Month: April 2021

Key Takeaways:

 

Current Price: $58               Price Target: $61

Position Size: 1.69%           1-year Performance: +64%

 

Overall results were good and the company is continuing on its growth trajectory, ex-Covid recovery, with its strategic acquisitions in the electrification theme, expanding its addressable market size quite meaningfully year after year.

Sensata released its 1Q2021 earnings this morning. Total sales growth was +21.7% (organic sales were up 18.8%) and operating income margin expanded 330bps thanks to end-market recovery and outgrowth. The chip shortage/extra costs impacted margins by 120bps this quarter, while Covid related costs were 10bps. Looking at Q2, the company is guiding to have 58% to 63% organic revenue growth and a 750bps operating margin expansion y/y. For the whole year, guidance is for 16%-21% organic revenue growth and 230bps operating margin expansion. We believe the stock is trading down today as the management team is taking down their expectation for market growth in the following sectors: aerospace, China, European and North America auto production – mainly due to the global semiconductor chip shortage, which will weigh on their margin upside potential later this year. On the positive side, Heavy Duty /Off-Road vehicles and industrials were revised up.

 

 

Sales growth by segment:

• Automotive organic sales +19.3%: ST outgrew the market by 910bps
• HVOR organic revenue +32.8% y/y: outgrew the market by 1,070bps
• Industrial & other: organic revenue +16.8%
• Aerospace organic sales declined 22.4%

 

On the M&A front, ST acquired Xirgo Technologies, which will help them accelerate their ability to provide data insights to transportation and logistics customers. The cost of capital was reduced by 80bps (now 4.5%). Net leverage ratio was 2.9x at the end of March, but 3.4x including the recent Xirgo acquisition (closed on 04/01).  They are also starting a joint venture with Churod Electronics extending their portfolio in electrical protection contactors. Sensata continues its growth in the electrification theme, which is much broader than just electric cars: charging infrastructures, industrial and grid opportunities as they expand in renewable energy. ST has a portfolio offer in high-voltage protection and battery management systems.

 

 

 

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

 

On 4/20, Travelers reported a Q1 EPS of $2.73, ahead of estimates of $2.40.  Positives for the quarter were improving margins, core return on equity of 11.1% and continued strong pricing gains in business and personal insurance lines. 

 

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

 

Current Price: $156                                Price Target: $170 (raised from $160)

Position Size:   1.71%                              TTM Performance: +59.6%

 

Thesis Intact. Key takeaways from the quarter:

 

1.       Core business results were solid, beating estimates

·         Combined ratio improved 1.8 points to 89.5%

·         Net premiums increased 2% for quarter

·         Strong pricing with renewal premiums up

o   Business +8.0%

o   Bond & specialty +10.8%

o   Homeowners +7.7%

o   International +6.9%

·         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.

               

2.       Total net Investment Income rose $71m due to strong returns in private equity investments as returns from fixed income investments fell $31m.

 

3.       Strong financial position

·         Debt to capital ratio of 20.5%

·         Most of debt is long term – just issued a 30yr bond yielding 2.5%

·         98.2% of fixed income portfolio is investment grade with average rating of AA

·         Strong rankings from rating agency relative to peers

 

4.       TRV continues to return capital with dividend yields 2.24% and shareholder yield over 6%

·         Raised dividend 4%

·         Book value growth of 9%

·         Over past 10 years shares outstanding have fallen by 53%!

·         Management has a long history of employing capital wisely! Instead of investing in mature business with spotty pricing, they have returned excess capital to shareholders

 

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

 

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

 

On 4/15, Bank of America (BAC) reported core Q1 EPS of $.86 well ahead of estimates of $.65.  Positives for the quarter were strong deposit growth, stable net interest margin (NIM) and resumption of share buybacks with a new program of $25b. 

