Month: November 2020

Disney Q4 Results

Current Price: $138         Price Target: $165

Position size: 1.5%          TTM Performance: -4%             

 

Key Takeaways:

  • Beat on revenue and EPS.
  • Strong Disney+ performance continues – Disney+ continues to ramp better than expected w/ 73.7m subs above expectations of 65m.
  • Accelerating transition to DTC first company – key driver of LT value for the company. Investor Day in early Dec will be devoted to this transition.
  • Dividend still suspended, but plan for it to resume – This comes despite the investor letter from Third Point suggesting they permanently suspend it and channel that cash towards content. Leverage is still up, aiming to return to leverage levels consistent with single A credit rating.

 

Additional Highlights:

  • Revenue was $14.7B vs $14.2B expected. Despite revenue down 23% YoY, driven largely by an 61% YoY drop in Parks segment revenue, Disney managed to post positive op income and FCF for the quarter. Adj. op income was $393m vs expectations of about -$1B loss.
  • Financial results continued to reflect significant impacts from COVID-19 which adversely impacted segment op income by $3.1B. Parks, Experiences and Products segment was again the most severely affected with an estimated adverse impact of $2.4B in Q4.
  • Segment re-alignment – Previously announced new segment reporting starts next quarter. This will essentially put all of their content creation together in a segment called “Media and Entertainment” and separate it from distribution. Currently, Studio, streaming and cable were in separate segments. The change separates optimal distribution decisions from the type of content made. This underscores a growing focus on streaming vs studio reliance and seems to suggest more movies going directly to streaming to drive subscriber growth. 
  • Overall, a very encouraging and upbeat call with an upcoming investor day in the coming months that mgmt. seemed very positive about. They will update Disney+ profitability guidance given it’s tracking way ahead of original targets. Additionally, the long-term speculation has been for a DTC model for ESPN – so this could be a potential topic.
  • Media:
    • Media Networks revenues for the quarter increased 11% to $7.2 billion, and segment operating income increased 5% to $1.8 billion. Op income was up in Q3 due to higher results at both Broadcasting, partially offset by lower results at cable networks.
    • At Broadcasting, the increase in op income was primarily due to affiliate revenue growth and lower programming, production and marketing costs. The decrease in programming and production costs was largely driven by COVID-19 related shutdowns, the shift of college football games to fiscal 2021 and a delay in airing new season premieres. Lower results at cable networks were driven by decreases at ESPN, partially offset by increases at FX Networks and the domestic Disney channels.
    • ESPN results were lower as affiliate and advertising revenue growth were more than offset by higher programming and production costs.
  • Parks, Experiences and Products:
    • Segment revenues decreased 61% to $2.6B, and segment op income decreased $2.4B YoY to a loss of $1B.
    • “We’re very pleased with the dynamics we’re seeing at parks across the globe.” WDW was at 25% capacity…now at 35% capacity. 
    • Virus resurgence continues to drive closures – Paris re-closed recently. California still closed. Shanghai open for the full quarter. Hong Kong open for part of the quarter.
    • All resorts operating at significantly reduced capacity. Walt Disney World, Shanghai Disney Resort and Hong Kong Disneyland all achieved a net positive contribution in  Q4, which means they generated revenue that exceeded the variable costs associated with reopening.
    • Positive demand signs – Walt Disney World already booked at 77% capacity for Q1. Thanksgiving week almost booked to capacity. In other words, there are some heavy fixed costs, but it pays to have them open despite really limited capacity.
  • DTC:
    • Revenues were +42% with an operating loss of $580m- an improvement of approximately $170m compared to the prior year. This improvement was driven by higher results at Hulu and ESPN+ partially offset by costs associated with the ongoing rollout of Disney+ and a decrease at our international channels. The improvement at Hulu was due to both subscriber and advertising revenue growth, partially offset by higher programming/production costs. The improvement at ESPN+ was due to subscriber growth and increased pay-per-view income from UFC events.
    • Between Disney+, ESPN+, Hulu they now have >120m paying subs. ESPN+ subs were ahead of expectations at 10.3m vs consensus 9.1m. Hulu came in slightly below at 36.6m vs consensus 37.5m. Disney+ was 73.7m vs consensus 65m.
    • Disney+ ahead of 5 yr. target after only 1yr. – 60m subs at Disney+ was originally targeted for 2024, so they hit their 5 year target in about 8.5 months. And said they’re ahead of expectations in every geo, with big launches still ahead. India plus Indonesia are ~25% of subs. ARPU is $4.52, or $5.30 ex-India. This is basically unchanged from last quarter. They will give updated subscriber targets at their Investor Day in December. 
    • Global rollout driving sub growth – Now in more than 20 countries worldwide. They launched Disney+ in the Nordics, Belgium, Luxembourg and Portugal in September, and in Latin America this November. Rolled out Disney+ Hotstar on September 5 in Indonesia, one of the world’s most populous countries. Disney+ will launch in Brazil, Mexico, Chile, and Argentina on November 17. By year-end, Disney+ will be available in 9 of the top 10 economies in the world.
  • Studio:
    • Studio Entertainment revenues for the quarter decreased 52% to $1.6 billion and segment operating income decreased 61% to $419 million. The decrease in operating income was due to lower theatrical and home entertainment results.  Worldwide theatrical results continued to be adversely impacted by COVID-19 as theaters were closed in many key markets, both domestically and internationally, and no significant worldwide theatrical releases in the quarter.
    • Production was heavily impacted by Covid except w/ animation which was uninterrupted. They’re finally re-starting production for live action films and television.
    • Over time number of films and quality of content. New content adds subscribers. Increased pace in investment on content should be a focus at Investor Day.

