Month: May 2020

Sharing some quotes from earnings calls from some non-Focus Equity names. Thought these quotes would be interesting to share as they tie into some of the recent Q1 themes we’ve discussed…

 

 

Shopify (SHOP), cloud based platform that helps merchants create online storefronts

Theme: Rising e-commerce competition

COO, Harley Finkelstein said, “It has become increasingly important for merchants of all sizes to sell online and to have better options for getting their goods to buyers…we’re helping, getting more large merchants online in our core geographies faster… and I have to tell you on a personal level, these are brands that I’ve been after for years to join Shopify and join Shopify Plus that told me that eventually they will do it. They are now doing it. And so, in many ways, what the situation is doing is it’s accelerating the catalyst for people to move from wholesale businesses to direct consumer businesses and move from businesses that traditionally were only brick and mortar to being more in a brick and click sort of model. So pleased to see that and we think that will continue.

 

Regency Centers (REG), Retail REIT

Theme: Rising e-commerce competition

CEO, Lisa Palmer said, “the part of retail real estate that we operate in, I think it’s best positioned. Whatever that post-pandemic world looks like, I like the fact that we are close to neighborhoods and that we have grocery-anchored shopping centers and the quality of our real estate. It’s something that was true pre-COVID, and it’s certainly going to be, I think, even more true post-COVID as retailers continue to focus on having physical presence, which I think they still need. And if anything — and perhaps this is highlighted, some of the difficulties in the cost of delivering picking up. And that physical presence really is going to be critical as part of their overall strategy. And being close to the customer and having the best locations is going to be of critical importance to them.”

 

Zillow (ZG), E-commerce real estate platform

Theme: Strength in housing/home improvement

CEO, Rich Barton said, “According to MIT about half the U.S. workforce is now working from home. And they’re not just working from home, they’re teaching their kids, feeding each meal, conducting their social lives all from home. But they are dreaming about an extra room for an office, a bigger yard or less dense neighborhood or for many of you may be a new second home, there is evidence that the experience has uncorked new aspirations and hopes of what home can be and needs to be…. Amid the jolting stories of lives, jobs and business lost, we are grateful to be able to share not just strong Q1 results, but evidence of the housing markets resilience and an encouraging readiness, perhaps pent up restlessness among people who are shopping on Zillow… We have seen all our metrics bounce off the bottom. Some metrics at the top of the funnel like visits have more than fully recovered and are up double-digit percentages year-over-year, indicating to us even higher demand to move or at least fantasize about moving than before.”

 

 

 

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

 

 

$SHOP.US

[tag SHOP]

$REG.US

[tag REG]

$ZG.US

[tag ZG]

[category equity research]

 

Key Takeaways:

 

·         Quarterly sales decline 25% as April included in the quarter

·         US has a 33% decline in April sales while China -21%, improving from its -46% in February/March

·         Margins impacted as company continues to invest, contrary to other medtech firms

·         Cash position is robust, dividend increased

 

Current Price: $97                               Price Target: $121   

Position Size: 2.91%                           TTM Performance: +3.5%

 

Medtronic released their 4Q FY20 results last week. Organic revenue was down 25% as the pandemic diverted healthcare resources away from elective procedures and bulk purchases. The decline in revenue impacted earnings as well, with non-GAAP EPS down ~63%. Margins have been compressed from COVID related expenses, and mix shift towards lower margin products and an increase in China tariffs, but also because it is not lowering salary expenses.

Since Medtronic’s fiscal year doesn’t follow the typical calendar year, their latest quarter includes April, which corresponds to the beginning of the pandemic in the US (48% of sales) and Europe (vs. other medtech names that ends their quarter in March, thus only 2 weeks of the crisis). This gives us some insight into the impact of the virus on sales in developed countries in April (Q2 for most companies) : in April the US showed a 33% decline, Western Europe 32%, and China 21% – China was an improvement from the -46% in Feb and March. A reminder that emerging markets represents 15% of total sales.

In terms of capital allocation, Medtronic will continue to focus on smaller deals (~$1B in size), which should limit the need to issue additional debt. Its cash position is strong (~$11B in cash), no near term debt maturity due and access to $3.5B credit facility.

