Month: February 2019

Share price: $78 Target price: $96

Position size: 2.5% 1 yr return: -11%

Hilton beat on revenue and EPS. 2019 EPS and EBITDA guidance better than expected despite lowered RevPAR guidance range from 2-4% to 1-3%. This new lowered RevPAR guidance was largely expected and is in line with other hotel operators. EBITDA was $544m, ahead of guidance and consensus. RevPAR for 4Q was +2% driven entirely by higher rates. Q1 guidance also ahead of expectations. While RevPAR guidance is weakening, Hilton is structurally different than it was last cycle – asset light means less operating leverage and less volatile earnings stream if RevPAR continues to weaken. Moreover, unit growth will aid EBITDA growth regardless of RevPAR trends. (RevPAR = revenue per available room. It’s their total room revenue divided by their total number of rooms).

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Key takeaways:

· Their weakest areas of demand were leisure travelers in the US and Asia Pacific.

· Group business is solid – 2019 group bookings up in the mid-single-digits and corporate negotiated rates up just over 2%; slightly ahead of last year’s growth. More than 70% is already on the books.

· On 2% RevPAR growth in 4Q, they grew EBITDA 12%.

· Net unit growth – In 2018 they opened more than one hotel per day – the best year of openings in their history. They added over 450 hotels (+57K rooms) or approximately 7% growth YoY. They ended 2018 with 5,700 properties and 913K rooms (~5% global room share) across 113 countries.

· Strong pipeline for 2019 – record year for construction starts and signings. They are expecting to grow rooms 6-7% in 2019. 80% of that is under construction. >50% of pipeline is outside of the US.

· Launched new luxury brand, LX. The first hotel opening under this banner is in Dubai and is a conversion from a contract Marriott lost last year.

· Loyalty members hit 85m and account for 60% of system-wide occupancy. Goal is to have 100m members by the end of the year.

· China RevPAR was weaker than expected at +5% – it had been trending up double digits. They echoed other companies in saying that the macro environment in China is weakening. Despite that, management had a very positive tone about the future of their operations in China.

· Conversions (an existing hotel changes their banner to Hilton) increased from 20% of pipeline to 25%. This can be a little counter-cyclical. It peaked as a % of their pipeline in the recession in low 40% range. They are starting to see a ramp in conversions in China.

· Returned $1.9B to shareholders in 2018.

· The stock is undervalued, trading at over an 8% FCF yield on 2019.

Investment Thesis:

∙ Hotel operator and franchiser with geographic and chain scale diversity of 14 brands, 5,400 hotels and 880k rooms across 106 countries (Hilton, Hampton Inn & Hilton Garden Inn ≈ 2/3 of portfolio).

∙ Network effect moat of leading hotel brand and global scale lead to room revenue premiums and lower distribution costs.

∙ Shift from hotel ownership to franchising results in resilient, asset-light, fee-based model.

∙ Record pipeline generating substantial returns on minimal capital will lead to increasing ROIC and a higher multiple.

∙ Unit growth and fee based model reduce cyclicality – Lower operating leverage vs ownership reduces earnings volatility and unit growth offsets potential room rate weakness.

∙ Generating significant cash which is returned to shareholders through dividends and buybacks.

$HLT.US

[tag HLT]

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

Key Takeaways:

Current Price: $76 Price Target: $87 (under review)

Position Size: 2.19% 1-year performance: +7%

Fortive released 4Q18 results with sales up 7.4% organically (+11.4% reported), and adjusted EPS up 30% from last year (helped by lower interest expenses and lower tax rate). While China was highlighted as strong in 4Q18, the company did warn that there was some early buying that pulled forward some sales (70-100bps of growth) as companies were buying ahead of possible tariffs. Management thinks North America will remain solid in 2019, while Western Europe and China could experience some slowing down. Those assumptions are driving the 3% core top line growth guidance for 2019, and the high end of 5% assumes there is no slow down. Operating margins increased 40bps (excluding the recent acquisitions dilutive effect), helped by 80bps price increases. During the call, the company highlighted accelerating their portfolio transformation towards less cyclical markets and more secular growth drivers, also increasing in the recurring revenue base. This is part of our buy thesis on the name and reassuring to hear the transformation is going in the right direction. Continue reading “Fortive 4Q18 earnings summary”

Key Takeaways:

Current Price: $42.5 Price Target: $51

Position Size: 1.65% 1-year Performance: +7%

Sanofi reported 4Q18 sales results containing no surprises, with sales up 3.9% and EPS +4.7%. Flu vaccines was a growth driver this past quarter, while the diabetes franchise remained weak. The divestiture of Zentiva, its European generic business as well as growth of Dupixent will boost margins going forward. The Dupixent sales increased thanks to advertising and the recent US launch in asthma (the drug is approved for severe form of eczema and asthma). Sanofi new R&D chief is pruning the portfolio to focus on better prospects, accelerating research on 17 programs while discontinuing 25 others. The firm is putting cancer treatment on its priority list, and removing diabetes from it, which had been a major growth driver for the company in the past (with drug Lantus). In addition, the company is refocusing its segments in order to “unlock organizational efficiencies”… we have heard that from other companies in the past, and we remain unconvinced about the value of such reorganizational efforts. But on the positive side, Sanofi’s dividend yield is now an attractive 4.2%, which offers good support to the stock. Continue reading “Sanofi 4Q18 earnings summary”

Key Takeaways:

Current Price: $49 Price Target: $61

Position Size: 2.13% 1-year Performance: -10%

Sensata reported slower revenue growth sequentially, a miss vs. consensus as well. Organic sales growth was +3.5%, with an overall Chinese business organic growth rate of 4.3%, which we think is respectable given the recent business volatility cited by the company and peers. Although the Chinese auto production end market declined 15% in 4Q (way beyond their expectations) and drove most of the slowdown in their overall results in 4Q18, Sensata had an impressive +1560bps sales above the auto end market production. The company noticed a small slowdown in Europe as well, but a strong North America growth. For 2019, management expects +400-500bps relative outperformance over the global auto production. While China’s economy is still growing, volatility is expected to continue in 1Q19. Regarding its other end markets, aerospace was strong but industrial weak driven by the Chinese slowdown. Margins expanded 80 bps in the quarter despite lower volume and unfavorable impacts from tariffs. Their business model enables continued profitability, even in down cycles, as they have a highly variable cost structure. While today’s results were below expectations, investors were expecting much worse. It is reassuring to see the company able to protect its operating margins in a volatile environment, a proof of the company’s strong business model. Continue reading “Sensata (ST) 4Q18 earnings summary”

Alphabet reported mixed Q4 results, beating on top line (+22%) but spending on cloud and YouTube resulted in lower than expected profit margins (21% vs 22% expected). Two key positives were better than expected: ad revenue and lower TAC. Ad revenue disappointed last quarter, so this was an important reversal. TAC is the largest cost of revenues and, after climbing for a while, continues to trend down. Weaker operating margins were from higher R&D, headcount and marketing. Headcount increased to 99K people from 80k a year ago. The most sizable head count increases were in cloud for both technical and sales roles. The higher spending is not totally unexpected. This quarter follows a similar trend of rising expenses and higher capex impacting profitability as they “invest ahead of growth,” particularly, cloud, YouTube and hardware. “With great opportunities ahead, we continue to make focused investments in the talent and infrastructure needed to bring exceptional products and experiences to our users, advertisers and partners around the globe."

Key Takeaways:

· They are seeing broad based strength globally with the US growing 21%, EMEA up 20% and APAC up 32%.

· Net advertising revenues were up 21% to $25.2B vs consensus of $24.7B. Mobile search and YouTube continue to drive ad revenue.

· Revenue from Google sites was up 22%. Network sites revenues were up 12%. Other revenues (includes Google Play, Google Cloud, and Hardware) were up 31%.

· TAC was slightly better YoY at 23% percent of revenue. High TAC levels have been driven by the mix shift to mobile and to programmatic.

· Margins were negatively impacted by higher “other cost of revenues.” This is everything other than TAC. Key drivers were content acquisition costs (CAC) for YouTube, costs associated with data centers, and hardware-related costs for Made by Google and the Nest family of products.

· OpEx of $13.2B was up 27% YoY (vs. consensus of +23% YoY) driven by increases in R&D, headcount and marketing.

· “Other Bets” also contributed to the operating profit miss. Operating loss for the segment was $3.4B for the FY18, vs a loss of $2.7B in 2017. Accrual of compensation expenses to reflect increases in the valuation of equity in certain Other Bets hurt margins.

· Capex continues to increase. They spent nearly $7 billion in capex in 2018.

· Google Cloud: New head of cloud announced, Thomas Kurian. Management is not giving any specific cloud metrics, though they did say they more than doubled both the number of Google Cloud Platform deals >$1M as well as the number of multi-year contracts signed.

Valuation:

· FCF for 2019 is expected to be ~$31B or about a 4% FCF yield.

· $105B in net cash, 13% of their market cap.

Thesis on Alphabet:

· Online advertising as a share of overall Ad budgets will continue to grow as:

o People spend more time on the internet/mobile internet vs tv, radio, newspapers etc

o Higher ROI (+ easier to measure) per marketing dollar spent online vs other ad mediums

· They are the global leader in search.

· Well positioned to benefit from increased smartphone penetration.

· Flexible business model provides operating leverage with high returns ROIC and huge free cash flow generation.

$GOOGL.US

[tag GOOGL]

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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