Month: July 2019

Apple reported better than expected revenue and earnings, with revenue of $53.8B vs $53.4B expected and EPS of $2.18 vs $2.10 expected. Revenue was up 1%, returning to growth, despite 300bps headwind in the quarter from currency. They also issued guidance above the street with a range of $61B-$64B for Q4 – the street was at $61B. They are making progress on diversifying away from the iPhone. This was the first quarter in many years where the iPhone represented less than 50% of revenue. They saw an impressive 48% growth with their “Other Products” business on robust wearables growth (e.g. Apple Watch). A return to revenue growth in China on a constant currency basis was a big relief given sharp declines in the last couple quarters. Services, however, were a slight disappointment at $11.5B vs consensus $11.8B – that represented 13% growth. Services is a key part of their long-term story and is higher margin. The next couple quarters will be important for the Services segment as they launch Apple TV+, Apple Arcade and Apple Card.

Key Takeaways:

· Performance in China was a key positive – they returned to growth on a constant currency basis. Last quarter they reported China revenue down 22%.

· iPhone revenues (-12% YoY) were a little light vs expectations after beating last quarter.

· Revenue excluding iPhone was up 17% from last year with growth across all categories.

· Mac sales were better than expected after weak performance last quarter. Mac and iPad sales grew 11% and 8% YoY, respectively, when broader notebook and PC market declined YoY in 2Q

· Services revenue decelerated from 16% growth last quarter to 13% growth. However, excluding a one-time item from last year and Fx headwind, currency neutral Services growth was 18%. Management reiterated their target of doubling FY16 Services revenue in FY20. Accounted for ~21% of sales and ~1/3 of gross profit.

· Paid subscriptions grew by 30M+ in F3Q19 to over 420M.

· Apple recently announced a $1B acquisition of Intel’s smartphone modem business to further their long-term strategy of owning and controlling the primary technologies behind key products. This could reduce reliance on 3rd party vendors and help Apple differentiate and expedite the development of future products. Qualcomm, who Apple had been in a long legal battle with, dominates the baseband processor market – they design the chips that allow smartphones to connect with data networks. Qualcomm was Apple’s supplier, then b/c of the legal battle they moved to Intel, now they’ll be using Qualcomm again for 5G chips, but this acquisition signals more in-house design long-term. Apple already designs in-house the processor chips (their A12 Bionic chip) that are the “brains” of their phones, iPads etc.

Valuation:

· Trading at about a 1.4% dividend yield, and >6% FCF yield.

· They have about $102B in net cash on the balance sheet. That’s over 11% of their market cap.

· The stock is undervalued and substantial buyback from management’s goal of net cash neutral will support valuation.

· In addition to the >$100B in net cash they already have, they produce about $60B in FCF annually. That’s more than all the other FAANGs combined.

· In Q3 they returned $21B to shareholders through $17B in share repurchases and $3.6B in dividends.

The Thesis for Apple:

• One of the world’s strongest consumer brands and best innovators whose product demand

has proven recession resistant.

• Halo effect -> multiplication of revenue streams: AAPL products act as revenue drivers

throughout portfolio – iPhone, iPod, MacBooks, iPad > iTunes, Apps, Software, Accessories,

• Strong Balance and cash flow generation.
• Increasing returns to shareholders via dividends and buybacks.

$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

www.crestwoodadvisors.com

Key Takeaways:

Current Price: $47 Price Target: $61

Position Size: 1.88% 1-year Performance: -10%

Sensata released disappointing 2Q19 results, with organic sales of -1.6%, below management’s guidance of -1% to +2%. ST lowered its 2019 sales guidance by 3% due to lower end market growth assumptions in auto, HVOR and industrial. In 2Q19, the China auto industry was down 20% and European auto down 10%, much lower than anticipated. Despite weak top line, operating margins remained flat as the company actively managed its expenses and benefited from capital deployment initiatives. Additional actions are being put in place to align its cost structure to the lower market demand, as well as other restructuring actions (2 years payback on the restructuring already started).

Sensata reduced its market assumptions again:

· global auto market: -5%; vs -3% to -4% before

· China auto: -11% to 12-%; vs. -5% to -6% before

· European auto down 4-5%; vs. -4% before

o The auto slowdown is being offset by continued content growth such as electric vehicles battery subsystems

· Industrial -6%; vs. -1% before

· global HVOR market: -4%, vs. -2% before

On the positive side, Sensata continues to outperform the sectors it plays in, and is advancing its initiatives in the electrification theme (partnership with Lithium Balance). Even though the traditional Chinese auto market slowed down quite a bit, ST has been able to increase content per vehicle, allowing them to be somewhat flat in growth this quarter. They see China as the fastest EV market grower, helping sustain ST’s content growth in the future. Despite a weak quarter, the long-term content growth thesis remains intact, and the incremental $500mn buyback program announced today offers some support to the stock.

