Month: October 2020

GOOG Q3 Earnings Update

Current Price: $1,609      Price Target:$1,650

Position Size: 4%              TTM Performance:+35%

 

Key takeaways:

  • Broad beat – Alphabet reported better than expected results. Revenues +14% YoY (a return to growth after being down 2% last quarter).
  • Rebound in ad spending – Advertising +10% (after being down 8% last quarter).
  • YouTube ad revenue exceptionally strong – YouTube ad revenues were up 32% YoY
  • Continued strong growth in non-Ad revenues – particularly from Cloud, Google Play and YouTube Subscriptions.
  • Margin improvement on slower spending – mgmt. responded to Covid by making tactical adjustments to slow the pace of spend in certain categories – slowing headcount growth, sales and marketing spend, travel spend and capex which all aided margin improvement as sales rebounded.

 

Additional Highlights:

 

  • Saw broad-based improvement in advertiser spend across all geographies and nearly all verticals. This is reflected in both Search results as well as the rebound in brand advertising spend on YouTube. Also saw ongoing strength in their non-advertising revenue lines, in particular Google Cloud and Play.
  • Regarding the DOJ’s lawsuit, they didn’t say too much “scrutiny is not new for us. And in some ways, it’s now sector wide, and not surprisingly so. We will engage constructively, where possible. And as we’ve shown through some of the past cases…we’re confident about the benefits we bring to our users. We’ll make our case. Where there is feedback or rulings, we’ll be flexible and adapt.”
  • TAC – Total traffic acquisition costs were $8.2B or +9% YoY, above consensus of $7.6B. TAC ticked down slightly from 22.4% to 22.0% of ad revenues.
  • Op margin expansion (+160bps): higher costs associated with depreciation, data centers, higher content acquisition costs for YouTube were offset by lower R&D (primarily due to slower headcount growth), lower sales & marketing, lower G&A and lower T&E expenses due to Covid. Lower capex mostly driven by reductions in real estate acquisitions as they adjust given WFH.
  • New disclosures coming. More transparency is obviously a positive. Starting next quarter they will break out Cloud and at that time will also be reporting, not just the Q4 results, but will be providing full year results for 2018, ’19 and ’20. They’ll be providing not just the revenue disaggregation data that they expanded on earlier this year, but they’ll also be adding operating income for each of their segments.
  • Search revenue ($26.3B) +6.5%. Advertiser spend began to pick up in August. They made some improvements to search including “hum to search,” which will identify a song and artist based only on humming. So, try that out…
  • YouTube ad sales ($5B) were +32%, growing faster than search revenues. Driven by ongoing substantial growth in direct response, followed by a rebound in brand advertising. Interesting data points… “guided meditation videos are up 40% since mid-March and DIY face-mask tutorials have been viewed over one billion times.”
  • Network ad revenues: $5.7B, +9% YoY, trends improving somewhat towards the end of the quarter.
  • Google cloud (GCP and Google Workspace): was $3.4B, +45%. A slight acceleration from last quarter. GCP maintained the very strong level of revenue growth it delivered in the second quarter and its revenue growth rate was again meaningfully above Cloud overall. Growth in Google Workspace revenues was driven by seat growth, followed by growth in average revenue per seat. Significant growth in Meet as well as other products, like Docs, Drive and Chat. Meet saw a peak of 235 million daily meeting participants in Q3. “The fact that we were later relative to peers, we’re encouraged, very encouraged, by the pace of customer wins and the very strong revenue growth in both GCP and Workspace.”
  • Other Revenues ($5.4B, +35%) – primarily driven by growth in Play and YouTube non-advertising revenues. Within Play, app revenues in the third quarter benefited primarily from an increase in the number of active buyers, as well as increased spend per buyer. Within YouTube subscription revenues, they continued to benefit from subscriber growth across its various offerings. YouTube’s non-advertising business metrics have benefitted from the current environment. YouTube now has 30mn+ music and premium paid subscribers and 35mn+ including users on free trials. Additionally, YouTube TV has 3mn+ paid subscribers.
  • Other Bets (178m, +15%) – Op loss expanded slightly to >$1B. Waymo announced that its fully autonomous ride-hailing service in suburban Phoenix will open to the public, making it the only company to offer a fully autonomous service for riders. Waymo also entered into a strategic global partnership with Daimler Trucks to enable fully autonomous trucking.
  • Q2 FCF was $11.6B and they ended the quarter with cash of $133B. They have ~10% of their market cap in net cash. The stock is still reasonably valued, trading at a ~4% FCF yield on 2021.

