Below are updates on our twenty-four current high-conviction long and short ideas. We have removed Huya (HUYA) and Illinois Tool Works (ITW) from the short side of Investing Ideas this week. We have added Dollar Tree (DLTR) to the long side and Disney (DIS) and Kohl's (KSS) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
Traffic to supermarkets increased by high single digits% week over week after bars and restaurant restrictions went into place in California and Florida. The consumer behavior to shift meals to the home when COVID-19 causes additional restrictions can be seen at the state level using smartphone location data. A resurgence in COVID-19 cases and elevated spending in grocery stores in Q3 is not in current projections for the Sprouts Farmers Market (SFM) or the other grocers.
CHWY
Click here to read the long Chewy (CHWY) stock report that Retail analysts Brian McGough and Jeremy McClean sent Investing Ideas subscribers this week.
NOMD
Click here to read our analyst's original report for Nomad Foods.
Nomad Foods’ (NOMD) strategy has been to use its free cash flow to acquire other food companies, extract synergies and invest in growth. Acquisitions have 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. Nomad Foods’ acquisition of Findus in 2015 is a good example of the company’s ability to extract synergies and improve the target’s future top line growth.
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.
ZM
When we went Long we noted that Zoom (ZM) would be worth $75B-$100B. We are within that zone. We think RPO billings will soon point towards a ~$6B annualized revenue estimate with 35-40% incremental operating and OCF margins. We think the math continues to point within our estimate range on a growth to multiple basis, or approximately, ~25% remaining upside.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
There were several developments for Nautilus (NLS) over the last week or so. First the company announced it is looking to sell its Octane Fitness brand, perhaps NLS’s least known brand to the average consumer.
The company want to focus more on home products and that is not where Octane has its differentiation. This week UAA also announced it is looking to sell its MyFitnessPal connected fitness business. It is a business that struggled to do much under UAA ownership. Both of these announcements show the budding M&A market withing connected fitness, which started with Mirror/LULU a couple weeks back, and continues to be supported by the large valuation of PTON.
M&A optionality or higher valuation support is definitely developing as part of the bull case for NLS on top of the elevated demand environment we have been highlighting.
ONEM
The effects of COVID-19 have and will continue to structurally alter the way in which health care is consumed and physicians choose to practice. Under this landscape, recent health services IPO, One Medical (ONEM), has become a household name. With their own telehealth platform acting as a catalyst for adoption throughout COVID-19, ONEM continues their market penetration effort adding 30+ additional providers in June, including further expansion into newest market, Atlanta, GA.
The next lever management will look to pull is to drive RVU’s through an expansion in specialty offerings to pre-existing and potential members. Our tracker corroborates the early stages of this process. Throughout June, there has been a significant emphasis placed on growing the virtual office, psychology, and pediatrics. We remain Long ONEM in the Hedgeye Health Care Position Monitor.
DLTR
Hedgeye CEO Keith McCullough added Dollar Tree (DLTR) to the long side of Investing Ideas this week. Below is a brief note.
Patience remains a core holding in our #process...
If you wait and watch, eventually your Buy List comes your way. We're seeing Dollar Tree (DLTR) do that today, correcting -4.5% into the close.
Here's a summary excerpt from Retail analyst Brian McGough's Institutional Research on why we like this name from the perspective of the fundamental Pods (REVS and Cash Flows):
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In early March we said DLTR was one of the best names to own in all of retail, and it has sat at the top of our long list since. After all before Covid-19 it had the worse sentiment it had seen since the great recession, and throughout the virus disruptions it has been one of the few open retailers selling essentials that wasn’t trading at peak multiples. Expectations are now heading higher and the stock is re-rating upwards accordingly, so we’re definitely a little more cautious on the trend set-up, especially as we head into Macro Quad3 in 2H20. We’re still very much bullish on the long term optionality here. Dollar Tree has some real earnings growth levers with new stores, and breaking the buck. Family Dollar has gone from borderline irrelevant to perhaps a much brighter future from the comp and customer acquisition momentum under Covid-19. |
MAR & HLT
Click here to read our analyst's original report for Marriott.
Per the latest weekly STR release, total US RevPAR fell 44.8% vs the prior year for the week ended 7/4 - good for the biggest week/week acceleration since the recovery started... but there's a caveat.
Calendar shift (4th of July impacts)
- Timing of the 4th of July had a clear impact on this week's YoY data since the holiday fell on a Saturday this year vs falling on a Thursday or Wednesday in years prior
- US Hotels faced a comparative RevPAR base that was ~17% lower than it faced in the prior week, precisely driven by the holiday calendar
- Average the $ RevPAR for the past 2 weeks vs the prior year 2 week period = RevPAR down ~51% YoY. Given the calendar shift, we'll need to look at next week's data in context with the prior 2 week's data to see if there's actually a true organic shift in the data trend.
- The occupancy rate for US Hotels actually declined week / week to 45.6% for the week ended 7/4 from 46.2% for the week ended 6/27 -- the first week / week decline in 12 weeks
Group RevPAR dropped 85.9% YoY, while transient RevPAR posted a 53.4% decline. For the trailing 4-wk period ended 7/4 Group and Transient RevPAR was down 92.6% and 62.2% YoY, respectively.
