Month: July 2021

Key Takeaways:

 

Current price: $79                 Price target: $94  (under review)

Position size: 1.39%              1 year performance: +4% 

 

THE INVESTMENT THESIS IS UNDER REVIEW – DO NOT ADD TO PORTFOLIOS

 

Colgate released its 2Q2021 earnings this morning. Results for the quarter were in-line with expectations, but the company lowered full-year profit guidance due to cost pressure, which is driving the stock lower today. Reported sales were up 9.5%, with every regions expect North America in positive territory, and despite tough comps from consumer pantry loading last year. Adjusted EPS was up 8%, lower than sales as gross margin declined 80bps due to higher costs (raw materials and transportation). The company expects easing material costs in 2022. Free cash flow for 1H21 is 40% below 1H20 and 10% below 1H19, as cash flow from operations is lower while capex is increasing to fund future projects. While we understand the cost pressure companies are facing in 2021, we think a market share leader such as Colgate should be able to weather this better in our eyes.  

• Total organic sales were +5%, and details by region is listed below. Overall pricing was +2.5% and volume +2.5%
• North America sales decline is mostly due to lower volume y/y in the US in personal and home care. This was due to logistics issues and promotional abilities in the market

 

 

• Operating profits: the decline is due to significant higher raw material costs, higher logistics costs and increased advertising expenses, partially offset by some pricing increase

 

• 2021 guidance reiterated:
• Organic sales to be 3-5% (in line with its long term target), reported sales +4-7%
• Gross margin now expected to decline (previously expected expansion), and increased advertising spending
• EPS growth now expected at the lower end of its mid-single to high-single digits growth
• Capital allocation plans: dividend,  debt paydown and share repurchase increased. They see some strategic gaps they want to fill in their portfolio with M&A

 

• Earnings call quote:
• “We are also dealing with the impact of COVID, restrictions in several markets, economic and political uncertainty, strong competitive activity. And of course, significantly heightened raw material and logistics headwind . We expect that all of these factors will continue to impact our business”
• Latam comments: “So obviously the market seems to be returning despite the fact that would definitely not out of the woods relative to COVID”

 

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

 

Current Price:   $285                     Price Target: $340

Position Size:    7.9%                     TTM Performance: 40%

 

Key takeaways:

• Broad beat with 21% YoY revenue growth and +42% op. income growth.
• Azure continues to be key growth driver – Azure continues to take share in the public cloud with revenue growth of +51% YoY (+45% constant currency), similar to last quarter. Issued solid Azure guidance for next quarter.
• Teams gaining traction – they now have 250M monthly active users.
• CEO, Satya Nadella said…
• “We are innovating across the technology stack to help organizations drive new levels of tech intensity across their business.”
• “Hybrid work represents the biggest change to the way we work in a generation and will require a new operating model spanning people, places and processes. We are the only cloud that supports everything an organization needs to successfully make the shift. Microsoft Teams is the new front-end.”

 

Additional Highlights:

 

• Commercial cloud, which aggregates Azure, Office 365, the commercial portion of LinkedIn and Dynamics accelerated by 200bps sequentially to 31% YoY cc growth reaching nearly $80bn run rate (Azure is ~ $36-37B run rate, so approaching half). They saw significant growth in the number of $10 million plus Azure and Microsoft 365 contracts.
• While Microsoft benefited from accelerated digital transformation from the pandemic, they are well positioned to capitalize on a number of long-term secular trends that will continue to drive mid-to-high teens earnings growth. Secular driver include public cloud and SaaS adoption, continued digital transformation, AI/ML, BI/analytics, and DevOps. As organizations become increasingly digital, MSFT’s products are evolving from being primarily productivity tools to being more strategic tools. This suggests an improving value proposition to customers, which is key to the durability of their LT growth and profitability.
• Productivity and Business Processes ($14.7B, +25% YoY):
• LinkedIn – revenue increased 46% (up 42% in constant currency) driven by Marketing Solutions growth of 97%
• Office 365 Commercial (rev +20%)- driven by installed base expansion as well as higher ARPU.
• Dynamics 365 (rev +33%) – strong momentum in Power Apps and Power Automate, reflecting growing demand for their solutions to build apps and automate workflows.
• Teams continues to shine – they now have 250m monthly active users.
• Intelligent Cloud ($17.4B, +30% YoY):
• Server products and cloud services revenue increased 34% with Azure revenue growth of 51% (45% cc). Exceeded their expectations across consumption and per user Azure businesses as well as their on-premises server products business.
• An increasing mix of large, long-term Azure contracts can drive quarterly volatility in the growth rates. Leader in hybrid cloud and have more datacenter regions than any other provider – and continuing to add data center regions, including new regions in China, Indonesia, Malaysia, as well as the US.
• More Personal Computing ($14.1B +9% YoY):
• Surface was weak as they face ongoing constraints in the supply chain
• Gaming revenue increased 11% (7% in constant currency). Xbox hardware revenue grew a 172% (163% in constant currency), driven by demand for new consoles. Xbox and content and services revenue declined 4% against a high prior year comparable.
• Search advertising revenue improved (+53% YoY) as companies pick up spending on digital advertising ahead of re-opening.
• Valuation:
• For FY ’21, they generated over $76B in operating cash flow, up 26% YoY and over $56B in free cash flow, up 24% YoY.
• Recurring revenue is ~60% of total, underpins most of their valuation and is resilient and poised for additional growth. Particularly Azure, Office 365 and Dynamics 365. Stock is trading at ~3% forward FCF yield; a premium to the S&P, but supported by their high moat and solid secular growth drivers.