The Thesis on Sensata

• Sensata has a clear revenue growth strategy (content growth + bolt-on M&A)
• ST is diversifying its end markets exposure away from the cyclical auto sector over time through acquisitions, also expanding its addressable market size
• ST is a consolidator in a fragmented industry and still has room to acquire businesses
• Margins should expand as the integration of the prior two deals is under way, regardless of top line growth, and efficiencies in manufacturing are continuously pursued as they are gaining scale
• ST is deleveraging its balance sheet post acquisitions, leaving room for future M&A or a return to share buybacks, and improving EPS growth

[tag ST]

$ST.US

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

Key Takeaways:

Current Price: $77 Price Target: $91

Position Size: 2.08% 1-year performance: +0.7%

Fortive released its 2Q19 earnings, showing a mixed quarter with softer organic growth (+2% vs. 3-4% guidance) due to a worsening of its short-cycle business, much more so than when it was last discussed by management during 2Q (something that HON also mentioned being cautious about last month). Because of this, FTV is cutting its full year guidance: EPS is now expected to be $3.45-3.60 from $3.55-3.65 (~2% cut) due to lower top line growth (from 3-5% previously now 2.5-3.5%) and macro uncertainty. On the bright side, its EMV business (fuel retailing) is picking up momentum, and recent acquisitions should start contributing to organic growth in 4Q. Continue reading “Fortive (FTV) 2Q19 earnings summary”

Current Price: $1,252 Price Target: $1,350

Position Size: 4.7% TTM Performance: -2%

Alphabet reported earnings, beating on the top line and EPS. Currency neutral net revenue accelerated to +24% YoY vs. +19% in 1Q. Revenue beat and acceleration was a relief after missing on the top line last quarter on a deceleration that wasn’t sufficiently explained. Additionally, some cost pressures moderated – TAC as a percent of revenue decreased and capex growth decelerated. Cloud was one of the top contributors of growth and, after over a year of no specific detail on cloud, they indicated it’s at an $8B run rate. They also announced a new $25B stock repurchase plan.

Key takeaways:

· Top growth drivers were mobile search, YouTube and cloud.

· Operating margin of 23.6% beat estimates by ~100bps as operating expense growth slowed.

· The biggest operating expense increase, once again, was in R&D expenses, reflecting their focus on product innovation. Headcount is also key driver in opex increases.

· Cloud is now at an $8B run-rate. This is double the run rate revealed in Q1 last year. On Amazon’s call yesterday they indicated that AWS growth slowed to 37% from 50% (this was slower than expected growth). Microsoft’s Azure grew 68% in the quarter. This substantiates the idea that the cloud positioning of Google, along with MSFT, is improving.

· Google had a change in leadership in their cloud business this year and is looking to triple its cloud division sales force this year.

· They mentioned some major cloud customers including Lowe’s and Vodafone,

· YouTube: channels with >1M subs grew 75%. YouTube Music and YouTube Premium now available in over 60 countries, up from five markets at the start of 2018.

· They have long talked about hardware as a growth priority for them and gave some positive data points around the most recent Pixel phone launch in May. They also said to stay tuned for a new hardware launch coming in the Fall.

· Stadia, their streaming video game business will also launch in the Fall.

· While Amazon is poised to take share in online advertising, growth in AMZN’s emerging ad business again decelerated this quarter while Google saw accelerating growth.

· Waymo announced that it has entered into an exclusive partnership with Renault and Nissan to explore driverless mobility services for passengers and deliveries in France and Japan.

· Increasing buybacks: repurchased $3.6B of stock in 2Q vs. $3B in 1Q and announced a new $25B stock repurchase plan – there’s ~$7B remaining on previous authorization.

· ESG: announced a $1 billion investment in housing across the Bay Area to help address the chronic shortage of affordable housing. And earlier this week, they invested $50 million in Housing Trust Silicon Valley’s TECH Fund, which furthers the goal to help communities succeed over the long-term and expands access to housing for those who need it most.

Valuation:

· Operating cash flow was $12.6 billion with free cash flow of $6.5 billion.

· Reasonable valued, trading at >4% FCF yield on 2020.

· $108B in net cash, ~14% of their market cap.

$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

Alphabet is up >6% after-market – they reported earnings, beating on top line and EPS. Alphabet 2Q Rev. Ex-TAC $31.71B vs street $30.84B. EPS was $14.21 vs street $11.49. Positives included strong growth in “other” revenue which includes cloud and some moderation in capex spending which has been very elevated. More details to come.

$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

Share Price: $96 Target Price: $105

Position Size: 2.9% 1 Yr. Return: 18%

Hilton beat on revenue ($2.5B vs $2.4B) and EPS ($1.06 vs $1.02, +23%). Full year RevPAR guidance lowered as global macro trends weaken. Despite that, EPS guidance was increased, demonstrating the strength of their high incremental margin, fee driven business. On 1.4% RevPAR growth in 1Q, they grew EBITDA 11% – again ahead of the high end of guidance and consensus. While RevPAR is weakening, they are outpacing peers and their model is a lot less dependent on macro driven RevPAR growth and much more pipeline dependent. Their pipeline growth is not slowing and has some countercyclical aspects. They reiterated their plan to return $1.3-$1.8B in capital to shareholders for the year, equating to 5-7% of current market cap. They’ve already returned almost $800m YTD.