 

Current Price: $38.5                         Price Target: $40 (up from $36)

Position Size:   2.39%                       Trailing 12-month Performance: 82.7%

 

Highlights:

• Deposits surged 25% YOY spurring balance sheet growth of 4.4% YOY
• Strong metrics for loan quality throughout pandemic
• Return of excess capital built up over the pandemic – $25b share buyback which is worth 7.5% of outstanding shares

Concerns:

• Elevated expenses
• Negative loan growth

 

Deposits have grown 25% YOY

• BAC ranked #1 in deposit share
• Fiscal stimulus programs have supported consumers
• BAC pays just .03% on deposits

BAC has managed the pandemic well with strong credit performance.

• Net charge-offs only 0.37% of loans.  Last year this ratio peaked at 0.46%.  For comparison during 2010, the charge-off ratio peaked at 3.8% showing the relative severity of the Great Recession.
• With improving economy and outlook, BAC released $2.7b from loss reserves

Net interest income roughly flat from last quarter with margin at 1.68%

• NIM growth will remain sluggish until we see a sustained economic recovery and continued increases in interest rates.

Excess capital

• BAC announce a $25b share repurchase program which is worth 7.5% of outstanding shares. 
• Current dividend yield is 1.86% for a shareholder yield over 9%.

Negative loan growth

• Loans outstanding fell 8% YOY. Corporations and consumers continue to pay down balances.  Some of the YOY decreased is due to elevated loan balances at Q1 last year during the onset of the pandemic.

 

BAC Thesis:

 

• Over the years BAC has dramatically improved their Consumer Banking unit, leveraging technology and their digital platforms which has driven earning’s growth. 
• BAC has a high-quality loan book which was seen during the pandemic as loan loss metrics were best among peers.
• BAC has strong earnings power, generating over $5b a quarter in earnings

• BAC continues to build capital which 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:

 

Current Price: $387        Price Target: $469  

Position Size: 2.98%      1-year Performance: +4%

 

Lockheed released another good quarter, beating on the top and bottom line, and raising guidance for the year by 1% for revenue and 2% for EPS (all as usual).

• Revenue growth of +4% and segment operating margin 10.8%
• 2021 revenue guidance of $68B at the mid-point
• Cash flow from ops was $1.75B, guidance for the year raised by $600M to be at or above $8.9B
• Backlog still solid at $147B but flat quarter/quarter
• Book to bill 1.05X
• Balance sheet remains good with leverage of 0.9X and cash position of $2.9B
• The company repurchased $1B of stock during the quarter (vs. none last quarter)
• $4.4B purchase of Aerojet (announced in 4Q) will most likely not require new debt as FCF and cash on hand offer plenty of liquidity
• Aerojet offers opportunities in the growing space & hypersonic sector, a priority in the defense budget
• LMT has exposure to key defense programs such as the F-35, missile and space, all growing areas within defense spending, although the defense budget is likely to decelerate over the next few years

 

Sales per segment were as follow:

• Aeronautic +0.3%, with F-16 and classified contracts growth offset by lower F-35 development contracts and F-22
• Missiles and Fire Control +5%, driven by Patriot programs
• Rotary and Mission Systems +9.6% driven by an international pilot training system and Sikorsky helicopters
• Space Systems +3.4% driven by the Atomic Weapons Establishment and commercial civil space programs

 

 

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

 

Key takeaways:

 

Current Price: $166      Price Target: $200 

Position size: 2.23%     1-Year Performance: +7%

 

 

• 1Q2021 results:
• Overall sales +6% organic, adjusted EPS +12.6%
• Pharma segment performing well with sales +7.1% led by key franchises
• Beat largely lead by Darzalex, Xarelto and Tremfya
• Vaccines accounted for $100M in sales
• Consumer segment: -3% due to last year’s customer stocking at home, and lower sales in cough, cold and flu medications
• Medical Devices: showing signs of recovery from last year with +8% sales growth – US grew 5.4% while outside US grew 16.5%
• Management team is bullish on rest of year outlook for this segment, US healthcare system ended the quarter at 90-105% of normal volumes – Europe varies more country by country

 

• Dividend increased by 5%

 

• CFO quote: “So across all three parts of our business I think there is a real good take away there that the business is healthy and strong you couple that with the investment, we continue to make in R&D at elevated levels, I would hope folks feel really good about not just our performance of today, but our future performance on the horizon.”

