Month: October 2019

AAPL reported better revenue and EPS than estimates. Guidance for next quarter, which is seasonally their largest, was also ahead of expectations. By product, iPhone sales were down less than expected. They beat everywhere except Macs. However, for 2019 overall they generated the highest annual revenue ever for Mac.

Key Takeaways:

· Services growth accelerated to +18% and saw double-digit growth in all regions. They have several new services that aren’t making much of a contribution yet (Arcade, Apple News+, Apple TV+).

· Services segment accounted for 20% of revenue and 33% of gross profit. Positive commentary around launch of Apple Card. Apple Pay transactions more than doubled YoY to >3B transactions. Exceeding PayPal’s number of transaction and growing 4x as fast.

· Strong wearables performance (>50% growth YoY) driven by Beats, Watch and air pods. Set a Q4 records for Wearables in each and every market they track.

· iPhones declined 9% in Q4, but beat estimates (improvement from 15% decline they saw across the first three quarters). iPhone 11 is their best-selling iPhone.

· China improved – Greater China revenue at $11.1bn declined 2% Y/Y (up YoY in constant currency), improving from the 4% decline in FQ3. Management called out strong Wearables performance and double-digit Services growth as it saw more gaming approvals in the quarter.

· In general, they seem to be easing on iPhone pricing and it’s helping units. They lowered price points of the new lineup and have taken “lower exchange rates” in some markets internationally. Additionally, being promotional in the sense that customers can purchase their new iPhone with the Apple Card and pay for it over 24 months with zero interest and 3% cash back. With it they also get a year of free Apple TV+.

· Comment on tariffs: “We are paying some tariffs today as you know, some that went into effect pre-September, and some others that went into effect in September. So we are paying some that’s been comprehended. But in general, my view is very positive in terms of how things are going, and that positive view is obviously factored in our guidance as well.”

· They reiterated goal of being net cash neutral “over time.”

Valuation:

· Trading at about a 1.2% dividend yield, and ~5.5% FCF yield.

· They have about $103B in net cash on the balance sheet. That’s over 9% 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.

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

Current Price: $50 Price Target: $61

Position Size: 2.51% 1-year Performance: +9%

Key Takeaways:

Sensata released 2319 results, with sales contracting 2.7% due to weaker end markets. During the call, the management team commented on not seeing any auto industry relief near term, with the GM strike adding salt to the injury. However, the thesis on the name is still there, with content growth allowing ST to perform better than the industry it plays in. Its balance sheet is much stronger than it was a couple of years ago thanks to aggressive deleveraging, allowing the company to act on opportunities as they come.

Segments review:

· Automotive organic sales decline of -0.4%: in China, they saw an improvement over last quarter, but sales were still down. In North America, the sector still has positive growth, but they were impacted by the General Motors strike. The European auto market is still weak.

· HVOR organic revenue growth was -6.2% y/y: construction and agriculture end markets are incrementally weaker, experiencing inventory destocking.

· Aerospace & industrial: organic growth was -6.3%, worse than last quarter. China exports were weak, HVAC was impacted by lower demand of refrigerated trucks. Aerospace remains the bright spot.

Based on current market conditions, ST lowered its growth outlook for 4Q19. They also did a good job during the call at providing more details on future growth projects, for example the role they can play in helping fleet managers reduce downtime and become more efficient though the use of truck-to-trailer link and a telematics ecosystem (a $6B market). This is a place where ST can become a key data insight partner.

Continue reading “Sensata (ST 3Q19 earnings summary”

Current Price: $215 Price target: $240

Position size: 2.79% 1-year Performance: +36%

Key Takeaways:

Stryker released 3Q19 results with organic sales up +8.6%, a sequential decline – if you exclude 1% from the extra selling day – that bears are hanging on to. Pricing was somewhat negative across the segments this quarter, but made up largely by volume growth. The K2M salesforce integration is somewhat slower than expected, impacting the spine segment’s performance, but this should be resolved in the coming quarters. The operating margin improved 50bps y/y thanks to lower SG&A and R&D.

Results by segments:

· Orthopedics organic sales were up +8.8%. There were 51 Mako robots sold (vs. 37 in 3Q18), in spite of the competitive Rosa launch by Zimmer.

· MedSurg organic sales were up +8.8%.

· Neurotechnology and spine organic sales up +7.6%.

The management team reiterated their guidance for the year (7.5-8% organic sales growth), although seeing the higher end as most likely. Overall the thesis on SYK is intact. Continue reading “Stryker 3Q19 earnings summary”

Current Price: $1,257 Price Target: $1,350

Position Size: 4.7% TTM Performance: +18%

Alphabet reported mixed results, beating on the top line and missing on EPS. Revenue growth was +22% ($40.5B vs. consensus of $40.3B) driven by better than expected ad revenue. Net advertising revenue totaled $26.4B compared to consensus at $26.3B. While some cost pressures moderated, they also had some one-time hits that impacted earnings including a $1.5B unrealized loss on investments in other companies. They are an active venture capital investor (Capital G), but didn’t say which investments contributed to the loss. They also took a hit from a $554 million legal settlement in France. TAC as a percent of revenue decreased and capex was lower than expected. Reuters reported yesterday that Google made an offer to buy Fitbit, sending Fitbit shares up 30% yesterday, but mgmt. wouldn’t comment about this on the call.

Key takeaways:

· Interestingly, they’ve recently been evolving the way they talk about their mission. They used to say it was to “organize the world’s information” – now they say, “we’ve evolved from a company that helps people find answers to a company that helps you get things done.” Shift suggests growing focus on cloud, AI and hardware.