Key takeaways:

· RevPAR of 1.4% (this was the mid-point of guidance) outperformed the industry for the 6th consecutive quarter. RevPAR increase driven by increases in both ADR and occupancy.

· Full year RevPAR guidance lowered to 1-2% from 1-3% as their broad macro outlook has weakened.

· Solid net unit growth continue to drive strong performance. Net unit growth of 7% is running ahead of originally targeted 6.5% for the year. Current pipeline of 373k rooms represents 40% unit growth. With expected annual growth of about 6%, this is several years’ worth of growth with about half of it already under construction. >50% of pipeline is outside of the US. And more than 90% of their deals do not require any capital from them.

· Continued improvement in their market leading RevPAR index – RevPAR index is RevPAR premium/discount relative to peers adjusted for chain scale. They are the market leaders – this is helpful because it’s what leads to pipeline growth (hotel operators want to associate w/ the brand that yields the best rates and occupancy) and is helpful in a macro downturn because it’s even more crucial for a developer to be associated with a market leading brand to get financing. i.e. they would likely take more pipeline share if lending standards tighten. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton).

· In a sensitivity analysis to a market downturn, mgmt. said they would expect flat to slightly positive growth in adjusted EBITDA and positive growth in free cash flow in an environment where RevPAR were to decline 5% to 6%. This is b/c 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.

· Tru is a fast growing new brand for them which management says has the opportunity to be much bigger than Hampton Inn. Hampton Inn is their largest brand with over 250K rooms.

· Their model is resilient because their pipeline is their growth driver.

· China is seeing weakness – their Chinese business is largely driven by Chinese domestic leisure travelers – these consumers are being negatively impacted by the trade war. Ongoing protests in Hong Kong are also having an impact.

· Loyalty members hit 94m from 89m last quarter and account for >60% of system-wide occupancy. Goal is to have 100m members by the end of the year.

· The stock is undervalued, trading at ~6.5% FCF yield on 2019.

Investment Thesis:

∙ Hotel operator and franchiser with geographic and chain scale diversity of 17 brands, 5,900 hotels and 939k rooms across 114 countries (Hilton, DoubleTree, Hampton Inn & Hilton Garden Inn ≈ 80% 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

Current Price: $181 Price Target: $185

Position Size: 4.3% TTM Performance: 29%

Visa continued to perform well in the third quarter with better than expected revenue and EPS. Net revenue was +11% vs street +8%. EPS was $1.37 vs consensus $1.32. Full year revenue guidance reiterated and EPS guidance raised on lower client incentives. Purchase volumes accelerated from last quarter but were slightly weaker than expected. Easter was blamed for weakness last quarter and benefited this quarter. Cross border, which accounts for about a quarter of gross revenue and is higher yield, also improved. Fluctuations in exchange rates leads to choppiness in this business. They reaffirmed full-year 2019 net revenue growth of "low double-digits" on nominal basis and slightly increased adjusted EPS growth to “mid-to-high-teens.” Management said volume growth through the first few weeks of Q4 remained solid.

Key Takeaways:

· They had 52 billion transactions (+10%) on their network driving >$2.2T in total volume, +9%, an acceleration from +8% last quarter. Credit was +7% and debit was +11%.

· US payments volume growth was ~9%.

· International payments volume growth in constant dollars was +2.2%. FX was ~670bps headwind.

· They saw decent growth across all geographies.

· Announced extension of their relationship with the largest issuer, JPM, through 2029.

· More emphasis on potential of Visa Direct – this capability supports long-term secular growth in non-traditional transactions (i.e. not consumer-to-business (C2B)). This enables direct, real-time, bank account to bank account transfers and is an important capability for them long-term that drives growth in B2B, B2C, P2P, G2C. This technology, which powers Venmo and enables new payment flows like an insurance reimbursement, massively increases their addressable market. Recently closed Earthport acquisition supports this, especially with cross border.

· Contactless payment will also be a growth driver – Many markets, including the US, are very underpenetrated. In more mature markets like Australia there’s 90% penetration. Contactless = wave your card over reader instead of swipe. It leads to higher penetration of small transactions where cash tends to be used.

· Total cards outstanding up 3% to 3.4B. One third credit, two thirds debit.

Valuation:

· Strong FCF continues to support buybacks.

· Trades at a ~3.5% FCF yield. Reasonable for a company w/ >50% FCF margins, high ROIC, and, absent a recession, should continue growing top and bottom line double digits.

Thesis:

· Visa is the number one credit and debit network worldwide – accounting for about half of all credit and roughly three fourths of all debit card transactions.

· We are still in the earlier innings of the digitization of electronic payments. This is a secular tailwind supporting Visa’s growth as 1.) Electronic payments continue to replace cash 2.) Commerce moves online 3.) Consumer spending grows globally

· Visa’s asset light “toll both” business model is characterized by recurring revenues, high incremental margins, low capital expenditures, and high free cash flow.

· Visa’s recent acquisition of Visa Europe should be a nice tailwind over the next few years as the European market is in the earlier stages of electronic payment adoption and Visa is well positioned to gain market share and improve margins in the region.

$V.US

[tag V]

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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