Month: July 2018

They missed slightly on top line, beat on EBITDA and EPS and reiterated full year guidance. The street is at the high end of their guidance for the year. Revenues were up 5% – a consistent pace with last quarter. Data analytics segment (~15% of revenue) revenues declined 4% as they lapped some upfront revenues from long-term strategic license deals. Growth going forward in this segment should be ~3-5%. Software Solutions segment revenues were up 7% as servicing grew 7% and originations grew 5%. This segment is 85% of revenue and is comprised primarily of servicing revenue (75% of total revs) which is steadier than their originations revenue (10% of total revs). On the servicing side, they continue to dominate first lien loans with 62% share and are growing share in second lien loans. At the end of 2017 they had 13% share of second lien, they now stand at 17% share and expect to reach 30% once current commitments are implemented. Originations continue to be negatively impacted by rising rates, but the drag from lower refinancing activity is diminishing as it’s a shrinking portion of segment revenue.

Key Takeaways:

· Guidance seems conservative given they expect an acceleration in revenue growth through the rest of the year that would come at high incremental margins.

· Returned to growth in the Origination business after a stretch of declines driven by lower refinancing activity.

· Better EBITDA margins driven by higher mix of Software Solutions segment revenues and better margins in that segment.

· In June they acquired an AI company called HeavyWater to gain AI capabilities. Their “AIVA” AI technology will help lenders and servicers complete manual, repetitive tasks more efficiently. It can be used to automate tasks like verifying income and assets in the loan origination process, replacing hours of work per loan and improving the quality of the process.

· They are not expecting revenue from HeavyWater in ’18, but expect there to be a $2m headwind to adj. EBITDA in the second half, spread equally between Q3 and Q4.

· New products:

o Service Digital – customer facing mobile tool that enables mortgage payment, scenario analysis on refinancing etc. Banks can use to help in customer retention and cross-selling. Will help BKI grow rev per loan.

o Actionable Intelligence Platform – analytics platform launching in August. Will also help BKI grow rev per loan.

Continue reading “Black Knight 2Q18 Earnings”

Key Takeaways:

Sanofi reported in-line revenue and a slight beat on EPS. Sales were +0.1% y/y, due to lower Vaccines sales. EPS grew +1.5% (ex-FX). The company raised the lower end of its 2018 EPS guidance from 2-5% growth to 3-5% (ex-FX impact of -6%). R&D expenses increased 13% (ex FX) due to the acquisition of Bioverativ and Ablynx, and investments in immuno-oncology and diabetes. 2H18 should have a better growth profile, however 2018 is not a very exciting growth year for Sanofi. On the bright side, we are pleased to see good growth in its consumer healthcare business, as many peers have been struggling there. We are maintaining our price target.

Continue reading “Sanofi (SNY) 2Q18 earnings recap”

Key Takeaways:

Exxon reported disappointing 2Q18 results, with lower production than expected due to heavy maintenance activity, leading to an earnings and cash flow miss. During 1Q18, the company had called for 2Q18 to show lower production rate, however expectations were for a higher number. This quarter, the management team sees 2Q18 to be the bottom in Downstream production, while Upstream should see a gradual improvement (thanks to maintenance recovery and Permian growth). Permian and Bakken production were up 30% y/y (and 45% sequentially). FY18 production guidance is now -4.5% (prior guidance was for production to be flat) on asset sales impact, maintenance outages and reduction of lower value exposure (US gas). On the positive side, XOM guided to production growth in 3Q and 4Q. We remain cautious however on how transparent this management team wants to be, as their positive outlook for downstream during their latest Analyst Day never mentioned the heavy maintenance activity that was scheduled for this past quarter. During the call, the analyst community requested to the company to provide more transparency on scheduled maintenance projects, so that production forecasts can include those outages. We maintain our $86 price target after review of our model.

Continue reading “Exxon (XOM) 2Q18 earnings recap: lack of management team transparency leads to production “miss””

Current Price: $142 Price Target: Raising to $160 from $135

Position Size: 3.3% TTM Performance: 41%

· Reported better than expected quarter and raised EPS guidance. Full year EPS growth expected up low 30% vs prior up high 20%.

· Visa Europe accretion quicker than expected. They expect double-digit accretion this year which is two years ahead of plan.

· Broad based growth in global purchase volume, +11%.

· Client incentives lower as a % of revenue, reversing longstanding upward trend.

