Month: October 2021

On 10/21, Schwab hosted their Fall Update detailing quarterly earnings and outlook.  Schwab Q3 results showed continued strong asset growth, good expense control and earnings above estimates.

• Strong new asset growth of 8% – $396b YTD, showing strength of Schwab’s platform
• Profitable franchise – pre-tax margin of 44.0% and ROE of 12%
• Earnings are highly levered to short-term interest rates – 25 basis point increase in Feds Funds rate will increase earnings 4%-5% over following 12 months!

 

Current Price: $83.6                         Price Target: $90 (increased from $78)

Position Size:   2.72%                       Performance TTM: 109%!

 

Schwab is building scale and platform as a premier asset gather. 

• YTD Schwab recorded 5,988k new brokerage accounts in the first half of this year 
• Schwab is succeeding with millennials.  60% of new-to-firm households were under the age of 40.

Expenses

• Versus last quarter, total expenses are down -8%.
• 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.

 

Quarter over Quarter revenue was up +1%

 

 

Profitability – industry leader

• ROE of 12% and pre-tax profit margin of 44%.  Expect margins to continue to expand over the next 2-3 years due to cost savings and scale from the mergers
• Current expenses are elevated due to 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 questions.

Thanks,

John

 

[category Equity Earnings]

[tag SCHW]

$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

 

Key takeaways:

 

Current Price: $164      Price Target: $200 

Position size: 2.05%     1-Year Performance: +11%

 

 

• 3Q2021 results:

 

• Overall sales +10% organic, adjusted EPS +16.4%

 

• Pharma segment performing well with sales +13% organically, higher than last quarter of +11%
• Covid vaccine sales below expectations, but still expect and additional 300bps growth from vaccine sales for the year
• Oncology +16.5% – growth in multiple drugs (Darzalex, Imbruvica)
• Infectious diseases +60% strong growth (covid vaccine added growth vs. last year)
• Immunology +12% growth in Stelara (Crohn’s disease, Tremfya for psoriasis)
• Pulmonary Hypertension +16% – share gains in Opsumit and Uptravi
• Cardiovascular/other only sub-segment negative growth -12% due to biosimilar competition
• Consumer segment: +4% growth
• Growth driven by over-the-counter (OTC) drugs +18%
• Medical Devices: +7% organic sales growth
• Growth driven by market recovery post pandemic, new product introduction success
• Modest impact from covid Delta

 

• EPS growth driven in part by lower taxes

 

• Surgical robot Ottava for general surgery is delayed another 2 years … this is a positive for Medtronic that is developing a similar robot.

 

• Earnings call quote:
• Robot: “a first in-human delay of approximately two years from our earlier projections of the second half of 2022, reflecting technical development challenges and COVID-19 related disruptions, including supply chain constraints being experienced broadly across all industries.”
• Labor shortages: ” When we look at quarter four, we do expect to see continued improvement. We do expect hospitals are going to have to continue to manage through labor shortages, I don’t expect that to get better in quarter four nor in 2022, but they’ve been quite masterful and how to manage patient close.”
• ” We are, when I talk to hospital systems over the past three weeks in particular, in the United States, they are ramping up again and resuming elective procedures.”

 

• New CEO Joaquin Duato to transition January 2022

 

• 2021 guidance raised:
• Revenue raised slightly on the lower end due to core sales growth – nothing meaningful though but a positive signs in the wake of the Delta variant
• Tax rate is lowered  due to one-time benefits
• EPS increased due to good operational growth and lower tax rate

 

 

 

 

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

 

On 10/14, Bank of America (BAC) reported strong Q3 EPS of $.85 ahead of estimates of $.71.  Highlights for the quarter were 12% revenue growth, declining expenses and ROTE of 15.8%. BAC’s earnings remain levered to rising interest rates – a 100 basis point increase in yields would increase earnings $7.2b or 8%. 

 

Current Price: $46.4                         Price Target: $50 (raised from $40)

Position Size:   2.62%                       Trailing 12-month Performance: 96%

 

Highlights:

• Revenue growth of 12% to $22.8b
• Deposits continued their strong growth – 15% YOY
• Strong metrics for loan quality throughout pandemic. BAC had a loss ratio of 20 basis points the lowest in 50 years.
• Over $26b of excess capital – returned $12b to shareholders in Q3.
• Good expense control with noninterest expenses down 4% QOQ

• Loan growth turned positive, growing 6% QOQ.  In prior quarters, loan growth was negative due to high levels of mortgage refinancing.
• Net Interest Margin (NIM) rose to 1.93% from 1.83%, but remains depressed due to low interest rates. 

 

• Deposits have grown 14% 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 0.20% of loans, which is a 50-year low.  Last year this ratio peaked at 0.45%.  For comparison during 2010, the charge-off ratio peaked at 3.8% showing the relative severity of the Great Recession and the current strength of the U.S. banking system.
• Excess capital
• In Q2, BAC announce a $25b share repurchase program which is worth 7.5% of outstanding shares. 
• Returned $11.6b to shareholders with $9.9b in share repurchases.  Dividend yield is 1.80% and shareholder yield is above 10%

BAC Thesis:

 

• Over the years BAC has dramatically improved their Consumer Banking unit, leveraging technology and digital platforms which has improved margins and 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 generate excess capital which should lead to increased dividends and continued share buybacks
• BAC’s earnings are sensitive to rate increases. 

 

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: $216                Price Target: $251 NEW (from $255)

Position Size: 2.26%              1-Year Performance: +18%

 

• Total company sales +5%, core beer demand remains elevated, Wine & Spirits finding its new growth level post-divestitures
• Overall demand for core beer brands is robust, supporting future growth of the portfolio
• Beer sales increased by 13.8% organically (volume +11.7%)
• Modelo Especial demand remains robust with +16% growth – remains #1 brand in high end beer market, and fastest market share gainer
• Wine & spirits grew +15% organically, driven by high end portfolio
• Hard seltzer: still an opportunity, but the management team is not relying on this category to drive growth – lots of consolidation in the space
• STZ working on different flavors, packaging (single serve in convenience stores for example), low-carb/low calories/functional offerings
• Supply chain issues:
• Some shipping delays due to severe weather: 2-3pts impact on shipping growth
• Inventory levels should return to normalized levels by FY22 Q4
• Beer operating margin was impacted by higher marketing expenses and SG&A in general
• One-time charge regarding hard seltzer inventory obsolescence ($0.25 EPS impact a 2-3% impact for the year) impacted gross margins 350bps
• Wine & spirits operating margin declined 15% y/y due to higher SG&A (marketing spend), but gross margin increased from 42% to 45.2%
• Remains on track to reach 30% operating margin by FY23 as portfolio reshaping is taking place (divested ‘cheap” wines, keep high end ones)
• Guidance for fiscal year 2022 EPS increased by $0.15 thanks to better beer performance – raise of guidance is due to good fundamental performance
• Beer net sales increased to 9-11% from 7-9%, and operating income growth 4-6% from 3-5%
• Beer margins to reach 39-40% in FY22
• Wine & Spirits to decline -22% to -24% (due to sale of business). Excluding divestment, sales would be +2% to +4%
• Higher share buybacks
• Valuation: while we lowered our PT slightly to account for supply chain issues lasting a bit longer than expected in FY22, we still believe there is long-term value to be made in this name. On a P/E basis, the stock trades at a discount vs. its historical P/E. Our DCF shows upside as well.

 

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