 

 

$GOOGL.US

[category earnings ]

[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

Colgate 3Q20 earnings summary

Key Takeaways:

 

Current price: $78                   Price target: $84 (from $82)  

Position size: 1.68%                1 year performance: +12% 

 

  • Overall great quarter, showing strategy of innovation & premium products is a positive for sales and margins
  • Organic sales +7.5%!! above consensus of 3.9%
    • EM sales +8.5% – led by Latam +11.5%
    • Developed markets: +6.5%
    • Hill’s pet nutrition +11%
    • Market share improvement
  • Gross margin increased 220bps, operating margin up 120bps
    • Innovation strategy to lift pricing & top line growth through premium rather than promotions is positive impact to margins
  • 2020 guidance updated:
    • Top line growth + mid-single-digits (organic sale at the high end of MSD)
    • Gross margin expansion
    • EPS $3.00-$3.03 (consensus $2.97)
  • Debt down payment and share repurchase to continue in 4Q
  • We are upgrading our price target slightly to account for better profitability

 

 

The Thesis on Colgate

  • High exposure to fast growing emerging markets (36% of Operating Profit from Latin America; 50%+ from EM)
  • Defensive Product set (soap and toothpaste). Product line less vulnerable to trade downs due to low private label exposure in the categories
  • Strong balance sheet (net debt/ebitda 1.4x) and highest ROIC in the sector
  • 2.64% dividend yield

 

$CL.US [tag CL] [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

 

 

Apple Q4 Earnings update

Current Price: $109         Price Target: $129

Position size: 8.2%          TTM Performance: +81%

 

 

Key Takeaways:
  • Beat estimates – Beat on revenue and EPS w/ beats across all segments except iPhones. Mac and iPad sales were particularly strong, iPhones sales (small miss) were down 21% related to the delayed iPhone launch this year. The launch was delayed by a few weeks which caused a negative comparison vs last year.
  • Weak sales in China not concerning – sales in China were down 29% while other geographies were strong. The weakness was driven by the delayed product launch vs last year – this had a bigger impact on the China revenue comparison as new phone were a higher percentage of Q4 revenue in the region last year.
  • Response to new 5G phones – “off to a great start”
  • No specific guidance – said that they expect both Products (ex. iPhone) and Services revenue to grow double digits YoY in Q1, in line w/ consensus.
  • CEO Tim Cook said…”Apple is in the midst of our most prolific product introduction period ever, and the early response to all our new products, led by our first 5G-enabled iPhone lineup, has been tremendously positive.” 

 Additional Highlights:

