Month: November 2020

CVS 3Q20 earnings summary

Key Takeaways:

    

Current Price: $65                            Price Target: $90

Position Size: 1.87%                        1-year Performance: -13%

  • CEO transition announced for February 2021, current CEO Larry Merlo will be replaced by Aetna President Karen Lynch – we’re not expecting any dramatic change to the company’s strategy following the change

  • 2020 guidance increased on the EPS and cash flow lines (higher on better working capital and underlying performance of the business)

  • CEO Merlo quote: “we identified the strategic need to round out our suite of assets with a national health plan business which led to the industry disrupting acquisition of Aetna, and this month marks our two year anniversary as one company and we are now leveraging our local presence and communities to deliver expanded and integrated services to people, wherever they are“

  • Winning quote from the Deutsche Bank analyst during the Q&A session: “congratulations to Larry and to Karen and I’ll say […] it’s always good to see a peaceful transition of power“

  • 6 millions Covid tests administered so far (or 70% of retail setting tests)

  • Flu vaccine administered August-October were up 78% y/y

 

Segments update:

  • Health Care Benefits: membership growth driven by government products up 24% y/y (Medicare and Medicaid) while commercial membership declined 4%

  • Pharmacy Services: revenue slightly down (-0.9%) due to some client losses and price compression, partially offset by Specialty Pharma growth. Operating income grew 12% due to purchasing economics and mix.

  • PBM: 98% retention rate

  • Retail/LTC: sales up ~6%, driven by increased prescription volume (+5.8%), higher front store sales (+2.2%), increased diagnostic testing. Profits were impacted by continued reimbursement pressure and additional COVID-19 costs

 

There are now 450 HealthHub across the US, in over 30 states. In 2021 CVS will expand the offering to add in-person behavioral health support. More visits are now to manage chronic services, which in addition to lowering ER visits and increase adherence to treatment will lower medical costs. Regarding its capital allocation, CVS continues to pay down debt, with the goal to achieve a low 3X leverage ratio.

 

Thesis on CVS

  • Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.
  • Aetna acquisition makes it vertically integrated.
  • Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.
  • shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)

 

$CVS.US

Category: earnings

tag: CVS

Zoetis 3Q20 earnings results

Key Takeaways:

   

Share price: $172                     Target Price: $182 NEW (from $177)

Position size: 2.36%                TTM return: +46%

 

  • Impressive sales growth of 15% (ex-FX):
    • + 18% in the US, driven by demand +21% in companion animals products (paraciticides, vaccines and dermatology products), and +13% in livestock products (rebound from Covid restrictions)
    • Market share gain in paraciticides (+6% share) thanks to Simparicia Trio introduction this year – and cannibalization below expected levels. The Trio offering is attarcting new customers.
    • +11% in International sales (ex-FX), with companion animal sales +20% (strong growth in China) and +6% livestock sales
  • Simparica Trio will continue to be a driver to growth going forward, with heavy investments behind it to gain market share ahead of a competitive launch sometime next year.
  • Potential launch in 1H2021 in Europe of the first injectable monoclonal antibody licensed for alleviation of pain associated with osteoarthritis in dogs.
  • In Q3, there wasn’t an increased number of vet visits, but rather an increase in spending per visit, a positive trend that will continue as long as people spend more time at home with their pet. 
  • There is also an increased use of diagnostics – a good thing as they recently acquired a diagnostics company
  • Guidance for the year increased on good Q3 results, but Q4 is expected to be more moderate
  • CEO quote: “animal health is a steady and reliable sector, even in times of economic hardship. The world’s fundamental need for nutrition, comfort and companionship, provided by animals, has proven durable and enduring over time”.

 

Updated guidance for 2020:

Revenue guidance increased now +7% to +8% (prior 3%-6%) due to better 3Q results than expected

EPS now $3.76-$3.81 from prior $3.52-$3.68

 

Zoetis investment thesis:

  • ·         Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented
  • ·         ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs
  • ·         ZTS is growing above the industry rate and has proven resilient throughout economic cycle
  • ·         Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013
  • ·         Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability

Vontier: recommend selling VNT and adding the proceeds to FTV – #researchtrades

After further review, we recommend selling the small VNT position that came out of the FTV spin-off and put the proceeds into FTV.

