TCPNX – Q4 2018 Commentary
The Touchstone Impact Bond Fund fell short of its benchmark in the fourth quarter but outperformed for the year as a whole. Touchstone maintains a quality diversified portfolio that remains agnostic to the yield curve. The team believes that its current positioning in Treasuries and MBS should benefit from the divergent Fed monetary policy and global trade disputes as demand from foreign investors has decreased.
Below is a graphic from TD Ameritrade that looks at retail client allocation changes within the S&P 500. What the green line shows is that individual investors sold out of the S&P 500, choosing to buy on less risky asset classes like core bonds.
This is just another reminder that attempting to time the market is very difficult. As we discussed this morning, tempering client fears makes it easier to keep individuals invested in the market. The turnaround between December and January is an example where one could have recouped much of their loss in a relatively short timeframe.
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
Current Price: $418 Price Target: $480
Position Size: 2% TTM Performance: 2%
SHW reported Q4 results, they already released sales and earnings numbers a couple weeks ago that were below expectations. The stock rallied after the report yesterday on guidance which reflected rebounding demand trends. Revenue guidance was better than the street and EPS guidance was weaker. They will see less benefit from lower raw material costs this year than the street was expecting. Guidance implies low-single-digit raw material inflation for 2019 (though raw material prices are trending lower, they see the benefit on a 6-9 month lag). Q1 Revenues guided to +2-6% and full year revenues guided to +4-7%, led by strength in the N. America paint stores business. Price increases should add about 2-3% to top line in 2019, which implies volumes +2-4%. That’s a nice rebound from flat last quarter. Mgmt said they’re “off to a very good start. January sales will come in high above our first quarter guidance.” The improvement was a big relief given the negative pre-announcement a couple weeks ago. The weakness in October and November that hurt Q4 results has been largely attributed to weather.
Key Takeaways:
· SHW set to benefit from higher product prices, good volume growth, and falling raw material costs.
· They are taking share with strong volumes despite weak housing numbers.
o Turnover is down, both new and existing home sales are weak. But SHW says they are seeing a decoupling from housing turnover and residential repaint. More homeowners are staying in place and remodeling. Higher home values and mortgage rate lock-in are contributing to that. Current rates are above a vast amount of mortgages which discourages selling.
o They’ve been growing residential repaint double digits for five consecutive years while the industry is growing more like high single-digits.
· Raw materials, delayed benefit – As has been the case for a few quarters, pricing continues to lag raw material inflation. The good news is raw material costs have started to go in the other direction, but that will take several months to show up in COGS. When it does, SHW should see a gross margin benefit because of all the pricing they’ve taken. Raw materials represent ~80% of the cost of a coatings product on average.
· They saw generally weak trends across products in Europe.
· The Americas Group (55% of sales) – this is their network of 4,270 paint stores.
o SSS were +3% for Q4 and +5% for FY18.
o Domestic new residential construction & repaint end-markets are ~50% of store sales. The domestic commercial building paint end-markets are 20-25% and domestic industrial end-markets including protective coatings for structural steel and U.S. marine coatings are 15-20%.
o Residential repaint remained their strongest customer segment in the year, up by double-digit percentage.
· Performance Coatings Group (29% of sales) – up 4.6% in Q4 driven mostly by price increases. Sales across all product categories were positive, led by general industrial and packaging, which were both up by double-digit percentages.
· Consumer Brands Group (16% of sales)– Down 6.5% in Q4 due primarily to lower volume sales to some of the Group’s retail customers and the new revenue standard, partially offset by a new customer program and selling price increases.
Valuation:
· Expected free cash flow of $2B in 2018, trading at over a 5% FCF yield. Dividend yield <1%.
· Given growth prospects, steady FCF margins and high ROIC the valuation is still reasonable. They deserve a premium multiple based on large exposure to the N. American paint contractor market and no exposure to the cyclical sensitive auto OEM end market.
· Balance sheet is fairly levered from the Valspar acquisition, but they expect to get to under 3x by the end of the year.
Thesis:
· SHW is the largest supplier of architectural coatings in the US. Sherwin-Williams has the leading market share among professional painters, who value brand, quality, and store proximity far more than their consumer (do-it-yourself) counterparts.
· Their acquisition of Valspar creates a more diversified product portfolio, greater geographic reach, and is expected to be accretive to margins and EPS. The combined company is a premier global paint and coatings provider.
· SHW is a high-quality materials company leveraged to the U.S. housing market. Current macro and business factors are supportive of demand:
o High/growing U.S. home equity values. Home equity supportive of renovations.
o Improving household formation rates off trough levels (aging millennials).
o Baby boomers increasingly preferring to hire professionals vs. DIY.
o Solid job gains and low mortgage rates support homeownership.
o Residential repainting makes up two thirds of paint volume. Homeowners view repainting as a low-cost, high-return way of increasing the value of their home, especially before putting it on the market.
$SHW.US
[tag SHW]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
Key Takeaways:
Current Price: $76 Price Target: $86
Position Size: 1.74% 1-year Performance: +11.8%
Exxon reported 4Q18 results, with continued production improvements and earnings ahead of consensus ($1.20 vs. 1.07). Permian production came ahead of expectations, with close to a 90% increase y/y, thanks to an increase in rigs. XOM’s CEO sees very good returns in the Permian even if the price of oil comes down to $35/barrel. On the other hand, growth in its other 4 pillars won’t be seen until 2020. Refining profits more than doubled as margins increased. Free cash flow covered their dividends. Capex spending slowed in 4Q as oil prices declined but Capex for 2019 is now guided up +16% y/y vs. management’s previous guidance numbers ($30B vs $28B previously). Overall we see Exxon moving in the right direction, and importantly staying the course on its strategic investments. Continue reading “Exxon (XOM) 4Q18 earnings summary”
