Below are updates on our fifteen current high-conviction long and short ideas. We have removed Zendesk (ZEN), Michaels (MIK), & Sprouts Farmers Market (SFM) from 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
Pet Value announced on Wednesday that it will be closing all of its 350 stores in the US – which are largely based in the Northeast and Midwest. Pet Value is a high quality product and service oriented retailer that is relatively new to the scene.
But Covid simply crushed its business as people switched online to the oligopoly that is Chewy and Amazon. Never good to see brick and mortar stores going out of business, as it means job losses for hard working Americans – but it’s a simply sign of the times.
The transition to online pet food and product delivery is not temporary – it’s both permanent and accelerated – with 5 years-worth of demand being pulled forward into a 2-3 year timeline. I’m sorry to say, but this won’t be the last of the Mom and Pop and small chain pet store closures. Bullish for Chewy (CHWY).
NOMD
Click here to read our analyst's original report for Nomad Foods.
Nomad Foods (NOMD) reported Q3 EPS of €0.30, $.02 above consensus expectations, and in line with our estimate this past week. Revenue grew by 6.7%. Organic revenue growth was 5.4% in Q3, comprised of a 4.2% increase in volume/mix and a 1.2% increase in price, decelerating from 12.3% in Q2 that had a price of 2.4%. Management’s guidance for the 2H of the year organic growth was +MSD%, as countries in Europe reopened over the summer.
Management believes COVID-19 had a limited impact on Q3 results, implying stronger underlying demand. Gross margins expanded 90bps driven by pricing, mix, and fixed cost leverage, improving from Q2's 50bps expansion. Operating expenses grew by 4%. EBITDA grew 13%, while EPS grew by 20%. Management raised 2020 EPS guidance to exceed €1.31, up from exceeding €1.27, mostly due to the share repurchase during Q3. Organic revenue growth is expected to be +HSD% for the year. For the first three-quarters, organic revenue has grown by 8.4%. Management expects gross margin expansion to continue, but operating expenses will accelerate as a catch-up for what has not been spent earlier in the year.
The company will host a virtual investor day next week. We are particularly interested to hear more about the M&A environment in Europe, an update on the company’s plant-based meat brand Green Cuisine, and more about how the company invests in the brands for future growth.
The investment thesis for Nomad Foods is not that it is a pandemic beneficiary, but an undervalued food manufacturer with visible organic growth in a secularly growing category that also has an opportunity to supplement growth with acquisitions that have temporarily benefited from the pandemic. We are modeling revenue, EBITDA, and EPS to grow in 2021, while many food companies will have difficulty lapping 2020’s COVID-19 boost.
ZM
We went Long Zoom (ZM) in the spring as our data indicated the market completely underestimated the size of the gains for Zoom. We stayed Long into the summer as F2Q still showed over 2x increase in invoices versus 1Q, and because the market misunderstood just how rich the incremental cash flows would be.
We stayed Long into the Fall as our tracker was showing no noticeable churn. On our FY22 revenue estimates and growth, the relative EV/S math puts the true north at ~where the stock made its 52-week high. Fundamentals continue to look good.
We are not seeing deterioration in units of billings, usage is sky high, and the education market is dominated by Zoom. The Webinar product makes sense for every company in the world that needs to host even medium sized sessions with employees or customers. And the longer we remain in a world of hybrid attendance at the office, the more the fixed phone infrastructure sitting at our desks looks silly and wasteful, and the more companies will simply turn on the Zoom phone app to enable an enterprise phone number for all employees wherever they may be.
NLS
Peloton reported earnings this week. It had another great quarter, yet focused a lot of time talking about its lengthening delivery times as it struggles to keep up with demand. Several aspects of the PTON print read bullish for Nautilus (NLS).
First, it is clear that industry demand for fitness equipment remains extremely strong, that likely means that trend expectations for NLS are too low. Next, there is perhaps some near term share opportunity for people scrambling to get fitness equipment before winter as a few Peloton shoppers might look elsewhere vs waiting. Lastly, Pelton’s digital only subs grew 382% this quarter.
Part of the market opportunity for NLS is to sell equipment to customers that will use a digital only subscription for Peloton and substitute a different lower priced bike/treadmill to get a reasonably similar experience at a much lower price. Digital growth for Peloton likely means some incremental demand for NLS machines. We remain bullish on trend fundamentals heading into NLS earnings on Monday.
