Month: October 2021

Key Takeaways:

 

Current price: $263                     Price target: $322  

Position size: 2.95%                    1-year performance: +50%

 

• Revenue growth of +20% y/y thanks in part to the Philips recall that had a positive impact on Resmed sales, adding $80-90M. The launch of AirSense 11 is also boosting sales, while the prior model AirSense 10 has not seen a price decrease as usually would be the case, most likely due to worsening supply chain issue. Q2 and Q3 sales growth will be impacted by supply chain issues, but the  company did not lower its full year sales guidance, suggesting a return to normal towards next summer.
• Devices sales lifted by competitor Philips recall:
• US devices sales were +40%
• Rest of world devices sales +24%
• Masks segment saw a sales slowdown due to lower new patient intake, but still reaching +9%
• US masks sales +4.5%, supported by their resupply program of current patients – the lower level of new patients will have an impact on future growth though
• Ex-US market +18%
• Software-as-a-service business: mid-single digits growth to increase high-single-digits throughout the year.
• Covid-driven demand for ventilator is now $4M from $40M last year.
• Gross margin impacted by higher freight costs. bps y/y  The launch of premium priced AirSense 11 (+15-25% per Goldman Sachs) should help gross margins in the coming quarters.

 

 

On the M&S front, RMD is under levered and has access to $1.5B in liquidity for bolt-on deals. This quarter, RMD completed the acquisition of Ectosense (a global producer of cloud-connected home sleep tests).

We think the stock is down today due to higher freight costs (profitability impact) and potential slowdown in sales in the coming quarters due to supply chain issues (by now, hopefully this is no longer a new theme to anyone!!).

 

 

Thesis on RMD:

• Leading position in the underpenetrated sleep apnea space
• Duopoly market
• New product cycle
• Returns of capital to increase: ~1% share buyback/year (back in FY18), dividend yield of 2%

 

$RMD.US

[category earnings] [category equity research] [tag RMD]

 

 

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: $266                          Price target: $293

Position size: 2.41%                        1-year Performance: +31%          

 

Stryker released its 3Q 2021 earnings last evening. Sales were up +4.5% organically y/y (+8.4% from 2019).

• The US knee/hip/spine business showed some slowdown during the quarter, as those procedures are more deferrable than others more urgent.
• The Delta variant was most impactful in Florida and Texas, with a peak seen in early September.
• Staffing shortage worsen between July and September
• Medical and surgical equipment remains good with orders up.
• Ongoing demand for Mako (Robotic surgery) continues, despite competitive landscape. Half of new sales were in new hospitals.
• New catalyst: the company is developing a shoulder surgery robot for shoulder implants as well – no launch date yet.
• Gross margins expanded 55bps vs. 2019 but operating margins were flat.

 

Although the management team had increased its guidance for 2021 due to good recovery in Q2, it is now lowering its target by ~2% (now 7-9% from 9-10%)) to account for Delta variant impact and staffing shortages likely to persist through year-end. EPS guidance is lowered as well to $9.08-9.15 (versus $9.25-9.40 prior).

 

Valuation is not overvalued, but not cheap either where I would want to add to the position. Long-term thesis is intact.

 

 

   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: $318         Price target: $330

Position size: 4%              TTM Performance: 38%

 

 

Key Takeaways:

• Results being weighed on by supply chain constraints that are resulting in raw materials shortages. Mgmt. had already cut guidance in the beginning of September.
• Price increases are lagging higher raw materials costs which is weighing on margins now, but will improve. Committed to fully passing through higher raw materials which they now expect to be in the low-20’s percent increase for the year vs expectations for mid-teens previously.
• Underlying demand trends continue to be strong and mgmt. feels shortages are starting to improve. Strong housing market and improving industrial end markets bode well for demand.
• DIY demand is normalizing after pandemic driven surge. Increased demand from Pros, commercial and industrial are offsetting.

• Quotes from the call…
• “the demand environment remains robust across our pro architectural and industrial end markets. Many external indicators and, more importantly, our customers remained highly positive. Demand is not the issue“
• “raw material inflation remained persistently high and raw material availability failed to improve.”
• “We are aggressively combating raw material inflation with significant pricing actions across each of our businesses. We implemented multiple price increases in the quarter. We will continue to do so as necessary. We continue to work closely with our suppliers on solutions to improve availability sooner rather than later. At the same time, we’re exploring every avenue to better control our own destiny going forward, including our recent announcement to acquire Specialty Polymers.”
• “we are confident we will see significant margin expansion as availability and inflation headwinds eventually subside.”

