Month: April 2022

Current Price: $159                                                         Price Target: $185

Position Size: 7.9%                                                        TTM Performance: +23%

 

Key Takeaways:

 

• Hitting record sales across categories despite supply chain constraints. The exception is iPad which is experiencing the most severe shortages.
• A few headwinds…$4B to $8B impact to next Q revenue due to supply chain constraints. Next Q should be ~$85B in rev for perspective, so a mid to high single digit impact in the Q. Also, Covid restrictions having an impact to demand in China. And finally, seeing a 150bps headwind from Russia.
• Getting better? “On a positive front, almost all of the affected final-assembly factories have now restarted,” said, Tim Cook. “We’re also encouraged that the Covid case-count that’s been reported in Shanghai has decreased over the last few days.”
• Better positioned…an article from WSJ underscores the advantage of owning market leaders like Apple that have big buyer power w/ their suppliers…while not immune to supply chain issues, they have an advantage in navigating them. https://www.wsj.com/articles/apple-suppliers-given-priority-for-factory-restarts-in-shanghai-region-11651250518?mod=Searchresults_pos3&page=1
• M1 success underscores their silicon and software advantage – they design their own chips for iPhone, iPad and Mac…making them one of the largest semiconductor companies in the world and giving their products an advantage b/c, not only are they some of the most advanced chips, they can tightly customize how their software and hardware work together. Apple points to success w/ Mac as evidence…which has strung together its best 7 quarters in history
• Asked on the call about M&A intentions…NFLX was specifically mentioned in the question. Mgmt. said they are always looking for opportunities, they usually do smaller acquisitions, but wouldn’t rule out a larger one. NFLX market cap is now $87B…AAPL has $193B in cash on their balance sheet and produces over $100B in FCF annually.
• Increased buyback authorization by $90B.
• Reasonable valuation…
• Trading at ~4.5% FCF yield, in line w/ the S&P, w/ another almost 3% of their market cap ($73B) 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.
• AAPL is down about 10% YTD (less than the tech sector) while forward FCF estimates have continued to go up.
• Their market cap has been tracking their massive increase in FCF estimates. FCF this year should be ~85% higher than pre-pandemic fiscal 2019
• They have a 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 ~$73B and expectations of over $470B of FCF over the next 4 years, shareholder returns could be well over $500B or >20% of their current market cap.
• They’ve returned >$550B since 2012. So, from 2012 to 2026, they may return well >$1T.

 

Quotes from the quarter & WSJ article on their Silicon Advantage…

• “With Apple silicon, our teams are pushing the limits of what we once thought possible, and we are seeing leaps and bounds in performance and efficiency. Last month, we announced another breakthrough with M1 Ultra, the world’s most powerful chip for a personal computer. The incredible customer response to our M1-powered Macs, helped propel a 15% year-over-year increase in revenue despite supply constraints.”
• “And with the all new iPad Air supercharged by M1, iPad brings more power and more versatility across the entire iPad lineup. For customers around the world, iPad continues to be essential for education, creativity, and entertainment. That’s why we’re continuing to see such a strong demand for iPad, even while navigating the significant supply constraint we predicted at the start of the quarter.”
• From WSJ: “Mr. Srouji’s (head of Apple’s chip design) chip operation, which already designed chips that power iPhones, has helped Apple improve the profitability of its smartphones and computers. It also has positioned Apple to move into potential future products such as a car or extended-reality headsets.”
• https://www.wsj.com/articles/the-chips-that-rebooted-the-mac-11650081649

 

 

Additional highlights:

 

• SECOND-QUARTER RESULTS
• Revenue $97.28 billion, +8.6% y/y, estimate $93.98 billion
• Products revenue $77.46b, +6.6% y/y, estimate $75.4b
• iPhone revenue $50.57b, +5.5% y/y, estimate $49.16b
• Mac revenue $10.44b, +15% y/y, estimate $9.23b
• iPad revenue $7.65b, -2.1% y/y, estimate $7.19b
• Wearables, home and accessories $8.81b, +12% y/y, estimate $8.98b
• Service revenue $19.82b, +17% y/y, estimate $19.78b
• Greater China rev. $18.34b, +3.5% y/y
• EPS $1.52 vs. $1.40 y/y, estimate $1.42
• 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.