Regarding expectations for next quarter, it should be slightly worse than Q4 as they will have a full quarter impact of procedures deferrals. The company is not cutting back on investments, hoping to be on the offense. The management team is not providing a detailed FY21 guidance at this point, only that it is expecting a recovery beginning in the second quarter of its fiscal year. We think that Medtronic’s diversified products (especially Respiratory and patient monitoring, as well as life support) should help the company weather the crisis. Near term, unlike others, the company chose to not cut back on its sales team salary as it wants to gain share once the COVID-19 crisis eases (which explains the great deleverage on the EPS line).

Today we see the decline in sales priced in the stock, and the cash position makes us comfortable that Medtronic remains a low-risk, with room for some M&A.

 

 

MDT Thesis:

·         Stands to benefit from secular trends (1) increased utilization from Obamacare (2) developed populations age

·         Strong balance sheet and cash flows. Increased access to non-cash should allow MDT to meaningfully increase their dividend

·         6% normalized Real Cash yield provides solid total return profile over next 2-3 years

·         Ownership interest aligned. Management incentivized to maximize shareholder returns – 14% 10yr average ROIC

Category: Equity Earnings

 

Tag: MDT

 

$MDT.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

 

 

Current Price:    $54                        Price Target: $70

Position Size:    3.5%                      TTM Performance: 3.5%

 

Key takeaways:

·         Revenue missed at $4.41B, -52% YoY. However, consensus number not that meaningful as the range of estimates was incredibly wide w/ some seemingly not updated.

·         Prior to the pandemic, SSS trends were strong.

·         They have begun re-opening stores (1600 so far) and say most stores could be re-opened by the end of June.

·         Strong re-openings. Stores that have opened have seen increased volumes YoY.

·         Seeing plentiful off-price buying opportunities

·         Committed to resuming dividend payments

·         No guidance

 

Additional Highlights:

 

·         Pre-virus trends: February SSS were +5% driven by higher traffic. All 4 major divisions had a February comp increase of 5% or better. Strong comp trend continued into the first week of March

·         Virus response: They closed stores in all nine countries and their online shopping sites as well as their distribution centers, and offices around the world. On April 11 they temporarily furloughed the majority of their hourly store and distribution center associates in the US and Canada and took comparable actions with parts of their workforce in Europe and Australia. They started out w/ a strong balance sheet, but took additional steps to maintain their liquidity and flexibility – they halted their dividend, drew down $1B of their credit facility and raised $4B in debt at the end of March. They don’t expect to issue a dividend in Q2 either, but remain committed to their dividend long-term.

·         Rent: they paid most of their rent through April. However, they have worked with many of their landlords and negotiated deferral of some of their April rent and a meaningful portion of their 2Q rent payments, until later dates.

·         Re-openings: they have reopened >1600 stores worldwide (of their >4500 stores). Stores in mainland Europe including Germany, Poland, Austria, and the Netherlands are open and stores in Australia are open. In the US, they’ve fully or partially reopened in 25 states.

o   “for the 1,100 plus stores that have been open for at least a week, sales overall have been above last year across all states and countries where we are open.”

o   “In our early results, we are seeing very strong demand at HomeGoods and in our home categories across all of our banners.”

o   “in this environment, we believe more consumers may discover our e-commerce sites, which could also drive additional visits to our stores as historically the vast majority of returns from our online sites have gone to our stores.”

·         Inventory: The marketplace is loaded with inventory which is an opportunity for them. They are taking markdowns on seasonal stuff, to clear through some of their own inventory. But they stand to benefit as they can be opportunistic in the current environment for goods that they can flow into stores now and goods that they can packaway. The inventory situation broadly is unprecedented. In fact it’s causing vendors to pack-away some inventory for next year as some inventory in the channel never even made it to stores. This is a new dynamic given how severe the situation is and bodes watching going forward.

·         Valuation: The stock has recovered from troughs and is now down ~10% YTD. Valuation reasonable at >4% FCF yield on 2019.

 

 

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

 

 

$TJX.US

[tag TJX]

[category earnings]

 

Key Takeaways:

·         HD reported strong Q1 results, beating on revenue but missing on EPS due to elevated costs related to COVID-19.

·         Strong SSS for the quarter (+6.4%), with “significant acceleration” to double-digit SSS at the end of April into May. This included self-imposed limits on foot traffic, adjusted store hours and halted non-essential install services (“several points of SSS impact in the quarter”).