 

 

Additional Highlights:

• Revenue and margin headwinds will subside…
• Supply chain disruptions are temporary headwind to growth – sales increased 0.5% as raw material availability negatively impacted sales by an estimated high-single-digit percentage.
• 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. A 630bps hit to GM was partially offset by 90bps lower SG&A.
• They’re taking action (all of which is aided by their scale & pricing power) – price increases, vertical acquisition (specialty polymers) that will aid supply, and they continue to invest in growth initiatives – they have significant production capacity available today and are bringing 50 million gallons of incremental architectural production capacity online over the next two quarters.
• “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 ($3B), -0.4%:
• Significant raw material availability headwinds; same store sales decreased 2.8%
• Pro architectural demand remains robust; expect delayed projects to be completed with improved product availability.
• DIY sales down double-digits, driven by difficult prior year comparisons and consumers returning to the workplace
• Consumer Brands Group ($647m), -23%:
• 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 drag from raw material availability and a divestiture.
• The Performance Coatings Group ($1.5B), +17%:
• Sales increased 17.4% with growth in all divisions and regions
• Packaging and General Industrial had highest YoY  increases and positive in every region; Coil strength continues globally. Auto Refinish solid as miles driven nearing pre-pandemic levels. Industrial Wood impacted by customer shutdowns in Southeast Asia due to COVID.
• Acquiring Specialty Polymers, should close by year-end – they’re a US based leading manufacturer of water-based polymers used in architectural and industrial coatings. This adds to their existing internal resin manufacturing capability.
• FY Guidance: expect high-single-digits percentage sales increase
• TAG: up high-single-digits percentage
• CBG: down mid-teens percentage – includes negative 4% related to Wattyl divestiture
• PCG: up low-twenties percentage
• Raw materials: up low-twenties percentage
• Continue to expect margin expansion over the long-term and maintain their gross margin target in the 45% to 48% range…from <42% now.
• Balance sheet remains strong – leverage ratio is ~2.6x. Debt is 92% fixed rate.
• Strong history of returning capital to shareholders continues – In 2020, they increased their dividend 19%, marking the 42nd consecutive year they increased their dividend.
• Valuation – trading at ~3.1% 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]

 

Current Price: $149                                                    Price Target: $166

Position Size: 6.7% (our smallest active position)TTM Performance: +29%

 

Key Takeaways:

 

• Issues with supply, not demand: quarterly results and guidance are being negatively impacted by supply chain constraints, but they continue to see record demand. The revenue miss for the quarter was entirely supply driven (semi shortages and Covid related manufacturing disruptions in southeast Asia).
• China continues to be strong – +83% YoY growth, significantly growing the installed base.
• Guidance – Supply constraints will be a bigger impact in Q1 (December quarter) than in Q4, but still expect to set a new revenue record for the December quarter. Supply constraints will be biggest w/ iPad – expect YoY revenue growth for each product category, except for iPad. Expect Services growth to decelerate. Expect gross margin to be between 41.5 and 42.5% (from <40% in 2020).

 

Additional highlights:

 