 

 

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

 

 

$DIS.US

[category earnings ]

[tag DIS]

 

Themes & Focus List Stocks: Artificial Intelligence and Medtronic

Going forward we thought it might be helpful to share some insights on how certain themes are present in our portfolio. This week I’m sharing an example of how the theme of Artificial Intelligence is present in our portfolio with Medtronic.
A year ago the company launched GI Genius, the first system worldwide to use Artificial Intelligence to detect colorectal polyps. It provides physicians with a powerful new solution in the fight against colorectal cancer.
The GI Genius module uses advanced artificial intelligence to highlight the presence of pre-cancerous lesions with a visual marker in real-time – serving as a second observer. Studies have shown that having a second observer can increase polyp detection rates. Medtronic also includes AI in its Diabetes solutions with Sugar.IQ (a partnership with IBM). The company’s Minimed insulin pump comes with the Guarduan 3 sensor, which uses AI to help diabetes patients beat high and low blood glucose related events.
Thanks,
Julie

tag: MDT

Themes & Focus List Stocks: Artificial Intelligence

Going forward we thought it might be helpful to share some insights on how certain themes are present in our portfolio. This week I’m sharing an example of how the theme of Artificial Intelligence is present in our portfolio…
Black Knight’s AIVA Product: AIVA (AI Virtual Assistant) is BKI’s AI technology that can help clients automate what is still a very paper intensive origination process. Mortgage originations are expensive and getting more expensive partly because they are so labor intensive. AIVA is powered by machine learning and performs manual, repetitive tasks at scale. This helps clients reduce operating costs for this time-consuming process. AIVA mimics cognitive thinking to read, comprehend and draw conclusions. “She” is able to remember patterns within data the same way humans recall what they have learned on the job. Loan applications contain hundreds of data points from various document types, including PDFs, screenshots, TIFFs of things like W2’s and paystubs.  The documents need to be verified, classified and entered into an origination system. Mortgage professionals are tasked with doing this under tight deadlines. AIVA can read, analyze and extract the data. It then creates queues of documents for a processor to scan and make corrections. In doing this, each new set of origination documents serves as training data, making AIVA “smarter” and more efficient. BKI says it reduces a 95 minute process to a 5 minute process. By performing error-prone, manual tasks, AIVA enables employees to focus on projects with greater strategic value, such as addressing exceptions and solving problems, which results in improved transaction turn times as well as reduced risk. As AIVA helps accelerate and streamline processes, lenders benefit from reduced expenses, which is key as loan origination costs hit new highs, pressuring net profits for lenders.