 

• 2021 guidance narrowed – we view it as conservative, leaving room to be raised as Covid pressures diminish during the year
• Revenue slightly raised: from 8.0%-9.5% to 8.7%-9.9% organic – not including the Covid-19 vaccine sales – a source of upside going forward
• Covid vaccine sales are selling on a not-for-profit basis, but 1Q was impacted by vaccines expenses ($0.05-$0.10) so recouping those costs in future sales is a possibility.
• The management team indicated that once the pandemic is behind us, sales of Covid vaccines could be at a profit
• EPS guidance narrowed: $9.42-$9.57 (vs $9.40-$9.60)

 

• In a separate event, the European Medicines Agency’s Safety Committee completed its review of the vaccine following rare cases of blood clots
• The committee confirm that the overall benefit vs. risk profile of the vaccine remains positive – shipments to Europe to resume
• All cases happened to people under 60 (mostly women) within 3 weeks of receiving the shot
• Not able to identify specific risk factors at this time
• Cases were similar to the Astra-Zeneca vaccine – they both employ a similar adenoviral  vector technology – different from the messenger RNA technology used by Pfizer/BNTX and Moderna
• A notice should be added to the product information
• The US CDC should provide some data on Friday following its planned review meeting

 

 

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: $224                Price Target: $255

Position Size: 2.74%              1-Year Performance: +41%

 

• Total company sales +3%
• Beer organic sales increased by 18% – off-premise consumption helps offset weak on-premise drinking
• wine & spirits grew +8% organically
• Sales, margins and EPS came above consensus
• Beer margin impacted by higher advertising and marketing spending
• total operating margin impacted by 900bps due to wildfires and increased marketing spending
• New guidance for fiscal year 2022 introduced – disappointing on the margin and share buyback front
• CEO quote: “One of the things that we’ve been quite good at over the last several years is running our plants at hyper efficiency. But I think one thing as learning from the pandemic. And I think any good business should have a element of learning when something hits you in the face. In the pandemic certainly did that across many, many, many industries. One of the things we learned is while our efficiency was tremendous. We didn’t have a lot of flexibility in the event that something didn’t go well and so one of the pieces that we are doing with this expansion is not only to meet the hyper growth that we have within our business, but also to create an increasing flexibility in some redundancy within our business.”

 

 

While Q4 results were good, guidance for FY2022 is below expectations, sending the stock price lower today. We think the management team remains prudent as it is stepping up its marketing efforts (new product launch – Corona Seltzer Limonada, new variety pack…), and increasing spending in capex to expand its production capacity in Mexico. For FY22, beer sales are expected to be +7% to +9% (in line with historical average), but beer operating income growth of only 3-5% shows some margin pressure. Inflation is back, with raw materials (such as glass), transportation and labor costs expected to rise.

Wine & Spirits sales are expected to grow +2% to +4% organically following the divestment of lower-end brands – we are finally seeing growth in that segment, driven by premium brands. The company needs to increase its capex spending to increase its capacity at its current Mexican plant, following the Mexicali fall-out with the local government. It is still unclear of STZ will be able to recover its investment in that plant, and the company is taking an impairment charge of ~$660M next quarter. This will limit potential for share buyback this coming year, which was highly anticipated.

Following disruption in its production capacity/supply chain due to Covid, STZ’s management team is looking at expanding its production capacity with some redundancies, in order to avoid future disruptions and increase flexibility.

 

Overall we still see long-term opportunity for growth in this name (including cannabis), and believe it is a good name to hold in staples.

 

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