• Seeing record demand – Q4 revenue was $83.4B, +29%, putting FY revenue at $366B, +33%, with record performance across the board. Every product category and every geographic segment set a new annual revenue record and was up at least 20% over fiscal 2020.….despite larger-than-expected supply constraints.
• Margins expanding – gross margins are up significantly YoY (but down sequentially) aided by higher margin Services. Services gross margin hit an all-time high of 70.5%, up 70bps sequentially, mainly due to a different mix.
• Supply constraints:
• Impacted Q4 by $6B which was much bigger than their revenue miss.
• Q1 (December quarter) will see an even bigger impact.
• Key issues were semi shortages and Covid related manufacturing disruptions. The semi shortages will continue, but the factory closures are improving. Chip shortages impacting iPhone, iPad and Mac.
• Shortages are in legacy nodes (these are less sophisticated chips and less in their control b/c they have proprietary leading edge chips, but not their own legacy chips). “In terms of the chip shortage, the chip shortage is happening on legacy nodes, primarily we buy leading edge nodes, and we’re not having issues on leading edge nodes. But on legacy nodes, we compete with many different companies for supply and it’s difficult to forecast when those things will balance, because you’d have to know kind of how the economy is going to be in 2022 and the accuracy of everyone else demand projections. And so I don’t feel comfortable in making a prediction.”
• Segments:
• iPhone – $39B in Q4 revenue, up +47% YoY. The iPhone 13 family was introduced and is in very high demand. Installed base is >1 billion devices.
• Mac – this quarter was all time record and the last five quarters for Mac have been its best four quarters ever. Revenues were up +2% YoY despite supply constraints.
• iPad – up 21% in spite of significant supply constraints. On the 9^th generation iPad, powered by the M1 chip.
• Wearables – grew 12% YoY. Nearly 75% of Apple Watch buyers were new to the product. This quarter, they introduced Apple Watch 7.
• Strong Services growth driven by growing installed base –
• Revenue +26% YoY; set a new all-time revenue record ($18.3B in Q4; $68B for FY21).
• All-time record for cloud services, music, video, advertising, AppleCare and payment services
• Now at 745m subs, added 45m from Q3; and up 160m from last yr. and 5x the number of subs they had less than  5yrs. ago.
• Apple Card won a J.D. Power award for customer satisfaction in its very first year of eligibility
• Introduced Apple Podcast subscriptions last quarter
• 5G upgrade cycle – 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.
• Why we still like…
• Big moat underpinned by growing installed base which 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.
• Apple is still not expensive…
• Trading at >4% FCF yield on 2022 (in line w/ S&P) and a 0.6% dividend yield w/ another almost 3% of their market cap ($66B) in net cash on their balance sheet.
• 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.
• Their market cap has been tracking their massive increase in FCF estimates.
• 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 ~$66B and expectations of nearly $450B of FCF over the next 4 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

 

Key Takeaways:

 

Current Price: $74.3                       Price Target: $88   

Position Size: 1.90%                       1-year performance: +20%

 

Fortive (FTV) reported 3Q earnings last night. Overall the recovery is taking hold, and FTV is showing its strength with pricing gains this quarter.

• Organic growth of +9% (+12% total growth)

o   All three segments had positive sales growth:

Ø  Advanced Healthcare Solution +5% organic (24% of revenue): elective procedures in the US were below pre-covid levels and impacted the sales of consumables products. However capital equipment continues to grow

Ø  Precision Technologies +7.7% organic (36% of revenue)

Ø  Intelligent Operating Solutions +13% organic (41% of revenue)

• Software-as-a-service grew 13%: FTV is building scale and differentiation with its software offerings: it has almost $750M of annualized revenue growing +double-digits
• with high recurring revenue / operating margins
• Adjusted operating margin 22.8%, +325bps, above guidance, thanks to multiple drivers: software-as-a-service strength, better pricing (+2.2%) and cost control benefits
• There is good momentum going into 4Q and 2022 thanks to order growth of 20%, amid the supply-chain challenges
• Some of the demand is being pushed-out to 2022 on delays, but remains strong and should supply returns to normal little by little, growth in 2022 would be better than the mid-single-digit target

 

2021 guidance updated:

·       narrowed 2021 guidance for adjusted EPS to $2.70-$2.75 (vs $2.65-$2.75 prior), up 29-32% y/y

·       Organic sales growth now seen at 10.5-11% (vs 10.5-12% prior)

·       Adjusted operating margins at 23-23.5% (vs 22.5-23.5% prior)

 

 

FTV Thesis:

• Market leader:
• Leadership position in most of the markets they serve
• Experienced leadership team
• Above industry margins with strong cash flows
• Quality:
• FCF yield ~5%
• Organic growth target of 3-3.5% (4-5% in last 2 quarters after being under the target in prior quarters)
• M&A strategy to enhance top line growth
• Margins expansion from new products introduction, continued application of the Fortive Business Systems and M&A integration
• Shareholder friendly:
• Management team focused on shareholder wealth creation through top line sustainability and margin expansion

$

FTV.US

Category: earnings

Tag: FTV

 

 

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: $2,923     Price Target: $3,450 (raised from $3,100)