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

$BKI.US

[category themes]

[tag BKI]

CSCO Q1 2021 Results

Current Price: $41                           Price Target: $58 

Position size: 2.8%                          TTM Performance: -9%

 

Key Takeaways:

·         Top line and EPS beat with better-than-expected guidance.

·         Upbeat guidance suggests macro environment showing signs of improvement. Aging network infrastructure needs to be upgraded. Growing use of new technologies and increased data demand places increased importance on this.

·         Mix shift to software and recurring revenue should continue as an increasing number of their products are to be offered this way.

·         Cost cutting to help preserve earnings power –  $1B in annual cost reductions to be implemented over next few quarters.

·         CEO Chuck Robbins said…“Cisco is off to a solid start in fiscal 2021 and we are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other macro uncertainties.”

 

Additional Highlights:  

·       Overall, business trends are weak but improving, they are lapping easy compares this coming year amidst some aggressive cost-cutting initiatives, transition to software/subscription continues, valuation is inexpensive, and they have a high dividend yield (3.5%) that’s easily covered. 

·        Q1 sales -9% YoY and EPS -10%. Q2 revenue guided to 0% to -2%. Street was expecting -3.5%.

·       New CFO announced – Scott Heron (was Autodesk CFO) , he will replace Kelly Kramer whose retirement was announced last quarter. He has a background in software and helped to lead Autodesk’s successful business model transformation from perpetual licenses to subscription software.

·       Improved demand commentary relative to last quarter…

·       By product – Soft demand w/ campus/DC switching, routing, servers, and WLAN still offsetting positive Webex, security, Cat9K, WiFi-6  trends, but order patterns are improving.

·       By end market – Positively, order patterns in public sector were solid while headwinds w/ commercial/enterprise are set to subside. Saw a pretty significant improvement in commercial orders -they were minus 23% last quarter in the midst of a “SMB meltdown,” that improved to -8% this quarter.

·       As I mentioned last quarter, Gartner expects global IT spending to decline -7% in 2020. Within this there are pockets of strength, like public cloud spending as companies shift IT budgets to areas of immediate need. For much of Cisco’s products the needs are less immediate, but the LT drivers still exist. Management talked about this dynamic on the call. “We had customers who are super-focused on getting their employees working from home productively and getting their security set up. I think everyone raced to do that and then I think they took a pause, which is what we felt in our last quarter in orders. And then I think they re-prioritized what they were going to be spending money on and I think we started seeing some of that come back and it’s sort of exactly what I expected, but we needed to see it and we’ll see if it continues. But we’re all dealing with the same macro environment.”

·        Positive commentary points to continued software/services mix shift and strength in new products –This includes strong demand for their Catalyst 9000, security, WebEx and other SaaS-based solutions. Software mix is close to 1/3 of revenue, w/ 78% of software sold as subscription. That means almost 1/4 of total sales is from software subscriptions sales (or close to $12B). Additionally, 27% of rev is services with much of that from maintenance/support which tend to be recurring. So overall recurring revenue could be 40% or more (they don’t break it out specifically). So while top line growth has been weak, the mix shift happening w/in their business should be supportive of their multiple and their margins. They intend to grow this mix over time.

·        Momentum w/ web-scale cloud providers – the positive commentary from last couple quarters continued. This is an end market where they lost share to Arista in the past, but their positioning is improving w/ new products announced last Dec. That being said, this is still early stages – mgmt. indicated it may take a year or two for this to be a meaningful top line contributor.

