Below are updates on our twenty-three current high-conviction long and short ideas. We have removed Conagra (CAG) and Flower Foods (FLO) from the long side of Investing Ideas this week. We have added Live Nation (LYV) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
Advantage Solutions, a business solutions provider for retailers, recently published its survey results that said six in ten shoppers opted to try an alternative to their primary food retailer (including online options) during the pandemic. Magid, a brand research consultancy, found in its consumer survey that 28% of consumers have continued to shop at new food retailers in May, down slightly from 30% in April. Out of stocks fell from 46% earlier in the pandemic to 32% as the cause of switching retailers. Other reasons given by shoppers for shopping elsewhere included one-stop shopping (27%), convenient location (23%), and lower prices (17%).
Out of stocks and a change in retail locations caused 55% of shoppers to purchase other brands during the pandemic. Magid reported that 78% of consumers who have tried new brands during the pandemic are continuing to buy them even when their preferred brand is available.
Conagra said yesterday that the repeat purchase rate for consumers whose first trial of a Conagra brand in March was 28%. The repeat rate increased to 37% in the four weeks ended April 19 and to 38% in the four weeks ended May 17. 60% of consumers said they would continue to purchase new private label brands after the pandemic ends. The categories with the most switching to private label Magid found are baby food (80%), snack bars (78%), spices (76%), dry goods (74%), and vitamins (74%).
The pandemic has caused several changes in consumers’ food shopping behaviors many of which benefit Sprouts Farmers Market (SFM). The natural/organic grocer is well positioned for an increase in more cooking, healthier eating, and more interest in diets and vitamins. The company has been a key beneficiary from increased trial as more consumers have discovered SFM for the first time during the pandemic.
CHWY
We presented a deep dive black book on Chewy (CHWY) this week. Here are a couple of the key points.
- Chewy is one of those rare examples of a company with multiple powerful multi-year secular tailwinds that is coinciding with a once in a generation cyclical (positive) demand shock, which should push it over the goal line cash-flow break even this year and then GAAP profitability in 2021. Our multi-pronged e-comm ‘model defendability’ framework ranks it above Amazon. The category is incredibility defendable with 2x GDP growth and is undergoing an accelerated shift to online – right into Chewy’s sweetspot. It has an upper hand in customer ownership in an emerging online duopoly in the pet space between Amazon and Chewy.
- The biggest optionality here is the international growth opportunity – as our model has CHWY going to Canada – leveraging US DC infrastructure – in 2021, and then followed by Western Europe within another 2-years. Our market bifurcation analysis shows Asia as a particularly attractive growth opportunity. Then there’s growth into services, pet meds, and private label which all serve as per-capita spend kickers that should take core US online market share to 50% (from 45%) today at a time when the online model is growing its share of pet spend by 400bp annually. Growth just accelerated due to Covid, and while there will be quarterly fluctuations, growth over a TAIL duration is set to accelerate given these layers of growth as opposed to mean revert to industry growth rates.
NOMD
Click here to read the long Nomad Foods (NOMD) stock report that Consumer Staples analyst Howard Penney and Daniel Biolsi sent Investing Ideas subscribers this week.
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.
We were hoping to hear more about the success of 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. Stellar results and momentum + ongoing increases in pace of billings + heavy conservatism in guidance + a future product with revenue potential as great as the first = buy.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
Lululemon this week announced a deal to acquire the connected fitness company Mirror, it begs the question what does it mean for Nautilus (NLS)? LULU paide ~5x revenue for Mirror. NLS just approaching 1x sales, roughly where it trades when revenue is stable or growing. The NLS stock move this week suggests that the market thinks it could be worth buying, and we don’t disagree. It has decent brands, very real equipment capabilities, and a long history of operating in the space.
If Mirror is worth $500mm its hard to argue NLS should be worth much less. Perhaps NLS is a target for the content creators (like PTON) to gain hard goods assets, since LULU (a content creator) bought Mirror for a hardgoods platform. The deal certainly validates the space even further as a place for capital deployment, which should be supportive of a higher multiple for NLS.
ONEM
Following Memorial Day, we noticed a significant drop off in app downloads across telehealth platforms. True to our thesis point that One Medical provides its patients with much more than a “Doc in a Box” Experience, we have not seen such deceleration. Rather, 1Life Healthcare (ONEM) downloads continue to increase sequentially along with the phased re-openings across the country.
We have also continued tracking provider activity. Utilizing their telehealth platform as a key catalyst for adoption throughout COVID-19, ONEM continues their market penetration effort with 30+ additional providers in June. Both indicators continue to signal stable growth. Therefore, we remain Long ONEM in the Hedgeye Health Care Position Monitor.
We remain Long ONEM in the Hedgeye Health Care Position Monitor.
MAR & HLT
Click here to read our analyst's original report for Marriott.
Ahead of the release of STR June RevPAR ranges, we plugged the Q2 data through our RevPAR trackers to get a preliminary view on the C-Corp quarters, which they should report in late July.