More of the same here for the industry. Continue the Marriott (MAR) and Hilton (HLT) short.
MDLA
Medallia (MDLA) reported $3.5MM of Non-GAAP Operating Profit, showing Y-Y incremental operating margins of 7% despite the incremental headcount from acquisitions. MDLA is committing to show positive NG operating profits this year. As such, we expect some gamification there, such as closing Voci in F2Q ($59MM acq) and we will be on the lookout for excess capitalization of costs.
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.
- 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
When Discover (DFS) reported 1Q20 results, posting diluted EPS of -$0.25, down -112% y/y, driven by a +123% increase in provision for credit losses tied to the reserve build for the projected impact of COVID-19 related losses and CECL adoption.
Not dissimilar from its consumer lending peers, 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.
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.
Accordingly, with both private label and considerable subprime consumer credit exposure, Synchrony Financial (SYF) remains a short.
MCD
Click here to read our analyst's original report.
McDonalds (MCD) is down 7% this year, and while the US business is doing better, there are many risks to profitability that are not built into 2021 estimates. In the US, before the pandemic, 60-70% of sales were thru the drive-thru, which is not the case in the rest of the world. Currently, street estimates are for 2021 EBITDA of $10.9 billion, versus the $10.6 billion the company reported in 2019.
McDonalds’ challenges in its international markets can be seen in this week’s announcement from Arcos Dorados (ARCO). ARCO, which accounts for 5% of the MCD system, announced 2Q20 systemwide comparable sales (excluding Venezuela) was (51.0%) vs. year-ago +14.2%. Delivery and drive-thru are acting as a catalyst for future sales contribution.
Cost-cutting has "stabilized operating cash flow," while leverage ratios are set to increase throughout 2020, mostly due to a decline in adjusted EBITDA and higher net debt. Importantly, McDonald's Corporation provided a waiver through the end of 2020 concerning the leverage ratios contained in the Master Franchise agreement. The pandemic is not in the rear view mirror for McDonalds.
SYY
While the three most populous states closed bars last week, restaurants were allowed to remain open with a reduction in dine-in capacity. According to Womply, a CRM provider, 33% of local restaurants are closed as of July 1, up from 20% on June 28, as seen in the following chart. The jump in restaurant closings reflects the difficulty the industry has had the following rules in flux. Both New York and New Jersey delayed the reopening of indoor dining days before their planned reopening last week.
Many restaurants have also closed after employees and guests have tested positive for the novel coronavirus. 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, 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) 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.
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.
WORK
Slack’s (WORK) EPS report shows 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
In addition to promoting events, Live Nation (LYV) owns the leading live entertainment ticketing platform, Ticketmaster. In 2019, approximately 220 million fee-bearing tickets were sold on the Ticketmaster platform representing a gross-transaction-value (GTV) of $20.7 billion across music, sporting, and live theatre events. We believe the supply and demand for events will be slow to recover in 2021. In the case of sports, for example, many leagues have planned their return but on a condition of no fans in the seats.
Live Nation has also been active in rolling up the fragmented promoter industry, with a 38% share of gross ticket sales in 2019 among the top 100 promoters worldwide. We believe consensus estimates reflect inorganic growth that is unlikely to materialize given balance sheet restrictions that limit LYV's ability to do deals.
DIS
Hedgeye CEO Keith McCullough added Disney (DIS) to the short side of Investing Ideas this week. Below is a brief note.
Did the ROC (rate of change) just re-accelerate for US COVID Cases? A: Yes. Will it get worse in the next 2-3 weeks? A: Probably. See me Real Conversation with Virologist and Hedge Fund PM, Mike Taylor, for details on why. The replay is up now on HedgeyeTV.
Communications analyst Andrew Freedman's remains bearish on Disney (DIS) who is no winner on that Re-opening of Risk. Here's a summary excerpt of his recent Institutional Research note on why:
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Among the most severely impacted by COVID-19 due to the theme park exposure, we removed DIS as an active long in early March. We will always have an affinity for the company, but we don't believe the stock reflects the fundamental reality of 1) park closures 2) no sports 3) advertising declines and 4) cinema closures. While Disney+ continues to be very successful (50M subs), we don't think DTC is going to be enough to offset what is likely to be a slow recovery in the other businesses. |
KSS
Hedgeye CEO Keith McCullough added Kohl's (KSS) to the short side of Investing Ideas this week. Below is a brief note.
With COVID's ROC (rate of change) re-accelerating, are you going to shop for groceries (ACI, KR, GO, SFM, etc.) or Kohls (KSS)? Asking for some friends...
We don't just short these Secular Slowers at any time and price. We wait and watch for an up day on decelerating volume... and we have that today.
Here's Retail analyst Brian McGough's recent Institutional Research recap on KSS:
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What matters now is the future. Stores are opening up and the company noted that stores are seeing comp rates at down 40%-50%, though e-commerce is apparently not being negatively impact at least, in those open store markets. You can't run a retail store profitably with comp rates down anywhere near this much, so we’ll need to see much better traffic trends before the P&L inflects to profits at KSS. |
