Below are updates on our twenty-three current high-conviction long and short ideas. We have removed Altice (ATUS) from the short side and added MGM Resorts (MGM) to the the short side of Investing Ideas this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
As Congress and the Senate debate the HEROES Act and the HEALS Act the $600 of extra weekly unemployment benefits have expired. Both of the Acts currently include stimulus checks.
The following table shows how survey respondents reported spending their previous stimulus checks. The percentage of the benefits spent on food, utilities, and household supplies decreases as household income rises. Food and grocery would be the largest beneficiary of a second stimulus, thus a positive for Sprouts Farmers Market (SFM).
People receiving the extra unemployment benefits were not eligible for food stamps. Now that the extra unemployment benefits have expired food stamp benefits should provide a safety net for those individuals and food spending should be relatively similar.
CHWY
Click here to read our analyst's original report for Chewy
Chewy (CHWY) has been solid lately, running to new all time highs midweek. The nice thing about all time highs, is that they often beget new all time highs. For CHWY, we think that’s the case. Not because of mere technical, but because the company is acquiring new customers in a post-Covid world at a faster clip than the consensus thinks – and the beauty of a customer acquisition at CHWY is that the customer is extremely sticky.
Retailers like Wayfair simply acquire transactions, and have to pay through the nose to reacquire those transactions. CHWY acquires customers as opposed to transactions, and 70% of the resulting order flow is on ‘auto-ship’ meaning that CHWY can plan appropriately when and where a product is needed, which accruses to its industry-leading cash conversion cycle (it converts GAAP revenue to cash extremely fast). We’re often asked where CHWY can go from here.
This question is a double edged sword. On one hand, it’s currently losing money, meaning that EV/Sales is one of the few ways to value the company. We hate EV/Sales, to be clear. Intellectually speaking, it’s a lazy way to value a company. No PE, EBITDA, DCF, Residual Income, nuthin….
The good news is that CHWY will be in the black in a two year period, making real valuation a reality. But for now, AMZN (a winner) is currently trading at about 4x EV/Sales, and Wayfair (a loser) is trading at 2x sales. We would never suggest that CHWY gets an AMZN multiple. But it also deserves something well above CHWY – by a country mile. Lets conservatively say 3x sales for CHWY. That suggests an $85 stock over a TAIL duration, which still leaves ample upside from its current $55.
This remains one of our top retail longs.
NOMD
Click here to read our analyst's original report for Nomad Foods.
Nomad Foods (NOMD) reported Q2 EPS of €.34, up 26% YOY vs. consensus of €.30. The upside was driven by better margins, as the company had previously reported a sales update in June. Organic revenue grew 12.3%, driven by volume/mix growth of 9.9% and price increases of 2.4%.
Revenue grew DD% in each month, including July, even after reopening in many European countries began in May. Gross margins expanded 50bps, expanding a quarter earlier than expected. This was driven by lower promotions as production was challenged to keep up with demand, making promotions unnecessary. The stronger Euro will benefit gross margins going forward. The company will also reinvest an additional €10M to drive future growth. Management raised their EPS and EBITDA guidance to exceed the previous range. The company also announced a modified Dutch auction to purchase up to $500M, representing 11% of the market cap.
We would like to see management create more value through acquisitions, but the repurchase does not signify acquisitions are off the table. Management said the M&A focus will now be targeted toward European frozen food, which they would not have said if there was a dearth of targets.
Our interpretation is that it signifies that the next acquisition will not be large or transformational, but below $500M. That is a range we prefer due to lower risks. It highlights the cash flow the company is generating in the current environment (it has generated more FCF through half of 2020 than all of 2019). It also takes advantage of a valuation that continues to be lower than its peers, despite the consistent results.
The winning growth formula for the company is LSD% organic sales growth, cost leverage, acquisitions, synergies, and financial leverage, driving EPS growth of LDD%. It is not premised upon the current HSD% organic sales growth or large acquisitions. The company continues to have a lower valuation than peers that have slower growth and less visibility in results which we find attractive especially with the higher estimates that we are projecting.