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
Oatly launched “Oatgurt,” oat-based yogurt last month. Oatly reports that it has a 64% share of milk alternatives in the U.K. In the U.K., oat has the largest share at 32% of the dairy alternative category, and Oatly’s sales are up 109% (for the year ended Aug. 15). In the U.S., oat milk recently took over the #2 spot from soymilk but grew at a faster 304% rate (for the year ended Sept. 6).
When Oatly was founded in 1994 by a Professor in Sweden the company’s mission was to shift people from dairy to oats and not tax the planet. Oats use 80% less land than required for diary, and the oat drink uses less water than cow’s milk. There was a boycott call a couple of months ago when the company received an investment from Blackstone for 7% of the company. Oatly’s General Manager of the UK said, “We haven’t seen any significant drop in sales within our data reads (grocery) nor account losses. We are tracking it ongoing. Foodservice is harder to track, but again, we had our strongest month last month, and it looks like October will also be a record month.” Starbucks recently reported that alternative milk' sales doubled in one quarter (Starbucks currently carries soy, almond, coconut, and oat).
Allied Market Research published a report last week sizing the global oat milk market at $360.5M in 2019, reaching $995M by 2027. Oatly had revenue of $200M in 2019 and is said to be on track for $350M in 2020. The last investment round in July valued the company at $2B or 5.7x current year sales. In comparison, SunOpta's (STKL) $700M market cap is 1.7x the Plant-Based division’s revenues. One big caveat is the much slower growth rate for SunOpta’s division, as it includes revenue from other alternative milk besides oat milk. Oatly may have the most well-known brand in oat milk, but SunOpta is positioned to be the largest producer.
IIPR
The market had perceived the largest risk for Innovative Industrial Properties (IIPR) to be the legalization of cannabis nationally or the passage of pro-industry banking legislation. With the Senate unlikely to be Democratic-controlled, the probability that either legislation would pass has fallen dramatically. Senator Cory Gardener (R-CO) was the most pro-cannabis senator in the Republican party, and his loss in the election drastically reduces bipartisan support for federal cannabis bills.
As we laid out the bull and bear thesis previously in the following chart, the probability of the bear thesis has been pushed out until at least the next election. It is worth noting that IIPR has an unlevered balance sheet that it would likely have used to offset a near term impact from lower yields if pro-banking legislation were passed.
As a result of the election 16 million Americans will join 93 million others who now live in states that allow adults to use marijuana legally after voters in New Jersey, Arizona, South Dakota, and Montana overwhelmingly approved ballot measures on weed.
This means that 1 in 3 Americans now live in states where marijuana is legal for anyone at least 21 years old. While ballots are still being counted, four states have joined the ranks of legal-marijuana states in the U.S., and two have legalized medical marijuana.
This opens up new markets that will create new investments that will need funding. IIPR stands is uniquely positioned to provide the growth capital the industry needs. We expect the company to announce several new sales leasebacks in the new states in the coming years.
EXPE
We thought Expedia's (EXPE) was punished unnecessarily following Q2 as investors failed to see a few positive and emerging trends. Granted, Q2 was very messy and cancellations impeded the market’s view of what was really going on past just the difficult Covid environment.
Well, there should be no impaired vision when it comes to viewing Q3 in a positive light. Q3 provided more and clear evidence that EXPE is looking like it’s on track to becoming a better, growthier, and more profitable company. We acknowledge the near term Covid fears, but yesterday’s commentary and results only add to longer term conviction for our top travel pick (EXPE).
For this still early leg of the recovery, the OTAs continue to offer a rather unique proposition for investors, with their exposure – leisure travel – as the key accelerant. For EXPE, the sentiment and estimates remain stubbornly low, and likely still will after today, making the stock an attractive recovery play with a still cheap valuation.
BYD
We’ve been running ahead of the other bulls for over a month now on Boyd Gaming (BYD) 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.
So far in Q3, we have seen a fairly consistent trend across most of the hotel companies that have reported – weaker RevPAR growth, better cost controls, and better NUG (for C-Corps). On the surface, that’s a great trade off and is providing cushion for nice quarterly beats. However, with Q3 expectations all over the place and the buy side well understanding the cost side, we don’t think quarterly beats (or misses) are really going to matter, at least not the headline figures.