  • Apple reported record revenue, earnings and FCF despite “an extremely volatile and challenging macro environment” and a delayed iPhone product launch which left iPhone sales down 21% for the quarter. This demonstrates the broad relevance and appeal of their products.
  • Reported total revenue of $64.7B for the quarter, up 1% YoY. Outside of iPhone, they grew 25% in aggregate and had strong double-digit YoY revenue growth in each product category. They set all-time records for Mac and services and a September quarter record for Wearables, Home and Accessories.
  • Q1 (Dec quarter) Guidance – They expect all products (ex-iPhones) in aggregate to grow double-digits and also expect services to continue to grow double-digits. This is in line w/ the street. No guidance on iPhone sales other than to point out that they are shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone Mini and 12 Pro Max seven weeks into the quarter. Street expects iPhone sales growth to be ~7% in Q1 (their Dec quarter) – so expectations were already lower than other segments.
  • They are experiencing supply constraints on most hardware products
  • Sales by segment:
    • iPhone – $26.4B, below estimates of $27B, impacted by later product launch. As anticipated, they launched their new iPhone models in October, a few weeks later than last year’s mid-September launch. Mgmt. said that up to that mid-September point, customer demand for iPhone was very strong and grew double-digits and that, for the quarter, iPhone sales (while below consensus) were ahead of internal expectations. They just started shipping iPhone 12 and 12 Pro and are “off to a great start.”  They start pre-orders on iPhone 12 Mini and 12 Pro Max next Friday.
    • Services revenue was $14.549 billion, a gain of 16%. The average estimate was $13.87 billion. Record quarter for the App Store, AppleCare, cloud services, music and payment services. Apple One launches tomorrow – bundled Apple services plan w/ Music, TV+, Arcade, iCloud, News+ and Fitness+ on a single plan. They now have >585m paid subs across services, up 135m YoY. They aim to reach 600m by year end.
    • Mac sales were $9 billion, up 29%. The average estimate called for $8.04 billion. Grew strong double-digits in each geographic segment. Seeing amazing customer response to the new MacBook Air and MacBook Pro.
    • iPad revenue came in at $6.797 billion, up 46%. That’s compared to an estimate of $6.06 billion. Management commented that they are supply constrained on both Mac and iPad
    • Wearables & Accessories -revenue of $7.87 billion, up 21%. The average estimate was $7.35 billion. Wearables business is now the size of a Fortune 130 sized company. That basically puts their wearables business just ahead of Dollar Tree in annual revenue or ~$24B.
  • Greater China is the region that was most heavily impacted by the absence of the new iPhones during the September quarter. Still they beat their internal expectations in the region growing non-iPhone revenue strong double-digits and iPhone customer demand grew through mid-September. Mgmt. said “the underlying business in China last quarter was very strong and perhaps very different than you might think from just a quick look at the stated number”…”we are very bullish on what’s going on there.”
  • Yesterday, the government of Singapore and Apple launched LumiHealth, a first of its kind program designed to encourage healthy activity and behaviors using Apple Watch. Created in collaboration with the team of physicians and public health experts, LumiHealth uses technology and behavioral insights to encourage Singaporeans to keep healthy and complete wellness challenges through their Apple Watch and iPhone. This touches on a secular opportunity for technology to be deflationary for healthcare costs by enabling (and in Singapore’s case helping incentivize) more preventative behavior…and Apple is at the forefront of this.
  • Ended the quarter with almost $192B in total cash and $79B in net cash. Returned nearly $22 billion to shareholders during the quarter with $3.5B in dividends and over $18B in share repurchases.
  • Trading at >4% FCF yield on 2021 w/ another >4% of their market cap in net cash on their balance sheet.

 

$AAPL.US

[category earnings]

[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

Visa Q4 Earnings

Current price: $185     Target price: $210

Position size: 4%          TTM Performance: 2%

Key takeaways:

  • Beat estimates – Visa reported revenue of $5.1B, above consensus $5B and adjusted EPS of $1.12 vs. $1.09 consensus. Beat driven by solid top-line results and lower than expected client incentives.
  • Sequential volume improvement – Payments volume, cross-border volume and processed transactions growth all improved through the quarter and were at varying stages of recovery.
  • Cross-border headwind – higher yield cross-border volumes, despite some improvement, continue to be the biggest headwind driven by lower travel demand as a result of Covid travel restrictions.
  • No specific guidance given Covid related uncertainty. They expect revenue to decline in the first half and rebound significantly in the second, with the highest growth in the fourth quarter.

Additional Highlights:

  • Q4 net revenues were $5.1 billion (-17%), primarily driven by YoY declines in prior quarter payments volume and current quarter cross-border volume, partially offset by growth in processed transactions. If they had recognized service revenues on current quarter payments volume, net revenues would have decreased ~11%. This is b/c quarterly service revenue is based on the prior quarter payments volume – so the impact of such a drastic drop lags in impact to that portion of their revenue. Payments volume for the September quarter increased 4% YoY.
  • From Q3 to Q4, payments volume improved 14 points, process transactions improved 16 points, and cross-border volume ex-Europe improved over 5 points.
  • Global payments volume increased 4%, improving from a 10% drop in Q3.
  • U.S. payments volume increased 8% on a 7% decline in credit, offset by a 24% increase in debit. The debit business has been the major beneficiary of the accelerated shift to e-commerce and the shift away from cash even for in-person transactions. In the US, debit is growing at twice the rate it was pre-COVID.
  • Visa total credit payment volume declined 9.3% in constant currency. Credit was hit hard by the pandemic, declining 20% globally in Q3. However, credit has been recovering fast, exiting September, down only 5%.
  • Total cross-border volume declined 29% (better than the 37% decrease in 3Q). Cross-border volume excluding transactions w/in Europe declined 41% in Q4 (an improvement from the 47% drop in 3Q). This recovery was driven by a few corridors, where travel is now relatively friction-less, like travel from the US to Mexico and the Caribbean. Travel from and to the Persian Gulf States and travel to Turkey. The sharp recovery in these corridors provide some early indicators for how cross-border travel may recover as borders open.
  • Through the pandemic, card-present spending has improved steadily as the economy reopened from a 44% decrease in April to a 4% drop in September. 
  • Contactless penetration grew to 43% of all face-to-face transactions around the world (or 65% excluding the US).

