Below are updates on our eighteen current high-conviction long and short ideas. We have removed Constellation Brands (STZ) from the long side. We have also added Boyd Gaming (BYD) to the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
CHWY
Click here to read our analyst's original report for Chewy
This week Chewy (CHWY) announced plans to launch telehealth services nationwide to pet owners. At first glance, I thought it was a way for people to access a vet network as a means to prescribe ped meds, like Heartguard, and Frontline (flea and tick) medications that otherwise have a steep markup at vet’s offices.
But this is a toned down version of that, as Chewy said its service will connect pet owners with licensed veterinarians who can answer questions, give advice, discuss concerns, and refer pets to local vets and emergency clinics. The service is not for diagnosing conditions, providing treatment, or prescribing medications.
My sense is that the latter, prescribing meds, will change, as this is a major future profit center for CHWY. The service is available for clients that use the Autoship feature – which is about 70% of CHWY customers.
As CHWY hits new highs this weeks (before selling off into weekend) it’s worth noting that the mean price target is $71.75 – about 1% away from where it closed on Wednesday. We’re about to see either a round of downgrades or price target increases – I still believe it will be the latter. I still think that this is a $90 stock over the next 12 months.
NOMD
Click here to read our analyst's original report for Nomad Foods.
We are expecting another strong earnings report from Nomad Foods (NOMD) this week. Consensus expectations appear beatable and frozen food trends have continued to be strong in Europe. A second wave of COVID-19 cases and new shutdowns in several countries is prompting more consumers to add more items to their grocery lists.
Frozen food has been one of the strongest categories during the pandemic and the second wave shopping trips have not been different. There is not a lot of controversy about the company currently so we do not expect an outsized reaction to the report, but expect the company to continue to deliver on its goals of organic growth and margin expansion.
ZM
The most important metric Zoom's (ZM) can disclose at the Analyst Day is one that (for bulls) shows the opportunity set as still under-penetrated in key enterprise accounts. At the time of Zoom's IPO the company had at least one paid host (single license) in 55% of F500 companies but only 5% of the F500 were in Zoom’s “large customer” category (>$100K TTM Revenue). An update on this metric (also presented at Zoomtopia 2019) would be a signal that enterprise revenue growth is still ahead of the company, despite the enormous success of the last several quarters.
Zoom is the best tool in the category on key factors (adoption, ease of use, & stability) as well as single pane management for companies ZM follow on product creates a compelling roadmap for customers to easily unburden themselves of older telephony systems and should have significant COVID tailwinds.
NLS
Apple One launched this week. One is basically a bundled subscription of various service Apple offers like TV, music, and games. The service will also include Apple Fitness+ when it launches later this year. Fitness and its inclusion in this Apple product mean more fitness content being accessible to consumers, and more fitness content is going to mean more demand for fitness equipment like that sold under the Nautilus (NLS) brands.
We continue to think that demand will drive sales well above current expectations, 4Q in particular is one where the street expects a significant slowdown in growth, yet heading to holiday season, with still many out of stocks at retail, and ramping Covid cases throughout the US, we could actually see accelerated demand for home fitness products in 4Q. As long as sales expectations look far too low over the trend duration, we remain bullish on NLS.
ZEN
Zendesk (ZEN) is a specialist in the customer support software category. In recent years, the company’s adoption curve has materially underperformed reported revenue growth as the original go-to-market motion became saturated.
Until now. Evidence after ZEN reported this week, showed an adoption curve that was in the process of being refreshed starting from June based on our data and our field work. We followed that up with October validation of the same trends on our recent EPS preview note.
Most importantly, ZEN added 5,400 total customers in the Q, the fastest rate of additions since 1Q19, and 2,700 parent-customer accounts which is the fastest rate of sequential addition by a multiple over the last four quarters.
FVAC
The sharp reopening snap-back in 3Q20 is likely giving way to stalling or backsliding in 4Q20 with a ‘Quad 4’ macro backdrop. While delayed stimulus and second wave virus fears contribute, prolonged changes in several industries may take longer to unwind. While consumer-oriented colleagues often speak of a K-shaped recovery from an income perspective, industries within our coverage are diverging for many specific reasons.
When the market gets messy, we prefer to focus on more idiosyncratic exposures – like Fortress Value (FVAC).
The Mountain Pass mine has the richest developed rare earth deposit in the U.S. at a time when the geopolitical value of those assets has rarely been greater. Molycorp was ‘early’ to market, leaving an extremely valuable processing asset base and unfocused operationally, which we expect Mountain Pass to optimize (finally). As highlighted in our prior work, EV/Motors, Electronics, and Sensor market growth are very real for rare earths.
STKL
This past week SunOpta (STKL) reported 3Q20 revenue of $314.98M, which beat consensus by $2.33M and grew 6.4% year-over-over with strong performance across all segments plant-based business segment. Breaking down the segments, the Global Ingredients reported revenues of $123.3M (+8.8% YoY), Plant-Based Foods, and Beverages of $99M (+7.9% YoY), and Fruit-Based Foods and Beverages of $92.6M (+2% YoY).
