Month: January 2021

Recently we have added S&P Global (SPGI) to the Focus Equity portfolio. 

 

S&P Global is a highly profitable company with established “information” businesses that have deep moats in attractive industries.  Their history stretches back over 160 years.  Standard and Poor’s rating agency was created in 1941. 

 

Business lines

 

Ratings: (45% of revenue and 51% of operating income) is a key business for S&P Global.  Ratings industry is a duopoly between S&P and Moody’s who combined are over 90% of US ratings market.  Bond ratings are necessary workflow for issuers and buyers.  Revenue is based on new issuance (50%) and recurring fees for maintaining ratings.  Over past 3 years, segment has averaged 7% growth and over 65% operating margins – basically a big cash cow.

 

Indices:  (13% of revenue 18% of operating income) Own S&P 500 index fund and other indices.  They gain royalties from ETF and funds using their indices and have benefited from the growth in passive investing.  Over past 3 years, this segment has averaged 13% growth and over 70% operating margins – another highly profitable segment.

 

Market Intelligence: (28% of revenue 18% of operating income) Segment provides information and services to financial markets (Capital IQ) and businesses (supply chain analysis and credit risk solutions).  Segment has high recurring revenues and stands to gain from pending merger with IHS Markit.  Over past 3 years, segment has averaged 6% growth with over 30% operating margins.

 

Platts: (12% of revenue 12% of operating income) Industry leader in data and analysis for oil and gas markets.  They have been expanding into trade flow analytics, derivatives and new benchmarks.  Over past 3 years, segment has averaged 6% growth and over 50% operating margins despite falling energy prices.

 

Overview

 

Over the past 4 years, S&P Global has grown earnings 19% supported by rising margins and revenue.  They have little debt (minus cash) and a long term credit rating of ‘A3’ from Moody’s.  The firm has been focused on returning capital to shareholders.  Since 2015 they have returned $9.7b through share buybacks and dividends, reducing outstanding shares by 12%.  They have a stated goal of returning 75% of free cash flow to shareholders. 

 

S&P Global is a top ranked ESG firm – Sustainalytic rank 92, MSCI ranks A and RepRisk rating is zero (lower is better!).

 

In November S&P Global announced a merger with IHS Markit pending regulatory approval.   The all stock deal for $44b is expected to close in the second half of this year.  IHS has segments that focus on Financial Services, Transportation, Resources and technical engineering.  Like S&P Global they have lots of proprietary data and provide analysis to clients.  Known brands of IHS Markit owns are CARFAX, iBoxx indices, Ipreo, Thinkfolio, automotiveMastermind and shipping data dating back to 1764.  S&P Global believes that this acquisition increases their data breath and analytical capabilities allowing them to expand their addressable markets significantly.  S&P Global owns Kensho (artificial intelligence) and Panjiva (supply chain management) who will benefit from greater data pools and a broader client base.

 

Current valuation is attractive based on free cash flow valuation.  After the merger, S&P Global is expecting to increase margins through synergies by about 200 bips for each of the next two years. 

 

Starting weight S&P Global (SPGI) 2.5% in the Financial Sector

Funded from

APPL .75%

IVV .75%

BAC .50%

RMD .50%

 

Both Apple and Resmed have grown in weight due to strong performance.  Bank of America has rebounded sharply and further upside may be more of a grind.  We still consider these names as core holdings and are trimming on strength.

 

I look forward to discussing S&P Global next Tuesday at the RM/Research meeting.  Please see attached presentations and let me know if you have any questions.

 

Thanks,

John

 

[category Equity Earnings]

[tag SPGI]

$SPGI.US

 

 

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Key Takeaways:

 

Current price: $78.9              Price target: $94 (New down from $96)  

Position size: 1.5%                1 year performance: +15% 

 

Colgate released its 4Q2020 earnings this morning. Overall the company published another quarter of high sales level, with positive comments for the first part of 2021, while 2H21 should see some moderation from the vaccine rollout.

