Month: April 2019

Current Price: $160 Price Target: Raising to $185 from $160

Position Size: 3.8% TTM Performance: 32%

Visa continued to perform well in the second quarter with better than expected revenue and EPS. Net revenues were up 9% (constant currency), dampened by higher client incentives. EPS was $1.31 vs consensus $1.24. They reaffirmed full-year 2019 net revenue growth of "low double-digits" on nominal basis and slightly increased adjusted EPS growth to "high-end of mid-teens," from "mid-teens.” Slight weakness in the quarter was that volume growth decelerated from 11% to 8%. Mgmt said volume growth was impacted by fewer processing days in the quarter and timing of Easter. Processed transactions continued to see double-digit growth. Last quarter they expressed concerns around weakening non-US macro trends and cross border transactions, but this quarter they struck a more positive tone, indicating that cross border had stabilized. Cross border accounts for ~27% of gross revenue and is higher yield. In the first few weeks of Q3, payment vols have accelerated, especially in the US.

Continue reading “Visa 2Q – Beat and slight FY EPS raise”

Key Takeaways:

Current Price: $185 Price target: $201 NEW ($198 OLD)

Position size: 3.62% 1-year Performance: +12%

Stryker released results with organic sales up +7.3%. This quarter operating margin improved 10bps (including a 50bps negative impact from acquisition). Its Mako robot will see some competition in the near future as peer Zimmer is launching its own knee replacement robot (Rosa), but so far the order book remains strong for SYK, with 55% of the placements in accounts taken from competitors. A total of 35 robots were placed globally (27 in the US). Regarding the recent K2M acquisition, the combined sales organization is now in place, which will allow a revenue ramp up as the year progresses. We are raising our price target slightly to account for a continued good growth in the business.

Segments revenue growth:

· Orthopedics organic revenue growth of 5% was driven by 6.4% international growth and 6.6% growth in Knees which benefited from strong Mako TKA demand and strength in cementless

· MedSurg organic revenue growth of 8.9%, led by 17.5% U.S. Instruments growth and 7.5% Endoscopy growth (NOVADAQ and Sports Medicine). The Medical division grew 9.2% organically in the US, reflecting solid performance in the bed, stretcher, and Sage businesses

· Neurotech & Spine organic growth of 7.8%

2019 Guidance update:

Organic sales increased on the low end from 6.5-7.5% to 6.8%-7.5%

30-50bps EBIT margin improvement reiterated

Adjusted EPS raised on the low end from $8.00-$8.20 to $8.05-$8.20

SYK Thesis:

• Consistent top and bottom line growth in the mid and upper single digits respectively
• Continued operating leverage of current infrastructure
• Strong balance sheet and cash flow used in the best interest of shareholders

$SYK.US

[tag SYK]

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

Current Price: $459 Price Target: $540 (Increasing from $480)

Position Size: 2% TTM Performance: +14%

SHW reported a weak 1Q, missing estimates on lower volumes across all three segments. They saw a slow start to the architectural painting season in N. America and continued challenging conditions in “many end markets outside N. America.” Despite this, the stock is up on positive outlook in N.A. w/ an expected rebound in volumes in 2H and better gross margin performance. Despite miss, management reiterated full year EPS guidance (+13.5% YoY). Very positive commentary on expectations for N. America paint stores (drives majority of their profit) on an expected improvement in housing turnover. In addition, price increases and declining raw material pressure may lead to positive revisions on improved margin expectations.

Key Takeaways:

· SHW is set to benefit from higher product prices, good volume growth, falling raw material costs and an improvement in housing.

· Gross margins improved sequentially, flat YoY, despite the volume shortfall and higher raw material costs. This is encouraging given mgmt. expectation that YoY raw material inflation will be highest in Q1. They expend continued GM expansion and expect volumes to improve over the balance of the year, particularly in the back half.

· They saw broad based softness in Asia and Europe.