Gross margin increased 440 basis points to 13.3% from 8.9% a year ago, the highest since 2012, with each segment delivering expanded margins. The revenue growth and stronger operations led to a 129% gain in adjusted EBITDA at $22.8M vs. $9.9M in Q3 2019.
SunOpta is one of the strongest players in the growing plant-based food category. Consumer demand in the company's core categories continues to be some of the best in the consumer space. The company is operating close to capacity in Q4 so far. Importantly the focus and investment in plant-based growth drivers will provide a continuous source of strength.
The evidence will be that the new investments that come online during the fourth quarter set the company up for continued strong growth in 2021 and beyond. Management expects the three expansion projects to add $100M when fully utilized - which could be the end of 2022. Management was also confident in the goal of doubling plant-based capacity over the next three years.
IIPR
This past week Innovative Industrial Properties (IIPR) entered into two sale-leaseback transaction agreements for $30 million, putting more of its capital to work. The transaction agreements with 4Front Ventures cover cultivation and production facilities in Tumwater, WA, and Georgetown, MA. The all-cash sale price of $30 million will be used by 4Front to pay down its outstanding senior secured debt obligation and for other general corporate purposes.
"Entering this sale-leaseback transaction marks a significant milestone in our stated strategy to further strengthen our balance sheet, providing us greater flexibility to fund our growth initiatives.
The successful closing of this transaction positions us well as we enter 2021, with our laser focus on profitable growth within our core markets of Massachusetts, Illinois, California, Washington, and Michigan," said Leo Gontmakher, CEO of 4Front. Under the terms of the transaction, 4Front will occupy the Tumwater, WA, and Georgetown, MA facilities according to 20-year lease agreements, with two 5-year extensions exercisable at 4Front's discretion.
IIPR stands in a unique position at the intersection of the cannabis industry and the REIT space in a rapidly changing legislative landscape, earning outsized returns in the current environment with few competitors.
EXPE
The Q3 peak summer and leisure season is in the rear view, but the data trends coming in and out of it are revealing. Geographically speaking, North America has generally led the global recovery when it comes to OTA usage and bookings (ex. China), but the summer season was strong for Europe as well.
Fast forward to today and we see increasingly diverging trends across the globe - North America is still leading but the gap with the rest of the world has widened. Due in part to Expedia's (EXPE) North American (mostly US) exposure, EXPE as a platform seems to be really outperforming its international competition.
Owning the best house in a downtrodden neighborhood is not exactly a bull case in isolation, but its noteworthy that in recent weeks, mobile usage data for EXPE’s North America segment is actually reaccelerating, which could be a positive catalyst heading into earnings.
MIK
With Covid cases surging throughout the country we’re going to see families looking for at home entertainment much like in spring, though this time outdoor activities will likely lose out to indoor activities. Michaels (MIK) is a great store for indoor activities from board games, to knitting, crafting, scrapbooking, art, etc.
We expect its products will see increased demand driving upside to sales numbers in 2H. With the stock trading at super cheap multiple and financial leverage in the model, upside to near term numbers should be notable bullish for equity value in the coming months.
SFM
Sprouts Farmers Market (SFM) reported Q3 EPS of $.52 vs. consensus of $.36, $.04 above our estimate. SSS were up 4.2%, missing consensus estimates of 7.6%. Management attributed the deceleration in sales to lapping a very promotional August and September last year. E-commerce grew 337%, which means in-store comps were negative.
The combination of pulling back on promotions and shifting to digital ads from circulars likely led to the loss of customers who are deal focused. During a pandemic with consumers purchasing more for food at home is probably the best time to make a change in their promotional strategy. Gross margins expanded 400bps driven by the change in promotions and lower shrink.
Management estimates COVID-19 benefited gross margins by 250bps. SG&A deleveraged 200bps due to COVID-19 operational costs. Management guided Q4 EPS to $.36-.40 vs. consensus of $.37 based on SSS, increasing LSD%, which is also below a 4.6% consensus. The company’s push to roll out a new smaller store format with higher returns than the existing stores will be very important in determining Sprouts future store growth rate.
BYD
Hedgeye CEO Keith McCullough added Boyd Gaming (BYD) to the long side of Investing Ideas this week. Below is a brief note.
Waiting & watching has its perks, when your Independent Research team bench is as deep as mine is...
As all subscribers to The Call @Hedgeye are well aware, Gaming, Lodging, and Leisure analyst Todd Jordan has crushed it with his Long Boyd Gaming (BYD) pivot call this year.
All we had to so was wait for a "sell the news" immediate-term TRADE #oversold signal to remind you of the upside from here (per TJ):
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"We’ve been running ahead of the other bulls for over a month now and apparently we weren’t fast enough on our top idea in gaming. Our new and higher 2022 EBITDA estimates combined with significant sports betting (SB) and iGaming value, justifies a much higher stock price – $50-60 is now in the cards." |
MAR
Click here to read our analyst's original report for Marriott.
It’s the forward outlook and commentary that we’ll be focused on this earnings season and our multitude of leading indicators show little demand improvement. For the C-Corps, pipeline and NUG growth may be an uphill battle relative to expectation and we expect cracks to continue to emerge, particularly for Marriott (MAR).