 

Reasons for the sale:

 

Risks are greater than opportunities:

 

  1. 70% of 2019 sales came from their GVR business (retail fueling stations). We see the longer term risk no so much the decline in chip card readers in the US in 2021 (that can be offset by growth in other markets), but rather the upcoming obsolescence of gas stations as electric cars become a greater part of the vehicle pool globally. While currently only 1% of the car pool today, EV are estimated to be 10% of the car pool in 10 years. This could prove conservative as more countries ban ICE. And as car manufacturers increase production of EV that get better and better. The UK banning the sale of ICE starting in 2035 (including hybrid vehicles). France is planning the ban for 2040. Diesel cars will be banned sooner in some cities (2025 for Paris, Madrid, Mexico City, Athens). See the list below of all the countries that have announced an upcoming ban – this include China that is thinking about a ban as well.
  2. The switch to electric vehicles will also have an impact on their Matco Tools business (20% of sales): EV engines have 1/3 of the ICE engines maintenance. This is due to the fact that ICE engines contains hundreds of moving parts in its motor and drivetrain, vs. and EV engine that contains roughly 20. Less parts means less maintenance, and less trips to the auto repair shop.

While those two major risks to VNT are longer term in nature (short-term, the company could benefit from the increased sale of used cars due to COVID and emerging markets growth), it would require extensive M&A to shift the business towards the electric vehicle trend and/or the smart cities theme that is also growing but only 1% of sales today.

 

So what about Fortive now?

Fortive is focused on products that provide critical workflow solutions in productivity and safety. In addition to instruments that measure and control, they are also adding a set of Software solutions and data analytics capabilities.

3 segments targeting the control/sensor/measuring of liquids/gas/electricity in various end markets:



Some examples of what they actually make:

Gems: this company makes various sensors and control systems that find application in numerous end markets. Below are only a few:
  • In healthcare: pressure switch to measure the cooling system of medical imaging equipment, fluid control for medical lasers.
  • In the Alternative Energy space Gems makes sensors critical for wind turbines, by monitoring the hydraulic pressure that maintains the blade pitch, essential to maximize the amount of power generated, while protecting the blade from damage.

  • Gems sensors are also used by the Marine markets, both commercial and military. Since a picture is worth a thousand words, here’s where you can find their sensors on boats:




Dynapar: its products are also used across many end markets such as aerospace & defense, elevatorsm passenger rails and even medical imaging.
  • Example of and encoder used in the medical imaging field: “MRI is a noninvasive diagnostic technique that uses nuclear magnetic resonance to produce cross-sectional images of organs and other internal body structures. Dynapar offers a range of industry duty encoders designed to comply with FDA manufacturing guidelines for MRIs and X-Ray imaging. In x-Ray machines our encoders move water in and out of the machine, while in CT Scan and MRI machines they move patients in and out and measure the rotating speed.”



Anderson-Negele: hygienic sensors for the food, beverages, and life sciences industries:  
  • They have a product called a refractometer: it measures the sugar content in orange juice to guarantee a consistent taste experience (thank you!!).
  • Their turbidity sensor measures the wine clarity: even before the smell and taste experience, the color and clarity of the wine needs to be consistent and pleasant. A California-based wine maker installed the ITM-4 sensor to monitor the turbidity in their clarification process prior to bottling. This allowed increased production yields and consistent monitoring (Thank you again!!).


 

Thanks,

Julie

Schwab Q3 results

On 10/29, Schwab hosted their fall update for Q3, a quarter which had earnings of $.51. beating estimate of $.47.  Key takeaways are:

  • Schwab reported solid core new asset growth of 5%. 
  • Completion of the TD Ameritrade acquisition 
    • AUM jumps to $6.0t. from $4.1t
    • Expect cost savings of $1.8b-$2.0b over 2-3 years which will increase margins over 10%
    • SCHW is already the 7th most profitable company in the finance sector (on TTM pretax margin) and the cost synergies could increase margins 10 percentage points!
  • Low interest rates remain a headwind with Net Interest Margin (NIM) falling to 1.34%. 
  • Rising deposits up 52% yoy have helped offset falling NIM. 
  • Valuation remains attractive.

 

Despite lower interest rates, we remain optimistic that SCHW will continue to grow AUM significantly this year, leveraging its platform to drive ESP growth. 