 

 

 

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

 

On 7/29, S&P Global announced impressive Q2 earnings with EPS up 6%. 

Key takeaways are:

• Revenue up 8% to $2.1b
• Expense growth of 9% as expenses normalized post Q1
• Strong issuance in high yield, bank loans and CLOs
• SPGI increased EPS guidance for 2021

 

Current Price: $426.27                      Price Target: $450

Position Size:   2.95%                         Performance since add on 2/3/21: +32%

 

2020 Highlights:

• Ratings (50% of revenue)
• Revenue grew 7% and trailing four-quarter operating profit rose +30%
• Margins fell -100 bps to 68.1%
• Global bond issuance fell -9%, but bank loans and high yield issuance surged +70%
• Non-transaction revenue (not related to bond issuance) increase 19% Y/Y and is over 40% of ratings revenue
• Market Intelligence  (26% of revenue)
• Revenue grew +8% Operating profit rose +11%
• More than 1/3 of revenue growth was from recent product investments with solid growth across all categories
• Margins increased +100 bps to 33.4%
• Platts (11% of revenue)
• Revenue grew +9% and operating profit rose +15%
• Strong growth in all categories with trading services growing 18% over past 10 years
• Margins increased +170 bps to 55.9%
• S&P Dow Jones Indices (13% of revenue)
• Strong growth in index fees – ETF AUM was $2.4t up 51% Y/Y
• Revenue grew 16% and operating profit rose 7% Y/Y
• Margins fell -100 bps to 69.2%

 

Growth initiatives

• Implementing ESG offerings across platform – ESG revenues up 40%
• China analytic platform – 22 ratings in 2020 and 25 ratings so far this year
• Technology expertise – Kensho AI initiatives
• RiskGuage, ProSpread, Riskcasting Indices, Moonshot index, Kensho Scribe and many others combining data and analytics
• Merger with IHS Markit remains on track for closure in Q4 of 2021

Capital allocation

• SPGI has a current yield of .67%
• SPGI has repurchased 14% of outstanding shares over past 5 years
• Currently, share buybacks are on hold with the pending merger of IHS Markit.  SPGI has $5.2b of cash piled up on the balance sheet and generated $1.5b in free cash so far this year.  Expect ~75% to be returned to shareholders post merger.

 

S&P Global Investment Thesis:

• S&P Global is a highly profitable company that has established businesses with deep moats in attractive industries
• S&P Global is focused on shareholders and returns 75% of free cash flow in dividends and share buybacks
• Over the past several years, S&P Global has demonstrated an enviable history of revenue growth and margin expansion
• With the merger of IHS Markit, S&P Global will combine many unique data sources, enhance data analytics capabilities, and broaden addressable markets.

 

Please let me know if you have any questions.

Thanks,

John

 

[category Equity Earnings]

$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

 

On 7/22, Schwab hosted their summer update detailing quarterly earnings.  Schwab continues to attract a wide range of retail investors, which spurred organic growth up 8% or $109B for the quarter.  Quarter over quarter, revenue for the quarter fell -4% as trading revenue fell -21% after Q1’s surge.

• Strong organic growth of 8% – Schwab has had higher net new asset growth in the first half of this year than any prior full year’s growth!
• 45% adj pretax margin

 

Current Price: $68.1                         Price Target: $78

Position Size:   2.19%                       Performance TTM: 105%

 

Schwab is building scale and platform as premier asset gather. 