ZM
Competitors surging and transactions sagging was perhaps the old data; the new data looks like transactions sustaining a large jump and Zoom (ZM) sustaining leadership despite Teams continuing to chip away.
Before COVID, Zoom (ZM) averaged $180 of RPO Billings per transaction and $140 of Billings per Transaction. After the impact of COVID on the business ZM averaged $93 of RPO Billings and $76 of Billings per Transaction. Net, our work leads us to see that Billings and RPO Billings may ~2x from F1Q21 to F2Q21.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
Nautilus (NLS) will report earnings on Monday. We expected the results to be good. Though with the stock hitting new highs this week, so does the market. The only concern we have is whether the company’s supply chain has been running well enough to satisfy sales relative to expectations.
We continue to see out of stocks for core NLS products across retail. Sales and earnings expectations should continue to March higher in the coming quarters as we see demand remaining elevated for likely at least another 6 months. As the supply catches up with the demand, fundamentals should beat expectations.
ONEM
Despite pulling back from its all-time high last month, we have seen nothing within our data updates which have changed our belief that One Medical (ONEM) will have an impressive print next week. Our most recent ONEM Provider Tracker shows continued additions across the care provision network, ranging from primary and specialty care doctors to support staff, such as registered nurses.
Based on our work, we expect that membership numbers will come in strong in 2Q20, and One Medical will maintain its long-term growth prospects as a preferred primary care network on the “other side” of COVID-19.
Additionally, recent IPO, Oak Street Health, which shares a similar business model to ONEM, nearly doubled in its first day of trading this past Thursday. We remain Long ONEM in the Hedgeye Health Care Position Monitor and into the Earnings Release on Wednesday, August 12.
DLTR
We’re gaining conviction in Dollar Tree (DLTR) as one of the best longs in retail. Specifically, on July 20th it was announced that CEO Gary Philbin will be stepping down and will be replaced by Michael A. Witynski,. Our sense is that Mr. Witynski is more in more in the ‘break the buck’ camp – meaning that he will move to a multi price point strategy at the core Dollar Tree concept, where everything is currently priced at $1.
How we’re doing the math, ‘breaking the buck’ at Dollar Tree is one of the most accretive strategic moves that can be done by any major retailer, adding $3.00 per share – conservatively – to the company’s current $5 earnings base.
The company has been testing what it calls ‘Dollar Plus’ in under 100 of its 7500 stores – a rounding error to say the least. But an extended rollout of Dollar Plus is not only a meaningful comp driver, but also a hidden Gross Margin lever that is in no way in the consensus estimate of 34.5% for 2021. This still assumes close to zero improvement at Family Dollar, which has shrunken to be only 15% of total company EBIT.
If the new CEO can right size that part of the story (which has admittedly been a slow motion train wreck for the better part of five years) it unlocks another $3.00 per share in EPS. Its tough to find a story out there with as many levers to unlock value as you have with DLTR.
STZ
Ingredion, a supplier to food manufacturers as well as brewers, reported earnings on August 4. The company’s results were negatively impacted by declines in the food away from home sector as well as the government mandated shutdowns of beer manufacturing in Mexico.
Ingredion expected the shutdown to be lifted by the end of May, but “they continued pretty much through the entire quarter, which was very surprising for us.” The CEO also said, “Brewing’s steep decline pressured net sales for Mexico in the quarter and while June and July sales to brewing in Mexico have picked up substantially, recovery of our overall volumes to prior year levels has not yet developed.” Ingredion’s CEO said the sales improvement has continued into July.
“The government mandated brewing shutdowns [in Mexico] hit us very acutely because those breweries were just shut down and could not operate. Now, that’s been lifted and we’re seeing the volume… coming back very shortly, with July up, even versus the prior year.” Earlier in the week Heineken expressed more caution on Q3 trends in Mexico noting that the end of Q2 had the benefit of restocking. Ingredion is a supplier to Constellation Brands (STZ) and the brewer is likely a major reason for Ingredion’s increase in sales as beer production resumes.
ZEN
COVID hurt Zendesk's (ZEN) 2Q. No surprise. The linearity of the quarter produced monthly results which showed extreme weakness at the start (via churn and contraction) and strength towards the exit. Management did not want to embrace better recent activities as they guided Q3 and preferred to marinate in the predictability of volatility.