  • They renewed about 25% of their payments volume in fiscal 2020 with key clients and secured several new wins, over 50% of Visa volume has now been renewed over the last two years. Key client wins/partnerships keep Visa at the center of the payment infrastructure w/ the evolving fintech payment landscape. For example, global fintech Revolut, chose them late last year to be their lead issuing partner. In 12 months, Revolut has issued nearly 7 million Visa credentials in over 34 markets. Also, in the US, they’ve secured the Venmo credit card which has started to rollout unlocking new ways for Venmo and its community of more than 60 million users to shop and split purchases. They also signed multiple deals w/ digital wallets including Yandex in Russia, Wing in Cambodia and PAYCO in Korea.

  • Recovery trend across 3 major spend categories in the US (each group accounts for ~1/3 of their volume).
    1. Includes categories such as food and drug stores, home improvement and retail goods. These categories have consistently grown above the pre-COVID growth rates in the high teens or even higher every week since mid-April. Through Q4, growth remained strong and stable.
    2. Includes categories such as automotive, retail services, department and apparel stores, which dropped between 10% to 50% in April and have recovered to growth by the end of June. In Q4, these categories steadily improved and are generally back to pre-COVID growth rates. 
    3. Includes categories that are the hardest hit by this pandemic, travel, entertainment, fuel and restaurants. These categories declined over 50% in April, improved 20 to 45 points through Q3, and at least another 10 points with steady improvement every month. Travel is still declining over 40% in September, with the largest improvement so far in car rentals and travel services. Fuel is also still negative but recovered 20 points since June, driven both by gallons purchased and higher prices. Restaurant spending is almost back to 2019 levels.

Acquisitions:

  • The DoJ is looking into their Plaid acquisition from an antitrust perspective. No details given.
  • They also announced another acquisition, YellowPepper – a software company with a platform that allows clients to connect through a single API based connection – so that processors and governments can add innovative capabilities without having to expend significant technology resources – they can access YellowPepper’s set of APIs to initiate secure, real-time money movement transactions across a variety of payment rails using a simple alley like an email address or a phone number.

While COVID has been a headwind for Visa, particularly in cross border volumes – the long term thesis is intact. Visa is a high moat, duopoly company with extremely high FCF margins (approaching 50%), strong balance sheet and continued runway for secular growth driven by the shift from cash to card-based payments. Trading at >3% FCF yield. 

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

$V.US

[category earnings]

[tag V]

Fortive 3Q20 earnings summary

Key Takeaways:

 

Current Price: $61.4                Price Target: $72 (NEW – down from $78 on VNT divestment)

Position Size: 1.88%                1-year performance: +8%

  • Sales recovered quarter/quarter, to reach flat organic growth (+2.3% including acquisitions)
  • Adjusted operating margins improved as well +140bps, leading to an 8% EPS growth y/y
  • The ASP business (Advanced Sterilization Products) has seen a nice recovery: elective procedure volumes are back to ~90% of pre-COVID levels in North America; and to ~95% in both China and Europe – However in Japan, they have seen a reduction in elective surgeries with the resurgence of cases – something to watch for going forward with our medtech names
  • Software businesses providing resiliency, but still have some Covid-related pressure (customer access & budgets)

 

 

Despite COVID, Fortive saw its sales jump 2.3% boosted by acquisitions, while margins increased nicely. Going forward, the company is focusing on adding more Software-as-a-Service businesses to complement its instrumentation products.

As for the use of cash, FTV remains committed to reducing its leverage and looking for M&A opportunities. We should expect additional debt reduction following the disposition of the 19.9% stake in Vontier (no date provided yet).

Q4 guidance is for a 0%-3% top line growth, and some margin expansion. Overall the quarter had no surprises, and we remain confident in FTV’s ability to generate shareholders returns over time. We are updating our price target to reflect the Vontier spin-off.