• Transfer ratio of 3 to 1, means that 3x the assets came to Schwab from competitors than left Schwab
• Schwab recorded 4,810 new brokerage accounts in the first half of this year 
• Schwab is succeeding with millennials.  70% of new-to-firm households were under the age of 40.

Expenses

• Total expenses up +1% QOQ due to $200m charge for reserve for potential find on robo advisor disclosures.
• Through merger with TD Ameritrade, SCHW expects $1.8b-$2.0b in expense savings over next 3 years, which equates to ~20% of total expenses.

 

Net interest revenue was up +2%

• Net interest margin of 1.46% down slightly from 1.48%

• Deposits were $368b down -$1b as clients invested cash into equities and bonds
• Strong growth in margin lending +38% YOY
• Schwab’s revenue remains sensitive to interest rate changes
• Starting in Q3 Schwab is converting over TD Ameritrade cash accounts which will aid growth to deposits by about $10b per month.

 

Profitability – industry leader

• ROTCE of 20% and pre-tax profit margin of 44.6%.  Expect margins to continue to expand over the next 2-3 years due to cost savings and scale from the mergers

Capital allocation

• Schwab plans to build capital on the balance sheet due to rising deposits and mergers, which may temper share buybacks.
• Dividend yield of 1.05%

 

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 has experience material AUM growth with USAA and TD Ameritrade mergers.  Expect SCHW to reduce costs and continue to leverage platform.

 

Please let me know if you have any questions.

Thanks,

John

 

[category Equity Earnings]

$SCHW.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

 

Current Price: $2,727     Price Target: $3,100

Position Size: 4.6%         TTM Performance:+75%

 

Key Takeaways:

• Broad beat – consolidated revenues were $61.9B, up 62% w/ meaningful op leverage – op margin hit 38% (of net rev), up from 36% in Q1 and 33.7% in Q4. Was high 20s pre-pandemic.

• Digital ad spending continues to surge – saw broad-based strength in advertiser spend as they lapped of the first ever revenue decline in their ads business last year

• Cloud strength continues – accelerated to 54% from 46% last quarter (mid 40s range last few quarters)
• Capex spending resuming – continuing to pick up the pace of investment in office facilities and data centers. Most recently announced a second cloud region in India, their 26th cloud data center region globally.

 

 

Several e-commerce quotes on the call…

• “Moving on to retail, where momentum remains strong. We’re continuing to build an open ecosystem that benefits both users and merchants. Last year, we removed financial barriers with free product listings and zero commission fees. This year, we’re removing integration barriers with Shopify, WooCommerce, GoDaddy and Square, merchants can now onboard and show their products across Google for free. And our Shopping Graph is using AI to connect these products to the people who want them with over 24 billion listings from millions of merchants across the web.”
• “Let’s talk omnichannel. Last quarter, I said it was here to stay and it is. Retailers continue to build their digital presence to drive both online and offline sales, and we’re helping them to do it.”
• “On YouTube, look, I mean, if you look at the engagement across the platform, we definitely see a lot of headroom for e-commerce. Over the past year, you’ve seen us really focus on accelerating a shift to in terms of onboarding merchants across Google. So we’ve definitely invested both in terms of bringing merchants on board, removing barriers there, providing better integrations by partnering with players, platform providers across the industry. And now we are investing in our consumer experience speed on Google search or on YouTube. And so you will see us roll out features over time.”
• “we’re working hard to build and open retail ecosystem. And that really levels the playing field for all merchants, and we think there is a lot of opportunity ahead.”
• “…interesting trend, people are more eager than ever to support their local small businesses. Searches for support local business are up like 20x last year in the US alone. And this is creating a lot of opportunity for SMBs overall.”

“Search & Other” revenue: $36B, up 68%

• Retail was by far the largest contributor to the YoY growth of their Ads business.
• Travel, financial services and media and entertainment were also strong contributors.

