Month: March 2021

McCormick 1Q FY2021 earnings summary

Key Takeaways:

 

Current Price: $90.8                 Price Target: $102  

Position size: 2.51%                1-Year Performance: -5%

 

  • Organic sales growth of 20%, driven by both segments, a big beat from consensus expectations
    • Consumer segment up 32% y/y ex-FX
    • Flavor Solutions +3.4% y/y ex-FX
    • Capacity constraints are easing from FY20, shipment timing helped this quarter’s performance, as MKC is rebuilding its inventory level with retailers
    • Increased cooking at home and demand from packaged food manufacturer is offsetting weak restaurant/foodservice providers
    • Fundamentals remain healthy
  • Margin improvement from operating leverage, favorable mix and cost savings
    • ERP spending was put on hold last year, and it hasn’t resumed to its full extent yet (ramp up in spending could come in 2Q)
  • FY2021 top and bottom-line guidance raised following a good Q1

 

Yesterday released its earnings for 1Q 21. McCormick had (yet again!) another impressive sales growth this quarter. In the Americas Consumer segment (its biggest in sales), its US branded portfolio grew 15% thanks to repeat purchases and household penetration increase, while the foodservice and restaurant demand declined. In the EMEA region, there was broad based growth due to the same dynamic as in the Americas in Consumers, but restaurant demand declined. In the Asia Pacific region, quick service restaurant, branded foodservice and consumer demand is recovering with double-digit growth. For this coming fiscal year, sales should grow 8% to 10%, with 2% benefit from currency and 3-4% coming from recent acquisitions. Prices increases will be done in 2021 if needed, a good indication of pricing power/leadership. Overall we are please with MKC and the thesis remains in place.

 

 

 

The Thesis on MKC:

  • Industry Leader: McCormick & Company (MKC) is a leading manufacturer of spices and flavorings. MKC has been in business for 120 years and the founding family still has ownership interest
  • Growth opportunity: Spice consumption is growing 3 times faster than population growth. With the leading branded and private label position, MKC stands to be the biggest beneficiary of this global trend
  • Offense/Defense: MKC supplies spices to major food companies including PepsiCo and YUM! Brands giving it a blend of cyclical and counter-cyclical exposure
  • Balance sheet and cash flow strength offer opportunities for continued consolidation through M&A in the sector

 

$US.MKC

[tag MKC]

[category earnings]

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

 

 

 

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

 

Accenture Q2 Earnings

Current Price: $267     Price Target: $295

Position size: 4.2%       Performance since inception (3/11): +61%

 

Key Takeaways:

  1. They beat estimates and issued strong guidance. Revenue (+8%) ahead of high end of guidance range and highest street estimate. Upped full year revenue growth guidance to +6.5% to +8.5%, from previous guidance of +4% to +6%.
  2. Broad based improvement in demand – digital transformation is long-term secular growth driver to their business.
  3. Strong bookings and they continue to take significant market share, signifying solid business fundamentals. Bookings were up 13%.
  4. CEO Julie Sweet said…“For digital leaders, we see them no longer strictly competing for market share, but to build their vision of the future faster than the competition. And for digital laggards, they are determined to not simply catch up, but to leapfrog. While COVID has accelerated the demand, the reality is that the extent of transformation ahead is enormous. The move from approximately 20% to 80% in the cloud alone is a huge undertaking and it is just the start, as companies will then continue to invest to grow and innovate on their new cloud foundations.”

 

Additional highlights:

  • Revenue $12.09 billion, +8% YoY, estimate $11.84 billion. Included 2pt reduction from reimbursable travel costs which are a pass through. Adjusted EPS of $2.03 (+10% YoY) vs. consensus $1.90, driven by 30bps of op margin expansion.
  • Consulting revenues were $6.4B, up 4%, which includes a 3pt headwind from lower travel reimbursement.
  • Outsourcing revenues were $5.6B, up 14% YoY
  • Geographic breakdown: “growth markets” were up 6%, Japan was strongest, up double-digits. Europe was up 3% (Italy & UK were strongest), North America was up 7%.
  • Strong bookings of $16B, up 13% YoY – 18 clients had bookings >$100 million. Overall book-to-bill of 1.3. Consulting book-to-bill of 1.2 and outsourcing book-to-bill of 1.4.
  • Hardest hit end markets are showing improvement – they saw broad-based improvement across industries and geographic markets
    • Similar to last quarter, ~50% of revenues came from 7 industries that were less impacted from the pandemic that, in aggregate, accelerated from HSD to low-double-digits growth.
    • ~20% of revenue from clients in highly impacted industries – declined mid-single-digits, but seeing continued improvement this includes travel, retail, energy, aerospace & defense and industrials.
    • This underscores the benefit of diversified industry end markets.
  • Digital transformation imperative is long-term secular growth driver to their business. Before Covid there was already exponential technology change taking place with every business becoming a digital business. Mgmt. thought it would take a decade, now they think it is more like five years. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has been positioning themselves to be a leader in digital capabilities since 2014, which is why they are the leader, continue taking share and are well positioned in the future. Accenture’s unique positioning of trusted partner w/ leading edge technology expertise (they have their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise are key to this. No competitor has their scale, breadth of services and cross-industry insights, which gives them an advantage in serving “compressed transformations.” “Our clients know that through our investments and focus on innovation, we will help future-proof them.”
  • Accenture shines from an ESG perspective. They are a real leader in addressing how they create value for all of their stakeholders (employees, customers, vendors, shareholders) – it’s a constant theme on their calls, particularly w/ respect to their employees which is important as the “social” factor for them is very material b/c their industry is a “people business” w/ ~537K employees across the globe. For instance, they had a special employee bonus paid this quarter to employees below MD level, they’ve been heavily investing in upskilling their employees and they are now ~45% women; on track for their 2025 goal of a 50-50 gender balance. They also recently started their “360 degree value initiative” – aimed at helping their clients achieve responsible business goals – they say their clients are increasingly focused on sustainability, inclusion and diversity (rise of ESG is a catalyst to this) and that they are in a unique position to help companies w/ this.
  • Capital allocation: they now expect to return at least $5.8 billion in cash to shareholders through dividends and share repurchases, compared with previous guidance of $5.3 billion. Dividend up 10% YoY. They’ve made investments of $1.1B in acquisitions (19 transactions) in the first half of the year and they expect to invest at least $2B in acquisitions this fiscal year.
  • Valuation:
    • The stock is undervalued trading at a >4% forward yield. They have an easily covered 1.3% dividend and no net debt.
    • Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).
    • They have $8.7B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 


$ACN.US

[tag ACN]

[category equity research]

 

Berkshire Hathaway Q4 2020 annual report

On 2/27, Berkshire Hathaway reported their 2020 Q4 results.  Annual results are accompanied by Warren Buffett’s letter to shareholders (attached), which lacked the usual news-worthy disclosures or sage market advice.   Key takeaways from the quarter and year are as follows:

  • Buffett sizably increased share buybacks to $8.97b, which is more than he has ever bought bringing the total buyback for the year to $24.7b reducing share count by 5.2%.
  • Cash on books remained steady at $138B. 
  • Cash and stock portfolio represent over 50% of the company’s value.
  • Sum of the parts valuation shows 25% upside

 

Current Price: $252                         Price Target: $300 (raised from $280)

Position Size: 3.0%                          TTM Performance: 34.4%

 

Segment highlights from the quarter:

  • Geico earnings more than doubled on lower loss ratio
  • Berkshire Hathaway Reinsurance continues to struggle with $-2.7b in losses
  • Low interest rates highlight Berkshire’s competitive advantage of an investment portfolio being invested primarily in equities and being less dependent on bond market yields
  • Railroads – YoY revenue fell -11.3% and earnings fell -5.8% with pandemic slowdowns
  • Berkshire energy – YoY revenue up 4.5% and earnings up 8.8%
  • Manufacturing, service and retail – Profits fell -14% due to pandemic
  • $11b write down of Precision Castparts purchased in 2016.  They sell many parts to the aerospace industry

 

Stock portfolio highlights:

  • Investment in Apple is worth $120b
  • Since 2019 Berkshire has cut allocation to finance stocks from 41% to 24%
  • Dumped airline stocks
  • Latest filing shows
    • Added Verizon which is now 6th largest holding
    • Added Chevron

 

Valuation:  Berkshire is selling at a 25% discount to intrinsic value using sum of the parts.  Their cash of $138b represents $57 per share for B shares. 

 

Berkshire remains a core holding, is currently undervalued and is defensively positioned to take advantage of opportunities as they arise.

 

Please let me know if you have any questions.

 

Thanks,

John

 

($brk/b.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

 

pdf icon Berkshire-2020-annual.pdf