The company is updating its segments following the recent Vontier spin:

 

 

 

 

FTV Thesis:

  • Market leader:
    • Leadership position in most of the markets they serve
    • Experienced leadership team
    • Above industry margins with strong cash flows
  • Quality:
    • FCF yield ~5%
    • Organic growth target of 3-3.5% (4-5% in last 2 quarters after being under the target in prior quarters)
    • M&A strategy to enhance top line growth
    • Margins expansion from new products introduction, continued application of the Fortive Business Systems and M&A integration
  • Shareholder friendly:
    • Management team focused on shareholder wealth creation through top line sustainability and margin expansion

$FTV.US

Category: earnings

Tag: FTV

 

 

 

 

 

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

 

 

MSFT Q1 Results

Current Price:   $203                     Price Target: $224

Position Size:    7.5%                     TTM Performance: 78%

 

Key takeaways:

·       Broad beat – MSFT beat on revenue and EPS. Total revenue growth was +12% – they beat estimates and the high end of guidance in all segments.

·       Weak guidance – The negative in the quarter was guidance which was slightly below expectations (similar to last quarter). Long-term drivers and positioning still very strong.

·       Cloud strength continues to be a key theme – commercial cloud surpassed $50 billion in annual revenue, +36% YoY. Azure revenue was in line w/ expectations at +48% growth.

·       CEO, Satya Nadella said, “ in a world of uncertainty and constraints, every person and every organization needs more digital technology to recover and reimagine what comes next. This represents an unprecedented expansion of our addressable market in every layer of the tech stack.”

 

Additional Highlights:

·       Transactional licensing business remained a headwind, although the small and medium business customer segment improved slightly through the quarter.

·        Improvement in advertising market benefited Search and LinkedIn

·        Company gross margin percentage was up 2 pts YoY to 70%, driven that was driven by an accounting change (noted below). Excluding that, gross margins were down slightly, b/c of increasing cloud revenue mix and also b/c of “trial offers” and flexible financing options in response to the “challenging environment.”  Excluding the accounting change, op margins were up by 2pts. 

·         Productivity and Business Processes ($12.3B, +11% YoY):

o   Cloud usage and demand increased as customers continued to work and learn from home. Transactional license purchasing continues to be slow, particularly in small and medium businesses. LinkedIn saw improvement w/ revenues +16%.

o   Strength especially w/ Office 365 Commercial (up 21%), Dynamics 365 (up 38%).  Office 365 Commercial growth driven by installed base expansion as well as higher ARPU.

o   Dynamics 365 is helping organizations in every industry digitize their end-to-end business operations from sales and customer service to supply chain management.  Mercedes-Benz is using Dynamics 365 Remote Assist to help technicians across its US dealerships service increasingly complex cars, faster. And BHP is using the solution to keep employees at mining sites in rural Australia safe.

o MSFT recently announced a partnership with C3.ai and Adobe to bring to market a new class of industry-specific CRM solutions powered by Dynamics 365. It’s their first industry-specific cloud (“Microsoft Cloud for Healthcare”) which will become available later this week. It brings together healthcare-specific capabilities from across Dynamics 365 as well as Microsoft 365 Power Platform and Azure to help providers like Cleveland Clinic and St. Luke’s Health Network improve patient outcomes.

o Teams product is really shining for them right now – they reported 115m daily active users, up from XX in April and 32m before the pandemic started. Teams advantage is its broad integrated user experience. The fact that it’s sold bundled w/ MSFT’s other productivity offerings and its interoperability are key to its positioning. For example, Dynamics 365 can connect to Teams so that you can incorporate customer information and analytics. Teams is about actually getting work done where meetings and video is just one part – as such, its utility should increase w/ mixed office and WFH environment in the future.

o Seeing an acceleration in Office E5 licenses – that’s the highest license tier. 

·         Intelligent Cloud ($13B, +20% YoY):

o   Cloud usage and demand increased as customers continued to work and learn from home.

o   Server products and cloud services revenue increased 22% with Azure revenue growth of 48% driven by continued strong growth in their consumption-based business.

o  “We are building Azure as the world’s computer with more datacenter regions than any other provider, now 66, including new regions in Austria, Brazil, Greece, and Taiwan.” In the previous two quarters they added Italy, New Zealand, Poland, Mexico and Spain.

o  Power Platform (low code/no code solution) now has more than 10 million monthly active users, at more than 500,000 organizations from Ikea to Toyota. PayPal, for example, is using Power BI within Teams to expand access to data insights.  

o Lockheed Martin is using Azure mixed reality and HoloLens to speed up the development of the Orion spacecraft.