Echoing our thoughts from the last few weeks, RevPAR issues for the industry are cutting deep, and will continue to do so for the next few quarters, particularly for those C-Corps that index at the higher end of the chain scale spectrum. For now, we’re looking at slightly “higher” RevPAR growth figures for MAR, HLT, and H on Q2’20 RevPAR growth, but we think the real issues should arise with the estimates we’re seeing for 2H’20.
Analyst are baking in too much of an acceleration in Q3 and Q4 for these companies – we’re about 10% lower for the back half of the year across the board for Marriott (MAR) and Hilton (HLT). Come mid-July or following the upcoming Q2 prints, we’d expect to see numbers taken down for 2H’20 and beyond. For now, here’s what we’re seeing for Q2’20, based on our latest tracking:
- MAR – Hedgeye Estimate: -78% vs. Street: -81%
- HLT – Hedgeye Estimate: -75% vs. Street: -78%
MDLA
On acquired revenue, instead of sharing the amount with investors Medallia's (MDLA) CFO wrote it off as "very immaterial." We estimate that it was ~$5.5MM in the quarter (only 5% of total quarterly revenue but the difference between 24% subscription revenue growth and 16% subscription revenue growth). How do we know we are right and not the CFO?
- Based on our research of the companies that were acquired we discovered revenue for nearly all of them and back tested with the annual cost of carrying the employee base against mostly limited capital raises in the target's lifetime.
- In FY20, total reported DR grew $52.7MM but the cash change in DR over the same period was $49.7MM. So, we know that the company at least acquired $3MM of DR post the DR haircut from M&A (plus they added LivingLens in Q1).
- Leslie is the ultimate sales person and hocks his sales force as the best. He isn't spending $120MM in the last year for cool technology. Dollars are involved!
MDLA remains a Hedgeye Technology Best Idea Short.
ATUS
Click here to read our analyst's original report.
We spoke with two former division-level CFOs (cable/telecom) to better understand the capital budgeting and planning process. Both individuals have decades of experience managing copper, coax, and fiber networks across different geographies. The focus of our conversation was on the ROI/payback on fiber-to-the-home (FTTH) initiatives, as well as the maintenance of existing infrastructure. Here are the key takeaways as it relates to our Short Altice (ATUS) thesis.
- Years away from realizing a return on FTTH investment – Altice is rolling out fiber across the Optimum footprint (~60% of ATUS homes passed). As of 2Q19, ~19% of homes passed are fiber, and ~10% ready for service as of 3Q19 (Optimum). The CFOs we spoke with indicated that meaningful cost-savings do not occur until the 30% adoption threshold. With Altice not ramping their go-to-market on Fiber until 2H20, we are years away from seeing any meaningful benefit.
- Underinvesting in existing infrastructure – We believe Altice can achieve such a low capex profile because they are underinvesting in the maintenance of their existing coax networks. Altice cut capex significantly post the Suddenlink and Optimum mergers (largest cuts at Suddenlink). Cash capex % of depreciation dropped to 50-60% before Altice began its fiber program. With 90% of customers on the existing network and only ~19% of homes passed with Fiber, Altice will continue to have to support the coax network for the better part of the next decade. If service levels deteriorate, maintenance costs and churn will increase on the existing and likely offset the benefit from Fiber in the intermediate-term.
- Doing more with less doesn’t seem practical – “Conservatively, when you are doing a successful Fiber or new product rollout, you can see a 30% increase in labor units.” We believe Altice is trying to roll out a new Fiber network and launch a new mobile product with fewer labor units than they had before.
DFS
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.
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.
The issues around reopening are many and the dine in business is now very complicated. The WSJ reported that McDonald's (MCD) will wait three weeks before any new U.S. restaurants add dine-in service to its drive-through, takeout and delivery operations. “Our resiliency will be tested again. Covid-19 cases are on the rise.” said a company letter written by Joe Erlinger, McDonald’s U.S. President, and Mark Salebra, head of the National Franchisee Leadership Alliance owners association, that was viewed by The Wall Street Journal.
McDonald’s operators began offering limited, dine-in service in May, and around 2,200 of its 14,000 U.S. restaurants now allow customers to eat their meals inside. Restaurant owners that began offering dine-in service can continue if their jurisdiction still allows it, the letter said, but the company decided to halt additional openings as a number of state and local governments tighten social-distancing regulations ahead of the July 4 holiday weekend.”
The change certainly indicates a reversal in the pace of re-opening. Many franchisees have said it is more costly to open the dining area.
ITW
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. We see 30% relative downside in shares of ITW, a name that every few years gets re-rated as a mediocre, discounted conglomerate.
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
According to Yelp, since the beginning of March, 23,981 restaurants on its platform shut down entirely at some point during the pandemic. Of those restaurants that closed, 53% have closed permanently.