Position Size: 4.8%         TTM Performance:+93%

 

Key Takeaways:

• Broad beat – gross revenues were $65.1B up 41%
• Continued meaningful op leverage despite resumption of spending on headcount – OM expanded sequentially for the 5th quarter in a row. Now at 39% on net rev, well ahead of high 20’s pre-pandemic.
• Digital ad spending continues to surge – saw broad-based strength in advertiser spend, particularly w/ retailers
• Cloud strength continues – was +45% w/ losses narrowing
• Capex spending resuming – continuing to pick up the pace of investment in office facilities and data centers… “We continue to increase the pace of investment in fit-outs and ground-up construction of office facilities to accommodate our ongoing headcount growth globally. We will continue to pursue real estate acquisition opportunities where it makes sense.”

 

Similar to last earnings call, there was a big focus on Retail/e-commerce…

• “as the world begins to reopen, shoppers are returning to stores. Brick and mortar isn’t dead – instead, omnichannel is in full force. Searches for ‘open now near me’ are up four times globally vs. last year.”
• Omnichannel and next-gen user experiences are core to their shopping strategy, including:
• Easier ways for businesses to show the local services they offer across Search and Maps.
• Local inventory ads that highlights which products are in-stock and when to pick them up.
• Free shipping and easy return annotations across Search and Shopping.
• AR capabilities that bring in-store moments online and let users try before they buy.
• Instantly shoppable images with Google Lens.
• New visual, browsable experience on Search.
• ” There’s a lot more to come…including tapping into commerce on YouTube“. They are still in the early innings w/ e-commerce potential w/ YouTube. Possibilities include: shoppable livestream events w/ large retailers or letting viewers buy directly from their favorite creators’ videos.

Heavy focus on AI capabilities on the call which is relevant across segments

Google is faring better than others from Apple’s app tracking changes…

• Earlier this year, w/ the latest iOS release, Apple changed their app tracking policies, referred to as ATT (app tracking transparency)…now users need to opt in rather than opt out. This small change has made a very big difference in the digital ad space.
• Google indicated only a “modest impact” to YouTube while Facebook and Snap have both indicated this as a significant headwind for their business.

 

“Search & Other” revenue: $38B, up 44%

• Seeing broad-based strength in advertiser spend across industries, but some unevenness still across geographies depending on local regulations and vaccines.
• Retail was gain by far the largest contributor to the YoY growth of their Ads business.
• Media & entertainment, Finance and Travel were also strong contributors.

YouTube ad sales: $7.2B, up +43% YoY

• Over 120 million people watch YouTube on TVs every month; that’s up from ~100 million last year
• Strong value proposition to advertisers & positioned to capture the shift in advertising away from linear TV
• “YouTube’s reach is becoming increasingly incremental to TV”
• YouTube helps advertisers reach audiences they can’t reach anywhere else (especially younger audiences) and helping brands do it more efficiently
• 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%.

 

Network ad revenues: $8B, up 40%. 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 45% YoY to $5B w/ an operating loss of $644m
• GCP’s revenue growth was again above Cloud overall, reflecting significant growth in both infrastructure and platform services.

Other Bets

• Revenues were $182 million, the operating loss was $1.3 billion
• Waymo – Next year will open a dedicated trucking hub in the Dallas-Fort Worth area, helping support commercial freight routes across the Southwest
• Announced last week the first commercial expansion of Wing’s on-demand air delivery service to Walgreens customers in select locations
• https://www.nbcdfw.com/news/business/walgreens-googles-wing-bring-store-to-door-drone-deliveries-to-dfw/2777244/

ESG:

• They aim to operate on 24-7 carbon free energy by 2030
• 2/3 of the electricity consumed by Google data centers in 2020 was matched with local, carbon-free sources on an hourly basis
• New Carbon Footprint tool gives customers carbon emissions insights associated with their Google Cloud Platform usage

 

Valuation – They generated $59B in FCF in the last 12 mos. and ended the quarter with $114B in net cash, ~6% of their market cap. The stock is still reasonably valued, trading at a >4% FCF yield on 2022 and they‘ve 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: $55                   Price Target: $61

Position Size: 1.47%               1-year Performance: +26%

 

Sensata released an overall good 3Q report.Sales were +21% overall (~17% organic), with growth by segments as follow:

• Automotive organic sales +5.2%: ST outgrew the market by 1,150bps

• HVOR organic revenue +59% y/y: outgrew the market by 2,400bps

• Aerospace/Industrial sales +8%/+18%, driven by defense product launches and electrification/HVAC

 

Volume and productivity had a 310bps positive impact on operating margin, while supply chain constraints were a 80bps headwind, and will have a greater impact in Q4 (100bps). Because of its solid cash position, Sensata is reinstating its share buyback program in Q4, which we view a bullish for near-term performance. Sensata recently won some new contracts in the EV (electric vehicle) space: electronic stability in brake sensing (supplier Continental), pressure and force sensors in brake system with a leading EV OEM. Those a just a couple of examples of what Sensata sees in content growth in EV in the next 5 years, planning to double its EV content per vehicle vs. a traditional internal combustion engine vehicle, with a dollar content usually 20% higher as well. EV wins have been 50% of new business wins so far in 2021.

 

The new acquisition of Spear Power Systems will enable ST to offer full energy storage solutions. Fun Fact: Spear is enabling the Washington State Ferry system to go electric with battery energy storage.

 

2021 guidance update:

• 4Q guidance is below expectations due to supply chain constraints worrsening
• OEM production outlook for 2021:
• Auto production to contract 3% overall (worse in every regions)
• The aerospace sector overall is expected to contract 8% vs 4% previously guided in July.
• Industrial looks stronger at 13% vs 12% in July
• HVOR is expected at 25% vs. 23% in July.
• Sensata did not provide a 2022 guidance, but believes the IHS view of ~10% auto production growth is too optimistic as the supply chain constraints could continue into 2022.

 

To finish, Sensata published its first Sustainability Report!

 

 

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 10/26, S&P Global announced impressive Q3 earnings with revenue up 13% and operating profit up 18%.  S&P also raised 2021 EPS guidance.  Key takeaways are:

• Dow Jones Indices had a blowout quarter with revenue up 28% and margins up 660 bps!
• S&P Revenue up 13% with solid growth in all four segments
• Expense growth of 7%
• Operating margins expanded 250 basis points to 55.4%
• Expect IHS Markit merger to close Q1 2022 after some divestitures

 

Current Price: $462.60                      Price Target: $480 (raised from $450)

Position Size:   3.10%                         Performance since add on 2/3/21: +43.5%

 

2021 Q3 Highlights:

• S&P Dow Jones Indices
• Asset-linked fees were up 36%! YoY ETF AUM up 43%!
• Revenues benefited from strong price appreciation and inflows
• Strong growth in index fees – ETF AUM was $2.4t up 51% Y/Y
• Revenue grew 28% and operating profit rose 40% Y/Y
• Margins rose +660 bps to 69.2%
• Ratings
• Global bond issuance increased 3%, with strong growth in high yield, Bank Loans and CLOs
• YoY revenue grew 14% and operating profit rose +17%
• Margins rose +160 bps to 63.4%
• Non-transaction revenue (not related to bond issuance) is over 40% of ratings revenue
• Market Intelligence
• Revenue grew +7% Operating profit rose +13%
• Margins increased +190 bps to 35.7%
• Platts
• Revenue grew +8% and operating profit rose +5%
• Margins decreased -110 bps to 54.6%

 

IHS Markit merger update

• Closing target Q1 2022 from second half 2021
• IHS Markit will divest OPIS, Coal, Metals & Mining (CMM), and PetroChem Wire businesses to News Corp and Base Chemicals business
• S&P Global will divest CUSIP Global Services and Leveraged Commentary and Data, together with a related family of leveraged loan indices.
• Despite divestitures, S&P has raised cost synergies to $530m-$580m (from $480m) and revenue synergies to $330m-$360m (from $350m)

Growth initiatives

• Implementing new ESG offerings across platform – ESG revenues up 40%
• Technology expertise – Kensho AI initiatives
• RiskGuage, ProSpread, Riskcasting Indices, Moonshot index, Kensho Scribe and many others combining data and analytics
• Merger with IHS Markit

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 $5.8b of cash piled up on the balance sheet.  Expect some of  this excess cash and ~85% of annual free cash flow 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 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

 

Current price: $180         Target price: $201

Position size: 2.3%           TTM Performance: 12%

 

 

Key takeaways:

• Beat estimates and issued solid FY22 guidance
• Solid AFFO/share growth – Maintained AFFO/share guidance for FY21, implying +12% YoY growth, meaningfully above their long-term annual target of 7% to 8%. FY22 guidance issued ahead of the street, implying +8% YoY growth.
• Their business is seeing tailwinds as the 5G investment cycle is (finally) ramping – first stages of 5G investments resulting in record level of tower activity. Small cell growth is slower but should improve in later stages of what should be a massive, decade-long investment cycle.