· Stronger dollar caused slight deceleration in cross border volumes (+10%). Highlights the impact on their business to a strengthening dollar –i.e. not just translation but also transactions.

· B2B initiatives progressing – 11% of volume now, growing at a faster rate than the overall business. Retail payment market is $45 trillion; B2B market is $120 trillion.

o Blockchain and “B2B Connect”: Processing speeds make blockchain impractical for low-value high-volume transactions (most of their existing business), but it is applicable for high-value, low-volume cross-border B2B transactions. These transactions are “one of the largest single pain points in B2B payments today” – Visa is piloting a blockchain based technology to address this called “B2B Connect.”

Visa reported very strong 3Q18 results and raised guidance. Beat driven by higher data processing revs and lower client incentives. Net revenues were up 15% and full year revenue growth guidance maintained at up low-double-digits. Guidance includes lower incentive outlook and lower projected tax rate of 20.5% – 21.5% (from 21-22%). In a reversal of last quarter trends, they saw weakness in cross-border volume driven by a stronger dollar. Because so much of Visa’s revenues (almost 28%) are generated from cross-border (spending in a country different than the card’s origin) their business is susceptible to currency fluctuations. Constant currency payment volumes were up 11% and processed transactions were up +12%. The integration of Visa Europe is progressing ahead of expectations and nicely accretive to margins. Cards outstanding grew 4% (to 3.3B), with 4% growth in credit cards and 4% growth in debit cards.

Visa is continuing to develop new avenues for growth as the payments industry changes. Contactless payment penetration continues to rise globally (e.g. FitBit and Garmin embedding Visa tokens in devices). They are positioning themselves to grow in the evolving P2P and B2B markets. For example, in March they acquired Fraedom to help expand their B2B business. This expands their addressable market from the $45 trillion retail payment market to the $120 trillion B2B market and the $60 trillion P2P market. Visa is also in the early stages of standardizing their digital checkout with the “Common Button” – an association with Amex and MasterCard to offer a common user interface for digital payments. The platform will create a single button checkout across sites and devices, eliminating the friction of online checkout across various sites.

Continue reading “Visa 3Q18 Earnings Update”

Key Takeaways:

Fortive released good 2Q18 earnings, showing an acceleration in its organic growth rate into the high single digits (+5.3%), acquisitions added +7% to growth and FX +1.6%. While gross margin expanded 120bps, SG&A expenses impacted operation margin by 210bps (mostly from new companies having lower margins with a total impact of -70bps, and transaction costs lowering margins by another 60bps). Fortive’s core margin (removing the impact of M&A) expanded by 50bps, a good sign of the business’s strength. EPS grew 28% y/y. However, its 3Q18 guidance is below expectations (tariffs impact) and explains today’s stock weakness.

· 2Q18 comments showing the strength of the business: 5 out of the 6 platforms had positive pricing and core margin gains.

· Updated 2018 guidance: organic growth rate increase by 100bps (now 4-5%). As a result, core margins expected to gain 75bps (50bps prior guidance). EPS guidance raised as well on the lower end ($3.42 from $3.40). The updated guidance includes the $0.08/share impact from its mandatory convertible preferred stock offering, which should be offset by the strong operational improvements.

· Tariffs: $0.06/share negative impact in 2H18. This is higher than previously expected by management, but it should be offset. Tariffs explains the weaker margin outlook for 3Q18. Mitigation of tariffs will come from pricing (40%) and operational actions (60%) such as alternative sourcing, moving regional production and supply chain actions. So far they have seen no impact on the demand side. 2 sets of tariffs impacts them: steel (use for making the tool boxes for example) & electronics.

· M&A: the acquisitions from last year are finally lapping, and will be included in Fortive’s core organic growth, which should boost the growth profile of the firm by 20bps. M&A pace: CEO doesn’t think there is limitations right now. FTV always build capacity for deals from a talent perspective: they funnel talent to take on new opportunities. They have the people and financial capacity to bring on more businesses on board.

· ESG: CEO James Lico started his opening remarks on the call by mentioning the publication of their first CSR (Corporate Social Responsibility) report.

After review of our model, we are raising our price target to $87.