The permanent closure rate of restaurants exceeds other service sectors, including retail at 35%, beauty salons at 24%, and gyms at 26%. According to the National Restaurant Association, 3% of restaurants have permanently closed, which would be 20,000 restaurants compared to the ~12,000, according to Yelp. According to Womply, a CRM provider, 20% of local restaurants remain closed as of June 27, as seen in the following chart. Womply’s higher figure reflects that its amount is not permanent closures, and its customers are smaller and have less financial resources than chains.
Federal assistance has helped the restaurant industry stay afloat with many operators still in a wait and see mode while others are surviving on take-out and outdoor seating. Independent restaurants are Sysco’s (SYY) most profitable customer group, and a high closure rate would represent a significant challenge for the company and its ability to reach past sales and earnings.
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
And the hits just keep comin’.
On top of the mask mandate that went into effect for all Nevada casinos on Friday, Yelp released some discerning statistics with pretty negative ramifications for the locals Las Vegas casinos like Boyd Gaming (BYD). Per Yelp, “Las Vegas, NV, endured the highest number of closures relative to the number of businesses in the city (1,921 total closures)”.
Our concerns surrounding the health and outlook for the Las Vegas economy is central to our short thesis on RRR and it appears that it may be worse than even we expected. The locals Las Vegas market faces a long road to recovery, probably one of the longest of any gaming market in the country in our opinion.
Obviously, the Las Vegas economy is heavily reliant on tourism and air travel and many business are already closing and leaving people out of work. BYD maintains significant exposure to Las Vegas, through its properties in the locals market and downtown.
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
In more normal trading markets, we’d expect International Flavors & Fragrances (IFF) to pop on the garbage Old Wall takes about accelerating growth and whatnot in the quarter, and then trade off.
The earnings call will likely encounter some tough questions. Jilla Rustom wasn’t such a bad CFO at MSM, but the spread between the press release and 10-Q here is egregious. A portion of customers aren’t paying, negative mix impact in 2Q is omitted in the press release, restructuring is being drawn out, and a chunk of the operating margin improvement is a Brazilian litigation benefit.
IFF is not a quality name worthy of a premium multiple – it is super risky, we think, and pursuing the N&B transaction to paper over the mess with Frutarom. This behavior stinks; once a company loses reporting credibility, it is very hard to get it back.
HUYA
HUYA's (HUYA) recommendation banner stopped working last week as it underwent serious rectification. Some of its cultural content was not updated and some went offline. In addition, there was a new minors mode which mentions that some functions have been disabled.
HUYA has been in hot waters lately. First, in early June, the game advertisements during their education courses for kids was scorned by CCTV News. Second, in mid-June, pornographic content appeared in some of its live broadcast rooms and user comments again attacked HUYA.
Furthermore, the State Cyberspace Administration and relevant departments stated that live broadcast platforms such as "HUYA Live", "DOYU Live", "BILI", "Tentacle Live", and "NTES CC Live” have problems of vulgar content.
We remain negative on HUYA.
WORK
Slack’s (WORK) EPS report showe acceleration in RPO and in RPO Billings but ultimately translates to our estimates coming down. We are underwhelmed by Slack's disclosure that it added 12k net new customers in the quarter after having disclosed on March 26 that the company had added 9k customers. Revenue, and standard Billings were similarly underwhelming, especially with Billings growth decelerating from 47% y/y growth to 38% y/y.
Mysteriously, the company also pulled Billings guidance for the full year which is more appropriate for the companies in the travel industry seeing a collapse in business rather than for a company whose business is a direct quarantine beneficiary, such as Slack.
Short it. We see 50%+ downside risk from pre EPS levels.
ZI
Some of the other negatives we have to know include the non-software roots of ZoomInfo (ZI). The “research” team at DiscoverOrg was not building software. They were cold-calling companies pretending to have a research project and taking notes on the org chart, key titles + responsibilities, and contact information.
On the + side, ~40% of the business comes from US software companies - i.e. the traditional early adopters of the best tools and tech - contrary to companies throwing around "digital transformation" to create fomo induced buying from old + losing market players.
Remain Short.
lyv
Hedgeye CEO Keith McCullough added Live Nation (LYV) to the short side of Investing Ideas this week. Below is a brief note.
As you know, I covered basically all of my recent single stock shorts before the US stock market's 3-day ramp to lower highs...
What that means is that we are well positioned to start selling things, again, at big-lower highs within Bearish @Hedgeye TREND signals. One of those is Live Nation (LYV).
Here's a summary excerpt from Communications analyst Andrew Freedman's Institutional Research note on the name:
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We are adding Live Nation Entertainment (LYV) as an active short in the Hedgeye Communications Position Monitor. As the largest producer of live music concerts globally, Live Nation is among the hardest-hit companies from the pandemic in our coverage. While LYV is well-positioned to capitalize on the reopening of the experience economy, at 15x Adjusted AOI and 3.9x leverage (...on 2022 numbers), the market is already pricing in an optimistic recovery scenario. Additionally, we believe the street is basing LYV's valuation on numbers that overstate the company's true economic earnings due to acquisition accounting and adjusted financial metrics. |