·        Valuation: trading at almost an 8% FCF yield on fiscal 2021, which ends in July. This is well below S&P average of <4%, for a strong balance sheet, high FCF generative business w/ a growing mix of software and recurring revenue. Despite macro headwinds, fundamentals continue to be supported by business transformation/digitization trends at a reasonable valuation while much else in tech has seen substantial multiple expansion. Additionally, their valuation is supported by a 3.5% dividend yield which they easily cover. They have ~$15B in net cash on their balance sheet, or almost 9% of their market cap.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$CSCO.US

[category earnings ]

[tag CSCO]

FW: TCPNX – Q3 2020 Commentary

TCPNX Commentary – Q3 2020

Thesis

TCPNX is a smaller fund that does not have as many assets under management compared to our other core mangers, enabling them to make more nimble and tactical decisions. By making small allocations to undervalued “riskier” asset classes (high-yield and non-dollar denominated debt), TCPNX diversifies our fixed income portfolio and generates superior returns to the benchmark (Barclays U.S. AGG). We like that the fund utilizes a bottom-up investment process through proprietary framework analysis, fundamental security review, and portfolio risk management.

 

[more]

 

 

 

 

 

 

 

 

 

Overview

In the third quarter of 2020, TCPNX outperformed the benchmark (Barclays U.S. AGG) by 54bps. The overweight to spread securities and underweight to U.S. Treasuries positively added to returns. An overweight to U.S. Agencies and Agency Multi-Family MBS, and underweight to Agency Single-Family MBS, helped contribute to performance. Underweight to CMBS and general allocation to higher quality credit and secured debt created a headwind.

 

Q3 2020 Summary

  • TCPNX returned 1.16%, while the U.S. AGG returned 0.62%
  • Quarter-end effective duration for TCPNX was 6.0 and 6.1 for the U.S. AGG
  • Three largest contributors
    • Small Business Administration Development Company Participation Certificates, airline Enhanced Equipment Trust Certificates, and High Yield bonds
  • The top detractors
    • Municipal debt and Title XI bonds

 

 

 

 

Optimistic Outlook

  • We continue to hold this fund and believe in our thesis due to the fund’s consistent and defensive approach that we expect to generate alpha through times of low volatility
  • The fund believes the decline in the recovery outlook is largely correlated with the lack of a stimulus deal
  • Tight credit spreads and high levels of economic uncertainty will create challenges for the fund to find opportunities
    • “Lower for longer” rates stated by the Fed has created opportunities in U.S. Agency debt
  • TCPNX is focusing on increasing quality names – recently exited oil and exploration companies

 

[Category Mutual Fund Commentary]

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

FW: WATFX – Q3 2020 Commentary

WATFX Commentary – Q3 2020

Thesis

WATFX is an actively managed fund that finds overlooked areas of the market that can go against consensus views and add value. Through internal macro, credit, and fundamental research WATFX identifies undervalued securities and takes on more credit exposure to generate alpha over time. Through a diversified approach to interest rate duration, yield curve, sector allocation, and security selection, the fund dampens exposure to volatility.

 

[more]

 

 

 

 

 

 

 

 

 

 

 

Overview

In the third quarter of 2020, WATFX outperformed the benchmark (Barclays U.S. AGG) by 87bps. Duration positioning adjustments helped generate positive returns for the fund. Exposure to structured products, non-agency RMBS and ABS gave the fund positive relative performance. TIPS and EM exposure were also a positive for returns, but investment grade corporate bond exposure, such as in the banking industry, detracted from overall performance.

 

Q3 2020 Summary

  • WATFX returned 1.49%, while the U.S. AGG returned 0.62%
  • Quarter-end effective duration for WATFX was 7.0 and 6.1 for the U.S. AGG
  • A steepening yield curve created a headwind for returns
  • Cut TIPS exposure as breakeven inflation rates rose

 

 

 

 

Outlook

  • We continue to hold this fund and believe in our thesis due to the fund’s diverse approach and strong top down-bottom up fundamental value investing over the long-term
  • WATFX is expecting a longer “U-shaped” global economic recovery
    • Expecting central banks to continue to roll out stimulus
  • The fund is excited to seek out opportunities as spreads widen and the Fed continues to support corporate credit markets

 

 

[Category Mutual Fund Commentary]

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

FW: MWTIX – Q3 2020 Commentary

MWTIX Commentary – Q3 2020

Thesis

MWTIX is an actively managed fund that provides a sector-based strategy while still maintaining fundamental research driven through issue selection. When compared to the benchmark (Barclays U.S. AGG), the holdings have similar duration and exposure, yet selection is focused around areas where other managers are not looking. Through sector rotation and active weighting, we expect MWTIX to generate alpha over time.