As is the case for Marriott (MAR) this AM, they put up a solid EBITDA and EPS but well ahead of the Street (and us), driven by great G&A controls and also, somewhat surprisingly better NUG performance (+3.8% YoY). Cost controls should prove sticky, however, and we’re not so sure on NUG. With +3.8% YoY growth, and a guidance range of +2.5-3% for the year, the implications for Q4 are no different than they were 3 months ago, in fact, they might actually be a bit softer as it appears MAR may have held off on some property terminations in the quarter – we’d expect Q4 growth to be flat YoY, which would imply QoQ room base declines.
The call will be crucial and we expect management to provide more context around the RevPAR recovery that appears to be stalling out globally, but also provide more context around their NUG expectations for next year. Commentary in the release suggests MAR is slightly more bullish on the NUG outlook for next year vs their last quarterly conf call, which we’re curious about in the context of their pipeline showing another quarter of sequential declines and YoY deceleration.
We’re skeptical on NUG for MAR as we have been for a while, but net-net, even if we have to raise our NUG assumptions a touch for next year, our RevPAR outlook continues to weaken, which would be offsetting factor looking out over the NTM. We’ll see what MAR has to say on the call, but we continue to remind investors that MAR is no HLT, and the results so far continue to prove that notion. We remain bearish on MAR.
AXP
The larger uncertainties plaguing the outlook for American Express (AXP) revolve around two fronts: first, how long will T&E activity remain depressed and what will the shape of the recovery ultimately look like? and second, will Covid-19 result in structural changes to business travel and entertainment?
Using the September 11th attacks as a precedent, U.S. air travel did not return to pre-attack levels for another two years. Given its exposure to T&E spending due to the travel-heavy appeal of its card products, we think the company's top-line will likely be impaired long-beyond a basic resumption of activity, as evidenced by the very slow recovery in T&E billings.
Marred by a deteriorating merchant value proposition and staring down the double barrel of depressed payments volume and rising credit risk, we continue to see asymmetric downside in the shares of American Express and are thus keeping AXP on as a Best Idea Short.
SMAR
Smartsheet (SMAR) was the first in the Project Management standalone category to go public. The PM category is highly competitive with little differentiation. But sticky when you land, which implies that there is upsell potential. And SMAR CEO Mader is good.
Until recently, the market believed in Mader + SMAR, went Long and gave them an adoption curve multiple. But there was no adoption curve. SMAR was adding 150k paying users per year for three straight years in a market that is supposed to be enormous (all knowledge workers) – that was our ‘tell’ that the market was small in reality. Our TAM work from this summer furthers that conclusion, and our original BB work shows the competitive dynamics which make it even more challenging. Tiny market, very competitive.
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.
Bottom line, we think MDLA had a bit better 3Q post COVID recovery, went back to hiring, won some large new customers, and thus will notch a bit better organic sequential revenue growth in F4Q. If we are right, it should give all of us a chance to Short it again.
RL
If you want to see the potential for Ralph Lauren's (RL) top line and margin structure…look no further than Thursday’s HBI release. The stock was down by 20%. The top line was anemic and the new CEO said that the company has long been underinvesting in both marketing and R&D.
This nearly mirrors the problem we have at RL. It’s a brand that’s in a secular decline, and in dire need of upgraded/more relevant and price competitive product with a turbo-charged brand message. The company is cutting costs out of its organization and flowing through the lower costs in the form of higher margins, but its leaving revenue growth in the dust.
There is one way, and one way alone to regentrify an ailing fashion brand – and that’s to spend capital on consumer connectivity. RL doesn’t get this (at least that’s what it’s actions suggest), sadly, because its otherwise one of the most iconic consumer brands in fashion. It’s simply losing relevance and management isn’t investing appropriately to turn it around. The top line is a melting ice cube.
WORK
Why is developer engagement falling for Slack (WORK)? We covered our active Short and went to the Bench in August as our data showed improving metrics into September. But the data now looks ho-hum. For now, we are stuck on Slack within investing ‘middle ground’.
We are not on board with the call that Slack will go away due to Microsoft Teams. We find this thinking to be misguided because although some large company CIOs will switch to Teams it will only be CIOs who care singularly about the cost factor; anybody who is envisioning potential multiplier from their communications investment will be able to look beyond the cost difference, which as we’ve pointed out is a fairly small bill (can equip 1K employees with Slack for < the price of 1 year of an engineer in SV).