 

 

 

 

 

 

$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: $2,342    Price Target: $3,450

Position Size: 4.8%         TTM Performance: -1%

 

 

Key Takeaways:

• Robust revenue growth and steady impressive margins, but saw weaker than expected ad revenue from YouTube.
• Overall, strong ad revenue continues…retail and travel-related ad spending were among the strongest sectors. Overall, ad related revenue up 23% w/ “Search & Other” revenue ($40B, up 24%), Google Network ($8.2B up 21%) and YouTube ad sales ($6.9B, up +15% YoY).
• YouTube weakness – management attributes the YouTube weakness essentially to two things: weakness in Europe, impacted by Russia/Ukraine and an increased mix of viewership of YouTube shorts (their TikTok rival product) which they don’t monetize as well as longer format videos….yet.
• Google Cloud Platform (Azure & AWS competitor) continues to do well, +44%.
• Investing behind growth as they ramp spending on Capex and headcount – continuing to pick up the pace of investment in office facilities and data centers. They recently announced plans to invest $9.5 billion in US offices and data centers, creating at least 12,000 new jobs in places like New York and Atlanta.
• Valuation –The stock reasonably valued, trading at a 5% FCF yield on 2022, cheaper than the S&P at ~4.5% and growing top line and FCF/share double digits w/ margins more than 2x the S&P. Additionally, they have almost 7% of their market cap in net cash ($106B) after generating $69B in FCF in the last 12 mos. They have been stepping up their pace of buybacks lately. They repurchased $50B in shares in 2021. And announced a $70B buyback this quarter which should support the stock. Also a 20-for-1 stock split to go into effect on 7/15.

 

Quote from the call on the War in Europe …

• “about 1% of Google revenues were from Russia in 2021, and that was primarily from advertising. In addition, from the outset of the war, there was a pull-back in advertiser spend, particularly on YouTube in Europe. So a couple of impacts from the war.”

 

More on YouTube…

• YouTube has lots of opportunity ahead despite slowing this Q in Europe and higher penetration of YouTube shorts (strong engagement but weak monetization so far).

• Positioned to capture the shift in advertising away from linear TV & strong value proposition to advertisers
• YouTube presents a great opportunity to address commercial intent w/ video in a more measurable way than 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
• According to Nielsen, in the US, YouTube accounts for over 50% of ad supported streaming watch time on Connected TVs among people ages 18 and up. And over 35% of viewers in this group can’t be reached by any other ad supported streaming service.
• E-commerce potential: 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.

 

 

 

 

 

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

 

 

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: $270         Price target: $330

Position size: 3%              TTM Performance: 9%

 

 

Key Takeaways:

• Broad beat, demand trends are strong and they’re past the worst of supply chain issues. “We believe we are through the worst of the industry supply chain challenges and the incremental architectural capacity we added late last year positions us well for the upcoming architectural painting season.”
• Inflation – still elevated but they expect this to improve in the second half. They are taking price increases to offset and are prepared to take more if necessary. Higher labor costs for customers is causing a positive mix shift to higher quality paints which can reduce labor intensity of jobs (which is the largest portion of pro project costs).
• Taking action to offset headwinds which positions them to take share – Their actions are all aided by their scale & pricing power. Taking continued price increases, vertical acquisition (specialty polymers) that will aid supply, and they continue to invest in growth initiatives – “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.”

• Margins will improve  – as headwinds recede, strong demand and pricing actions will lead to higher margins
• Valuation is reasonable – current yr. FCF is depressed due to the raw material headwinds they are facing and investment in new capacity. As headwinds recede, margins will expand. Low-to mid-single digit top line growth and an improvement in margins toward long-term targets, yields ~25% upside.
• Balance sheet remains strong – leverage ratio is between 2-2.5x. Debt is 92% fixed rate.
• Strong history of returning capital to shareholders continues – In 2021, they increased their dividend over 20%, marking the 43rd consecutive year they increased their dividend.