· The Americas Group: 55% of sales, +3.6%

o Despite a strong backlog and project pipeline reported by their professional customers, volume growth was slower than expected.

o Weakness this quarter is not a cause for concern. This is the seasonally smallest quarter for their paint stores business, and can be volatile year-to-year. Better indicator of demand is painting contractor’s feedback on project backlog. They are universally optimistic, report seasonably high project backlogs and a very healthy pipeline of new projects.

o They would be a big beneficiary of an improvement in the housing market.

o Opened 15 new stores

· Consumer Brands Group: 16% of sales, down less than 1%

o FX headwinds(-1.6%)

o Most of the softness in demand in the quarter was in markets outside North America, most notably Asia-Pacific.

o Operating margin in the first quarter expanded sequentially and YoY

o “we are very well positioned across all North American retail channels heading into the important spring selling season.”

· Performance Coatings Group: 29% of sales, modest sales growth

o Operating margin improvement despite raw material pressure.

· Guidance Reaffirmed

o Sales guidance for Q2 +2-5%; full year +4-7%

o Reaffirmed full year 2019 adjusted diluted net income per share guidance to be in the range of $20.40 to $21.40 vs $18.53 in 2018. Midpoint slightly below street.

Valuation:

• Expected free cash flow of $2B in 2019, trading at over a 4.7% FCF yield.
• Increased our quarterly dividend by 31%. Dividend yield 1%.
• Given growth prospects, steady FCF margins and high ROIC the stock is undervalued. 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 leverage from the Valspar acquisition continues to improve; they expect to get to under 3x by the end of the year.
• Buybacks should accelerate in 2019 as Sherwin returns to its historical capital allocation.

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:
  • High/growing U.S. home equity values. Home equity supportive of renovations.
  • Improving household formation rates off trough levels (aging millennials).
  • Baby boomers increasingly preferring to hire professionals vs. DIY.
  • Solid job gains and low mortgage rates support homeownership.
  • 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

www.crestwoodadvisors.com

Key takeaways:

Current Price: $333 Price Target: $388

Position Size: 3.50% 1-year Performance: -12%

Lockheed’s 1Q19 earnings results were impressive with organic revenue growth of 23% (including an 8% boost from an extra work week). With bookings trend still positive (1.21X in the quarter), the revenue growth looks sustainable for the rest of the year (although not as high as 1Q). Margins expanded as well, and as new programs headwinds ease during the year, we should expect continued margin gains. This quarter, Lockheed delivered 26 F-35 jets (vs. 14 in 1Q18). During the call, management highlighted the increased international demand for the F-35, which will represent nearly half of the growth for this program in the future. LMT has facilities in place to ultimately produce over 180 aircrafts a year. The CFO noted some frustration with the US Air Force (discussions on driving down the price, as well as committing to 48 jets/year over the next 5 years vs. 60 jets initially projected). Overall 1Q19 earnings were much better than expected, explaining today’s positive stock reaction.

Continue reading “Lockheed Martin (LMT) 1Q19 earnings summary”

Key Takeaways:

Current Price: $178 Price Target: $177 (NEW)

Position Size: 1.94% 1-year Performance: +30%

UNP reported a revenue decline of -2% (but with an average price slight acceleration from last quarter to +2.75% – enough to offset some cost inflation), and an operating ratio that improved 100 bps y/y, despite weather related challenges (160bps impact including lost revenue and increased costs). Heavy snowfall and flooding resulted in track outages affecting train speed and network fluidity, but the implementation of the Unified Plan 2020 (focused on asset utilization) is having a positive impact on freight car velocity, terminal dwell time and train speed. UNP’s operations proved more resilient to weather disruptions than it did in the past (our fear heading into the quarter). The outlook for 2019 cost savings is positive, with a step-up in net cost savings in Q2-Q4. We are raising our price target to $177 to account for a better operating ratio than expected.

Continue reading “UNP earnings summary”