YouTube ad sales: $7B, up 84% YoY

• Over 120 million people watch YouTube on TVs every month; that’s up from ~100 million last year
• Potential for e-commerce to be a growth driver – they have number of shopping capabilities already underway, and working to make it easier for users to discover and buy directly on YouTube…“stay tuned for more updates later this year”
• Strong value proposition to advertisers & positioned to capture the shift in advertising away from linear TV
• YouTube helps advertisers reach audiences they can’t reach anywhere else (especially younger audiences)
• According to Nielsen data, on average 70% of YouTube’s reach was delivered to an audience not reached by the advertiser’s TV media. In other words, YouTube’s reach is becoming increasingly incremental to TV.
• Nielsen found that US advertisers who shifted just 20% of spend from TV to YouTube generated a 25% increase to the total campaign reach within their target audience while lowering the cost per reach point by almost 20%.
• So not only driving improved reach, but also helping brands do it more efficiently

 

Network ad revenues: $7.6B, up 60%. This is revenue from ads placed on sites other than their own, like an ad placed on the NYT site.

 

Google cloud = Google Cloud Platform (“GCP”) + Google Workspace (i.e. collaboration tools):

• Revenue grew 54% YoY to $4.6B w/ an operating loss of $591m
• GCP’s revenue growth was again above Cloud overall, reflecting significant growth in both infrastructure and platform services.
• Key differentiators helping their cloud strategy –
• Security – they pioneered zero-trust architecture; “increase in cyber and ransomware attacks is a wakeup call for the industry”
• Real-time insights – expertise in real-time data and analytics – key for their data cloud which is one of the fastest growing segments of the market.
• Expertise in AI & machine learning
• Industry-specific solutions

Other Bets

• Revenues were $192 million, the operating loss was $1.4 billion
• Waymo – launched services to the public in Phoenix last fall. Has now served tens of thousands of rides w/out a human driver in the vehicle.

ESG:

• They aim to operate on 24-7 carbon free energy by 2030
• Several of their data centers are already operating at ~90% carbon-free energy

 

Valuation – They generated $59B in FCF in the last 12 mos. and ended the quarter with $108B in net cash, that’s ~6% of their market cap. The stock is still reasonably valued, trading at a ~3.7% FCF yield on 2021. They have ~$43B remaining in their buyback authorization and have been stepping up their pace of buybacks.

 

 

 

 

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: $270                          Price target: $293

Position size: 2.38%                        1-year Performance: +38%          

 

Stryker released its 2Q 2021 earnings last evening. Sales were up +9.3% organically form 2019 (+43% from 2020). Lower COGS and SG&A expenses due to cost discipline and leverage helped margins, although the company is not back to full spending post-covid.

The portfolio performance improved sequentially, and pushed the management team to raise its full year guidance.

• The US knee business is back in positive territory (+4%), although below pre-covid level (+8%). Orthopedic surgeries are elective in nature and thus still seeing some impact from covid. Surgeries are moving to various settings such as surgery centers (away from hospitals), but this does not seem to affect tool/products used by surgeons.
• In MedSurg, hospitals capital equipment orders is strong, a positive leading indicator.
• The Wright acquisition -its largest ever- is going better than expected and added 7% to top line this past quarter.

 

The disruption from the Delta variant is baked into their updated guidance, while some care continues to be deferred and will be a tailwind in 2022. For 2021, sales guidance was lifted on the lower end to +9-10% from 2019 levels, and EPS guidance lifted as well by the $0.11 beat, thanks to 2Q performance (implying 2H unchanged). Operating margin guidance is unchanged, remaining at +30-50bps from 2019, excluding M&A impact.

 

Overall this was a good quarter, but the evolution of the recent rise in covid cases across the globe will dictate how 2H21 turns out. We remain positive on this name long-term and maintain our price target unchanged due to remaining uncertainties for the rest of 2021.

 

CEO quote:

• “On hip and knee, what we’re seeing is really a gradual increase. We’ve seen throughout the year a return of elective procedures. These are deferrable procedures that need to be done at some point. And yes, with the Delta variant, you’re starting to see pockets of disruption, but overall, the hospitals are very capable of being able to deal with this.”

 

 

 

   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: $146                                                    Price Target: $157

Position Size: 7.5%                                                     TTM Performance: +57%

 

Key Takeaways:

 

• Strong beat across all products & services – revenue up 36% and profits almost doubled
• China continues to be strong – +58% YoY growth. Set a June quarter revenue record and significantly growing the installed base. In greater China, 85% of Apple Watch buyers were new to the product and 66% of Mac and iPad buyers were new.
• No specific guidance again – Growth this Q will be lower than last quarter’s 36% b/c of Fx, greater supply constraints and lapping a more difficult Services compare. The constraints will primarily impact iPhone and iPad.

