries.
Keep in mind that the demand is coming at minimal acquisition cost, meaning high incremental margins for the likes of NLS taking sales and profit gains to levels not seen in years.
ONEM
As caseload metrics point to a re-acceleration of the spread of COVID-19 across the “Re-Opening” United States, many of the thesis points we liked in our original 1Life Healthcare (ONEM) BlackBook continue to hold true. To address concerns of high penetration in their existing markets, we spoke with a regional manager of a large PEO that offers One Medical within their product menu. His insights not only re-affirmed that the company has “more than enough room to grow” before facing concerns of slowing adoption, but also highlighted favorable new target markets.
We continue to track physician counts weekly, including the provider’s title, office location, and specialty. These fields give us an in-depth monitor of ONEM’s patient demand throughout the re-opening and commitment to diversifying their offering for existing members. We remain Long ONEM in the Hedgeye Health Care Position Monitor
MAR & HLT
Click here to read our analyst's original report for Marriott.
For the MTD, June RevPAR is down 62.9% YoY, which is an acceleration vs the anticipated May RevPAR figure of down 71% YoY.
RevPAR did re-accelerate from the prior week, but in the past 3 weeks RevPAR growth is generally flat, i.e. the incremental gains are slowing in aggregate. Time will tell if it's just a pit stop before more improvement, but cash flow break evens remain a great distance away for a number of key chain scales and segments.
We remain firm on the short thesis for both Marriott (MAR) and Hilton (HLT).
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
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.
We understand that the CEO speaks with optimism but it is hard for us to find a reason to be bullish on the stock when MDLA is losing in the core business, billings are damaged by COVID, organic SaaS revenue deflated to the teens, the co is pursuing a lower dollar opportunity in the mid-market, making up the expectations gap with more and more M&A, but thanks to his cool accent the stock is 11x forward revenue.
MDLA remains a Hedgeye Technology Best Idea Short.
ATUS
Click here to read our analyst's original report.
We held our Long TMUS institutional presentation earlier this week. As part of that work, we updated the data we track across the broader cable/telco space for employee satisfaction and user reviews. The latest update shows that ATUS continues to rank the worst among peers across all key metrics. While everyone hates their cable company, we would note that Altice (ATUS) ranks worse than Frontier (Which is bankrupt!).
This data is further evidence that ATUS management continues to manage the business with a focus on short-term, financial engineering over long-term value creation. Additionally, ATUS high leverage of ~5.0x Net Debt/EBITDA is a style factor that underperforms in Quad3, which is the Hedgeye Macro teams expectation for Q3.
DFS
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 (DFS), with the option to temporarily suspend certain accounting requirements related to troubled debt restructurings.
As of June 7, 2020, $3.3 billion or 4.7% 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, 30% has been enrolled in a second month of the Skip-a-Pay program.
We remain firm on the short.
SYF
We continue to hold the view that private label card operators are in a curious position relative to their general purpose counterparts due to the risk-sharing and economics-splitting nature of these relationships. On the one hand, these arrangements serve to insulate the issuer, but on the other hand, this risk-sharing may catalyze a liquidity event on the part of certain retail partners.
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 and in the Monthly Noteholder's Statements relating to the June 2020 Payment Date may be impacted by an increased amount of forbearances granted in connection with the COVID-19 pandemic
Accordingly, with both private label and considerable subprime consumer credit exposure, Synchrony Financial (SYF) is on the front lines of this COVID-19 downturn.
MCD
Click here to read our analyst's original report.
McDonald's (MCD) is on our short list on the theory that declining SSS (MCD reported Systemwide same-store sales are down QTD -29.8%) coupled with excess leverage at the franchise level will result in MCD owning more stores (the downside of asset-light.) All of this will result in a lower multiple, reduced profitability, and a lower stock price.
The exact opposite has happened.
McDonald's CEO said earlier this week, "What we do have is we have more individual circumstances, either where we've had some franchisees that maybe took on some additional leverage in the last couple of years as they've done a whole bunch of Experience of the Future projects, maybe purchased some restaurants. So you do have individual circumstances where individual franchisees are potentially highly leveraged that we need to step in and help in some of those individual circumstances."
