Month: September 2020

Key Takeaways:

 

·         Consumer segment: trend of eating more at home is now becoming a habit globally driving growth for this segment to +15%

o   CEO quote: “Even before COVID-19 the consumers were cooking more at home. They were using more spices, and seasonings and sauces to prepare fresher healthier meals, they were moving to trusted and inherited brands. […]. The pandemic accelerated these trends and other trends like e-commerce that already underpin our strategies and that we were already capitalizing on”

·         Quick service restaurants are recovering strongly (but are lower margins), while other foodservice is slower to rebound which is a higher margin business (-1.1% decline in its Flavor solutions segment, especially in the Americas as Asia/Pacific had a +7% growth)

·         Packaged food is returning to pre-Covid levels

·         High demand in the US put pressure on supply chain, while EMEA and APZ had already built extra capacity

·         Margins pressure from Covid related costs, and scaling up production/on-boarding people

·         Guidance reinstated: organic sales 5% to 6%, flat margins, EPS growth of 6% to 8%

·         Stock split 2 for 1 on 11/30/2020 (last one was 18 years ago) in order to provide greater liquidity

 

 

 

Current Price: $190                 Price Target: NEW $202 (prior $191)  

Position size: 3.15%                1-Year Performance: +24%

 

 

McCormick had another impressive sales growth of 8.6% this quarter, but this was shadowed a bit by the margin pressure, which should continue near term with Covid-related costs and additional capacity needed to meet higher demand.

In the Americas Consumer segment (its biggest in sales), the data points are encouraging, and supportive of MKC’s premium valuation, as its portfolio grew 28%, gaining share in 7 out of 11 categories, while household penetration and repeat buyers increased 8% and 7% respectively. Regarding the supply chain pressure in the US, the company is rapidly scaling up, and should meet demand by the end of the year.

Because the company continues to invest behind its brands, restocking shelves and restarting SKUs that were put on hold, the company believes it can produce positive growth in 2021 even with tough comps later in the year. While it is a bit early to talk about 2021 yet, the management team thought necessary to clarify some questions on the future growth of the company. Another positive this quarter was the early deleverage target of below 3X reached a quarter earlier than targeted, which can certainly open the door for acquisitions in the near term. We are updating our price target to reflect better 2020 sales numbers and increased scale providing a lift to margins longer term.

 

 

The Thesis on MKC:

•          Industry Leader: McCormick & Company (MKC) is a leading manufacturer of spices and flavorings. MKC has been in business for 120 years and the founding family still has ownership interest

•          Growth opportunity: Spice consumption is growing 3 times faster than population growth. With the leading branded and private label position, MKC stands to be the biggest beneficiary of this global trend

•          Offense/Defense: MKC supplies spices to major food companies including PepsiCo and YUM! Brands giving it a blend of cyclical and counter-cyclical exposure

•          Balance sheet and cash flow strength offer opportunities for continued consolidation through M&A in the sector

 

$US.MKC

[tag MKC]

[category earnings]

 

 

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:

1.       They missed estimates and issued weak guidance. Revenue however was at the midpoint of their guided range and took a 2pt hit from lower travel re-imbursement headwinds. Full year EPS ahead of guided range.

2.       While headwinds in some end markets persist, digital transformation imperative is long-term secular growth driver to their business.

3.       Strong bookings and they continue to take significant market share, signifying solid business fundamentals. They grew 4x the market in the last 2 quarters.

4.       CEO Julie Sweet said…”Post Covid leadership requires that every business become a cloud first business quickly moving from today’s approximately 20% in the cloud to 80%. This is a once-in the digital era massive re-platforming of Global business.”

 

Current Price: $216     Price Target: $267

Position size: 4%          Performance since inception (3/11): +31%

 

Additional highlights:

·         While headwinds in some end markets persist, digital transformation imperative is long-term secular growth driver to their business. Before Covid there was already exponential technology change taking place with every business becoming a digital business. Mgmt. thought it would take a decade, now they think it is more like five years. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has been positioning themselves to be a leader in digital capabilities since 2014, which is why they are the leader, continue taking share and are well positioned in the future, despite “this incredibly difficult challenging macro environment.” Accenture’s unique positioning of trusted partner w/ leading edge technology expertise combined with deep industry expertise is key to this.

·         Industry end market performance – headwinds in some industries persist:

o   Similar to last quarter, ~50% of revenues came from 7 industries that were less impacted from the pandemic that, in aggregate, grew high-single-digits with continued double-digit growth in software platforms, Life Sciences & Public Service.

o   >20% of revenue from clients in highly impacted industries which continue to be pressured – this includes travel, retail, energy, aerospace & defense and industrials. Last quarter they called out banking/capital markets as a weak area, but this quarter they did not. While performance varies by group collectively declined mid-teens. This is an acceleration from last quarter when this group declined high-single-digits.

o   This underscores the benefit of diversified industry end markets.

·         Delivered full year revenues within guided range and EPS above guided range. For the full fiscal year adjusted earnings per share were $7.46, $0.03 above their adjusted guided range for the year.

·         Consulting revenues were $5.7B, down 8% in local currency, which includes a 3pt headwind from lower travel reimbursement.

·         Outsourcing revenues were $5.2B, up 7% in local currency.

·         Continued mix shift to “the new” – now 70% of revenue. Digital, cloud and security grew low single digits.

·         Geographic breakdown: strongest markets were Japan (double digit growth) and Brazil (high single digit growth). Europe was down 5% (Italy strong, UK weak), North America was flat.

·         Large client tailwind – Ended FY20 with 216 Diamond clients (represents their largest client relationships) – an increase of 15 clients from 2019. Diamond clients account for more the 50% of revs.

