Month: August 2019

Current Price: $50 Price Target: $60

Position Size: 3.4% TTM Performance: 1%

TJX initially traded down after reporting revenue that missed quarterly estimates and guiding below consensus for next quarter. Since the call the stock has recovered as management indicated weather in May dampened same store sales (SSS) results which contributed to the miss. SSS in June and July materially improved. Weak SSS at HomeGoods also contributed to the miss, but mgmt. said that was almost entirely self-inflicted and not really about a weakening macro environment. Additionally, management’s commentary around their inventory positioning eased concerns of bloated inventories (inventory growth outpaced sales growth in the quarter). Full year SSS and EPS guidance maintained.

Key takeaways:

· Revenue missed on same store sales of +2% vs expected +3%.

· Traffic was again the biggest driver of SSS. E-commerce sales are not included in SSS numbers.

· EPS was in-line with expectations.

· Management sees Q3 EPS of $0.63-$0.65, below consensus of $0.68, on same-store sales growth of 1%-2%. In Q3 they are lapping their strongest quarter last year which saw a 7% consolidated comp increase and a 9% comp at Marmaxx.

· In Q2, their core Marmaxx division (60% of revenue) delivered SSS growth of +2%.

· Flat SSS at HomeGoods contributed to the miss – management attributed this to issues in a few categories which they are working to fix. This led to higher markdowns and some margin compression in this segment. Mgmt said 80% to 90% self-inflicted execution issues and very, very, very little macro environment.

· International comp sales grew an impressive 6%. Despite the challenging retail landscape in Europe they continue to take share as many other major retailers across Europe report slower sales growth and close underperforming stores.

· Higher payroll costs and escalating freight expenses from rising home-furniture penetration are margin headwinds

· Merchandise margin was down, but would have been positive ex-freight.

· In terms of inventory, mgmt. said they are “thrilled with the tremendous buying opportunities we see in the marketplace, and are in an excellent position to take advantage of them .”

· When asked on the call about the impact of tariffs they said in the “short term, we believe some of the advantageous buys that we’re making more recently could be due to early delivery of tariff category merchandise.”

· Chart below demonstrates TJX’s resistance to e-commerce and economic cycles. Despite the ramp in e-commerce share of retail over the last several years, of the companies listed below TJX is nearly half of aggregate incremental spend. The companies listed below represent ~$200B of the $275B in US apparel retail sales. Additionally, in the ’08 to ’09 period they were one of few retailers that continued to grow and post positive SSS.

Continue reading “TJX 2Q20 Earnings Update”

Current Price: $46 Target Price: $63

Position size: 4.1% TTM Performance: 7%

CSCO reported strong Q4 results, but guided below expectations for next quarter. Revenue growth guided to 0% to +2% vs street +2.6% and Q1 adj. EPS guided to $0.80c to $0.82 vs street $0.83. Weaker than expected guidance driven by Server Provider end markets (e.g. telecoms) and China. While China is only about 3% of sales, revenue was down 25% in Q4 and is down “very dramatically” in Q1 which mgmt attributed to the trade war and said that with state-owned enterprises in China they are being uninvited to bid. Their Service Provider end markets have been weak for some time, but should improve over time as telecoms spend to build out the core of their networks for 5G. Management’s tone about the macro environment was more negative…” we did see in July some slight early indications of some macro shifts that we didn’t see in the prior quarter.”

Thesis intact, key takeaways:

· Total revenue was $13.4 billion, up 6%. Non-GAAP EPS was $0.83, up 19%. Q4 gross margin was 65.5%, up 2.3 points.

· Infrastructure platforms (largest segment, ~58% of revs) grew 6%. All of the businesses were up with the exception of routing. Switching had a great quarter with double-digit growth with the continued ramp of Cat 9K and strength of the Nexus 9K. Routing declined due to weakness in service provider end markets.

· Applications were up 11% with collaboration, AppDynamics and IoT software all up double digits.

· Security was up 14% with strong performance in identity and access, advanced threat, unified threat and web security.

· Service revenue was up 4% driven by software and solution support.

· They continue to transform their business, delivering more software offerings and driving more subscriptions. Subscription revenue was 70% of total software revenue, up 12pts YoY and 5 points sequentially. This transition will drive an upward trend in CSCO’s margins over the next several years.

· While orders were flat YoY, orders outside of service provider grew mid-single digits. Total product orders growth was flat. By geography, Americas was up 1%,EMEA was up 4% and APJC was down 8%. Total emerging markets were down 8% with the BRICS plus Mexico down 20%. By customer segments, enterprise was down 2%, commercial grew 7%, public sector was up 13% and service provider was down 21%.

· Cisco is helping their customers change their technology infrastructure to accommodate new technologies like cloud, AI, IoT, 5G and WiFi 6. Their evolving portfolio of products help customers navigate this complexity by helping them simplify, automate, and secure their infrastructure. They are in the early innings of evolving network architectures.

Valuation:

· They have a 3% dividend yield which is easily covered by their FCF.