 

Quotes from the call…

On demand:

• “Rising mortgage rates have not made an appreciable dent in the demand for our new residential customers to this point.”
• “I’d just highlight this article by USA Today that I think captures kind of the sentiment that we have in new residential. It talks about the housing unit shortfall… despite an annual average of 1.5 million new housing units completed, and a 1.7 million spike in 2020 alone, new construction would need to accelerate to a pace that’s well above this current trend to more than 2 million housing units per year to close this gap. Even if building were to continue at the current level, the most rapid pace in more than a decade, it will still take more than 20 years to close the 5.5 million unit gap.”
• “we made more architectural paint gallons in March than in any previous month in our company’s history”
• “European demand also remains strong, although we continue to closely monitor for potential impacts from the war in Ukraine.”

On Supply chains:

• “the supply chain is not completely recovered as the bottleneck has now largely moved from suppliers’ production to their transportation and logistics. In the near-term, we’re speeding this recovery by employing our own fleet and tank wagons to supplement suppliers’ delivery capabilities. Our ability in this area is unique among our competitors.”

 

 

Additional Highlights:

• Revenue and margin headwinds will subside later in 2022…
• Disruptions are acting as a short-term headwind – Natural disasters (winter storm Uri and Hurricane Ida) destroyed the industry’s raw material supply chain, which led to poor availability and unprecedented cost inflation due to high demand. Labor and transportation costs also became elevated throughout the year. Lastly, the new COVID variant (Omicron) added to operational complications.
• America’s Group ($2.6B), +5.6%:
• Sales increased 5.6% including low-double-digit pricing; same store sales increased 3.8%
• Segment margin improved 170 basis points sequentially
• Consumer Brands Group ($700m), -10%:
• Sales decreased 10.1% driven by difficult prior year comparisons, lower sales outside of North America and the Wattyl divestiture (-6%). High-single-digit price realization in the quarter
• The Performance Coatings Group ($1.65B), +20%:
• Sales increased 20.4% including mid-single-digit volume growth and mid-teens pricing
• Double-digit growth in North America, Asia and Latin America; high-single-digit growth in Europe
• Packaging and Coil highest year-over-year increases and double-digit growth in every region
• General Industrial and Auto Refinish growth in all regions
• Industrial Wood strength in North America driven by strong architectural end markets

 

 

 

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

 

 

 

Giving an update on Disney and a measure passed today by the Florida legislature that would have a negative impact on the company. The legislation, which now goes to Gov. Desantis for his signature, would dissolve six special districts in the state as of June 1, 2023. One of those is  Reedy Creek Improvement District where Disney World is based. It was created in 1967 to allow Disney to essentially function as its own municipality.

 

Implications?

 

• Florida Association of Special Districts leader David Ramba said “For Disney, the main effect is more red tape. Disney would no longer be able to grant itself permission to renovate buildings or to build a new road. Instead, park officials would have to go to the county governments for every request.” Which Ramba indicated was more of an annoyance than a threat to the parks. He also indicated that despite the legislation passing, legislators could simply reverse themselves during the next regular session in January, after election season ended.
• The dissolution of the district could inhibit Disney’s ability to borrow in the $4 trillion state and local debt market, impacting the company’s access to cheaper tax-exempt financing through that special district, and could potentially cost Disney more to finance projects w/in that district.
• Reedy Creek would likely be absorbed by the local government which would become responsible for things like sewer and road maintenance. In exchange, the counties would collect the tax revenue that Disney currently pays itself. Local governments would also absorb all of the district’s liabilities, including about $1 billion of municipal bonds currently outstanding, according to Bloomberg. Reedy Creek historically operates at a loss of approximately $5 to $10 million per year which Disney subsidizes.
• There is some uncertainty as to how this proceeds, some, including Disney executives, seem to have the view that the Legislature can’t dissolve the district without the approval of voters.

 

Below are some snippets from an article in the LA Times that gives a good summary of the situation…

 

Why does Disney have these special powers?

 

“When brothers Walt and Roy Disney were looking to create another theme park on the East Coast, they took with them lessons from operating Disneyland in Anaheim, where it opened in 1955. Dealing with local regulations and government building inspections was a hassle. Disney wanted a way to achieve its sprawling ambitions without being so encumbered by municipal bureaucracy. The original idea for Epcot, in fact, was that it would essentially function as its own city.