·         Omni-channel strategy shines. E-Commerce sales were 15% of sales in the quarter, up+80% YoY, with >60% of online sales picked up in store. Their e-commerce sales accelerate to triple-digit growth by the end of April.

 

Additional Highlights:

·         Elevated opex (benefits/wages) used to support employees during the pandemic. HD made a series of adjustments to support associates including improving benefits, eliminating co-pays, increasing overtime wages and expanded paid time off for all hourly associates. This eroded margins in the quarter, but they should see improvement – excluding the increased benefits margins would have increased by 120 bps on strong expense control.  

·         Macro commentary: strong housing market heading into this. In normal, non-housing led recession, they would expect flat SSS.

·         Investments in omni-channel & distribution infrastructure were key in enabling them to grow in this environment

o   Online: As shelter-in-place orders were rolled out across the country in mid to late March, they saw their digital businesses accelerate from ~30% growth in early March to triple-digit growth by the end of April. Investments in their omni-channel strategy enabled them to support these record e-commerce orders and quickly shift to contactless curbside pickup.

o   SSS benefited from different fulfillment capabilities like buy online, pickup in store, and enhanced delivery capabilities, like flatbed truck, box truck and car and van service. Their BOPUS and deliver from store fulfillment options saw a triple-digit growth in the first quarter.

·         SSS Details:

o   For Q1 SSS were +6.4% vs street 4.3%. US SSS were +7.5%.

o   Positive comps of 9.3% in February, 7.1% in March and 4.2% in April. Comps in the US were positive 7.5% for the quarter, with positive comps of 9.7% in February, 7.5% in March and 6.4% in April. Those SSS include a 3 week period, just after shelter-in-place orders – the last week of March and the first two weeks of April – where they saw negative comps in most departments.

o   Prior to the outbreak, saw strong sales across the store with all departments showing mid-single to double-digit comps.

o   Ticket increased 11% and transactions decreased 4%, reflecting the lower traffic. Saw strong performance in big ticket categories like appliances and riding lawnmowers. This was offset by pressure in categories like special order kitchens, countertops and flooring, where they intentionally limited installation services in customers’ homes.

o   Not surprisingly, and related to the above point, DIY sales grew faster than Pro sales.

o   For the full quarter, they reported positive comps in 11 of their 14 merchandising departments.

o   Comps in kitchen and bath, flooring and millwork, departments with a heavy reliance on in-home installation were negative during the quarter.

·         No guidance. “Month-to-month and even week-to-week, we saw extreme ups and downs across different categories and geographies. As a result, we are cautious to extrapolate trends from the first quarter into a forecast for the remaining of the year, particularly given the tremendous amount of uncertainty we face with regards to the duration and continued impacts of the virus.”

·         ESG: I think a quote from the CEO on the call really captures one of HD’s advantages: their culture. Associates tend to be long-tenured and experienced which is an advantage in servicing Pro customers. They also often give data points about how many Executives started as store associates. This all hits at the relevance of “S” in ESG. He said, “This reminds me of the words of our Founder, Bernie Marcus, that have never resonated more deeply than they do today. If you take care of our associates, they take care of the customers and everything else takes care of itself.”

·         Capital allocation: suspended share repurchase, dividend maintained.

·         Valuation: Strong balance sheet, defensive qualities and trading at >4% FCF yield on 2019.

 

 

 

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

 

 

$HD.US

[tag HD]

[category earnings]

 

 

Happy Friday!

 

Below are a few quotes from CEO/executives that came out during this earnings season that we think are helpful to frame themes that have emerged.

 

Have a great weekend,

Julie

 

Xylem (XYL)

Industrials, Machinery

Theme: changes in the work place

 

CFO Mark Rajkowski said “we all recognize in this world that we’ve learned the hard way all of us to be able to do a lot more with less. And that’s all factoring in to our thinking on what the permanent structural changes will be. So more of that to come in our next earnings call.”

 

“Our teams [are] working through what life looks like after the pandemic, where those meetings have changed, a lot of it is virtual, a lot of it is less people than previously done.”

 

Xylem (XYL)

Industrials, Machinery

Theme: China returning to pre-pandemic activity

 

CFO Mark Rajkowski said “you’re now seeing us return to utility activity and quoting bidding activity that returned to pre-COVID levels in China. So that’s an encouraging sign that our teams have seen”.