 

[more]

 

 

Overview

In the third quarter of 2020, MWTIX outperformed the benchmark (Barclays U.S. AGG) by 64bps, largely due to strong selection within corporate credit and residential MBS. The fund’s overweight to energy and finance companies helped contribute to higher relative performance, as well as a higher average yield. Exposure to non-agency MBS, ABS, and TIPS also added to relative performance. The fund’s duration – which is shorter than the index – had little impact on the returns as Treasury rates had mild changes during the quarter.

 

Q3 2020 Summary

  • MWTIX returned 1.26%, while the U.S. AGG returned 0.62%
  • Quarter-end effective duration for MWTIX was 5.58 and 6.1 for the U.S. AGG
  • The fund has focused on allocating to higher quality products and securities
    • Defense sectors make up the allocation in corporate credit and high yield
    • Agency MBS have been swapped for TBAs
    • A focus from ABS to AAA-rated CLOs and government guaranteed student loan collateral

 

 

 

 

Outlook

  • We continue to hold this fund and believe in our thesis due to the fund’s defensive approach and minimal exposure to more vulnerable issuers and industries
  • Pandemic data suggests that is will take a considerable amount of time for the economy to get back to its pre-COVID levels
    • Behavioral changes and persistent labor market disparities will act as a headwind to a consumer-driven rebound
    • Volatility will continue, especially with a delayed and potentially lower stimulus
  • MWTIX has positioned itself to take advantage of relatively attractive prices during times of high volatility to generate strong returns

 

[Category Mutual Fund Commentary]

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

FW: DBLTX – Q3 2020 Commentary

DBLTX Commentary – Q3 2020

Thesis

DBLTX utilizes a top down-bottom up process that focuses on MBS and Agency bonds. When compared to the benchmark (Barclays U.S. AGG), the holdings have lower duration and exposure to corporate bonds, reducing their sensitivity to interest rate movements and credit spreads. We expect attractive risk-adjusted return characteristics over the long term from DBLTX, especially during periods when corporate bonds’ spread increase and the yield curve steepens.

 

[more]

 

 

Overview

In the third quarter of 2020, DBLTX outperformed the benchmark (Barclays U.S. AGG) by 40bps, largely due to asset allocation within the securitized credit sectors. Non-Agency RMBS was the largest contributor to returns, while non-agency CMBS also helped performance as rent collections stabilized. CLOs and asset-backed securities also contributed positively to returns, yet Agency MBS slightly detracted from the fund’s overall performance.

 

Q3 2020 Summary

  • DBLTX returned 1.02%, while the U.S. AGG returned 0.62%
  • Quarter-end effective duration for DBLTX was 3.33 and 6.1 for the U.S. AGG
  • The top two performers were non-Agency RMBS and non-Agency CMBS
    • Agency MBS securities produced negative returns due to high levels of prepayment rates which caused spreads to widen

 

 

 

 

Outlook

  • We continue to hold this fund due to the approach and strong diversification factor within our core bond holdings – yet we are looking further into the holding as the year-to-date volatility and underperformance has made us reassess the approach
  • DBLTX is a good position to hold due to its low duration which outperforms during periods of rising rates – Treasury yields are at an all-time low and we expect the yield curve to steepen at some point in the future
  • Historically, DBLTX has displayed stronger returns and lower volatility than the index
  • DBLTX has had consistent strategy, allocation focus, and sector distribution

 

[Category Mutual Fund Commentary]

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Black Knight 3Q20 Earnings

Current Price: $90           Price Target: $96 (raised from $85)

Position Size: 2.6%          TTM Performance: 53%

 

 

Key Takeaways:

 

·       Better than expected revenue and EPS. Guidance raised above street. Exceeded expectations on higher origination volumes and continued improvement in data and analytics sales.