·         More Personal Computing ($11.8B +6% YoY):

o   Surface (+37%) and Gaming (+22%) benefited from increased demand to support “work, play, and learn-from-home” scenarios, while Search (-10%) was negatively impacted by reductions in advertising spend. Seeing headwinds from SMB spending. Also offset by declines in Windows OEM revenue (-5%) on a difficult prior-year comparable that benefited from the end of support for Windows 7.

o   Xbox content and services revenue increased 30%. Xbox Game Pass service has more than 15 million subscribers. 

o   Windows Commercial products and cloud services revenue increased 13%

·         Commercial Cloud ($15.2B, +31% YoY)

o   “Commercial cloud” aggregates the cloud businesses w/in the first two segments: Office 365, Azure, the commercial portion of LinkedIn, Dynamics 365.

o   Gross margin percentage increased 5 points YoY, from 66% to 71% due mostly to an accounting change, and some improvement in Azure gross margins.

o   

Valuation:

·        FCF was $14.4 billion. They returned $9.5B to shareholders w/ $5.3B in share repurchases and $4.2B in dividends an increase of 21% vs Q120.

·        Recurring revenue is ~60% of total, underpins most of their valuation and is resilient and poised for additional growth. Particularly Azure, Office 365 and Dynamics 365. Stock is trading at >3% FCF yield on 2021 (ends in June).

 

 

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

 

 

$MSFT.US

[category earnings ]

[tag MSFT]

 

Sensata 3Q 2020 earnings summary

Key Takeaways:

 

Current Price: $44.5              Price Target: $53

Position Size: 2.08%             1-year Performance: -5.6%

 

  • Sales show a bounce back from last quarter up 37% quarter/quarter, thanks to auto and truck markets recovery
  • Margins contracted due to weaker volume, reversal of temporary cost cutting and mix shift (lower sales from higher margins aerospace and industrial clients)
  • New business wins are positive, and above last year’s level – with a majority coming from new megatrends opportunities in electrification and smart & connected solutions
  • CEO quotes:
    • “we continued to be confident that we will sustain our market outgrowth for 2020 in the range of 600 basis points to 800 basis points for our heavy vehicle off-road and 400 basis points to 600 basis points for automotive, consistent with our long-term goals and supported by our higher levels of new business wins”
    • “we have closed electrification new business wins with some of the largest and the most innovative automotive OEMs around the globe. In our core markets, the average content on battery electric vehicle now materially exceeds that of the average internal combustion vehicle”
    • Content in electric cars battery is $50, vs. $38-$40 for internal combustion
  • 4Q20 sales guidance is above estimates but margins below
  • Agreement reached to install and operate their “smart & connected” hardware and data services with a heavy duty vehicle fleet manager
  • Move towards data analytics/subscription basis service is advancing: first commercial agreement achieved, with multiple trials moving forward toward commercialization (a $6B market)
  • If Biden wins, it would be a positive for the company as Biden signaled his desire to increase fuel standards (something that does not happen overnight but long-term positive impact)

 

Sensata released 3Q20 revenue that beat expectations (organic sales down 7.5% vs. down ~34% last quarter). Regarding its end-markets, the company believes the auto industry has consumed in Q3 the inventory built earlier in the year during the shutdown of the economy. In its HVOR segment, the company is starting an attractive recurring sales type of business with a large fleet manager (some potential leads they have manage over 10,000 vehicles). SO here is an example of where Sensata is moving parts of its business: this particular first client opted for a full subscription option, where ST builds the equipment and work with the client to install it. The client then pays for the equipment and data analysis on a subscription basis for the next 6-7 years. Other clients can opt to pay the equipment up-front and only pay for the data services. This looks pretty attractive, and will allow more regular revenue stream for the company (they typically have a more cyclical business with industrial/auto end-markets).