 

Additional highlights:

 

• Seeing broad based growth – set new June quarter records in almost every product segment (iPad was highest in a decade, for everything else it was a record June Q) and in every geographic region with very strong double digit growth in each one of them.
• iPhone – up +50% YoY. The iPhone 12 family continues to be in very high demand. Installed base is >1 billion devices.
• Mac – the last four quarters for Mac have been its best four quarters ever. Revenues were up 16% YoY despite supply constraints.
• iPad – up 12% in spite of significant supply constraints. Started shipping iPad Pro powered by the M1 chip.
• Wearables – grew 36% YoY. Nearly 75% of Apple Watch buyers were new to the product. This quarter, they began shipping AirTags – their new stalking device. JK.
• Strong Services growth driven by growing installed base –
• Revenue +33% YoY; set a new all-time revenue record.
• Mix shift towards Services drove 80bps in GM expansion to 43.3%.
• Now at 700m subs, up 150m from last yr. 4x the number of subs they had 4 yrs. ago.
• Introduced Apple Podcast subscriptions.
• Apple TV + was the recipient of 35 Emmy nominations this year, which speaks to the quality of their programming (Ted Lasso is excellent if you haven’t seen it!).
• 5G upgrade cycle on the horizon – only in the early innings of 5G. If you look at their 5G penetration around the world, there is only a couple of countries that are in the double digits yet.
• Growing installed base is key positive – this drives their virtuous cycle. More users of their devices lures developers to create better apps which lures more users. This is key to their LT growth. Apple continues to significantly expand their installed base. And they have multiple new products being launched and more in the pipeline (e.g. AR glasses, Apple car) that could be key drivers of LT growth….and, importantly, a growing services business tied to all these products. Part of what differentiates Apple is they design their own silicon for the processor chips that are the brains of their iPhones and iPads and now their Macs, which gives them better control over performance and feature integration in their devices. This has proven to give them an advantage with the way they design their products and an advantage with developers. So, now they have Macs, iPhones and iPads running the same underlying technology which should make it easier for Apple to unify its apps ecosystem, including allowing iPhone and iPad apps to run on Macs. This advantage and the relevance of their ecosystem gets more and more important as computing power in phones increases, 5G delivers better connectivity and, as a result, we have the ability to use their devices in enhanced ways (w/ increased revenue opportunities) ….like apps that take advantage of augmented reality and IoT related technologies.
• Despite increase in price, Apple is still not expensive…
• Trading at >4% FCF yield on 2021 (in line w/ S&P) and a 0.6% dividend yield w/ another 3% of their market cap ($72B) in net cash on their balance sheet.
• Their market cap has been tracking their massive increase in FCF estimates. See chart below – the green line (left scale) is forward 12 month FCF estimate.
• For reference, pre-pandemic in Jan 2020, Apple was trading at ~4.7% FCF yield and 1% dividend yield with ~7% of their market cap in net cash.
• Huge amount of cash on their balance sheet w/ years of buybacks to support valuation
• Capital returns may need to expand further to hit their net-cash-neutral target in a few years. 
• With current net cash of ~$72B and expectations of >$450B of FCF over the next 5 years, shareholder returns could be ~$500B or  >20% of their current market cap.
• They’ve returned >$530B since 2012. So, from 2012 to 2026, they may return >$1T.

 

 

 

 

 

$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

 

Current price: $287         Price target: $310

Position size: 3.6%          TTM Performance: 38%

 

 

Key Takeaways:

• Slight miss on lower DIY demand which is normalizing after pandemic driven surge. Increased demand from Pros, commercial and industrial are offsetting. Consolidated net sales increased 17% w/ SSS of 19%.

• Overall demand environment continues to be strong – strong housing market and improving industrial end markets bode well for demand.
• Raised prices to offset rising raw material costs – saw GM pressure in the quarter (320bps; SG&A leverage partially offset), but committed to fully passing through higher raw materials which they now expect to be mid-teens for the year.

• No change to outlook despite slight miss

• CEO John Morikis said, “I’ve got great confidence that as we come out of this, you’re going to see that same coiled spring that we’ve exited other challenging times uncoil and we’re going to accelerate that… as our competitors continue to close stores and close territories and we continue to invest in a number of areas. We’re going to take advantage of this market and we actually, as difficult as these times are, these are the best times for our company.”

