Month: August 2018

Current Price: $46 Target Price: $54

Position size: 4.4% TTM Performance: 47%

Thesis intact, key takeaways:

· Cisco reported a really solid Q4 with better than expected sales and EPS and issued well above consensus FY19 sales growth guidance of +5-7%.

· They continue to make progress on their transformation from a hardware business to a software and services focused business. The percentage of recurring revenue is now at 32% – they set a goal of 37% by 2020.

· Campus switching strength – Infrastructure Platforms segment (58% of revenue; +7% YoY) driven solid demand for their Catalyst 9k products. Catalyst 9K was launched last year, best ramping product in the company’s history and only sold with a subscription. It’s a key part of their strategy of shifting to recurring revenue.

· Positive inflection in Service provider demand. Service provider orders (+6% YoY) grew for the first time in over 2 yrs driven by a large carrier footprint build-out in Asia as well as better trends in US cable. Management, however, continues to be cautious in forecasting this segment given the lumpy nature of the service provider business.

· Similar to last quarter, gross margins were a disappointment. Last quarter gross margin compression was driven almost entirely by higher memory costs. This quarter memory cost issues persist and also higher growth in Asia came at the expense of lower margins. Mix shift towards servers was also a drag. Margins should move higher over time driven by higher subscription software sales.

· Cisco is another company well positioned to benefit from the increasing adoption of hybrid cloud (along w/ MSFT): Their customers are undergoing a fundamental shift in their technology infrastructure. Historically, large enterprises have run applications in their private data centers. Now they still have applications running in private data centers, but also are consuming SaaS applications and services from public cloud providers. This is essentially what hybrid cloud is. A mix of on-premise and off-premise. Large companies with large expensive data centers, sensitive data, and lots of sunk technology costs are taking a slower, staged approach to moving to the cloud. With it their networks and how their traffic is flowing and how it is secured has fundamentally changed – data is destined for 50 locations instead of just a private data center. Networks are proliferating and the coming internet of things (IoT) and 5G will drive even more proliferation. So, companies are having to rethink their entire IT infrastructure and Cisco is at the center of this transition, which is leading to the success they are seeing.

· Recently announced Duo Security acquisition is an example of how they are helping customers navigate a hybrid cloud world. Duo has SaaS-delivered authentication and access solutions that will expand Cisco’s cloud security capabilities to help enable any user on any device securely connect to any application on any network.

· “Other products” (~2% of revenue; -18% YoY) continues to be a slight drag on growth. They plan to divest a portion of this – Service Provider Video.

· Returned $23.6B to shareholders over the full year, representing 184% of FCF (>FCF b/c of repatriation). That was made up of $17.7B of share repurchases and $6B dividend.

Valuation:

· They have close to 3% dividend yield which is easily covered by their FCF.

· FCF yield of over 6.5% is well above sector average and is supported by an increasingly stable recurring revenue business model and rising FCF margins.

· The company trades on hardware multiple, but the multiple should expand as they keep evolving to a software, recurring revenue model. Hardware trades on a lower multiple because it is lower margin, more cyclical and more capital intensive.

Thesis on Cisco

· Industry leader in strong secular growth markets: video usage, virtualization and internet traffic.

· Significant net cash position and strong cash generation provide substantial resources for CSCO to develop and/or acquire new technology in high-growth markets and also return capital to shareholders.

· Cisco has taken significant steps to restructure the business which has helped reaccelerate growth and stabilize margins.

$CSCO.US

[tag CSCO]

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

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We moved! Please note our new location above!

Current Price: $39.50 Price Target: $43

Position Size: 2% TTM Performance: <1%

· Aramark reported 3Q18 earnings, beating on the top and bottom line, maintaining full year EPS guidance of $2.20-$2.30.

· Revenue was up 9% constant currency with about 4% organic growth. That organic growth was a nice acceleration from 2% last quarter.

· Raised organic revenue growth guidance from 3% to 3.5%.