 

And so the company worked with lawmakers to establish the Reedy Creek Improvement District. Walt Disney died in 1966, the year before the Reedy Creek law passed and a few years before Walt Disney World Resort opened in 1971.

 

The district, spanning roughly 40 square miles in both Orange and Osceola counties, provides everything from fire protection and emergency medical services to water systems, flood control and electric power generation. Its boundaries include four theme parks, two water parks, a sports complex, 175 miles of roadway, the cities of Bay Lake and Lake Buena Vista, utility centers, more than 40,000 hotel rooms and hundreds of restaurants and retail stores, according to its website. A five-member board of supervisors, elected by landowners, governs the district.

 

Its creation allowed Disney to transform acres of uninhabited pasture and wetland into a massive driver of tourism.

 

The powers granted were broad, making it much easier to move forward on building something like, say, the 183-feet tall Cinderella Castle, experts said. The district’s charter left open the possibility of Disney building its own airport or nuclear power plant if it wanted to. This was done to anticipate whatever needs might come up.

 

“They knew they were going to have one shot at these powers, because Florida needed Disney more than Disney needed Florida,” said Richard Foglesong, author of “Married to the Mouse: Walt Disney World and Orlando.” “They could get these powers at the opening, but they weren’t confident that they could add to their powers down the road. And so it was understandable that attorneys, I have no doubt, said, ‘Let’s get all we can now.'”

 

How would Reedy Creek be dissolved?

 

“Though the Florida Legislature is moving rapidly, the end of Reedy Creek wouldn’t happen immediately. Its dismantling would take effect June 1, 2023, along with that of a few other districts, giving Disney and the state about a year to resolve their issues. It also leaves the door open for special districts affected by the legislation to be reestablished.

 

Some lawmakers who oppose the move against Disney question whether the Legislature has the power to eliminate the company’s powers. Florida House Rep. Carlos Smith, who opposes the bill targeting Reedy Creek, tweeted an image of a section of a Florida statute indicating that dissolving an active special district would require the votes of landowners in Bay Lake and Lake Buena Vista. Disney holds the vast bulk of the voting power.”

 

How would this affect Floridians and Disney?

 

“Some lawmakers say the decision, if it takes effect, could create a significant financial hit for the counties affected by the Reedy Creek district. Disney finances the services the district provides, which would normally be paid for by local municipalities. Disney effectively charges itself property taxes to finance these services. For law enforcement, Disney pays the Orange County Sheriff’s Office.

 

If the district is dismantled, those responsibilities could fall to local municipalities and taxpayers, experts said. So could the district’s debt-load. The district’s long-term bonded debt totaled more than $977 million as of September, according to Reedy Creek’s annual financial report. State Sen. Stewart tweeted that removing the district “could transfer $2 Billion debt from Disney to taxpayers” and could have “an enormous impact on Orange & Osceola residents.”

 

“The fallout for Disney is also uncertain. While Disney pays for its own services in the district, it does get some benefits. It can issue municipal bonds, which get a lower interest rate than corporate debt. Disney is also exempt from certain fees and may save money by contracting local sheriff’s deputies, according to Foglesong. But the main benefit over the decades has been the flexibility the designation affords Disney.”

 

“They’d rather have it their way, where they can do things for themselves, rather than have to depend upon government,” Foglesong said.

 

Disney will probably fight back. It can’t pick up Walt Disney World and move it to a friendlier state, the way it can threaten to take the production of Marvel movies out of Georgia.”

