Apple is up ~5% after-hours after reporting a strong 2Q. They beat on revenue and EPS and issued solid guidance. Midpoint of 3Q revenue guidance was better than street. Key positive is that the beat was driven by better than expected iPhone and services revenues. More details after the call.
$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
Current Price: $1,191 Price Target: $1,350
Position Size: 4.6% TTM Performance: 18%
Alphabet reported earnings, missing on the top line and beating on EPS. Management attributed the revenue miss primarily to Fx and also the timing of some ad product changes. Total revenue was $36.3B vs. consensus of $37.3B, up 19% constant currency (+17% reported) – that’s a deceleration from 23% in 4Q18. Currency was a $1B headwind, so pretty much all of the miss. This was partially offset by lower TAC which only grew 9%. That put net revenue up almost 19%. Excluding the impact of the EU fine EPS was $10.81, better than consensus of $10.53.
Key takeaways:
· Management attributed the broad-based slowdown to product changes but did not elaborate further. Lack of detail here is largely the reason for the selloff.
· Trend of lower TAC continues – decreased from 24% of rev to 22%.
· Alphabet accrued a 1x fine from the European Commission this quarter for €1.5B ($1.7B) related to agreements in the AdSense business that were found to be in restraint of competition.
· Operating expenses were $12B, up 20% YoY. The biggest increase was in R&D expenses with headcount growth in Cloud as the largest driver.
· Capex of ~$4.6BN decreased materially vs. $7.3BN in 1Q18 as they lapped the purchase of office space in New York City in 1Q18.
· ESG:
o Google data centers use 50% less energy than a typical data center, while delivering 7x more computing power than they did five years ago.
o Since 2017, they have matched 100% of the electricity consumption of their operations with purchases of renewable energy and is now the world’s largest corporate buyer of renewable energy.
Segment performance:
As a reminder, they report in 2 segments: “Google” and “Other Bets.” Google segment revenue is comprised of: Google Sites, Network Partners & Google Other Revenue. The first two are ad revenues and make up the majority of total revenue. Other Revenue includes hardware and cloud. “Other Bets” are their moonshots like Waymo – they’re a tiny part of the business and losing money.
· Google ~$30B in ad revenue, +15% YoY.
o Google Sites: revenues were ~$25B, +17%YoY (includes roughly 2 pts drag from Fx). In terms of dollar growth, results were led again by mobile search with a strong contribution from YouTube, followed by Desktop Search.
o Network: revenues were $5B, +8% YoY, continuing to reflect the performance of the primary drivers of growth, AdMob, followed by Google Ad Manager.
· Other revenues for Google were $5.4 billion, up 25% year-over-year, fueled by Cloud and Play and partially offset by Hardware (slowing growth of premium smartphones resulted in lower Pixel sales). “Today 9 of the world’s 10 largest media companies, 7 of the 10 largest retailers and more than half of the 10 largest companies in manufacturing, financial services, communications and software use Google Cloud.”
· Other Bets – Revenues were $170 m, primarily generated by Fiber and Verily. Loss increased from $600m to ~$900m.
Valuation:
· Trading at below average P/E ratio (see above) and about a 4.5% FCF yield.
· $110B in net cash, 13% of their market cap.
· Repurchased ~$3B worth of shares during quarter. $11B remaining on the existing share repurchase authorization.
$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
[tag MMM]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
We are recommending the following changed to our Focused Equity portfolio:
Selling MMM, putting proceeds to bring SHW to 3% weight, and remaining proceed to IVV.
Sell MMM thesis:
We reviewed the original buy thesis following last week’s earnings release.
1. The original thesis is broken:
a. “diversified industrial revenue stream”: resilient segments did not offset larger decline in more cyclical segments
b. “margin expansion from scale and international expansion”: most segments saw a margin contraction as a result of delayed reaction by the company to end markets softness
c. “ROIC strength”: decline forecasted
d. “good capital allocator”: debt has funded a lot of the EPS growth, while cash flow from operations set to decline
2. Even after a big pull-back the stock is not cheap (both on P/E and DCF)
3. At this stage of the cycle, being patient with this name is risky (we see more slow down possible in revenue + restructuring story might not be enough)
Buying to SHW 3%:
a) Housing turnover should improve as mortgage rates are back below average rate of outstanding mortgages. This reduces the mortgage rate lock-in effect that weighed on the housing market last year.
b) Aging housing stock – by 2020 54% of the housing stock will be >40 years old.
c) Aging in place – Baby boomers, over the last couple years, have accounted for about 50% of the remodeling spend
d) Housing starts should increase. Rate of new home construction has been unsustainably low given continued strength in household formation. Historically housing starts run at ~1.3x HH formation to make up for housing units that are taken out of stock (natural disaster or demolition). Over the past 4 yrs. housing starts have run in-line with household formations.