· This report was a big relief (sending the stock up over 8%) because they are finally delivering solid organic growth and look to hit the adj. margin targets they’ve been promising. This was especially important because heading into the quarter guidance was heavily back-half weighted. They should hit their full yr margin target of 7.2% that was set in their analyst day in 2015. Given first half results, investors were skeptical of their ability to achieve this.

· A couple of announcements on the innovation front:

o On the food service side, they announced a strategic partnership with a local company, Oath Pizza (started on Nantucket).

o On the uniform side, they announced this quarter the launch of a new “athleisure” premium performance uniform line called FlexFit.

· Retention rate remains strong in mid-90’s.

· Adj. operating margins expanded 60bps on productivity improvements and lower overhead. Top line growth combined with margin expansion led to op. income up an impressive 20% on a constant currency basis. The adjustments however are a little questionable and a good reason to look at this stock on a cash flow basis. Essentially, they capitalize some important revenue generating expenses that they are trying to get you to altogether exclude by adding back their depreciation to arrive at adj op income.

· They are closing the margin gap with industry leader, Compass Group and have now strung together two consecutive quarters of improvement in adjusted operating margins in conjunction with top line growth. The two together had been elusive for a while. In 2017, they disappointed with organic growth, but saw margin expansion. Then in Q1 they saw meaningfully improved top line growth at the expense of 50bps in margin contraction.

· Longer term, their acquisitions will help with margins through increased purchasing scale with Avendra and better capacity utilization and route density with AmeriPride.

· Inflation: they saw an uptick in labor inflation but feel comfortable with their ability to deal with this based on pricing power as well as investment to improve productivity. E.g. investing in consumer-facing technologies, self-help kiosks

Continue reading “Aramark 3Q18 Earnings Update”

Current Price: $1,896 Price Target: $2,400

Position Size: 3% TTM Performance: 18%

· Revenue (+20%) and EPS (+36%) were better than expected, but guidance was a disappointment. Gross bookings were basically in line with consensus at $23.9B, up 15% (11% constant currency).

· They saw EBITDA margin expansion this quarter, but guided to weaker than expected margins next quarter.

· Though they do have a track record of guiding conservatively (see below), their expected deceleration in gross bookings to 5% to 8% constant currency growth is meaningful.

· In general, these results are very similar to last quarter as they continue to prioritize profit over growth. Part of the disappointment is that weak room growth is happening while the global travel market is extremely healthy. Though, this disruption to room night growth is somewhat self-inflicted.

· Room night growth slowing due to reduced ad spend:

o Current quarter was good, but they guided to a slowdown in Q3. Room growth for Q2 was +12% ahead of the high end of their +7-11% guidance. Guidance for next quarter is 6-9% (consensus +13%). They blamed the deceleration on the World Cup and weather (heatwave) in Europe.

o Ad spend has been part of their engine of growth and their ability to spend at scale has enabled their success. They have been trying to dial this back for several quarters.

· They want people to go directly to them to book in the same way they go directly to Amazon to buy something. This means less performance ad spend and more general brand advertising like TV. They are seeing an increase in direct booking as a result.

· On the call they said “I think we are in a fairly good position in terms of our optimization right now in terms of the balance between growth and profitability but there are always areas where we’re experimenting constantly in these channels”

· If they succeed in making the shift to higher ROI brand ad spend and continue to increase direct traffic as a % of the mix that should help margins long-term. But if this experiment doesn’t start paying off, I expect they re-adjust ad spending. Whether or not they need to back track on this calculated bet, the long-term thesis is still intact.

· They continue to work on a local experience product through both organic investment and acquisitions.

Continue reading “Booking Holdings 2Q Earnings Update”

The stock is up today after releasing good earnings with EPS of $1.69 vs consensus $1.61, and thanks to disclosing more information around their PBM business. Their 3Q18 EPS guidance is below consensus, but the focus is on the Aetna transaction closing in the coming 2-3 months. The Aetna deal is expected to close in Q3 or early Q4, pointing to higher confidence the deal will go through. A “substantial” number of states have approved the deal. MinuteClinic is introducing video visits through the CVS Pharmacy app 24 hours/day, leveraging Teledoc’s technology platform.

Continue reading “CVS 2Q18 earnings results”