Better customer count is a bright spot especially considering the company called out “significantly elevated” contraction and churn but still put up +10% y/y total customer growth (+2% q/q) and +5% y/y DBNER customer growth (+1% q/q), same as Q1.
MAR & HLT
Click here to read our analyst's original report for Marriott.
The timing of the Q1 earnings season occurred during the height of COVID-19 fear, yet we we’re more negative now than we were heading into quarterly conference calls then. What’s different?
At least back then there were positive developments relative to sentiment – liquidity was in the process of being secured, going concern risk was mitigated, and local leisure travel had just started to improve.
Management teams can’t even point to sequential improvement with the recent RevPAR sluggishness and new Covid outbreaks pushing out travel even farther.
The hotel stocks have massively underperformed since we hosted our hotel presentation last month (PK is down 22% for instance in an up market), so maybe sentiment has already captured the likely negative tone of the upcoming conference calls. But without any positive catalysts and the potential for worse than expected Q3 looming, we’ll stay negative on the group overall including Marriott (MAR) as well as Hilton (HLT).
DFS
When asked about the trajectory of delinquencies and charge-offs, Discover (DFS) management revealed expectations for delinquencies to tick up sometime in the fourth quarter, perhaps even in the third quarter - albeit there are currently no such signs, and then continuing to rise into 2021. On charge-offs, management expects elevated figures beginning in the fourth quarter, continuing into and peaking in 2021, and then falling off in 2022.
Touting of the success of the forbearance programs, the company said it does not expect to see a bigger bulge in charge-offs following the end of loan deferral periods and the expiry of enhanced unemployment benefits, even if things deteriorate at the consumer level.
SYF
Regarding asset quality, Synchrony (SYF) increased its allowance for credit losses by +139 bps to 12.52% of period-end loan receivables, matching the reserve ratio of JPMorgan on its own card book. While the street took comfort in the company's provision expense, -13% below expectations, we see things differently. With a card book of significantly lower quality than that of JPMorgan, our view is that Synchrony remains behind the curve in terms of its provisioning and we expect further catch-ups in future quarters.
SYY
Overall sales velocity in open restaurants is down 28% YOY in the week ended July 25. That is a 3% improvement from the prior week, according to Nielsen CGA RestaurantTrak data comprised of 15,000 independent restaurant operators and smaller groups.
Major restaurant chain customer transaction declines have been down between 11 and 14% YOY since the second week of June. In the week ended July 19, major restaurant chain total customer transactions declined 12% YOY, 2% better than the prior week according to NPD CREST data (comprises 75 QSR, fast-casual, midscale, and casual diners representing 53% of commercial restaurant traffic).
In the week ended July 19, QSRs were responsible for the improvement in transaction declines, which were -11% while full-service restaurants were down 27% (comprised of off-premise +91% and on-premise-62%). Independent restaurants are Sysco’s (SYY) most profitable customer segment.
GOLF
Click here to read our retail analyst's original report.
See our update on Acushnet Holdings (GOLF) earnings this week HERE. We also got earnings from ELY, which generally showed similar trends for golf equipment, though the performance of golf balls for ELY was significantly better.
ELY has been gaining share in recent years with higher growth rates than GOLF, and that appears to be the case even in the business declines of 1H2020. Separately if there is a bull case around renewed growth for the industry (which we think is unlikely), we’d argue there is more share opportunity for ELY within new/occasional golfer than there is for GOLF.
AXP
With net interest income accounting for only 22% of total revenue, American Express (AXP), unlike its consumer lending peers, faces the dual impact of massively depressed payments volume and ballooning credit risk. Whereas companies like SYF, COF, and DFS saw earnings eroded primarily as a result heightened provisioning, American Express, even after adjusting for its reserve build, is currently running at ~$0.91 of quarterly earnings power, down from $2.07 of quarterly earnings power in 2Q19 - a greater than 50% decrease in core earnings power.
Delving into the details, billed business growth fell -33% y/y in the second quarter, hitting a low of ~40% y/y in April and rebounding to -25% y/y in June.
