Month: November 2018

Current Price: $46 Target Price: $54

Position size: 4.4% TTM Performance: 30%

Thesis intact, key takeaways:

· Cisco reported a really solid Q1 with better than expected sales and EPS and issued guidance in-line with consensus. Top line growth was ~8%. FY19 sales growth is expected to be +5-7% and GM guided better than expected.

· Impact of the 10% tariff was immaterial in the quarter. They were able to offset with pricing. Their guidance assumes some impact from the tariff escalation to a 25%.

· The transformation they laid out 3 years ago is working, driven by their transition to a software and services focused business. They accelerated revenue growth, expanded margins, generated strong operating cash flow and double-digit EPS growth.

· Growth was broad-based across all geographies, product categories, and customer segments.

· The percentage of recurring revenue is now ~1/3 – they set a goal of 37% by 2020.

· Gross margins increased by 110bps YoY mostly driven by Product gross margins, while Service margins where basically flat.

· Switching had another great quarter and routing returned to growth.

· 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 and is only sold with a subscription. The product is a key part of their strategy of shifting to recurring revenue. It involves “intent-based networking” – this automates configuration, saving labor hours. The reason it’s relevant and resonates with customers is because networks are becoming more complex. Enterprises are expanding to multi-cloud and hybrid-cloud environments with growing data traffic from a proliferation of new devices.

· They have $43B in cash. In the quarter they returned $6.5B to shareholders through dividends and buybacks.

Valuation:

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

· Forward FCF yield is over 7%, well above sector average and is supported by an increasingly stable recurring revenue business model and rising FCF margins.

· The company trades on a 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: $35 Price Target: $43

Position Size: 2% TTM Performance: -11%

Aramark missed consensus, but the stock was up on strong organic growth and solid margins. They will update 2019 guidance at their investor day in a few weeks.

Key Takeaways:

· Aramark reported 4Q18 earnings, missing on the top and bottom line, though full year adj. EPS of $2.25 was at the midpoint of their guidance.

· Despite the miss, the stock was up because the organic growth was strong and they hit their margin target. The miss was largely driven by currency and the negative impact of natural disasters – mostly wildfire related.

· Constant currency sales grew 8% in the quarter. This increase was composed of 5% from acquisitions (about three quarters of which was from AmeriPride) with the remaining 3% growth generated by their legacy business.

· Last quarter they raised organic revenue growth guidance from 3% to 3.5% and they delivered. The Q4 +3% organic growth put full yr. organic growth at 3.4%

· Heading into the 2nd half of the year, guidance was heavily back-half weighted.

· Excluding natural disasters and currency, they hit their target of 100bps operating margin improvement that they set at their investor day in 2015. They did this through reductions in food, labor and SG&A expense.

· They have their next investor day coming up on December 11. Management is not providing specific guidance until then.

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

Continue reading “Aramark 4Q18 Earnings Update”