By the Numbers – Returns after mid-year election & Aging population

Good Morning,

Attached is the most recent “By the Numbers” piece put together by MFS. The two facts that I highlight today discuss market returns following midterm elections and how many Baby Boomers are reaching retirement age.

“The S&P 500 stock index has gained an average of +15.3% in the 1-year following the last 17 midterm elections, i.e., change of the index’s value not counting reinvested dividends for the 1-year period following the midterm elections from 1950 through 2014. Each one of the 17 “1-year periods,” i.e., 100% of them, resulted in a stock market gain for the S&P 500” (source: BTN Research).

“An estimated 10,400 Americans will turn 65 years old each day next year (2019). This group represents the 9th year of 19 years of “Baby Boomers” turning age 65. An estimated 11,500 Americans will turn 65 years old each day in the year 2029” (source: Government Accountability Office).

The point about post mid-term election returns is not that we should expect this trend to continue in 2019. Instead, I would reiterate to clients that the results of the elections and possible “changing of the guard” in Washington is difficult to predict. More importantly, the forward looking return expectations are extremely difficult to predict and are generally driven by various factors outside of politics.

The fact about Baby Boomers emphasizes how many individuals are reaching retirement age on a daily basis. While this does not necessarily mean that everybody will be retiring at exactly age 65, it paints a picture of just how many individuals need to be prepared for life without recurring income.

Thanks,

Pete

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

btn111218.pdf

AAPL Update

Apple is down today because one of their suppliers, Lumentum (LITE), just cut guidance for next quarter raising concerns that iPhone sales next quarter will disappoint. Lumentum reported earnings results a couple weeks ago, but put out a press release today saying “we recently received a request from one of our largest Industrial and Consumer customers for laser diodes for 3D sensing to materially reduce shipments to them during our fiscal second quarter for previously placed orders that were originally scheduled for delivery during the quarter." Apple, which is 30% of their revenue, buys components related to face ID from them. LITE cut their revenue outlook by 17%.

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

Cost of production of renewable electricity falls below that of coal

Good news for environmental fans!  The economics of renewable power generation are more attractive than those for burning coal even without considering externalities – the cost of pollution and CO2.  In 2017, Coal was used for 29% of energy production, so lots of room to build out renewables.

Expect utilities to struggle with assets of that burn coal as they become less competitive.

FT article on generation costs of renewables less than coal 110918

Thanks,

John

Booking Holdings 3Q Earnings Update

Current Price: $2,007 Price Target: $2,400

Position Size: 2.5% TTM Performance: 20%

· Key Takeaways:

1. Beat on revenue, missed on EPS. Miss driven largely by higher ad spend.

2. Strong Q3 room night growth of 13%, well ahead of guidance.

3. Strong Q4 guidance for room nights, revenue and EPS.

4. Increased ad spend helped re-accelerate growth.

· Bookings of $24.3B were better than expected (+14% constant currency) and an acceleration from last quarter. This is important as bookings guidance was a disappointment last quarter. Management blamed weak trends on the World Cup and unseasonably warm weather in Europe. They saw an acceleration after they reported 2Q results.

· Part of the disappointment last quarter was weak room growth that was somewhat self-inflicted. Room night growth slowed previously due to reduced programmatic ad spend….and maybe some weather like they said. They’ve since increased ad spend (which contributed to the EPS miss). Ad spend has been part of their engine of growth and their ability to spend at scale has enabled their success. They spend back more than a third of their revenue on advertising. That’s over $4B. Expedia does the same thing. They have been trying to “optimize” this for several quarters by spending less on performance advertising (e.g. Google AdWords) and more on brand advertising (e.g. TV commercials). The idea is that brand advertising drives direct traffic to their site, resulting in a higher ROI. This ad spend/rev growth algorithm will continue to be a focus going forward as clearly the relationship between growth and spend persists and their ability to shift to “higher ROI” ad spend still isn’t clear.

· The good news is direct channel mix did increase (now ~50% of booked room nights). Probably not a coincidence that they now say over 50% of their bookings come from mobile devices, as mobile traffic is more likely to be direct (via app).