 

Sensata (ST)

Industrials, Electrical Equipment

Theme: greater use of individual cars at the expense of public transportation

 

Paul Chawla, Executive Vice President, Automotive said: “We’re monitoring a potential trend where consumers now post COVID could be using less public transportation and prioritizing again an individual means of transportation.”

 

Honeywell (HON)

Industrials Conglomerates

Theme: greater use of individual cars at the expense of public transportation

 

CEO Darius Adamczyk  said “this is sort of an educated hypothesis is that I actually think the use of automobiles and personal vehicles is going to go up, not down. I think that there is going to be resistance and by the way, this is something we have seen in China… this is something we’ve seen, where the use of personal vehicles is going up, not down after the reemergence. So, I actually think we’re going to see that and the use of mass transit’s going to reduce”

 

 

 

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:

·         Solid results and guidance: sales and EPS beat street expectations w/ results at the low end of guidance (which was issued pre-pandemic). Guidance for the next quarter is above the street – reassuring given most companies are not even issuing guidance.

·         The company is seeing tailwinds from certain aspects of the WFH environment, offsetting some diminishing order rates as Enterprise IT managers delay some investments.

·         Current environment highlighting the LT story: With the world going online practically overnight, the demand on networks has never been greater. Aging infrastructure needs to be upgraded. Growing use of new technologies and increased data demand places increased importance on this.

·         CEO Chuck Robbins said…”I have had a lot of customers who are not at the center of this crisis who realized during this pandemic that they have a fair amount of technical debt, and they have a lot of aged equipment. And so we don’t know what the time frame is, but many of them have said this is a wake-up call, and this is going to actually give us air cover to talk to our senior leadership team about upgrading and building out a more robust, modernized infrastructure.”

 

Additional Highlights:  

·         COVID Impact – Positives seem to be offsetting the negatives. Their business was performing ahead of its expectations through March, but began to see a slowdown in April w/ lockdowns. Despite this, the impact to Product orders was no worse than last quarter. So, coronavirus didn’t increase overall headwinds for them. This is b/c they are seeing some offsetting effects. Strength in Collaboration (especially Webex), Security, and the Service Provider business (CMTS and Routing) are offsetting softer Campus Networking sales (particularly in hard hit industries like hospitality, retail and transportation). They are mitigating the impact of some of these harder hit industries by extending credit. They announced $2.5B in financing, their “Business Resiliency Program” to support business continuity to help customers invest for recovery and defer most of the payments until early 2021. Also, they did have some supply chain disruption in the business – particularly the Infrastructure Platforms segment, but they didn’t quantify the impact on results.

·         Revenue by geography/customer segment – The Americas was flat, EMEA was down 4%, and APJC was down 22%. Total emerging markets were down 21%, with the BRICS plus Mexico down 29%. Public sector was up 1%, while enterprise was down 4%. Commercial was down 11%, and service provider was down 3%. “Commercial” is SMBs. So, SMB, Asia and Emerging Markets were weakest.

·         Tailwinds – remote work impact on security & collaboration demand, free WebEx 90 trials converting, improvement in Service Provider spending w/ increased network demands, growing strength w/ webscale customers, new 8K line of products moving from testing phase to implementation (not even benefiting webscale revenues yet), strength in software/service related revenues will continue to drive recurring revenue mix and margins.

·         Long-term picture: The initial phase of this has been companies focusing on business continuity as people rapidly moved to WFH. That transition had the effect of exposing weaknesses in technology infrastructure. So, the focus is starting to shift from immediate virus response to preparedness for the “new normal.” This includes a variety of technologies around digital transformation and infrastructure to support them. And things like big  data/machine-learning, and IoT will increase the demands on networks and thus increased investment by enterprises globally.

o   “We’re working very closely with higher education because you see in the news the discussion around whether students will be on campus in the fall. As one of the heads of one of the biggest systems in the United States told me, they used anything and everything they could to get students online back in March. And now they need to go step back and actually build the real, robust, long-term architecture that they need, and we’re working with them to do that.”

o   “I think telehealth is here finally. And I think that’s going to change forever. And I think that those — that industry will continue to work and build out a more robust architecture to support telehealth as opposed to what we put together as quickly as we could with them over the last few months.”