We think the stock was weak today due to the margins comments. While adjusted operating margin was above estimates at 19.6%, it is still a 390bps decrease y/y. Also, the want to continue investing in the megatrends (electrification etc) in the coming year. O offset some of that, the company is starting a new cost reduction program that should save $60-$65M next year. At the end of the quarter, ST had $1.6B of cash on hand. The management team is putting a priority in growing its megatrend business (through R&D and M&A).

We still believe in the long-term thesis of this company, and are not changing our view/price target or position size at this time.

Illustrations of the megatrends opportunities:

 

 

Segments review:

  • Automotive organic sales -7.9%: ST outgrew the market by 290bps thanks to safety related launches, electrification and emissions growth
  • HVOR organic revenue -7.8% y/y: outgrew the market by 860bps thanks to China VI emissions regulations
  • Industrial & other: organic revenue -2.2%:  strength coming from ventilators and factory automation growth
  • Aerospace organic growth -24.4% – new defense products launching

 

 

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

category: earnings

$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

 

 

FW: CCI Q3 Results

Current price: $160          Target price: $190

Position size: 2.5%           TTM Performance: 13%

 

Key takeaways:

  • CCI guided to a slower than expected ramp in 2021 tower leasing activity and services, but outlook for small cell bookings in 2021 remains stable. Long-term secular growth dynamics unchanged.
  • Despite this, given lower int. expense and capex, they’re on track to generate AFFO/ share growth this year that is consistent with their 7% to 8% target and expect growth to accelerate to 10% in 2021.
  • Announced an 11% increase in dividend – ahead of LT 7-8% dividend growth target.
  • Higher dividend, emphasis on lower fiber capital intensity and new board members likely a response to Elliot mgmt.

 

Additional highlights:

  • CCI reduced their outlook for 2020 tower leasing activity to $150mn ($170mn – $180mn prior) and reduced their outlook for services revenue in 2020 (by -$50mn). The full rebound in activity on towers is continuing to occur a bit slower and later than mgmt. previously expected, with a portion of the activity they expected to occur in late 2020 shifting into early 2021.
  • For 2021, guidance may be conservative given potential for lower Sprint consolidation churn and it doesn’t include a material contribution from Dish in 2021. Outlook for small cell bookings in 2021 remains stable, with mix shift towards colocation nodes.
  • They should see improvement in 2022 from C-band spectrum deployment and from a step-up in investment from Dish.
  • Beyond that, tower leasing activity will increasingly be driven by spectrum deployment for 5G – particularly w/ small cells.
  • iPhone 12 as a catalyst – quote from CEO on call “Last week, we saw an important milestone and the march towards greater network densification, when Apple announced that all iPhone 12 models sold in the US support millimeter-wave spectrum bands…This announcement reminds me a lot of 2007. At the time the wireless carriers in the US had accumulated a vast supply of 3G capable spectrum, but there were no use cases identified requiring that much capacity. At the time phones were used for talking and in limited cases texting. Ringtones were the exciting feature you could download to personalize your device. Then Apple launched the original iPhone and the world changed.” The introduction of the iPhone kicked-off an era of wireless innovation that spurred unprecedented investments in wireless networks. 
  • The situation is similar now. The new iPhone was launched for spectrum bands that are not yet deployed at scale. The use cases for 5G are few, but as the iPhone 12 proliferates, the installed base grows the incentive for new applications to be created and for the relevant spectrum to be deployed. And the relevant spectrum requires densification (millimeter wave spectrum provides significantly more capacity, but over a fraction of the geographic coverage area) – and densification is a driver of additional leasing on their tower assets and small cells.
  • Carriers have ~20X the spectrum capacity they did in 2007, w/ a significant portion yet to be deployed and w/ upcoming (C-band) auctions. C-band is mid-band spectrum and mmWave is high-band, the former can be deployed via towers and small cell but the latter is lower propagation and should primarily be deployed using small cells  – both will drive lease up activity for CCI. This should drive improving returns as they expect decreasing capital intensity for growth within their small cell and fiber business.
  • Strong balance sheet. No meaningful debt maturities until 2022. Trading at >4% 2021 AFFO yield.

