Month: February 2019

Current Price: $1,737 Price Target: $2,400

Position Size: 2.6% TTM Performance: -6%

Key Takeaways:

· Slight miss on revenue, beat on EPS. While revenue was below consensus, it was ahead of the high-end of their guidance.

· Weak guidance: disappointing Q1 guidance driven by a weakening European market (the vast majority of their revenue) and higher ad spend.

· They have a track record of conservative guidance – they almost always come in ahead of the high end of their bookings guidance on a constant currency basis.

· Europe softening – they witnessed a slow start to the year, primarily in their core European markets, which they believe is largely due to overall macroeconomic factors. Average daily rates were a little weaker than expected and they guided to a meaningful deceleration in room night growth.

· FX headwind is expected to be significant this year. Current rates assumed in guidance reduces gross booking growth, revenue growth and non-GAAP EPS growth by 250 bps for the full year and 500 bps for the first half.

· Investing for growth: this will compress Q1 margins by ~350bps and reduce their full year EBITDA growth by a few percentage points. This reflects increased spend on brand advertising, customer acquisition and incentive programs and spending to support their new payment platform. They are investing in a payment platform that supports non-hotel properties, and will facilitate growth in transport and local attractions business.

· 171 million worldwide room nights booked in Q4, up 13% YoY and ahead of the high-end of guidance.

· Gross bookings of $19.6B were a little lower than expected (+13% constant currency) a slight deceleration from +14% last quarter.

· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. For the first time they disclosed revenue for this business – it now makes up 20% of revenue. They also said 40% of Booking’s active customers booked an alternative accommodation property at some point during the past 12 months.

· Growth vs. margins: They have been trying to “optimize” ad spend 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 trade-off between growth and spend persist.

· Direct channel mix increased again (“well over 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).

Continue reading “Booking Holdings 4Q Earnings Update”

Current Price: $50 Price Target: $60 (updated for the stock split)

Position Size: 3.6% TTM Performance: 29%

TJX reported Q4 EPS that was in-line with the street and much better than expected SSS (+6% vs consensus +3.5% (guidance was 2-3%). Guidance was a little below expectations due to higher wage and freight costs and currency headwinds. For Q1 wage and freight will be a 7% drag on earnings, for the full year these are expected to be a 4% drag. It’s been a very mixed quarter of results for retailers so far. WMT, COST, TGT and now TJX have all stood out with strong results while others reported a poor holiday season, particularly department stores. TJX, along with other off-price retailers, captured market share in the US. TJX’s sales have doubled over the last 10 years despite a changing retail environment.

Key takeaways:

· TJS Q4 SSS were an impressive +6%. Traffic was again the biggest driver (SSS numbers do not include e-commerce).

· Performance was solid across all divisions and geographic regions.

· Core Marmaxx division (60% of revenue) delivered SSS growth of 7%.

· For the full year, HomeGoods was their fastest growing division with 10% square footage growth and 4% SSS.

· The margin pressure they are expecting from freight and wage increases is a continuation of trends they saw last year.

· Q4 gross margins were flat and inventories grew less than sales. For fiscal 2019 merchandise margin was essentially flat despite a significant increase in freight costs. Ex-freight, merchandise margins improved significantly.

· Optimistic comp guidance: Fiscal 2020 EPS outlook is based on SSS growth of 2%-3% (3%-4% at Marmaxx). This is notably positive because for at least the last 6 years, they have started the year with comp guidance of 1-2% and have ratcheted up that guidance as the year progresses.

· Announced they are launching e-commerce for Marshall’s later this year.

· Tariffs: when asked on the call about the impact of tariffs on product availability, mgmt. said longer term it’s probably going to be a benefit for them because any chaotic change in the way vendors manage or allocate product will ultimately benefit them.

· Continue to take share in Europe: In Europe comp sales grew 3% despite the challenging retail landscape. They have over 500 stores in Europe- in mainland Europe, they are in only 4 markets: Austria, Germany, Poland and the Netherlands. They also have stores in the UK

Continue reading “TJX 4Q19 Earnings Update”

Key Takeaways:

Current Price: $96.7 Price Target: $136

Position Size: 1.94% 1-year Performance: -12%

EOG reported 4Q18 EPS and EBITDA below consensus: while the US oil production beat expectations, EOG had higher unit costs and lower natural gas production. Capex was higher as well due to more efficient drilling that led to more wells being completed. Importantly, in 2H18 EOG showed improvement in its Permian performance (big driver to its growth), alleviating some concerns around this region that lingered in 1H18. The company’s premium drilling strategy started in 2015 is paying off: ROCE was 15% in 2018, way above its 10% target.