·         Valuation: trading at >7% FCF yield on 2020, and we’re partway through their fiscal 2020 fourth quarter. This is well below S&P average for a strong balance sheet, high FCF generative business w/ multiple data points supportive of improving top line growth and growing mix of recurring revenue. Moreover, their valuation is supported by a 3.3% dividend yield which they easily cover.

 

 

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

 

 

On 5/2, Berkshire Hathaway reported Q1 earnings and held its annual shareholder meeting.  Key takeaways are as follows:

·         Berkshire is a collection of best-in-class businesses with an extremely conservative financial position – $137b in cash represents over $55 per share.

·         No major capital allocation changes.  Through this downturn, Berkshire has not made any meaningful acquisitions despite the large cash balance and the economic slowdown.  Their largest actions was to completely sell all their airline holdings.

·         BRK/B is selling at a 34% discount.  After some underperformance relative to the market, Berkshire is selling at a 34% discount to intrinsic value and below the value at which Buffett has stated he would buy shares.

Continue reading “Berkshire Hathaway – Q1 update”

As we discussed this morning during the RM/PM/Research meeting, here is a summary of the themes we have observed this earnings season:

 

1.       Some of the hardest hit industries:

o   SMB’s & highly levered, weaker balance sheet companies. Seeing a consolidation of strength w/ market leaders that could continue

o   Retail, restaurants, travel & entertainment. Companies are saying we may not see a return to pre-crisis levels until vaccine. (BKNG, DIS)

o   Auto – auctions are shut-down. Could see big fall in used car prices

o   Medtech with large portfolio of elective surgeries (such as knee replacement, etc.) as patients and doctors delay non-emergency surgeries

o   Airlines and aerospace: the lockdowns have destroyed demand for travelling by plane, and a return to pre-crisis could take  up to 2 years

 

2.       China:

o   ZTS: China seeing a rebound, and seeing an improvement in US and Europe clinic visits recently

o   XYL: China showing signs of early recovery

o   FTV: China recovering, plants operating at 80% capacity

o   SYK: expect recovery in China in Q2

o   ST: China pointing to recovery

o   Visa:  Hong Kong dropped in early February, along with the rest of China and appears to be recovering in April

o   DIS: Shanghai Disney opened yesterday @ 30% capacity

o   SHW: “We have started to see some recovery in China at a slower pace than anticipated.”

o   Uber said HK is now at 70% of pre-COVID levels

o   AAPL: Supply chain is back to a normal operation. Apple stores open

o   Moving supply chains? Apple defended current structure but wouldn’t rule it out

 

3.       Europe:

o   Europe worse than expected (XYL)

o   Region was already challenged before COVID-19 hit, not activity is worse (FTV)

o   SHW, BKNG talked about weakness. Visa saw the biggest negative impact in central and southern Europe with similar declines as the US

 

4.       How companies adjusting to current environment…

o   Pull forward of digital transformation (MSFT, ACN, ADBE, GOOGL, AAPL)

o   Improving bandwidth/connectivity (CCI, CSCO)

o   Conserving cash

o   Cost cutting

o   Sales team transitioned to virtual sales meeting with doctors and training, and think this could be the new normal (SYK, BKI)

 

5.       How consumers adjusting to current environment…

o   Use of telemedicine and home deliveries of prescriptions (CVS)

o   Could see people using more individual cars rather than public transportation due to COVID-19 change in habits (ST)

o   The management team believe this crisis will accelerate the need to monitor patients remotely (RMD)

o   Utility sector looking for remote sensing and automated operations (XYL)

o   People eating cheaper protein (chicken instead of beef) ZTS

o   WFH/distance learning – likely to continue after the pandemic. Positive implications for the technology that supports this and negative for real estate and travel. (GOOGL, MSFT, AAPL, CSCO)

o   E-commerce – Increase in online spending especially on essential items. Less so on discretionary items. Companies establishing an online presence that didn’t have one before leading to increased e-comm. competition. (V, HD, SHW, TJX, GOOGL, ADBE)

o   Entertainment – Increase in streaming & gaming. (AAPL, GOOGL, DIS)

o   Housing & home improvement – seeing underlying strength in housing, nesting benefiting home improvement. (SHW, HD, BKI)

 