· In their Q2 fiscal ’18 earnings call, they said they would return $31 billion through share repurchases over the following 18 to 24 months. As of Q4 fiscal ’19 they completed that commitment with share repurchases of 32.6 billion. Going forward, they will return to a capital allocation strategy of returning a minimum of 50% of their FCF to shareholders annually through share repurchases and dividends. This indicates much less buyback going forward as their annual dividend is $6B and half of annual FCF would be less than $8B.

· They have ~$9B in net cash. In the quarter they returned $6B to shareholders – $1.5B in dividends and $4.5B in buybacks.

· Forward FCF yield is ~7.5%, well above sector average and is supported by an increasingly stable recurring revenue business model and rising FCF margins.

· The company trades on a hardware multiple, but the multiple should expand as they keep evolving to a software, recurring revenue model. Hardware trades on a lower multiple because it is lower margin, more cyclical and more capital intensive.

Thesis on Cisco:

· Industry leader in strong secular growth markets: video usage, virtualization and internet traffic.

· Cisco is the leader in enterprise switching and service provider routing and one of the few vendors that can offer end-to-end networking solutions.

· Significant net cash position and strong cash generation provide substantial resources for CSCO to develop and/or acquire new technology in high-growth markets and also return capital to shareholders.

· Cisco has taken significant steps to restructure the business which has helped reaccelerate growth and stabilize margins.

$CSCO.US

[tag CSCO]

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

PLEASE NOTE!

We moved! Please note our new location above!

Cisco reported Q4 results that beat expectations, but guidance for their fiscal Q1 is below estimates. Revenue growth guided to 0% to +2% vs street +2.6% and Q1 adj. EPS guided to $0.80c to $0.82 vs street $0.83. More details to come.

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

$CSCO.US

[tag CSCO]

Current Price: $1,916 Price Target: $2,400

Position Size: 2.5% TTM Performance: -4.7%

Key Takeaways:

· Gross bookings growth was $25B up 5% YoY and up 10% constant currency. Guidance was for 4-6% growth constant currency.

· They booked 213 million room nights in 2Q, a 12% increase (6-8% guided).

· ADR’s down 1.5% a little better than the -2% last quarter. Geographic mix and stronger dollar negatively impacting ADR’s. Countries with lower ADR’s growing faster and European travelers to the US trading down b/c of stronger dollar.

· Revenues were $3.85B, up 9% (14% constant currency), better than the $3.75B expected.

· Bookings guidance for Q3 (peak travel season) was lower than expected, but they have a long history of guiding conservatively (chart below). Guidance for Q3 is +3-5% gross bookings growth constant currency, suggesting a deceleration from this quarter (partly driven by tougher compares). Despite this, management noted a “solid start to the summer travel season”

· Increased ad spend this quarter (+8%) aided higher bookings growth. They’ve been trying to “optimize” ad spend for several quarters which has been resulting in weaker bookings growth…clearly this ad spend/rev growth algorithm will continue to be a focus going forward as the trade-off between growth and spend persists.

· On the call they said “short-term return on our brand spending is running below our expectations. As a result, we plan on refining our spending levels on brand marketing in the second half of the year.”

· Investing for growth: focus on “connected trip” and payment platform that supports non-hotel properties. Investments will reduce their full year EBITDA growth by a few percentage points. Connected trip vision encompasses all of their brands w/ a goal of broadening focus from accommodations to other aspects of travel spend. They’ve been talking about this for a while, but focus here seems to be ramping with more emphasis on leveraging assets like Opentable.

· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. This is growing faster than their overall business. They declined to give any details on the state of this business when asked.

· French digital services tax will have $32m full year impact.

Continue reading “BKNG 2Q Results”

Key Takeaways:

Current Price: $57 Price Target: $90

Position Size: 1.64% 1-year Performance: -17%

This morning CVS published its 2Q19 earnings results, with EPS above expectations (an 11% beat) thanks to higher revenue and gross margins. Revenue was up 3.7%: pharmacy same-store-sales were +4.7% (comparable scripts were up +7.2% thanks to better adherence to taking medication) and front end same-store-sales were +2.9% (although 80bps of that was a shift in Easter holiday date y/y). On the PBM side, claims were up 4% y/y, a growth in volume that helped boost margins 9.7% y/y. Net new business is still negative (-$7.6B, on the loss of Centene and lower new contracts) but this result was better than the previously negative $8.7B provided at the June investor day. Aetna is performing well, with synergies expectations now to be $400M in 2019 vs $300-350M previously announced: formulary optimization and transition of functions happening faster than initially thought (such as consolidation of the mail operations and pharmacy). The management team raised its FY19 guidance to $ $6.89-$7.00 from $6.75-$6.90. Its 2020 EPS is currently $7, which appears conservative at this point. We believe sentiment around this name will improve as regulatory concerns dissipate and we gain more clarity on PBM business wins during the year. Continue reading “CVS 2Q19 earnings summary”