• Colgate finished the year with the highest revenue growth rate since 2008, helped by the continued shift in consumer behavior due to the pandemic (more cleaning product and personal hygiene sales, and more pets at home), and the new strategy put in place by the new CEO
• Organic sales +8.5% – bringing overall 2020 sales growth to +7%
• EM sales +8.5% – led by Latin America +10.5%, similar to last quarter
• Developed markets: +9%, and increase from last quarter’s +6.5%
• Hill’s pet nutrition +14.5%
• Market share gain (including online)
• Operating margin impacted by increased advertising expenses (-100bps)
• FCF increased 18% y/y
• 2021 guidance initiated:
• Top line growth to moderate from 2020 levels, and be between 4-7% and organic sales to be 3-5% (in line with its long term target)
• Gross margin expansion (no exact range given)
• EPS growth lmid-single to high-single digits growth
• Capital allocation plans: debt paydown and share repurchase
• We are reducing our price target slightly as we roll over our model to 2021 and assume 2020/1H21 higher level of sales will not continue in out years

 

 

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

 

 

Key Takeaways:

Current Price: $232                          Price target: $293

Position size: 2.49%                        1-year Performance: +8%          

• Sales in the quarter declined 1% organically (+3.2% reported includes acquisition) due to Covid pressure coming back in November and December, delaying non-emergency surgeries again (which represents nearly half of its business)
• Emergency procedures did well: neurotech +5%, Medical +10%, and trauma & extremities +27% (includes Wrights acquisition)
• Adjusted operating margin expanded 90bps, adjusted EPS increased 13%
• Wright Medical integration moving according to plan – this is a big acquisition for them and will take time
• 2021 guidance:
• Organic sales growth of 8-10% from 2019 numbers (a better baseline than 2020), forecasting a recovery in 2H21
• This includes 10-12% volume growth but 1% of price decline per year
• EPS to grow 6.5% to 11% from 2019
• Margin to expand 30-50bps excluding the dilutive acquisition of Wrights
• Smaller bolt-on acquisitions going forward as SYK integrates Wrights

 

Overall SYK had earnings that were as expected, considering the Covid disruption, and a 2021 guidance that looks promising. We’ll keep an eye on Mako robots sales progress, as competitors launched other robots that compete with SYK. It is hard to see if the slow-down in knees comes from competition or Covid delays.

   SYK Thesis:

• Consistent top and bottom line growth in the mid and upper single digits respectively
• Continued operating leverage of current infrastructure
• Strong balance sheet and cash flow used in the best interest of shareholders

 

$SYK.US

[category earnings] [tag SYK]

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

 

Current Price: $138                                                          Price Target: $157 (Increasing from $145)

Position Size: 8.3% (just reduced by 75bps)          TTM Performance: +78%

 

Key Takeaways:

 

• Beat estimates on strong iPhone sales –Beat on revenue and EPS w/ beats across all segments except Macs (though Mac sales were very strong at +21%). iPhones sales were well ahead of expectations at +17% – growth benefited from an easy compare given the delayed iPhone launch (hit Q1 instead of Q4).
• Strong traction with new products –including 5G phones, M1 powered Macs, iPad Air, latest Apple watch and Air Pods
• Big improvement in China – 57% YoY growth, a record quarter in China aided by quick 5G adoption rate and US export restrictions hurting Huawei.
• No specific guidance – just guidelines, same as last quarter. They expect total company revenue growth in Q2 to accelerate on a YoY basis (seasonally smaller quarter, lapping early impact from Covid).
• CEO Tim Cook’s response related to a question on whether they need acquisitions to grow…“if you back up and look at the ingredients that we have at this point…we have the strongest hardware portfolio that we’ve ever had and we have a great product pipeline for the future… both in products and in services. We have an installed base that has hit new highs…and we’re still attracting a fair number of switchers and upgraders. We just set an all-time services record and we have that installed base to compound that, particularly with the services that we’ve added over the last year…I still think that we are in the early stages of [wearables]. If you look at our share in some of the other products, whether you look at iPhone or Mac or iPad, you find that the share numbers leave a fair amount of headroom for market share expansion…particularly in some of the emerging markets… and we’ve been on a multi-year effort in the enterprise and have gained quite a bit of traction there. We are very optimistic about what we can do in that space. And then of course we’ve got new things that we’re not going to talk about that we think will contribute to the company as well.” (I’ve deleted some of what he said to shorten it)