• Dividend raised 11%. Well ahead of long-term dividend growth targets as they are growing the dividend in line w/ AFFO growth.

 

 

Additional highlights:

• Quotes from the call: “With history as a guide, we believe the deployment of additional spectrum on existing cell sites will not be enough to keep pace with the persistent 30% plus annual growth in mobile data traffic….As a result, we expect cell site densification to remain a critical tool for carriers to respond to the continued growth in mobile data demand.”
• “When the current cell site upgrade phase shifts to densification phase, we believe the comprehensive offering of towers small cells and fiber will be critical for our customers and provide us with an opportunity to further extend the runway of growth in our business.”
• Seeing record tower growth now; small cell growth will be longer term driver
• Customers upgrading existing tower sites as a part of their first phase of 5G build-out.
• Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
• Carrier spend is currently focused on deploying mid-band spectrum as this is the first stage of 5G deployment and is often referred to as the “goldilocks” band as it is an ideal balance between bandwidth and propagation (i.e. its ability to carry more data and travel far distances). It can be deployed via towers and small cell, but towers remain the most cost-effective way for carriers to deploy spectrum at scale and establish broad network coverage.
• Carriers just spent a ton (~$90B) at the recent C-band spectrum auctions… and now they’re focused on deploying it.
• This near-term carrier focus is on C-Band deployment is stalling small cell deployment growth.
• Small cells are the next stage…
• High-band (mmWave) spectrum is the next stage and is relevant for what’s often called the “real 5G” which would deliver on the huge gains in performance that 5G promises (step function increase in latency and bandwidth). It has significantly more capacity, but over a fraction of the geographic coverage area (lower propagation) which is why it needs to be deployed using small cells connected to fiber, making it ideal for dense urban areas. This densification is a driver of additional leasing as it’s a critical tool for carriers to accommodate continued growth in mobile data demand b/c it enables carriers to get the most out of spectrum assets by reusing it over shorter and shorter distances.
• Growth in small cells should drive improving returns as they expect decreasing capital intensity for growth within their small cell and fiber business. With small cells there are “anchor nodes” and “colocation nodes” – the first “anchor” nodes are a lower ROI and additional nodes on existing infrastructure have higher incremental margins. So as lease-up activity continues, their ROI improves.
• Balance sheet strength – They continue to methodically reduced the risk profile of their balance sheet. Since they achieved their initial investment grade credit rating over 5 yrs. ago, they have increased average debt maturity from 5 yrs. to >9yrs, reduced average borrowing costs to 3.1% from 3.8% and increased the mix of fixed-rate debt to > 90% from < 70% w/ no meaningful near term debt maturities. So limited near term exposure to rising rates.
• Sustainability/ESG considerations…
• Just announced goal of carbon neutrality by 2025
• “Our business model is inherently sustainable and shared solutions limit infrastructure in the communities in which we operate and minimize the use of natural resources.”
• “Our business finished just one ton of CO2 per $1 billion of enterprise value which is 90 times more efficient than the average company in the S&P 500 based on industry estimates.”
• Their solutions also help address societal challenges like the digital divide in under-served communities by advancing access to education and technology. “To date, we have invested nearly $10 billion in towers, small cells and fiber assets located in low income areas.”
• Enhanced focus on ESG may drive increased revenue opportunities from things like smart cities and “broadband for all” and lower operating costs in areas like tower lighting and electric vehicles.
• Reasonably valued – trading at >4% 2022 AFFO yield. With LT AFFO/share growth of 7-8% and >3% dividend yield, they should compound total returns low double-digits over a long period of time as demand for their shared infrastructure offering is tied to robust mobile data growth (~30% annually).

 

 

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

 

$CCI.US

[category earnings]

[tag CCI]