Month: April 2018

LMT 1Q18 earnings

Thesis Intact. Key takeaways:

Lockheed Martin released its 1Q18 earnings well above consensus expectation both on the revenue and earnings front. The management team also raised its sales (+0.7%), operating profit (+2%) and EPS (+3.9%) for the year. Yet the stock sold off as investors were expecting a lift of its 2018 cash flow guidance as the FY18 DoD budget grew, in particular the 2018 Appropriation Act offering an incremental $7B for Lockheed’s programs. The management team did not know if those incremental dollars will translate in new contracts/sales and preferred to remain conservative this early in the year. Production plans still target 90 F-35s delivered in 2018, with peak delivery year in 2025. There is an on-going dispute with the DoD over some production issue but this is not impacting revenue, and we do not think this will be a big problem to solve. Its Sikorsky business saw a nice margin expansion, most likely thanks to cost cutting and synergies flowing through post acquisition. The pension contributions are always a big part of defense companies’ expenses, and LMT is no exception. Management is guiding to the possibility of negative cash from operations in Q2 due to most of the pension contribution being made by Q3: $1.5B was made in Q1 and the full year amount will reach $5B.

Overall we keep a positive view of this holding.

Valuation: we are not changing our price target, a review of our model warrants a $374 price target.

LMT Thesis:

· Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships

· Excellent management team focused on returning capital to shareholders

· Strong cash flow and financial position

Julie S. Praline

Director, Equity Analyst

Direct: 617.226.0025

Fax: 617.523.8118

Crestwood Advisors

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Pepsi 1Q18 earnings results

Thesis intact. Key takeaways:

Pepsi reported good organic revenue growth (+2.3%) with emerging markets strength (+HSD sales growth) lifting the company’s growth this quarter. On the negative side, North America Beverages continues to face tough competition, but results improved sequentially – in the eyes of the CEO, this is a short term problem and they “know exactly how to fix it”. The gross and operating margins were weaker, with input costs inflation impacting the company (a theme we have heard from others as well). Some responsible pricing will help offset cost inflation this year. Management is guiding to a continued gross margin compression through 2018, which has typically been offset by SG&A productivity. However this year the company will increase spending to fend off competition (Coke but also smaller players). Cola is the only category Pepsi has been outspent recently, which they intend to fix to keep their market shares. The lower tax rate will instead be used to maintain earnings growth. Pepsi is maintaining its 2018 guidance.

There has been pressure for Pepsi to break its business into 2 companies: beverages and food. PEP’s CEO reiterated the importance of having both businesses together, as it is used as a bargaining tool with their customers (retailers): beverages has a high velocity in store, which is attractive to retailers (drives traffic). When warranted, beverages are sold in pair with salty snacks (salt makes you thirsty J). They also view their bottling business as a utility company that has low margins but creates lots of cash.

Pepsi remains a key holding in our consumer staples sector.

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MMM 1Q18 earnings – better than the stock reaction implies

Thesis Intact. Key Takeaways:

Yesterday MMM reported its 1Q18 results, with sales and EPS in-line, but margin missing (30bps expansion vs. 100bps expected). While EPS met consensus expectations thanks to a lower tax rate, and healthy reported sales growth of 7.7% (+2.8% organic – and all five segments in positive territory), management reduced its top end of organic sales growth guidance for 2018 to 3-4% (from 3-5%), and the top end of EPS guidance by $0.15. A guidance cut this early in the year drove the stock down on the news. In particular, its Industrials segment (1/3 of sales) fell short of expectations, with a sales deceleration to +2.2% from 5.7% last year. The auto aftermarket (auto body shops) was weak – although not new news as it was previously called out in March. But recall that IHS forecasts a return to positive global auto production for the rest of the year, which should support its auto OEM business (+3% in 1Q). Oral care saw weak demand (flat y/y), and electronics experienced a deceleration in growth.

On the positive, 3M’s pricing increase (+70bps) showed the company’s strength and sustained margins expansion, but this needs to be monitored as raw material inflation continues through 2018 and pressures margins. The management team raised its buyback target to $3-$5B from $2-$4B before. MMM remains a best-in-class industrial company, as proven by its improving ROE and consistent FCF margin (even during the last recession – see charts below).

· Valuation: we have updated our model and do not change our price target at this point.

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HLMEX – Q1 2018 Commentary

HLMEX – Q1 2018 Commentary

Harding Loevner Institutional Emerging Markets had a strong quarter outperforming its benchmark and a large majority of its peers. The strategy benefited from strong stock selection and remains cautiously optimistic about current synchronized global growth. The team continues to drive alpha through its focus on high quality growth companies.

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Crown Castle International ($CCI.US) Q1 2018: CCI exceeds high end of revenue guidance, falls short of AFFO consensus

Crown Castle International Corp. (CCI) had a strong quarter increasing yoy revenue by over 34%, exceeding the high end of guidance. AFFO per share was up 24% but fell short of broad estimates. Discussing a possible S/MTUS merger, management noted overlapping sites account for about 5% of total revenue. CCI maintains a target dividend growth rate of 7-8% annually. The company continues to work on balance sheet improvement and has reduced its leverage ratio to 5.1x. Investment has been focused on small cell and fiber where they expect long term growth trends to be in the low double digits.

Current Price: $102 TTM Return: 10.4%

Target Price: $125 Position Size: 2%

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TIPS – How they work and our thoughts

For those that have received questions about the relevance of owning TIPS during periods of increasing inflation, I have broken down how they work and why we do not own them at this time.

Conclusion: why we do not currently own TIPS

1.) We do not anticipate annual inflation above 2.14% over next ten years (breakeven at parity)

2.) TIPS performance driven by factors similar to Treasuries

3.) TIPS are an expensive insurance; drastically underperform during periods of low inflation

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J&J reported 1Q18 earnings: new product launches are driving their pharma segment growth

Thesis intact. Key takeaways:

JNJ reported 1Q18 earnings results that showed the strength and breadth of its portfolio, with good performance in Pharma (Stelara and Zytiga offsetting Remicade deceleration). However, the sales beat was driven by a greater positive FX impact than expected, rather than operational outperformance. The company-wide organic sales growth was 4.3%, a modest acceleration from +4.2% in 4Q17. JNJ’s raised its 2018 operational sales growth guidance by 50bps to 4%-5% and affirmed its EPS guidance of $8.00-$8.20. The management team intends to use the extra cash from the lower tax rate for additional R&D spending. On the call it was clarified however that the pursuit of better organic growth rate will not deter from looking for more M&A targets, as it remains core to its growth strategy. In the next 5 years, the company plans to implement various supply chain actions to reduce complexity and improve cost competitiveness, resulting in $0.06-$0.08B in annual pre-tax savings. These savings will help offset some pricing pressure or internal investments.

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FT article on effect of tariffs and global savings glut

As a guest writer for the FT, Michael Pettis argues that tariffs will reduce global growth rather than fix trade deficits.  He focuses on capital account flows rather than trade flows as the key issue in the imbalances facing the global economy.

Tariffs increase savings in a world already drowsy with too much savings _ FT Alphaville Continue reading “FT article on effect of tariffs and global savings glut”