ZI
Near term data looks ok with website visitation up 5.5% q/q in 2Q, hiring improving in July, and mainly an easy setup for 3Q Billing-per-Customer as 3Q19 average was ~$24k vs ZoomInfo's (ZI) normalized average of ~$30k. However, we also showed data from a developer who reached out to us having single handedly built a competitor to ZI of his own in the last few months with over 100m contacts (ZI = 120m) and cell phone numbers across executives and mid-level management teams which reminded us that whatever barriers may once have existed in this territory are no longer there.
Remain Short.
LYV
LYV lenders have agreed to further suspend Live Nation’s (LYV) net leverage covenant until 12/31/2021 (unless the company elects to resume the net leverage testing earlier). This compares to 9/30/2020 previously. In addition, the net leverage covenant test has been amended and increased on favorable terms. We don’t see any filing with SEC with additional details.
We believe consensus estimates reflect inorganic growth that is unlikely to materialize given balance sheet restrictions that limit LYV's ability to do deals. Live Nation (LYV) 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.
KSS
Kohl's (KSS) announced it will be reporting 2Q EPS on August 18th. The quarter will no doubt be a disaster, and we think for the most part that is in expectations. What is not in expectations is a prolonged period of sales pressure, and that is looking more and more likely to be the reality.
The street expects comps to linearly improve from down 25% this Q to down slightly in 4Q. Yet, we have heard many retailers talk about weakening sales where the virus cases have ramped. And as we approach back to school season, data points are looking net negative.
In our consumer survey this week, we are not seeing a recovery in intention to shop at a department or clothing store, even as we get into what is historically one of the biggest apparel shopping periods of the year. You might think people are simply buying it all online, but in checking Kohl’s online interest, its actually down slightly vs this time last year. We think sales and earnings are likely to miss in 2H 2020.
SHAK
Shake Shack’s (SHAK) locations are ill suited for the pandemic. The company’s best performing units are in high traffic urban locations that are currently deserted. The company continues to open new units despite comps being depressed (-39% in July). Management’s incentives are based on revenue and EBITDA growth without measuring for the unit growth that drove that growth or the return on capital. Those incentives will emphasize unit growth over other priorities and could lead to deteriorating shareholder returns.
SMAR
We see risks to the Smartsheet (SMAR) adoption curve, with seat growth already well below revenue/billings growth, enterprise adoption well along the way, 15 years into the journey with under 1MM paid seats and decelerating versus messaging of a TAM infinitely larger which together points to a much smaller landing spot for SMAR.
We see peers outgrowing SMAR adoption rates, large competitors refreshing their tools, tens of millions of potential users who have trialed Smartsheet and passed, tens of millions of users sitting in the free tiers of competitors, and we continue to see SMAR taking price on their free base of users.
EDU
Similar to New Oriental (EDU), TAL Education Group (TAL) turned more prudent regarding its marketing expenses this past Q but G&A cost growth accelerated as TAL paid more money to staff.
Compared with EDU, TAL has a significant advantage in terms of enrollment and revenue growth and is more focused on the online side and investing more dollars in online technology and tutors. Because of this, TAL is scooping up market share at a faster pace than EDU.
We remain short on EDU.
MGM
Hedgeye CEO Keith McCullough added MGM Resorts (MGM) to the short side of Investing Ideas this week. Below is a brief note.
Some of our favorite consumer shorts are making tasty lower-highs this morning on the fake news narrative of a "better than expected jobs report and consumer"... ha
Since TJ told me to wait on it (and I did), I've been waiting for MGM Resorts (MGM) to tag the top-end of my Risk Range ... and it is doing that this morning.
Here's a summary excerpt from Gaming, Lodging and Leisure (GLL) analyst Todd Jordan's recent Institutional Research note:
|
A relief rally may be in the cards but the few positives from the quarter will be quickly digested, if they weren’t already anticipated by investors. We suspect Strip demand will show little near term improvement with a potentially disappointing Q3 and Q4 as the lack of group business will become more evident. Lower for longer remains our theme for the Strip and keeps MGM on the Hedgeye Best Idea Short List. |