· Two significant technology advances:

1. “Dramatic improvement” in their search algorithm b/c of a new type of neural network based technique called BERT. Here’s an article about it: https://techcrunch.com/2019/10/25/google-brings-in-bert-to-improve-its-search-results/

2. Quantum supremacy – Google’s 53-qubit quantum machine, Sycamore, successfully performed a test computation in just 200 seconds that would have taken the most powerful supercomputers many years to accomplish. “Distinct milestone in our effort to harness the principles of quantum mechanics to solve computational problems.” For anyone who is interested, you can learn more about this here: https://www.ft.com/video/48d44362-3926-4111-b19b-037c0394a85c?emailId=5db6d71006676700047a9d10&segmentId=13b7e341-ed02-2b53-e8c0-d9cb59be8b3b&playlist-name=editors-picks&playlist-offset=4

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

· Key expense lines:

o Higher cost of revenues as a % of sales driven by costs associated with data centers including depreciation, content acquisition costs (primarily for YouTube), and impact of Pixel 3a hardware costs, offset by lower % of TAC.

o Higher than expected opex driven by legal settlement in France. Headcount is also key driver in opex increases. Sizable headcount increase focused on cloud business.

· Google Other Revenues (includes Google Play, Google Cloud, and Hardware)

o $6.4B in revenue vs consensus of $6.3B, up +39% YoY.

o Cloud: No specific detail on cloud. Last quarter they indicated it was at an $8B run-rate. Google had a change in leadership in their cloud business earlier this year and is looking to triple their cloud division sales force over the next few years.

o Announced partnership with Mayo Clinic – they will us Google Cloud to secure and store data and understand insights at scale. The partnership will encompass transforming patient and clinician experiences, identifying new methods of diagnosing diseases, conducting clinical research and finding new models for delivering patient care.

o Hardware:

§ They have long talked about hardware as a growth priority for them.

§ Hardware benefited from the Pixel 3a – their lower priced phone. The phone did a lot better than the more expensive Pixel 3.

§ New products…Nest mini, Pixelbook Go, Pixel 4 and Pixel Buds, similar to air pods.

o Gaming: Stadia, their streaming video game business, will soon be available in the US, UK, Canada, and throughout Europe.

· Other Bets: Waymo continues to progress…expanding in Phoenix and testing long-haul truck driving on Arizona freeways. There will also be heavy-rain testing in Florida and 3-D mapping in Los Angeles.

· Record High Share buybacks – $5.7B in Q3 which brings buybacks to $12.3B YTD. $121B of cash & equivalents on the balance sheet.

Valuation:

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

· $107B in net cash, ~13% 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

Current Price: $179 Price Target: $185

Position Size: 4.2% TTM Performance: 29%

Visa reported better than expected Q4 revenue and EPS. Net revenue was +15% and adj. EPS was +23%, $1.47 vs consensus $1.43. Payments volume growth was strong at +9% (constant currency). They introduced full-year 2020 guidance of net revenue growth of "low double-digits" and EPS growth of “mid-teens.” Guidance in-line with consensus but includes higher client-incentive fees due to a high level of contract renewal activity. In general, growth trends of their key business drivers – payments volume, processed transactions and cross-border volume – have been stable.

Key Takeaways:

· They had 47 billion transactions (+12.6%) on their network driving >$2.27T in total volume, +9%, in line w/ last quarter. Credit was +7% and debit was +11%. Cross border was +7%

· US payments volume growth was ~8% with credit growing 7%and debit 10%.

· International payments volume growth in constant dollars was 10%. The UK remains weak, but growth has now improved for two quarters after hitting a low in March.

· Expanding access with new players – This is critical to expanding credentials and acceptance globally. Deepened relationships with several FinTech partners across the globe including Chime, N26, Railsbank and Toss.

· Teaming up with Samsung to allow merchants to accept contactless payments with just an app download and no hardware. So in essence the phone becomes the terminal.

· Launched common button – they’ve been discussing this for a while. This is a joint effort between AmEx, Discover, MasterCard and Visa of a joint click-to-pay button that makes online checkout easier.

· B2B (Visa Direct) was 12% of volume in 2019. Recent developments in B2B include Visa Direct integration with Oracle ERP that allows customers to make payments directly from the account payable system.

· 2020 FCF should be ~$12B and they anticipate returning at least $12B to shareholders through dividends and stock buybacks.

Valuation:

· Strong FCF continues to support buybacks. Returned $2.7 billion of capital to shareholders in Q4 and $10.9B for the full year.

· Trades at a ~4% 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.

· Announced a 20% increase in their quarterly dividend to $0.30 – puts the payout ratio in 20%-25% range.

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

PLEASE NOTE!

We moved! Please note our new location above!

Current Price: $69.9 Price Target: $86 (NEW – lowered from $91)

Position Size: 2.22% 1-year performance: -6%

Key Takeaways:

Fortive released its 3Q19 earnings, with core sales growth of 2%, thanks to high growth in its Industrial Technologies business, making up for weakness in its short-term cycle businesses. Retail fueling (gas pump upgrading to chip card reader) continues to be a bright spot globally.

The management team further reduced its 2019 guidance, lowering organic sales growth and EPS as macroeconomic trends are worse than expected and possibly could continue into 2020. We are lowering our price target to reflect weaker sales in 2019 and possible continued slowdown in early 2020. Overall we think the long-term thesis around increasing SaaS as a % of revenue and moving away from cyclical businesses is still intact. Continue reading “Fortive (FTV) 3Q19 earnings summary”