 

 

Additional Highlights:

• Revenue and margin headwinds will subside…
• Supply chain disruptions are temporary headwind to growth – saw an 3.5% drag on revenue growth from the “Uri” winter storm in Feb that impacted the complex Petrochemical supply chain. Impact split evenly across the Americas Group and the Consumer Brands Group.
• Gross Margins will improve – similar to past cycles, price increases come at a lag to higher raw material costs which are 80-85% of COGS for paint. The result is a near term hit to gross margins, but they will maintain pricing and see gross margins expand as some of the temporary drivers to higher commodity costs recede.
• This environment may improve their competitive positioning and client/partner relationships…
• “We’re leveraging all of our assets, including our store platform, our fleet, our distribution centers and more, to let us come up with unique and creative customer solutions that others simply can’t”…” We are unique in the fact that we have our own fleet of vehicles, we have 860 tractors and 2,100 trailers that we use to expedite these raw materials into our plants and in many cases right now from our plans to customer projects, so it’s the entire supply chain… working to expedite and cut out as many days as possible.”
• America’s Group ($3.1B), +23%:
• Same store sales increased 19.3% (lapping a -7%)
• Sales in all end markets, except DIY, were up double-digits led by residential repaint, commercial and property maintenance that more than offset the decrease in DIY. As expected, sales to DIY customers were down double-digits, driven by difficult comparisons.
• Contractors are reporting solid backlogs. Fourth consecutive quarter spray equipment sales increased by double digits. This continues to be a very healthy sign of recovery as contractors typically invest in this type of equipment in anticipation of solid demand.
• Consumer Brands Group ($732m), -25%:
• Lower DIY demand was a big drag (but is their smallest segment) resulting in lower sales volumes to their retail customers – this was partially offset by selling price increases. Also saw a 4% drag from a divestiture.
• The Performance Coatings Group ($1.6B), +41%:
• All divisions in this industrial focused segment delivered strong double-digit growth, led by industrial wood and general industrial
• Positive trends in new residential construction are driving increased demand for kitchen cabinetry, flooring, and furniture.
• Guidance: “While we are very encouraged with our strong start to the year in a seasonally smaller quarter and continuing strength in the demand environment, our full year adjusted earnings guidance remains unchanged given the near-term uncertainty of raw material availability and cost inflation. Despite the uncertainties, our businesses are extremely well positioned, and we remain confident in our long-term ability to grow faster than the market.”
• Balance sheet remains strong – leverage ratio is ~2.5x.
• Strong history of returning capital to shareholders continues – In 2020, they increased their dividend 19%, marking the 42nd consecutive year they increased their dividend. They’ve also bought back 6.4m shares YTD.
• Reasonable valuation – trading at ~3.5% forward FCF yield.

 

 

 

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

 

$SHW.US

[category earnings]

[tag SHW]

 

Key Takeaways:

 

Current Price: $54.5               Price Target: $61

Position Size: 1.47%               1-year Performance: +30%

 

Sensata released its 2Q21 earnings this morning. Sales grew 63% organically thanks to end-market recovery and their own market outgrowth, while operating income grew 179% due to top line growth and productivity. The China VI regulations has led to a nice content per truck increase. The management team remains cautious in its auto production growth, expecting a rebound still from 2020 but lowering it to +5% globally for the year, while IHS predicts a 9% growth rate. On the positive side, ST now sees better recovery in Heavy Vehicles and Industrials end markets. The chip shortage situation is impacting the auto and heavy vehicles production, but Sensata’s industrial portfolio came in stronger than expected. The current cash balance is $1.9B, leaving plenty of room for additional M&A. Net leverage ratio is 2.7X, decreasing from 2.9X last quarter. The stock is trading down slightly today due to the reduction in auto production outlook for the rest of 2021. We think the company has plenty of opportunities going forward thanks to its push in the electrification theme and see the near-term auto production downgrade as a minimal risk to the investment thesis.

 

Sales growth by segment:

• Automotive organic sales +75%: ST outgrew the market by 990bps, excluding channel restocking. This is driven by powertrain and emissions, safety, electrification applications despite chip shortage. The company expects restocking to be a further tailwind going forward.
• HVOR organic revenue +96% y/y: outgrew the market by 2,850bps, excluding channel restocking. This is driven by the China VI emissions regulations, operator controls, RADRA safety and tire pressure monitoring applications
• Industrial & other revenue +29%. Growth was driven by heating, ventilation and air conditioning, new electrification launches and restocking.
• Aerospace sales +20.6%, as OEM production improved and air traffic recovery (aftermarket business)

 

2021 guidance was raised to account for the good 2Q results and is now:

• Organic sales +19-21% from +16-21%
• Adjusted EBIT $782M-818M from $755M-805M
• EPS $3.42-$3.62 from $3.20-$3.50

 

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