 

Additional highlights:

 

• Total revenue was $111B, +21%. Their first >$100B quarter. EPS $1.68 vs street $1.42 aided by better than expected gross margins primarily from leverage from higher sales and to a lesser extent from a mix benefit.
• Enterprise market – positive commentary on the call related to companies switching from fixed phones to iPhones for employees and to increased Mac adoption in enterprise driven by WFH.
• iPhone: $65.6B (+17%) vs street $60.33B. Strong response to new models, especially Pro and Pro Max, leading to both unit and ASP growth. iPhone installed base now exceeds 1 billion handsets. Aging installed base combined with increased 5G availability should be catalyst for future iPhone sales. China was a key driver of growth and is a leading indicator of 5G as a catalyst. 5G service availability in China is ahead of the US and 5G capability in the new iPhone lineup was pointed to as a big driver of the +57% growth in the region. That being said, China is different than the US in terms of how reliant they are on phones as primary devices and greater penetration of things like mobile ordering – that might suggest an accelerated relevance of 5G to consumers there, but it does still underscore 5G as a longer-term catalyst. The other driver in China, of course, was a hobbled key competitor: Huawei. Trade sanctions have cut them off from key components and from Android apps.
• Tim Cook from the call re: China: “I think probably some portion of this was that people probably delayed purchasing in the previous quarter. As rumors started appearing about an iPhone. Keep in mind, 5G in China – the network is well established and the overwhelming majority of phones being sold are 5G phones. And so I think there were some level of anticipation for us delivering an iPhone with 5G and so iPhone did extremely well.”
• Services: $15.8B (+24% YoY) vs street $14.9B.
• The now have > 620 million paid subscriptions across their services platform up 140 million from a year ago. Beat their 600m goal for 2020.
• Installed base growth (which is a driver of services) has accelerated and is an all-time high across each major product category – 1.65B in total w/ over 1B of those being iPhones.
• Apple Pay growing as coverage continues to expand – nearly 90% of stores in the US now accept Apple Pay.
• Antitrust – no commentary on the call specifically on antitrust – the services segment is the focus of scrutiny, specifically related to Apple’s high (~30%) fees. While no suit has been filed against AAPL, in response to the scrutiny they are facing, Apple lowered App store commissions to 15% for developers earning less than $1m/yr. The change was inconsequential to Apple as it represents a small portion of their fees but the improvement to the economics for developers could actually be a catalyst to new/better apps…Tim Cook said, “we are already hearing from developers about how this change represents a transformation in their potential to create and grow on the App Store.”
• Wearables & Accessories: $13B (+30% YoY) vs street $11.5B.
• Wearables business is now the size of a Fortune 120 company.
• Apple Watch continues to extend its reach with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product.
• Mac: $8.68B (+21%) vs street $8.86B
• Installed based is growing w/ about 50% of purchases coming from people that are new.
• Strong demand for the new MacBook Air, MacBook Pro and Mac Mini -all powered by brand new M1 Chip…which could have been a contributor to GM expansion in the quarter.
• iPad: $8.44B (+41%) vs street $7.57B
• Similar to Mac, installed based is growing w/ about 50% of purchases coming from people that are new.
• “it’s clear that some people are using these as laptop replacements”
• Specific guidance not given, just broad guidelines – consensus should go up as street generally raising estimates. For Q3, total company revenue, “we believe growth will accelerate on a year-over-year basis.”