· Merchant revenues are growing faster than agency revenues. With merchant revs they get paid up front for the full cost of travel and hold onto the cash until remitted to the hotel/home owner (less their fee) at the travel date. Revenues from their growing home rentals business (competes w/ Airbnb) are primarily driving this as they’re booked as merchant revs. This dynamic drives a growing negative cash cycle which benefits their FCF. So, as this business grows this will be a tailwind to FCF.

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

Continue reading “Booking Holdings 3Q Earnings Update”

2018 Cap Gains Estimates

Good Afternoon,

Attached are the cap gains estimates for year end 2018. So far, the only funds that will be paying out cap gains are HILIX and BEXIX. Below shows the breakdown of short term and long term cap gain estimates based on a portfolio with $1 Million in assets in the growth model. The output assumes the highest tax bracket for both short and long term capital gains.

Ticker Name Capital Gains
Estimate Date3
Short-term
Capital
Gains as %
of NAV4
Long-term
Capital Gains as % of
NAV5
Total Capital
Gains as % of
NAV6
Tax Cost as % of NAV7 Position Size ($)8 Position Tax Cost ($)9 Sell by10
HILIX Hartford International Value I 19-Sep-18 0.89% 3.30% 4.19% 1.15% 55,000 631.69 14-Dec-18
BEXIX Baron Emerging Markets Institutional 30-Sep-18 0.00% 0.10% 0.10% 0.02% 20,000 4.76 27-Nov-18

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Cap Gains Estimates 2018.xlsx

Cannabis Investment Piece

Good Morning – below (and attached) is a discussion about ways to invest in cannabis. Many people have already seen this but I have updated the total return charts. Broadly, we are not making any proactive recommendations on investing in this area as the asset class is very new, extremely speculative, and, for many clients can be controversial.

There is only one mutual fund investment currently available, and the product is extremely expensive and poorly diversified. There are also two different ETF options available to U.S. based investors that would be suitable investments for somebody looking to get exposure to the cannabis industry. I have also included the names of two ETFs that are available for Canadian investors. Another option would be to invest in a small basket of individual stocks, with an emphasis on the largest market cap names in the industry.

Continue reading “Cannabis Investment Piece”

CVS 3Q18 earnings: good core business results and better synergies with Aetna ahead

Key Takeaways:

Current Price: $77.77 Price Target: $90

Position Size: 2.25% 1-Year Performance: +10.3%

The stock is up today after releasing good Q3 earnings results, and positive comments regarding their Aetna acquisition. Total sales were up +2.4%, and EPS +15.5% (mostly on lower tax). CVS’s PBM retention rate for next year remains high at 98% (previous number was ~95%), showing that the AET deal is not disrupting their PBM business at this point. 2018 guidance on CVS’s core business was reiterated, but 4Q results should be diluted by the AET deal costs. The Aetna transaction should close before Thanksgiving, and CVS’s management team seems incrementally more positive on the level of expected synergies (now to exceed $750M). Synergies will come from reduction in corporate expenses, integration of operations and medical costs reduction (integration of pharmacy and medical claims, leveraging the clinical data and utilizing CVS’s community assets: points of distribution and health professionals). The overall goal will be to reduce expensive hospital admissions and provide better management to the complex chronic disease cases. CVS will provide clearer details on the combined entity’s earnings guidance in February 2019. The Analyst day will also move to June (from December). Overall we remain positive on the name.

Continue reading “CVS 3Q18 earnings: good core business results and better synergies with Aetna ahead”

XOM 3Q18 earnings: clear improvement from last quarter

Key Takeaways:

Current Price: $81.86 Price Target: $86

Position Size: 1.83% 1-year Performance: -1.6%

Exxon reported 3Q18 results, with a clear production improvement from last quarter. Its Refining activity outperformed thanks to improved utilization, better reliability and lower maintenance activities (although the later should pick up in 4Q18). XOM continues to see organic growth opportunity in its portfolio. The management team continues to see its dividend as the key method to return capital to shareholders, rather than share buybacks. On the ESG front, XOM is facing some prominent lawsuits regarding climate change costs and how the company might have misled investors. The financial risks of those lawsuits should be minimal to XOM’s operations. The bigger impact on the company’s operations would however be the reclassification of oil & gas waste from solid to hazardous materials, which would add disposal costs to the entire industry. The EPA decision should come in March. No change to our price target or position size.