6.       Be careful extrapolating current consumer behaviors into the future

o   Discretionary…trends exaggerated like streaming, gaming, e-comm

o   Staples… shouldn’t extrapolate that center of store food will make a comeback or that cleaning products will be a bigger part of people’s budget

 

Thanks,

Sarah & Julie

 

 

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

 

 

 

 

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:

·         Revenue was better than expected and EPS was worse, however throughout the quarter they saw a phased impact of COVID 19 in their results as it hit different geographies that I think made consensus numbers not that meaningful. In Q1, partial impact of the coronavirus led to significant decrease in bookings. Gross travel bookings decreased 50% and room nights decreased 43%, w/ ADRs down mid-teens. Given their Europe focus, they felt the impact sooner than the US. Newly booked room nights, which exclude the impact of cancellations were down over 60% YoY in March and down over 85% in April.

·         In response to the current environment they’ve halted stock buybacks, reduced costs including cutting marketing (their largest expense), had layoffs/furloughs and bolstered their liquidity position.

·         No guidance. They expect a significantly larger impact in Q2 relative to Q1.

·         CEO Glen Fogel said… “we are seeing some stability in our newly booked room night growth trends. We hope that this is the beginning of the road back to recovery, but it’s certainly too early to say with certainty”…” we believe that domestic travel will rebound sooner than international travel as we expect travelers to look to their home country or region first for safe travel options.”

Highlights:

·         Total revenues were down 19% and adj. EPS was $3.77, down 66%.

·         Revenue was less negatively impacted than room nights and gross bookings due to the fact that many cancellations were received in Q1 with the check-ins expected to occur in later quarters.

·         Preliminary April results: newly booked room nights in April were down over 85% YoY. Reported room nights were negative in April (and March) as cancellations outpaced new bookings. For April, they saw a meaningfully higher domestic mix in their business. Historically, domestic accommodation bookings represent about ~45% of their total business and if Western Europe is considered as one market, the historic mix increases to about 55%. In April, their domestic share increased to ~70% and for Western Europe the domestic mix increased >75%. They also saw a shift to alternative accommodations associated with longer-term bookings. Towards the end of April, they saw some very early indications that domestic travel was starting to return in certain markets where shelter-in-place rules were relaxed, including Greater China, South Korea, Vietnam and Germany. In the US, newly booked room nights declined less than the global average in April and they saw an improvement in domestic travel during – and those trends cannot be tied to a relaxation in shelter-in-place rules as those have only happened in a few states and in recent days. They say it is too early to think we’re witnessing anything like a broad rebound in travel especially as they’ve seen some countries like Singapore, where travel demand was less impacted than other places initially, relapse. They are now seeing significant travel demand decreases associated with new outbreaks.

·         Management says their assumption are that it will be likely be years, not quarters, before we witness a full recovery of global travel demand and that they expect travel to fully recover later than many other industries.

·         They do benefit from having a highly variable cost structure which they can toggle in periods like this.

·         Balance sheet: Q1 ending cash and investment balance was ~$9B. They did spend $1.3B on buybacks early in the quarter, but then halted buybacks once they recognized the growing impact of the pandemic. Subsequent to the end of the quarter they had a debt offering. Including that and a refund of a sizable Dutch tax prepayment, their cash is now at >$14B.

·         Valuation: The stock has recovered from trough valuation in March, but still inexpensive relative to 2019 FCF, trading at close to an 8% FCF yield on 2019.  

Thesis:

1. Booking is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.

2. BKNG has several competitive advantages relative to Online Travel Agent (OTA) peers:

·         Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings

·         They operate largely on an agency basis which allows them to continue to grow their network and do so profitably

·         Strong position in China/South East Asia via Ctrip and Agoda

3. Booking’s addressable market is growing driven by:

1.) Alternative accommodations

2.) Increased penetration (growth of mobile/internet)

3.) Global growth of travel spend > GDP.

4. Their asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.

 

$BKNG.US

[tag BKNG]

[category earnings]

 

 

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:

 

·         COVID-19 is having a positive impact on CVS’s various businesses: greater use of 90-days prescriptions, more purchases made in front of store (in March), lower elective surgeries performed (April) benefitting Aetna’s costs

·         Telemedicine and home delivery saw a sharp increase

·         Liquidity is sufficient and the dividend is maintained

 

Continue reading “CVS 1Q20 earnings summary”