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
Disney presentation from today’s meeting.
$DIS.US
[tag DIS]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
Attached is the presentation from this morning’s meeting discussing the sale of MLPs.
[Asset Allocation]
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
Alphabet is down pre-market – they reported earnings, missing on the top line and beating on EPS. This is a quick summary – I will follow up with more details. Management attributed the revenue miss primarily to Fx and also the timing of some ad product changes. Revenue was $36.3B vs. consensus of $37.3B, up 19% constant currency (17% reported) – that’s a deceleration from 23% in 4Q18. Excluding the impact of the EU fine EPS was $10.81, better than consensus of $10.53.
$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
Key Takeaways:
Current price: $71 Price target: $77 (NEW)
Position size: 1.8% 1 year performance: +7%
Colgate surprised to the upside with organic sales growth of 3% (the highest in the past 9 quarters), driven by improvement in North America, while China remained weak. The management team expects China to improve in 2H. Colgate is still losing market share globally but on the positive side, their Total brand gained back some shares in the US after its relaunch in February. EBIT margins contracted 180bps (raw material costs inflation was partially offset by cost savings and pricing; but negatively impacted by a rise in advertising). Advertising spend will remain ~11% of sales in 2019, an increase vs. last year, but necessary to relaunch its brands. We are increasing our price target after updating our model. Continue reading “Colgate 1Q19 earnings results”
LISIX – Q1 2019 Commentary
The Lazard International Strategic Equity Fund outperformed the MSCIA EAFE Index in the first quarter by 150 bps driven by stock selection across most sectors. While political issues such as Brexit and trade can cause some market uncertainty, the team believes that market growth can be maintained given a more lax outlook in global monetary policy.
Market Overview:
– International equities rebounded strongly in the first quarter after weak end to 2018
o This was buoyed mostly by confirmation of the dramatic reversal in tone from the Fed
– Some signs of progress in US/China trade talks were also helpful
o Accompanied by early signs of stability in China after a variety of government stimulus
– With a combination of easing economic fears, and potential peak in rates, gains were broad based as both cyclical areas such as materials and more stable operations
– Technology sector saw jumps in both the cyclical semiconductor space and in long duration growth stocks
o Financials lagged, however, dogged by poor results, Scandinavian money laundering scandal and falling rate expectations
Performance Overview:
– Lazard International Strategic Equity portfolio outperformed the MSCI EAFE Index in the quarter
o Driven by stock selection across a number of sectors, mostly stemming from encouraging earnings reports
– In the industrials sectors, lock maker Assa Abloy and pilot training company CAE all showed good progress
o Chinese commerce giant Alibaba reported reassuring numbers, as did both Chinese insurer Ping An and its bank subsidiary
o Media stock Vivendi saw strong sales and rising bid speculation for its music business
– On the negative side, Spanish utility Red Electra was hurt by political uncertainty and a surprising satellite acquisition
– Japanese real estate company Daiwa House succumbed to sector weakness
– In the Philippines, conglomerate GT Capital is still seeing pressure on sales and margins at its Toyota auto business
Market Outlook:
– On the macro side, China is showing some signs of stabilization from its credit and sentiment slowdown, though Europe slowed further
– U.S. economic data was mixed with the labor market strong but forward looking indicators slowing
o Rising rates and cooling global growth started to bite
– Company reports have focused on weakening economy and cost pressures in many markets
– China has announced a variety of small stimulus measures, but the major change of tone came from the Fed, who went from increasing rates to possible decreasing
o The extent of this change was surprising given the amount of debt that has continued to pile up on public and private balance sheets
– Political issues such as Brexit and the trade war remain concerns but the market appears prepared to shrug off slowing growth again as monetary policy headwinds fade
– Overall, the team remains confident that by focusing on stock selection of sustainably high growth the long term track record can maintain
Performance Review:
[Mutual Fund Commentary}
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
BEXIX – Q1 2019 Commentary
The Baron Emerging Markets Equity Fund outperformed its benchmark during the quarter as EM equities bounced back to start the year. Many of the most impaired names recovered and Baron had incremental gains in all but two equity sectors. Baron believes that China will continue to surprise on the upside in 2019 helping drive broad EM performance.
Continue reading “Baron Emerging Markets – Q1 2019 Commentary”