Bailing out franchisees was to be part of the story that would concern the markets, and nobody cares. How many individuals was he referring to, how much do you need to spend, and for how long? MCD's stock is down on 4% this year, while EBITDA is down close to 25% to $8.2 billion. Like SBUX and DNKN, MCD has a big breakfast business that will also be challenged well into 2021. Yet, there is a remarkable profit recovery story built into the sock with EBITDA estimates of $10.8 billion for 2021.
The company reported $10.7 billion in EBITDA in 2019, implying that all the pandemic has cost MCD was one year of growth. Will the street ever care about declining profitability and a business model that may be challenged for more than 12 months?
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.
As we flagged in our ITW deck, used car prices are likely to fall, potentially impacting financing. We remain with the short thesis.
SYY
Maines Paper & Food Service, a smaller competitor of Sysco (SYY), filed for a Chapter 11 bankruptcy. The company and its ten distribution centers will be liquidated. Maines supplied 6,100 restaurants in total.
It had an extensive list of customers, including Olive Garden, Applebee’s, Burger King, Tim Horton’s, and Wendy’s and covered 30 states. The distributor had been challenged by increasing labor costs and had difficulty recruiting enough drivers.
Maines Paper & Food Service was one of the ten largest distributors in the US, with revenues of $3.5B. Maines’ bankruptcy highlights the tremendous hit from the shutdowns to restaurant distributors but also removes some capacity from the industry.
National restaurant chain customers have low margins for the distributors, so new business from the competitor bankruptcy will have a limited benefit unless larger competitors go bankrupt.
GOLF
Click here to read our retail 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
No update for the Boyd Gaming (BYD) ticker this week. Please check back next week.
BABA
Every time we have a big shopping festival, the e-commerce platforms like to throw out high growth figures.
These 618 sales figures are not revenues and are more for marketing purposes as there are multiple ways for e-commerce platforms to juice up sales.
Tmall's cumulative order value reached 698.2bn RMB; Tmall did not disclose last year's 618 sales. Purely for reference, this whopping figure was 160% higher than BABA's record of 268.4bn RMB set during the Singles Day festival in 2019. Our checks from our proprietary GMV database suggest more ‘normal’ growth for June.
We continue to believe Alibaba (BABA) is the laggard among the Big 3.
AXP
During the first quarter 2020, American Express (AXP) 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.
IFF
Hedgeye CEO Keith McCullough added International Flavors & Fragrances (IFF) to the short side of Investing Ideas this week. Below is a brief note.
Looking to broaden your short book ahead of Deep #Pod4 Earnings Season? On green is when professional short sellers do that. We fade the FOMO.
New idea from one of our best Pod Analysis Short Sellers, Industrials analyst Jay Van Sciver: Intl Flavors & Fragrances (IFF). Here's a summary excerpt from his Institutional Research note:
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We were surprised by the evident weakness in IFF’s quarter-end positioning. Incremental data and field work have increased our confidence in the bear thesis. We have assumed that investors would see the N&B deal as a bit desperate - faddish assets pursued to paper over the troubled Frutarom deal. IFF may look defensive, but it isn’t. Mature, ‘seasoned’ business lines have trended flat to down, while poor capital allocation aimed at offsetting core trends have likely destroyed billions in shareholder value. |
HUYA
Hedgeye CEO Keith McCullough added Huya (HUYA) to the short side of Investing Ideas this week. Below is a brief note.
Looking to broaden your exposure to Chinese Shorts on green today? In addition to shorting more YY, Felix Wang likes HUYA (not booyah) on the short side!
Here's a quick summary note from China analyst Felix Wang's recent Institutional Research notes on why:
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"As we mentioned in our Short HUYA presentation last week, HUYA is losing the support of the top anchors which is a key concern. HUYA only accounted for ~10% of the top livestreaming anchors (earned >3m RMB per month) since February 2020. It can't afford to lose any more of its top anchors." |
WORK
Hedgeye CEO Keith McCullough added Slack (WORK) to the short side of Investing Ideas this week. Below is a brief note.
Looking for a Tech Short against the Tech Sector Style (XLK) Long in #Quad3? Ami Joseph has generated plenty of alpha for our Institutional Subscribers here in Q2, despite the Sector Style going to all-time highs!
Slack (WORK) was a much better short at the beginning of June, but we bear hunters like nothing more than a lower-high on #decelerating volume from there...
Here are some Institutional Research notes from Technology analyst Ami's Joseph on why:
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