It appears that capex will be more front-end loaded in 2019, but the management team reaffirmed being committed to its capital budget (reassuring!). 2019 guidance for oil production was below consensus but that includes the international asset sales. Adjusting for the sale, the miss is only ~2%. The management team seemed confident to meet its 2019 goals thanks to good operating momentum and efficiency gains. Continue reading “EOG 4Q18 earnings results”

Key Takeaways:

Current Price: $64.88 Price Target: $90

Position Size: 2.11% 1-year Performance: -1%

While CVS reported 4Q18 earnings that beat market expectations, its continued struggle within its long-term care business and lower than expected 2019 guidance is pressuring the stock today. The bright spot was the continued growth in filled prescriptions (+7.4% pharma same-store-sales), proving that the online threat is not impacting store sales. Retail/Long-Term Care (LTC) operating margin was down 130bps in the quarter on greater investments in the business and the LTC weakness. [more]

PBM claims were up +5.7%, and although purchasing economics improved, pricing pressure continued. The client retention rate remains high at 98% but excludes the Centene upcoming loss. The MinuteClinic sales grew +9.8% y/y, a good testament of the value of this service within the stores.

This was the company’s first quarter including Aetna. CVS created a new health-care-benefits segment equivalent to the former Aetna health-care segment, which includes insured and self-insured medical, pharmacy, dental and behavioral health products and services.

There are a few negative points to highlight:

· The 2015 Omnicare acquisition (long-term care business) was the biggest deal CVS did until the Aetna merger. Years later CVS hasn’t been able to fix this business, triggering some questioning regarding CVS’s ability to integrate successfully another unit. Instead of being the growth driver its was advertised to be in 2015, Omnicare is facing industry challenges such as nursing homes bankruptcy, declining occupancy rates and payment pressures. “The LTC business has continued to experience industrywide challenges that have impacted our ability to grow the business at the rate that was originally estimated when the Company acquired Omnicare, Inc. in 2015,” CVS said. Almost half of what the company paid for Omnicare has been written down so far. Right now the bull thesis on the stock lies on the ability for CVS to integrate Aetna successfully, and the Omnicare failure is definitely creating some doubts in investors’ minds. We think the management team needs to bring more clarity to their strategy going forward and gain back investors’ confidence.

· CVS sees 2019 as (yet another) year of transition:

o Aetna integration. While we should see $300-350M of expected synergies, the savings will be fully reinvested, offsetting any incremental margin expansion from the acquisition

o Retail/LTC segment will be down 10% in 2019:

§ Half of the weakness is coming from the LTC business struggles & lapping of the tax reform investment

§ Half of the weakness is coming from continued reimbursement pressure and a declining generics benefit

· The corporate tax rate drop from 35% to 21% did not all fall to the bottom line as CVS reinvested some in higher wages and benefits.

To be fair, we found their action plan for 2019 attractive (more details to come in June), such as:

· New product lines in health & beauty

· Expanding higher margins service offerings

· A new PBM “guaranteed net cost” model offers greater simplicity to healthcare partners, which CVS expects to see more widely adopted in 2020 (not much traction seen in 2019). Rebates are 100% passed on to the client

· A new cost reduction effort for the combined companies (this is in addition to the $750M synergy target)

· Applying new technologies to improve health (collaboration with Apple)

· Programs to prevent hospital readmissions: by cutting them in half for example, CVS would reduce expenses by $300M.

Overall we still think CVS has the right long-term strategy by becoming vertically integrated, however the recent acknowledgement of the failure to turn around Omnicare is putting a dent in the trust we have with CVS. We expect the next investor day in June to be very relevant in gaining back some lost confidence.

Thesis on CVS

• Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.
• Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.
• shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)

$CVS.US

[tag CVS]

Julie S. Praline

Director, Equity Analyst

Direct: 617.226.0025

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Share price: $52 Target Price: $55

Position size: 2% TTM return: 9%

Key Takeaways:

· They beat revenue and EPS expectations. Adjusted revenue was up 6%, above the midpoint of their original guidance. Adjusted EPS was up 35%, above the high end of their guidance range, partly driven by a lower tax rate. Guidance issued for 2019 was a little below expectations.

· Data analytics segment (~15% of revenue) revenues were up 7% a big improvement from +2% last quarter. Growth was primarily driven by portfolio analytics and multiple listing service businesses. This segment is lower margin, but margins are improving – they were up 150bps for the quarter and 30bps for the year.