 

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

 

$CCI.US

[category earnings]

[tag CCI]

 

Lockheed Martin LMT 3Q20 earnings summary

Key takeaways:

 

  • Investors most likely awaiting election results to see impact on defense budget, recent pullback suggest market seeing a Democrat winning the election (and possible decline in Defense Budget) – a Democratic President does not necessarily mean a decline in the Defense Budget! A Biden wins does not mean we need to sell Defense names.
  • Preliminary trends for 2021 look good, but below consensus (+3% sales growth). LMT is always cautious in its initial guidance, and raises it throughout the year. Book-to-bill remains above 1x (1.2X), which is a sign of future sales. Margins should tick higher slightly
  • 3Q20 results were good, sales growth of +9% was driven by all segments.
  • Share repurchase program was increased by $1.3B, with $3B remaining for future repurchase.
  • Leverage remains very low at 0.9X net debt/EBITDA for a company with great cash generation potential. We should expect M&A action near term.

 

Current Price: $375        Price Target: $469  

Position Size: 3.51%      1-year Performance: -1%

 

Lockheed released its 3Q20 earnings results earlier this week. Sales were up 9% y/y and EPS +10%. Sales per segment were as follow:

  • Aeronautic +8% (F-35 and classified contracts),
  • Missiles and Fire Control +14% (higher tactical and strike missile programs),
  • Rotary and Mission Systems +8% (higher Sikorsky helicopter sales)
  • Space Systems +6% (government satellite programs, strategic & missile defense programs)

 

Because of the continued strong results, the company raised its 2020 outlook, higher than the top end of its July’s guidance, for its sales, operating profit and EPS lines. Backlog was up 4.4%, driven by all segments (mostly Aeronautics, which includes their F-35 program). In 2021, Lockheed intends to repurchase over $1B shares. Its pension funding requirement amounts to $1B.

 

Overall, LMT continues to deliver strong shareholders returns. It has outperformed peers in the last 3 years and YTD.

 

LMT Thesis:

·         Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships

·         Excellent management team focused on returning capital to shareholders

·         Strong cash flow and financial position

    

[category earnings] [tag LMT] $LMT.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

 

 

Medtronic Investor Day Summary

Every 2 years, Medtronic presents to the investment community a detailed list of the innovative medical tools they are developing. Here are the main take-aways from the virtual investor day held last week:

 

  • Targeting a 5% long-term top line growth (previously 4%) with change in culture and innovation:

 

1/ CEO pushing for a change in the company’s culture: decentralization is the new operating model, where each segment will act as its own operating unit (20 of them), with its own P&L and sales team to react faster to changes in the market place. This model has been tested in their Restorative Therapies Group while the current CEO was then President of that group. He increased organic revenue growth to 6% and improved profitability. I always thought of MDT as this big boat steady in the storm but slow to navigate. The CEO seems to be addressing this issue by making the company nimbler.

On a side note, the company featured many diverse employees and patients during the presentation, a way to highlight their desire for inclusion and diversity, one of their 5 sustainability tenets.

 

2/ Innovation: 130 new products have been approved since January.

New opportunities:

  • Robotic surgeries – could add +0.50% of growth in that segment, possibly reaching +2.5% extra sales growth by FY23. Looking to differentiate its robot with system modularity within the hospital.
  • Renal denervation – to treat a large population with hypertension (affects 1/3 adults globally, where 50% of patients are non-adherent within 1 year!)
  • Colon cancer screening (partnering with Amazon for the delivery of the PillCam Genius –  a pill-size camera to swallow that detects abnormalities in the colon and communicates with the doctor): 1 in 20 US adults will be affected by colon cancer, with a 90% chance of recovery if treated early.

 

Expanding into existing markets:

  • Diabetes: developed an app + insulin pen to provide intuitive and personalized insulin dosing intelligence. Developing an even smaller pump.
  • TAVR or Transcatheter Aortic Valve Replacement (going on a head to head trial with EW). This market is less than 10% penetrated and growing in the low teens. Edwards Lifesciences is a strong competitor so success there is not guaranteed.

 

As a result of looking to increase top line growth, MDT will spend >$2.5B in R&D per year, above the $2.2-2.3B it has spent the last few years. This amount should grow with sales as well. Tuck-in M&A, venture investments are also part of this strategy. To offset some of the extra spending, the company continues on its cost savings program, as well as a newly launched “Simplification” program, looking to reduce SG&A expenses. So while we are pleased to see an increased sales growth target, earnings growth target does not increase in the same measure as additional investments are necessary.

 

Overall this was a bullish investor presentation, as most are. We hope to see the recent innovations and focus on growth come to fruition in the coming years.

 

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