 

Current Price: $41.64                     Price Target: $48 (up from $38)

Position Size:   1.85%                       Performance since initiation on 6/24/19: 8.8%

 

Q2 Highlights:

  • Total client assets rose to $6.0T, with core new asset growth of 5%. 
    • Client assets 6% annualized organic growth
    • Brokerage accounts 21% annualized growth
    • Focus on growing digital platform with 64% digitally active households
  • Net interest margin
    • Net Interest Margin (NIM) was 1.34% falling from 1.53% in Q2, more than offsetting the growth in deposits as interest revenue fell 14%. 
    • NIM will increase slightly with AMTD acquisition
  • Advice and Funds
    • Schwab fee based advice solutions assets grew to $361.2b up 13% YoY.
    • Schwab assets in proprietary ETFs up 12% to $168.9b
    • Expanding into bank loans with $22.3b up 32%
  • Profitability – industry leader
    • ROE 12% and 39.1% pre-tax profit margin.  Expect margins to expand 10% points over the next 2-3 years due to cost savings and scale from the mergers
    • Current expenses are elevated due to mergers
  • Capital allocation
    • Schwab will look to issue a preferred stock issue as growth in balance sheet and acquisitions will require more capital.  Share buybacks are on hold.
    • Dividend yield of 1.70%
    • Valuation is attractive at 19x earnings.  Target price set at 22x.

Schwab Thesis:

 

  • Expect Schwab’s vertically integrated business model to drive AUM growth.  Schwab has averaged 6% organic core net new asset growth as retail clients and advisors are attracted to Schwab’s low cost trading and custody services.
  • Conservative, well-managed firm who is a leader in online trading and focused on leveraging platform. 
  • Schwab will experience material AUM growth with USAA and TD Ameritrade mergers.  Expect SCHW to reduce costs and leverage platform.

 

Please let me know if you have any questions.

 

Thanks,

John

 

$SCHW.US

 

Travelers Insurance Q3 results

On 10/20, Travelers reported a Q3 EPS of $3.12, beating estimates of $2.99.  Positives for the quarter were improving margins, core return on equity of 13.5% and continued strong pricing gains in business and personal insurance lines.  Paradoxically, COVID-19 has improved profitability due to fewer claims in auto.

 

Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks. 

 

Current Price: $123.92                           Price Target: $135 (raised from $120)

Position Size:   1.66%                              TTM Performance: -2.58% (up 14% since 9/30)

 

Thesis Intact. Key takeaways from the quarter:

 

  1. Core business results were solid, beating estimates

·         Combined ratio improved 6.6 points to 94.9%, ex-cats it improved 2.6 points to 91.5%

·         Net premiums increased 3%

·         Strong pricing with renewal premiums up:

    • Business +6.3%
    • Bond & specialty +8.1%
    • Personal Insurance +8.2%
    • International +7.3%

·         The industry has faced several headwinds – higher cat losses, negative tort trends and falling yields.  As a result industry wide pricing has been strongest in 10 years.

·         Losses related to COVID-19 total $133m driven primarily by worker’s compensation.  These loses were more than offset by lower claims in auto.  Net impact of COVID-19 has been a positive 2% points to the combined ratio.

               

  1. Net Investment Income rose $38m due to strong returns in private equity investments.

 

  1. Strong financial position
    • Debt to capital ratio of 22.7%
    • Most of debt is long term – just issued a 30yr bond yielding 2.5%
    • 97.9% of fixed income portfolio is investment grade with average rating of AA
    • Strong rankings from rating agency relative to peers

 

  1. TRV yields 2.7%.
    • No share buyback due to pandemic. TRV has built roughly $800m in excess capital.
    • Prior to pandemic, TRV has long record of returning capital to shareholders – past 10 years shares outstanding have fallen 53%!
    • Management has a history of employing capital wisely! Instead of investing in mature business with spotty pricing, they are returning excess capital to shareholders

 

  1. Current valuation of 12.2 P/E is close to historical mean.  Price target represents 13x 2021’s estimated earnings.

 

The Thesis on TRV:

  • We expect TRV will be able to grow book value per share in the mid-single digits over the near-medium term, and generate ROE in the 10-14% range
  • Industry leader with disciplined underwriting and investment portfolio track record  
  • Consistent returns in the low to mid double digits
  • Responsible capital allocation and proven desire to act in the best interests of shareholders

 

Please let me know if you have any questions.

 

Thanks,

John

 

$TRV.us