·       Lower foreclosures is a headwind: as they indicated last quarter, they are seeing lower foreclosure-related volumes in their Specialty Servicing software business due to the foreclosure moratorium.

·       Data & Analytics accelerated (+27% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.

 

Additional Highlights:

·        Q4 Revenues were $312m, +4.5% and adj. EPS was +7%.

·        Housing data points: low rates, improved affordability and low inventory continue to put upward pressure on home prices, with the median home price rising by 14.2% in September. This is up from an 11.5% increase in August, the highest annual home price growth rate in more than 15 years. This is benefiting origination volumes. Estimated origination volumes based on underlying locks suggest Q3 refinance and total originations could be up 25% or more from Q2, while purchase lending could be up by 35% or more. This would push 2020 purchase lending to its highest level since 2005 and both refinance lending and total origination volumes to their highest levels ever, with total lending on pace to easily eclipse the $4 trillion threshold for the first time on record.
·      Foreclosure moratorium: For homeowners with mortgages backed by government-sponsored enterprises Fannie Mae or Freddie Mac, the Federal Housing Finance Agency, the moratorium is set to expire at the end of the year. GSEs and other government loans cover about 70% of all mortgages. The other 30% of homeowners w/ private mortgages are not protected under federal law – some banks are following federal guidelines, but only legally obligated to stop foreclosures in a handful states.

·       Their stake in D&B is now worth $1.4B w/ the recent IPO. They invested just under $500m in their D&B stake ~1 year ago giving them a pre-tax unrealized gain of ~$900m.

·       Closed acquisitions of Optimal Blue (enhance their origination and Data & Analytics businesses) and DocVerify (supports e-notarization and remote online notarization).  Optimal Blue is, 80% recurring revenue, accretive to their overall organic growth rate and aided their guidance improvement.

·       Data analytics segment (~15% of revenue) revenues were up 27%, an acceleration from 21% last quarter. Driven by growth in their property data and portfolio analytics businesses.

o   EBITDA margin +940bps YoY.

o   Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals. They continue to see promising momentum in this business.

o   Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US. This is helping w/ loan origination despite social distancing. They’ve seen significant interest in and adoption of their expedite e-close and e-sign solutions as well as their loss mitigation solution since the beginning of the pandemic.

·        Software Solutions segment (~85% of revenue) down +1%.

o   Within this segment servicing (~70% of revenue) was down -4% driven by lower foreclosure related volumes due to the foreclosure moratorium as part of the CARES Act. The year-over-year performance improved from2Q as a result of the Bank of America conversion and the anniversary of headwinds from a client de-conversion.

o   They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages is >60%.

o   Year-to-date, signed five new MSP clients, representing over 750,000 loans.

o   Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 20% in Q2 – Volumes were stronger than expected. Lower rates help this business. Growth driven by new clients, a tuck-in acquisition, as well as higher refinanced volumes in their Exchange and e-Lending businesses.

o   Segment EBITDA margin down 110bps YoY.

·         Raised full year 2020 outlook:

o   Revenues of $1,229 million to $1,235 million (raised from $1,170 million to $1,184 million). 

o   Adj. EPS of $2.03 to $2.07 (previously $1.94 to $1.99), street at $1.93

o   Adj. EBITDA of $603 million to $608 million (previously $572 million to $583 million)

Valuation:

·         Trading at <3% FCF yield on 2021 –valuation is getting more expensive but supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex which should taper as they grow.

·         $2.3B in net debt – that puts their leverage ratio at 3.6x. Increased from <2x with recent acquisitions.

·         Capital allocation priorities include debt pay down, opportunistic share repurchases and acquisitions.

Thesis:

  • Black Knight is an industry leader with leading market share of the mortgage servicing industry. 
  • Stable business with >90% recurring revenues, long-term contracts and high switching costs.
  • BKI has high returns on capital and high cash flow margins.

 

.UA

[tag BKI}

[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

 

$BKI.US

[category earnings]

[tag BKI]

 

 

BKNG 3Q Results

Current Price: $1,783      Target price: $2,400

Position Size: 1.8%          TTM Performance: -12%

 

 

Key Takeaways:

·       Beat on revenue, missed on EPS.