Continue reading “XOM 3Q18 earnings: clear improvement from last quarter”

Apple Q418 Earnings Results

Apple reported good numbers for Q4, but disappointed on guidance and indicated they would stop reporting unit numbers. As consolation for the reduced disclosure, they are going to start reporting gross margins on Products and Services separately. They beat on top and bottom line and units were basically in-line with expectations. Revenues were $63B, up 20% and EPS was $2.91 (vs street $2.78), +41% YoY. All regions posted double digit growth.

Key Takeaways:

· The selloff today is because of guidance and the reduced/changed disclosure. Q1 (calendar Q4) is their seasonally biggest quarter and typically accounts for 35-36% of annual revenues.

o Weak guidance: Street is at the high end of 1Q19 revenue guidance. Guidance blamed on Fx ($2B headwind) and “macroeconomic uncertainty particularly in emerging markets.” Gross margin guidance was also weaker. The midpoint of rev and GM guidance would put 1Q19 gross profit about $1B shy of expectations.Weaker guidance may be conservative given growing mix of services and falling NAND (memory) prices.

o No more unit numbers: This is a little disappointing, especially given slowing global smartphone unit sales. Whenever a company reduces disclosures it’s viewed as a bad thing. Apple has historically reported units for iPhone, iPad and Mac. This also allows for ASP calculation. So going forward we’ll have neither of those.

o Gross Margin disclosure – this could be a silver lining to their disclosure changes if Services are more profitable than expected. This is especially true given Services are expected to be the new leg of growth.

· Weak iPad numbers, but they gained share. Also, not surprising given pending new product launches.

· Apple’s iPhone pricing power is strong with an average selling price (ASP) of $793 (much better than expected). That’s a 28% increase YoY and 10% increase sequentially. This is key as units were only up 0.5% for the year. So, iPhone revenues, which were up 18% for FY18, were basically driven entirely by higher ASPs. iPhones are about 63% of total revenues.

· Apple is taking share in smartphone units – 2018 should be the 2nd year in a row of global unit declines in smartphones. Calendar YTD Apple iPhone units are up 1.4%.

o In Q3 smartphone vendors shipped 355.2m smartphones, down 6% from the 377.8m units in Q3 2017.

o Apple gained 80bps of share, Samsung lost 180bps and Huawei gained 420bps.

o Huawei overtook Apple as #2 for Q3. However, Apple typically wins calendar Q4, while Samsung typically dominates the first three quarters of the year (but they’ve been ceding share to Huawei this year).

Valuation:

  • Strong balance sheet and FCF generation continue. $123B in net cash. 2018 FCF was $64B.
  • The stock is undervalued and the substantial buyback will support valuation. Trading at close to a 1.4% dividend yield, a 6.6% FCF yield and a 15.3x P/E.
  • Returned almost $90 billion to investors during the year, including $73B in share repurchases and $14B in dividends.

The Thesis for Apple:

  • One of the world’s strongest consumer brands and best innovators whose product demand

has proven recession resistant.

  • Halo effect -> multiplication of revenue streams: AAPL products act as revenue drivers

throughout portfolio – iPhone, iPod, MacBooks, iPad > iTunes, Apps, Software, Accessories,

  • Mac gaining share in PC market and iPhone robust global demand driven by China/EM.
  • Strong Balance and cash flow generation.
  • Increasing returns to shareholders via dividends and buybacks.

$AAPL.US

[tag AAPL]

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

EOG 3Q18 earnings results: stock weak on recent higher capex levels and lower production near term but long term thesis intact

Key Takeaways:

Current Price: $102 Price Target: $136

EOG reported better well productivity that led to oil and total production levels above expectations. Following 3Q results, the company is lifting its 2018 oil volume guidance by 1%, although total production remains below consensus (lower natural gas production). On the negative side this quarter, the 3Q18 oil production increase came with an increase in capex (and a 2018 capex guidance increase of 4%). We believe the stock is weak today as the management team is expecting slower growth in 4Q18 and 1Q19, since it plans on slowing down drilling activity. On the positive side, EOG maintained its 5% well costs reduction target in 2018 and even further reduction in 2019. FCF should also inflect positively in the coming year as capex shouldn’t increase as it did in 3Q, and capital efficiency should rise. We are not changing our price target or position size.

Continue reading “EOG 3Q18 earnings results: stock weak on recent higher capex levels and lower production near term but long term thesis intact”