We continue to believe there is downside left as expectations for net unit growth, fees, and EBITDA remain too high, in our opinion. Earnings estimates and the valuation multiple are likely heading lower, in our opinion, and a more somber Q3 conference call could be the catalyst.
AXP
With net interest income accounting for approximately one fifth of total revenue, American Express (AXP), unlike its consumer lending peers, faces the dual impact of massively depressed payments volume, particularly in the T&E spend category, and ballooning credit risk.
Whereas companies like Synchrony, Capital One, and Discover have seen their top-lines pressured primarily by net interest margin compressed and loan decay, this has been the least of American Express' worries.
Delving into the details, billed business growth fell -20% y/y in the third quarter, mechanically rebounding from a low of ~40% y/y in April as lockdown restrictions eased globally, yet the recovery has lost all momentum over the last three months.
SMAR
Smartsheet (SMAR) is probably the most controversial of our Shorts. CEO Mader is a good captain, who has long been dedicated to finding ways to bettering workflows via software. The company has shown strong growth historically.
But the cadence of that growth has been via upsell and gradual ARPU capture on the shift to the enterprise. The latter is great but not the same in repeatability terms as a seat adoption growth engine. Now, the CEO is talking about taking price on the Collaborators category (free, limited, invited users) next year to help fuel growth.
Bottom line: more one-time things to benefit the growth rate but not a sustaining opportunity.
MDLA
While profits improved into 2020, Medallia (MDLA) will confess (after they raise the convert, not before) that 2021 will be ‘an investment year’ and profitability will not improve. How do we know? Because incremental revenue driven inorganically doesn’t waterfall profit the way organic revenue does, and because the two companies most recently acquired are in cash-burn mode.
The acquisition of Stella Connect keeps 4Q above 20% revenue growth. Stella is a perfect MDLA acquisition: raised $50MM+ over 12 years, acquired for $100MM, and MDLA CFO pretends MDLA can "make Stella great again". MDLA needs one more to get them there for 1Q22. But the next one will be smaller ($10MM annual revenue; should cost $50-60MM) and CEO Leslie Stretch will be sure to remind all of us that he only does technology tuck-ins.
RL
All the reasons why we have Ralph Lauren (RL) as a short are playing out in this quarter. The company put up a huge headline beat, but put up simply atrocious revenue trends and made up for it in SG&A cuts. This brand is losing relevance by the day, but the good news is that it can absolutely be fixed.
Almost any brand can with the right amount of capital. The bad news is that in this case it’s likely going to remain broken. To regain momentum the company needs to take its SG&A cuts, and reinvest elsewhere in the organization at an outsized rate in order to increase consumer connectivity and make the brand both desirable and competitive again.
But it’s taking the easy route to grow earnings – cutting costs and flowing it through to the EBIT line without the reinvestment the brand so desperately needs. SG&A in aggregate was down 21% -- that’s $167mm, or 140bp in margin upside – and margins were STILL down 225bps due to the sorry state of the top line. Some numbers to prove the point…North America wholesale was down 46% and comp sales at its own stores down a depressing 31%. It touted improved e-comm growth – but that was up only 10% in the US.
A bit more impressive in Europe with digital up 26%, but a massive deceleration from the 44% rate we saw in 1Q.– and we’re facing the biggest digital shift we’re likely to see in our lifetime. Brands with heat are comping up between 80% and 120% online. Heck, I gave Puma a hard time yesterday for only growing e-comm at 60%. And RL puts up a +10% in its core market?!? That’s simply inexcusable. Ralph is trying to upscale its business and notes a 26% increase in Average Unit Retail – but that’s an irrelevant metric when you can’t hold onto a stable number of units to actually drive the top line higher. A -30% top line when all stores have reopened simply won’t cut it.
The problem here is management. It simply has the wrong philosophy for capital allocation and thinks that it can make the brand relevant again simply by working harder and smarter. Sorry folks…in 25 years I’ve never seen ‘hard work’ fix a fashion brand. It takes capital, and a lot of it. To RL’s credit, the stock looks cheap – especially with it selling off on a headline beat. But at this rate, we’re unlikely to see $5 in EPS over a TAIL duration, and the Street is looking at $6.00 next year. Not gonna happen.
This name is cheap, and is likely to get cheaper.
WORK
Slack (WORK) is a HedgeyeTech bench idea short. While WORK has hinted at some amazing potential roadmap products, the progress from imagination and hyperbole to actuality has not been the Ferrari pace that might inspire us. We have listened to management describe a Slack-first universe and we have read blog posts from technologists who can describe a Slack-first world, but as of August 2020, it still seems a little bit like science fiction.
On our September 1 HT3 we exhibited data that showed Slack with improving paid seats coming out of F2Q which made us hit pause on the active Short. Since then, we have 2 additional months of data, Slack hosted a Frontiers Day and announced new products which we will discuss, but generally speaking, continues to do a whole lot of ‘not enough’ to get us excited on the long side.