·         In Q4, they had 17 clients w/ new bookings of over $100m. For example, Accenture and Microsoft entered into a five-year strategic agreement with Halliburton to advance their digital capabilities, complete its move to cloud-based digital platforms and migrate all of its physical data centers to Azure.

·         Strong bookings of $14 billion, up 9% YoY with a book-to-bill of 1.3. Consulting book-to-bill of 1.1 and outsourcing book-to-bill of 1.5. Bookings dominated by high demand for digital cloud and security-related services, which they estimate represented ~70% of new bookings in the quarter.

·         Capital allocation: continuing all elements of their capital allocation program – they continues to return cash to shareholders through cash dividends and share repurchases. In fiscal 2020, they returned $5B to shareholders, including $2B in dividends and $3B in share repurchases.

·         They are now 45% women; on track for their 2025 goal of a 50-50 gender balance

·         Guidance:

o   For FY 21, they expect revenue to be in the range of 2% to 5% growth. This includes a 1pt hit from lower travel.

o   Expect diluted EPS in the range of $7.80 to $8.10 or +5% to +9%

o   FY21 FCF to be in the range of $5.7B to $6.2B

o   “We view fiscal year 21 as turning a page. We are no longer navigating a crisis we are facing a new reality and we plan on returning to pre-covid growth rates by the second half of this fiscal year.”

·         Valuation:

o   The stock is undervalued trading at a ~4.5% forward yield. They have an easily covered 1.6% dividend and no net debt.

o   Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).

o   They have $8.4B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.

 

 

 

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

 

$ACN.US

[tag ACN]

[category equity research]

 

Current Price:   $480                     Price Target: $520 (raised from $494)

Position Size:    3%                      TTM Performance: +63% since inception (3/18)

 

Key Takeaways:

·         Adobe beat highest estimates on revenue and EPS and guided in-line for Q4. Full year 2020 total revenue and EPS guidance are ahead of pre-pandemic targets.

·         Digital Media segment continues to be stronger than Digital Experience segment. Current environment is causing tailwinds for Digital Media as it benefits from the mission critical aspect of their creative and document cloud solutions in a remote work environment. While Digital Experience is seeing headwinds from a weak advertising market.

·         CEO Shantanu Narayen said…”Content creation and consumption are exploding in a world where connecting visually has become even more essential…our strategy of unleashing creativity for all, accelerating document productivity and powering digital businesses is more relevant than ever and driving our strong performance across every geography and audience.”

 

Additional Highlights:

·         ADBE reported 3Q total revenue growth of 14%. EPS was $2.57 vs. consensus $2.41. This compares to guidance of $3.15B and $2.40, respectively. Operating margin was 44%, up ~280bps vs. last year and above consensus of ~42%.

·         Some sequential improvement, but overall till seeing some headwinds w/ SMB’s.

·         “Students are adapting to learning remotely instead of in a classroom. Entire industries from media and entertainment to pharma, retail, automotive and financial services, have had to pivot overnight to digital operations to engage with customers and ensure business continuity. Electronic workflows and signatures are the only way to efficiently complete business transactions. The world has changed in a way that none of us could have foreseen. This reality has created new tailwinds for Adobe.”

·         Digital Media segment ($2.23B, +19% YoY; ~71% of revenue):

o   Comprised of Creative cloud (84% of segment revenue, +19% YoY) and Document Cloud (16% of segment revenue, +22% YoY).

o   Segment Annualized Recurring Revenue (“ARR”) grew to $9.6B exiting the quarter. With Creative ARR of ~$8.3 billion, and Document Cloud ARR of $1.3 billion.

o   Creative Cloud is benefiting from “exploding” content creation and consumption across phones, tables and desktops. “Web content, mobile application creation, imaging, video, animation, screen design, AR and 3D are all surging in this new era of digital storytelling and business transformation.”

o   Saw improvement in retention driven by increased engagement and product usage among individuals, teams and enterprises.

o   Document Cloud is key in the remote work environment as the imperative to translate paper processes to digital accelerates across the globe. Acrobat Mobile installs up 33% year-to-date; significant momentum with Adobe Sign. Key customer wins include Citi, PwC, Pepsi, HSBC, Merkle and J-Power.

·         Digital Experience segment (revenue was $838m, +2% YoY; ~29% of revenue):

o   Digital Experience subscription revenue was +7% or +14% YoY excluding ad cloud. Segment revenue includes: subscription revenue, professional services revenue, and “other”, which includes perpetual, OEM and support revenue.

o   Advertising Cloud revs were impacted by the global decline in ad spend and the discontinuation of a low-margin product which helped clients conduct advertising transactions.

o   Key customer wins include Eli Lilly, Truist, Nike, Lowe’s, Shell, Lloyds and the US Department of Commerce;

o   Started a partnership with IBM and Red Hat to enable Experience Cloud deployment in hybrid cloud environments that further strengthens real-time data security for enterprises in regulated industries

o   Recognition as a leader in six Gartner Magic Quadrant and Forrester Wave reports. In the Gartner Magic Quadrant for CRM Lead Management, Adobe was the leader, achieving the best scores across Ability to Execute and Completeness of Vision.

·         Guidance: Total revenue ~$3.35B w/ Digital Media segment revenue +18 percent YoY ($540m net new ARR) and flat Digital Experience segment revenue (subscription rev +1% YoY; +12% excluding Advertising Cloud). Adj. EPS ~$2.64. Overall, in line with the street and ahead of pre-pandemic full year targets.

·         Adobe is a rare company w/ >90% recurring revenue, double digit top line growth and ~40% FCF margins. Additionally, the headwinds from Covid (like lower global ad spending and weak SMB demand) should abate, while the accelerated secular tailwinds around digital transformation will persist.

 

 

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

 

$ADBE.US

[tag ADBE]

[category earnings]