• Ended the quarter with almost $196B in total cash and $84B in net cash. Returned >$30 billion to shareholders during the quarter with $3.6B in dividends and over $24B in share repurchases (up from $18B last quarter).
• Trading at ~3.5% FCF yield on 2021 w/ another ~3.5% 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

 

Key takeaways:

 

Current Price: $170      Price Target: $200 (NEW – from $175)

Position size: 2.43%     1-Year Performance: +12%

 

 

• 4Q 2020 results:
• Overall sales +7% organic, adjusted EPS -3.2%. last 12 months FCF ~$20B ($19.9B last year)
• Pharma segment had good results across the board, and market share in Darzalex (multiple myeloma), Stelara (growth in Crohn’s disease application). In immunology, growth remains below pre-covid level though.
• Consumer segment: oral & wound care, skin health & beauty growth were offset by lower over-the-counter sales due to reduction on cold/cough/flu medicine, as well as SKUs rationalization
• Medical Devices: China grew double-digits but US and Europe declined. Hospitals volume decline no more than 10-15% in the most affected areas by covid delays.

 

• Full year 2020 results overall: +1.5% organic sales. Pharma sales growth helped offset medical devices decline due to delay in doctor’s visits and surgeries. Adjusted EPS -7.8%
• Company has 28 products & platforms with sales above $1B in 2020.

 

• Vaccine phase 3 update will be provided next week. On track to manufacture 1 billion doses in 2021. More details on pricing and economics of this vaccine will come during the 1Q21 earnings call

 

• 2021 guidance issued:
• Revenue of $90.5B-$91.7B (+8% to +9.5%), above consensus, and excluding any potential revenue from the vaccine
• Pharma to continue driving overall growth, and cautious optimism on the medtech segment recovery in 2H21
• Operating margin to grow 200bps y/y due to leverage, recovery in medtech procedures and cost improvement initiatives
• EPS $9.40-$9.60 above consensus
• Opioid litigation payout to happen in 2021 vs. 2020 initially

 

 

Thesis on JNJ:

• High quality company with consistent 20% ROE, attractive FCF yield,
• Investments in the pipeline and moderating patent expirations create a profile for accelerated revenue and earnings growth
• Growth opportunity: Medical Devices and Consumer offer sustainable growth and potential for expansion internationally
• Strong balance sheet that offers opportunities for M&A.

 

 

 

[category Equity Earnings]

[tag JNJ]

$JNJ.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

 

 

Key takeaways:

 

Current Price: $333        Price Target: $469  

Position Size: 2.80%      1-year Performance: -23%

 

Lockheed released its 4Q20 earnings results and 2021 forecast yesterday.

• Revenue growth of 7% and segment operating margin +14% (+70bps expansion)
• Backlog still solid at $147B but moderated in growth (+2% y/y but down 2% q/q)
• Book to bill continues to decrease moderately which is something to keep an eye on as a predictor of future growth.
• But, since the company pre-funded a portion of its pension in 4Q20, it should help cash flow in the out years with less funding required. That resulted in 2022 and 2023 cash flow guidance to increase by $500M
• FCF implied guidance for 2021 is $6.6B with flat capex
• Slight increase in top line growth guidance: revenue and segment profit margins expected to grow between 3-5% y/y

 

Sales per segment were as follow:

• Aeronautic +5.2% (higher volume in F-16 and F-35),
• Missiles and Fire Control +3.5% (higher volume in Patriot and THAAD programs),
• Rotary and Mission Systems +8.3% (higher volume at Sikorsky helicopter programs)
• Space Systems +14.1% (higher volume on Next Gen OPIR and hypersonic development)

 

Here’s Goldman Sachs forecast on the F-35 revenue.

 

Overall this was a good quarter, but the focus remains on the Department of Defense budget, even though LMT has a pretty consistent and growing revenue stream coming from solid programs. We are not changing our price target or position size at this time.

 

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

 

 

On 1/11, Bank of America (BAC) reported core Q4 EPS of $.60 with positives of strong balance sheet and negatives of weakish results in capital markets. We believe BAC is managing the pandemic recession well, building excess capital and has strong earnings power. 