 

 

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: $183      Price Target: $200 

Position size: 2.44%     1-Year Performance: +9%

 

 

• Overall sales +7.7% ex-FX, +2.7% in the US and +12.6% International (driven by Europe)
• Operating margins came below expectations
• Adjusted EPS +6.2%
• JNJ continues to outperform in its pharma segment, although this has been muted in part by lower consumer segment performance
• Pharma segment performing well with sales +9.3%, but came below expectations due to covid vaccine sales and Xarelto performance
• Oncology (Darzalex gained market share), infectious diseases (covid vaccine), neuroscience and immunology (Stelara growth for Crohn’s) all positive growth, but cardiovascular negative growth (Xarelto pricing)
• Consumer segment: +0.8% organic growth
• Growth in over-the-counter medicine (Tylenol & Motrin) and women’s health (restocking & price increases) but weakness in skin health/beauty (supply chain issues), oral care, wound care and baby care
• Inflation has the biggest impact on this segment
• Medical Devices: +8.5% organic sales growth is showing good signs of improvements, with the omicron variant having a lesser impact than expected
• Growth in all sub-segments thanks to covid impact recovery
• Strength in this segment is a positive for our other medical devices names (SYK up on good news)
• Impact from China lockdowns will continue in April and May
• Recovery is helped by procedures being done more often in outpatient settings rather than hospitals, a move that the pandemic accelerated
• Diagnostics volume is now in line with pre-covid levels at the end of March
• Focus on adding to this segment through M&A is possible

 

• 2022 initial guidance:
• Revenue $97.3B-$98.3B or up 6.5% to 7.5% is maintained from January guidance but now excludes covid vaccines sales
• Guidance for vaccines is no longer provided due to supply chain (surplus) & demand uncertainty
• Pharma: above market growth continues, consistent throughout the year
• Medical devices: continued recovery expected, with prior launches to help
• Consumer health: supply chain constraints continue in 1H22, improvement in 2H
• 50bps operating margin expansion (no change to guidance)
• EPS $10.60-$10.80 represents 8.2% to 10.2% growth y/y

 

 

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: $242                Price Target: $255 (NEW)  

Position Size: 2.48%              1-Year Performance: +4.3%

 

• Total company sales +7.7% with both segments doing better than consensus
• Beer sales increased by 14% (pricing +3.5%)
• Beer shipment volume growth of 9.9% was above consensus and on top of last year high volume of +15.9%
• The company is building this coming summer inventory level at the distributor level
• Wine & spirits grew +5% organically, driven by high end portfolio (pricing +7.5%), but overall sales -6.9% due to divestitures. The company is adding ready-to-drink cocktails to the portfolio.
• Hard seltzer: still an opportunity although the market changed faster than they anticipated. They see growth going forward (change of tone from last quarter there…). They are reworking the packaging.
• Consumer consumption on-premise (outside the home) is strengthening but somewhat uneven, while at-home remains resilient
• The company’s focus remains on higher-end price points both in beer and wine & spirits

 

• Beer operating margin improved thanks to higher pricing and lower advertising expenses, expanding 240bps for the beer segment – in an environment that has most companies seeing shrinking margins due to high costs.
• 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 expanded by 280bps thanks to pricing & mix

 

• With share repurchase back on the table this quarter, STZ is focusing back on capital allocation in a way that make investors happy (rather than the Monster/STZ potential merger that wasn’t well received due to little synergies between the two). There has been talks about the share class change as well for the Sands family to swap their class B shares (carrying 10 votes each) into a class A share for a 35% premium, a move to alleviate the dual-share class governance risks. The move would cut the family control from 59.5% to 19.7%. Here’s the proposal from the family: “intended to enhance the attractiveness of the common stock to investors and to enhance the strategic flexibility of the Co.  for the long term and was not made in connection with or with the intention of facilitating any specific corporate transaction.”. The proposal would dilute the share count but allow a better governance rating and open the door to potential M&A discussions.

 

• Guidance for fiscal year FY23:
• Share repurchase of $500m in Q1 – with refocus on returning cash to shareholders
• Beer net sales +7-9%
• Beer margins to grow 2-4%, although we think this is conservative due to high inflation
• Wine & Spirits sales -1% to -3% and operating margin +4% to +6%
• EPS guidance of $11.20-$11.50 (+3.3% growth), but doesn’t account for all share repurchase that will/can be made during the rest of the year (only $500M in Q1).

 

• Valuation: trading slightly below peers and doesn’t look expensive vs. historical trend. Updated DCF gives us $255 after updating for the new fiscal year, and better top line in FY23 than previously thought.

 

 

 

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