FTV Thesis:

– Market leader:

· Leadership position in most of the markets they serve

· Experienced leadership team

· Above industry margins with strong cash flows

– Quality:

· FCF yield ~5%

· Organic growth target of 3-3.5% (4-5% in last 2 quarters after being under the target in prior quarters)

· M&A strategy to enhance top line growth

· Margins expansion from new products introduction, continued application of the Fortive Business Systems and M&A integration

– Shareholder friendly:

· Management team focused on shareholder wealth creation through top line sustainability and margin expansion

$FTV.US

[tag FTV]

Julie S. Praline

Director, Equity Analyst

Direct: 617.226.0025

Fax: 617.523.8118

Crestwood Advisors

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www.crestwoodadvisors.com

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Current Price: $432 Price Target: $480

Position Size: 2% TTM Performance: 25%

· Sherwin reported better than expected revenue and EPS for 2Q and guidance for the year was raised, aided by a lower tax rate. FY18 EPS for core business expected to increase 24% at the midpoint.

· Margins impacted by raw material costs (mainly propylene) that are trending slightly higher than the 5-6% that was expected.

· Volumes were strong across segments – they are taking share. Competitor PPG reported earnings recently and is losing share in architectural paint to SHW particularly at Lowe’s.

· Commentary around demand trends improved sequentially – last quarter they talked about a “slow start to the painting season in North America” and “choppy global economic growth.” This quarter they saw positive demand trends that were “broad-based across most businesses and geographies.”

· Housing turnover is low, but rising demand and low inventory have led to higher home prices which helps demand.

Pro forma sales (adj. for Valspar acquisition) were up 7.5%. Despite higher than expected raw material costs (mainly propylene), guidance for the year was raised though largely driven by a lower tax rate, but does assume some sequential gross margin improvement. Excluding all the moving parts with Valspar, YoY 2018 EPS of the core business at the mid-point is expected to be up 27% vs previous guidance of up 24%. Gross margins are improving as price increases are catching up with input cost increases. Raw material costs inflation was slightly higher than the 5-6% they were expecting and will remain higher than they previously anticipated. As seems to be a recurring theme across sectors in earnings so far, they are seeing strong demand but higher input costs. The Americas Group segment (60% of rev and includes no Valspar) sales were +7.7% driven by +6.8% SSS (4.3% volume; 2.5% price/mix) – this is an acceleration from +5.2% last quarter. Trends improved as the quarter progressed and the weather improved. They are seeing stronger demand in their chain of paint stores from contractors than DIY customers. Consumer Brands Group (15% of rev) sales were +1.5% (new rev recognition accounting, ASC 606, reduced this by 5pts) and Performance Coatings Group (25% of rev) sales were +11%. Q3 will be the first quarter that they fully lap Valspar, so pro-forma estimates will stop obscuring comparability starting next quarter. In general, the integration seems to be on or ahead of schedule, at least in the sense of recognizing synergies.

Continue reading “Sherwin Williams 2Q18 Earnings”

Key takeaways:

Yesterday LMT released strong 2Q18 earnings with sales +6.6%, operating margin +20bps, and EPS +31.5%. The sales beat came from more wins and faster conversion rate of orders into revenue. It is important to note that this is not a pull forward of orders from 2H into 1H, but rather driven by better business fundamentals. We are maintaining our favorable view on the stock.

Important points following the conference call were:

· LMT’s prior 2018 guidance was increased:

o The sales forecast raised by 2.5%: this is pretty significant compared to prior raises, and is broad based across the portfolio, thanks to strong new wins. Some orders came ahead of planning thanks to earlier than planned Department of Defense awards. The management team sees this strong growth as sustainable beyond 2019.

o EBIT margin forecast increased by 5%. Profitability should further improve as the F-35 ramps up (see margin progression in chart below). The production of the F-35 is expected to double from 2017-2019, and represents close to 30% of sales (of which 30% comes from foreign demand).

o EPS forecast raised by 6%, primarily due to better operational performance, and secondly due to more favorable tax rate.

o Cash from operations increased to $3.3B from $3B.

· The management team hinted at revenue toward the high end of its 3-5% growth target beyond 2018 (more to come in October during 3Q18 earnings).

· Free cash flow was negative this quarter, as another $2B were allocated to its pension plan ($1.5B additional will be added in Q3). As a reminder this is related to the tax law changes. 4Q18 will show significant FCF improvement.

Continue reading “Lockheed Martin (LMT) 2Q18 earnings: good quarter leading to increased 2018 guidance”