 

Current Price: $31.5                         Price Target: $36

Position Size:   2.76%                       Trailing 12-month Performance: -5.7%

 

 

Q3 Highlights:

• Strong credit quality with credit loses reverting back to pre-pandemic levels and BAC released reserves for loan losses
• BAC actually released $858m reserves built up in anticipation for pandemic related losses, showing confidence in the recovery.
• Net charge-offs (loan losses) are back to pre-pandemic levels

• BAC has managed the pandemic well with strong credit performance.
• Largest deposit base in country with $885b in consumer deposits
• Deposit growth has surged up over 23% yoy
• Low cost source of funding.  BAC pay only 4 bips on deposits.

 

• Net Interest income increased to $10.37b from $10.24b las quarter
• Net interest margin leveled off at 1.71% which they believe is the bottom
• Expect NIM to trend up as increased deposits are invested and balance sheet growth, though they noted reinvestment rates remain a headwind.
• NIM will remain depressed until we see a sustained economic recovery.  At that point, banks will be among the industries most levered to benefit from the rebound.

 

• Excess capital – BAC is a return of capital story
• BAC has massive excess capital of $36B (13% of market cap) with a CET1 ratio of 11.9% which is 2.4% above required minimum
• BAC has approved a $3.2b share buyback for this quarter 
• Current dividend yield is 2.28% for shareholder yield close to 7%.
• Fed’s stress test has consistently shown BAC losses to be lower than peers Strong capital ratios:
• Attractive valuation
• BAC has strong earnings power – generates over $5b a quarter in earnings
• BAC continues to build capital as share buybacks and dividend increases are restricted. 

 

BAC Thesis:

 

0. BAC has dramatically improved their Consumer Banking unit which has driven earning’s growth.  Loss metrics are best among peers.
1. Despite current recession, BAC has strong balance sheet and earnings power

0. Their stronger capital position should lead to increased dividends and buybacks

 

Please let me know if you have questions.

Thanks,

John

 

[category Equity Earnings]

[tag BAC]

$BAC.US

 

 

 

 

 

 

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Key takeaways:

 

• Overall sales +22%!
• Beer sales increased by an impressive 28%, wine & spirits grew 13% organically
• Sales, margins and EPS came above consensus
• Hard Seltzer to double in capacity, as they are back to gaining market share following some Covid-related slow-down in production
• Currently only have 1 SKU, will launch another variety pack in FY22 (pineapple, strawberry, raspberry and passionfruit)
• New projects to be announced soon
• Lower end wine & spirits brands divestiture to Gallo finally closed – focus back on higher end wine & spirits and beer business
• New $2B share repurchase program authorized (in addition to the $1.9B remaining)
• Cannabis business remains an opportunity with Democratic win

 

 

Current Price: $230                Price Target: $255 (NEW)

Position Size: 2.65%              1-Year Performance: +22%

 

Company sales increased 22% this past quarter, showing its ability to grow nicely in the at-home consumption channel as COVID continued to impact bars & restaurant sales. Beer sales were up 28%, due to consumer demand but also catch up in inventory stocking from the prior quarter (now largely restored). The wine & spirit segment is seeing improvement (organic sales ~13%). Operating profit margins expanded 340bp thanks to leverage and timing of marketing spend. EPS was well above consensus numbers.

With the end of the fiscal year approaching, and good results this past quarter, STZ reinstated its FY 21 guidance: beer sales +7% to +9%, wine & spirits sales -9% to -11% (due to divestiture), operating profits +8% to +10% for beer, decline of -16% to 18% for W&S; EPS in the $9.80-$10.05 range.

Overall we are very pleased with the results, and raise our price target to reflect better W&S sales going forward as the focus is back on higher end brands, new projects in seltzer that should help STZ gain market share to reach #3 market share, and continued beer portfolio performance.

 

 

 

 

 

Investment Thesis:

• STZ helps position our portfolio to be more defensive at this stage of the economic cycle
• Management team focused on high quality brands and innovation
• STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
• STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex
• Growth optionality from cannabis investment

 

[tag STZ] [category earnings]

$STZ.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