·       Demand improved throughout Q3, but weakened meaningfully beginning in October w/ Covid resurgence in Europe. Strongest trends were w/ domestic driving travel and alternative accommodations (e.g. home rentals). Alternative accommodations were 1/3 of booked room nights.

·       Cost cutting continues which should aid margins when demand environment improves.

·       Weak environment strengthens their position w/ suppliers as they are a key source of demand. Demand mix shift away from business towards leisure benefits BKNG’s leisure focus.

 

Additional Highlights:


·       CEO said Q3 benefited greatly from some lifting of government lock-downs and the release of pent-up demand created by the almost complete cessation of travel during parts of Q2.  However, COVID-19 case counts are now rising steeply in many parts of the world with corresponding increases in lock-downs and re-imposed travel restrictions that will continue to impact travel in the near-term.
·      Revenues for Q3 were $2.6B (-48% YoY) vs $2.5B consensus. While they missed on EPS, there were some adjustments including an unrealized gain on marketable securities and an impairment charge for OpenTable and Kayak goodwill. 
·       Q3 bookings were $13.4B (-47% YoY vs. -91% in Q2), slightly below consensus. 
·        Improving trends in Q3 – Room nights declined -43% YoY and ADRs declined -8% YoY ex-FX. This is an improvement from Q2 when room nights booked were down 87% YoY. They saw a surge in demand when travel restrictions and stay-at-home orders eased. 
·        Weakening results in Q4 w/ resurgence in outbreaks – The YoY decline in reported room nights was relatively consistent each month of Q3, as the steady improvement in global trends that they saw from April through July, flattened out in August and September. In October reported room nights declined by about 58% compared to October 2019. And over the last 7 days through yesterday, declined by about 70%. Worsening result is driven by increased virus infections and certain governments re-imposing public health-related restrictions. 
·       Weak guidance – “Given the trends we are currently seeing, we believe that year-over-year room night declines will be greater in Q4 than what we observed in October. If this turns out to be the case, it will be very challenging for us to reach profitability in Q4.”

·       Strength in domestic travel – booking trends were primarily driven by domestic travel with international trends seeing much more limited improvement. Domestic business benefiting from prohibitions/restrictions on international travel, which forces consumers who want a holiday to travel domestically. Note that “domestic” is just intra-country, so travel between countries w/in Europe is international.

·       Connected trip is a long-term growth driver – The long-term vision for them continues to be the “connected trip.” The idea is to be a platform for not just hotel, but a portal for all aspects of travel including flights, activities, restaurants etc. A key part of this is building up the “supply” (e.g. tour operators). The current environment could be a catalyst for supply as weaker travel trends spur suppliers to look to Booking as a necessary source of demand. They continue to invest behind this despite the current environment including their payment platform which enables payment to companies like tour operators through their platform. They recently announced the launch of flights on Booking.com in the US.

·        Cost cutting and improved marketing efficiency likely to lead to profitability recovering before top line does. Big headcount reductions with more to come. Also cutting marketing expense which is the biggest part of their cost structure – typically ~30% of rev. This is an important lever for cutting costs. As direct traffic grows as a % of bookings (over 50% now and increasing), this is an area where margins can structurally improve over time.

·       Regulatory Risk – New regulatory framework that the European Commission is working on (Digital Services Act)  will focus on “gatekeepers.” The focus is on big tech platforms – BKNG could potentially be included in this. The implications are not yet clear. BKNG feels designating them as a gatekeeper would be a mistake as they do not have the dominant market share of other “gatekeepers” like Google. BKNG puts their market share of bookable room nights in Europe at 11%. 

·       Stock is cheap and expectations are reasonable. Trading at almost a 5% yield on 2021. Consensus is for revenue not to recover to 2019 baseline until 2023. Consistent w/ mgmt. commentary that it will be years and not quarters before the travel market returns to pre-COVID volumes.

 

 

 

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

 

$BKNG.US

[category earnings ]

[tag BKNG]