· Software Solutions segment (~85% of revenue) was up 6% driven primarily by strong loan growth on their core servicing software platform from new and existing clients, higher average revenue per loan and new client wins.

o Within this segment servicing (~75% of revenue) grew 7%. This is steadier than their originations revenue. They continue to dominate first lien loans with 62% share and are growing share in second lien loans. They have high-teens share of second lien and expect to reach 30% once current commitments are implemented.

o Originations (~10% of total revs), which is made up of new loans and refi’s, grew 4%. Driven by 35% growth in loan origination system solutions, partially offset by the effect of lower refinance origination volumes. Refinancing volumes, down 40%, continue to be negatively impacted by rising rates.

o Segment EBITDA margins expanded 60bps for the quarter and 190bps for the year.

o Trends in this segment highlight a dynamic weighing on US housing statistics. The issue is a lock-in effect from lower mortgage rates. Homeowners have mortgage rates lower than prevailing rates making them less likely to sell as it would mean taking out a new mortgage at a higher rate. This is decreasing housing inventory and existing home sales. The average length of homeownership tenure has been rising from around 4 years in 2000 to over 8 years now.

Continue reading “Black Knight 4Q18 Earnings”

Key takeaways:

Current price: $115 Price target: $123

Position size: 2.30% 1-year performance: +1.5%

Pepsi reported +4.6% of organic revenue growth, helped by pricing +4% (although FX was -4%). What mattered today was the company’s 2019 guidance announcement. The company plans to return $8B to shareholders in 2019 through share repurchases and dividends. PEP expects organic top line to grow 4% (above consensus of +3.4%), and EPS of $5.50, which would be a 3% decline y/y as the company expects to reinvest for growth (more marketing spending) and incur some restructuring costs. It is pretty common to see an EPS “reset” lower as a new CEO takes the helm of a company. Thus there is no surprise there with a 3% decline in EPS this year. There is nothing completely different with newly appointed CEO Ramon Laguarta strategic vision. He has a desire to streamline Pepsi’s manufacturing and supply-chain footprint for better performance, becoming “leaner, more agile and less bureaucratic”. As costs rise, Pepsi is renewing its efforts to drive productivity gains and is targeting $1B in savings/year until 2023. Long term, Pepsi is hopeful to return to an algorithm of +4-6% organic growth, core operating margin expansion of 20-30bps and a high-single-digit core EPS growth starting in 2020. Continue reading “Pepsi 4Q18 earnings call”

Current Price: $48 Target Price: $54

Position size: 4.4% TTM Performance: 16%

CSCO reported very strong 2Q results. Sales and EPS were better than expected and guidance was ahead of consensus. They delivered revenue growth across all geographies and businesses, strong margins, double-digit EPS growth, and continued solid cash generation. Cisco is benefiting as their customers face an increasingly complex IT environment as they move to the cloud, deal with growing connectivity of users and devices, and changing security needs. Cisco’s evolving portfolio of products helps customers navigate this complexity by helping them simplify, automate, and secure their infrastructure. As a result, despite concerns of weakening IT spending, CSCO is seeing robust demand. Demand is solid enough that they haven’t seen any impact to their business from changes in the global macro-economic environment. The CEO said, “I would tell you that it certainly is one of the more complex macro geopolitical environments that I think we’ve seen in quite a while with all the different moving parts. But to be honest, from the first day of the quarter to the last day of the quarter, we saw zero difference. We saw very steady demand throughout the quarter.” They are in the early innings of evolving network architectures, so there is a lot of runway to the growth they are seeing.

Thesis intact, key takeaways:

· Top line growth was ~7%. Q3 sales expected to be up 4-6%, street was expecting +3%.

· Impact of the 10% tariff was immaterial in the quarter. They were able to offset with pricing.

· Transition to recurring revenue model. The percentage of recurring revenue is now ~1/3 – they set a goal of 37% by 2020. They are on track to drive software revenue to 30% of total revenue by FY20. Subscription revenue was 65% of total software revenue, up from 57% last quarter. This transition will drive an upward trend in CSCO’s margins over the next several years.

· Their largest segment, Infrastructure Platforms (58% of revenue), was up +6% YoY on another quarter of campus switching strength, driven by solid demand for their Catalyst 9k products. Routing declined due to weakness in service provider end markets. They also saw a decline in data center servers.

· In terms of customer segments, enterprise was up 11%, commercial grew 7%, public sector was up 18%, and service provider was down 1%.

Valuation:

· They have close to 3% dividend yield which is easily covered by their FCF. Dividend increased 6% and added $15B to buyback authorization, bringing the total to $24B, or over 10% of their current market cap.

· They have $15B in net cash. In the quarter they returned $6.5B to shareholders – $1.5B in dividends and $5B in buybacks.

· Forward FCF yield is almost 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.

· Cisco is the leader in enterprise switching and service provider routing and one of the few vendors that can offer end-to-end networking solutions.

· 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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