June 2018 – Crestwood Advisors

Empirical Research’s take on trade

Empirical Research has provided some insight on potential tariff effects. Key points:

1) Manufacturing matters more to the markets than to GDP. 40% of S&P 500 earnings versus 12% of GDP.

2) Most exports to China are agricultural products and commodities, which are not as costly to source elsewhere.

3) High-tech imports from China are roughly half of all imports. A third of imports from China are consumer goods.

Portfolio Strategy – U.S. – China Trade War, Margins and Tax Havens, Restructurings – Jun 20 2018

QMNIX – Recent Underperformance, Long Term Thesis Intact

Good Afternoon,

Below I address the recent performance of Market Neutral and why we are comfortable holding this fund long term.

We still believe that owning market neutral is a strong investment over the long term. The main pillars of our thesis remain intact.

1.) Diversification Benefits: The fund’s return correlations to traditional asset classes should be very low, targeting a beta of zero over time.

2.) Alternative to Fixed Income: Based on its risk parameters and expected return profile, QMNIX should provide an alternative to core bonds.

3.) Opportunity for positive risk adjusted returns: The fund seeks long term Sharpe Ratio of approximately 0.7 – 1.0.

Continue reading “QMNIX – Recent Underperformance, Long Term Thesis Intact”

Monthly Market Monitor – June 2018

I have attached the Monthly Market Monitor put together by Eaton Vance. As always, I recommend taking a look through the full presentation if you have the time. However, I have included a few helpful charts below.

Continue reading “Monthly Market Monitor – June 2018”

Fortive to acquire JNJ’s ASP medical sterilization unit

We had been waiting for Fortive’s next deal following the divestiture of its Automation & Specialty business to Altra for $3B. It was announced last night with the acquisition of JNJ’s medical sterilization unit for $2.7B. The deal is expected to close by early 2019. The EBITDA from the new business will offset the loss from the divested Automation business. The deal will be financed by cash on hand, new debt and/or equity.

What is the JNJ’s Advanced Sterilization Products business?

· Provides innovative sterilization and disinfection solutions and low temp hydrogen peroxide sterilization technology:

o Terminal sterilization: Manufactures capital equipment as well as accompanying proprietary sterilant cassettes, biological indicators and software that sterilize critical devices including laparoscopic and robotic instruments and stainless steel instruments. Installed base of >21k units with 8-10 year life.

o High-level disinfection: Manufactures cleaners, reprocessors and biocides for semi-critical devices such as endoscopes. Installed base of >9k units with 6-8 year life cycle.

o Services: Provides maintenance and repair of sterilization solutions ensuring critical uptime for hospitals.

· Global market leader with 80% recurring revenue base (in line with FTV growth strategy), a large installed customer base and good brands

· Provides entry into the medical sterilization and disinfection market:

o Strong growth sector

o International growth

· Expected to achieve 10% ROIC in 4 years

This unit hasn’t grown in the several years, in a market that grows mid-single digit. Being part of a large corporation such as JNJ, the unit might not have been a critical business the company was focused on. With $775M in sales last year, it is in line with FTV’s business unit size in the $1B range. EBITDA margin is 25%, which should be accretive to FTV right away.

We see this deal as positive for FTV, expanding its exposure in the non-cyclical medtech sector.

$FTV.US

[tag FTV]

Julie S. Praline

Director, Equity Analyst

Direct: 617.226.0025

Fax: 617.523.8118

Crestwood Advisors

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UNP Analyst Day Takeaways

Below is the summary of the positive data points that came out of yesterday’s analyst day:

· Management initiated a 60% Operating Ratio in 2020 (they walked away from their prior 60% by 2019 last quarter)

· Cadence of share repurchase is more aggressive than previously announced: $20B through 2020, and funded mostly from free cash flow

· Lower capex results in higher free cash flow conversion

· Dividend increase (implied to go to 2.5% from 2%)

· Leverage is going up from 2x to 2.7x. Management was reassuring that this increase would be gradual, and that they would remain prudent if the macro environment turns negative.

All these positive news might seem aggressive knowing that UNP didn’t meet its latest volume and operating ratio guidance, but we would assume they learned from that mistake and provided an update on guidance they feel comfortable achieving.

Below is GS valuation analysis, which shows UNP as being cheaper than peers assuming UNP meets its guidance on volume, pricing, OR and buybacks: