Author: Julie Praline

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

 

Key Takeaways:

Current Price: $81                          Price target: $120

Position size: 2.66%                      1-year Performance: +7%          

 

• Core sales +20.5% missed the street estimates due to FX impact, lower reimbursable expenses and faster wind down of some covid projects. The positive side of this is better profitability as mix improved.
• Total sales $1,373M vs estimates of $1,407M
• Clinical trials new business awards grew 17.5% à book-to-bill now 1.34X (above 1X is positive for future growth) which is stable y/y although a slight decline from Q3
• Clinical revenue +20.7%

 

 

 

• Commercial net new business awards grew 25.6% à book-to-bill 1.15X has improved y/y
• Commercial sales +19.8% y/y

 

 

• Gross margin contracted by 20bps y/y
• Adjusted EBITDA margin of 17.3% grew 20bps, where higher than consensus of 16.8%
• Operating margin contracted 10bps y/y
• Adjusted EPS of $1.48 beat consensus and was up 33% y/y
• Free cash flow was $159.1M, growing ~55% y/y
• Net leverage stands at 3.6X, lower from 3.8X 6 months ago and within their target range of 3.5-4X

 

2022 Guidance in line with expectations:

• Revenue growth of 7.4% – 10.3%
• Adjusted EBITDA margin 15% – 15.3%
• Adjusted EPS $4.98-$5.24 (+11.7% to +17.5%)

 

Why is the company seeing lower reimbursable expenses since the start of the covid pandemic?

• lower travel expenses for SYNH staff, due to sustained levels of remote monitoring
• investigator meetings remaining virtual
• reduce costs for study medications

This trend is expected to continue and as such, SYNH is changing its backlog reporting, which has no impact on demand or profitability, but a reflection of how business is done.

 

Competitors have released earnings earlier than Syneos, mentioning some weakness in SMID biotech funding. Syneos does not expect the same level of weakness, as their customers have incredible levels of funding (through private equity for example). They also have a solid RFP flow, a good predictor of future demand. The Syneos One offer is also very attractive to smaller companies who do not want to build a whole commercial structure.

 

CEO quotes from the call:

• “we see great strength in the SMID at the moment, we’ve seen that across both kind of ends of the SMID as well, the emerging biotech, as well as the more mature larger customers in the SMID that we’ve kind of do the majority of work”
• “We are proud of the the progress we have made over the past several years as we have continued to evolve our business model by developing innovative integrated offerings enabled by data and technology to position our business for long-term growth. Dynamic assembly investments that are fueling growth include Kinetic, our modern customer engagement capability and the expansion of our DCT solutions through Illingworth and study kick. Specifically in our clinical business, we’ve expanded our digitally enabled delivery and response to the pandemic, which catalyze the rapid deployment of decentralized trial capabilities and drove greater acceptance of these methods by regulators, customers, sites, patients.”
• “While these innovations streamline the clinical development process for our customers, they also result in a lower mix of reimbursable expenses, a dynamic that we now expect to have a lasting impact on our revenue profile.”
• “our commercial solutions business continues to demonstrate strong performance, with our full-service approach resonating with customers and the Syneos portfolio beginning to achieve commercialization milestones, resulting in 19.8% revenue growth. With deployment solutions ending back while growth of 20.9% for 2021, our commercial business remains well, positioned for low teens growth in 2022. T

 

In addition to Syneos One, the company is developing a very interesting business, helping customers with an integrated offering. We think this could help retain relationships with customers, especially smaller biotech firms who might not have the internal capabilities to navigate the complex landscape of drug development/approvals.

“We recently introduced a full-service medical affairs offering, […] Similar in concept of Syneos One, this unique approach combines our medical affairs capabilities from across all parts of our business, into an integrated offering, connecting our real-world evidence, health economics, outcomes and research, medical science liaisons, medical communications, and specialized consulting disciplines. Today, customers have had limited access to medical affairs outsourcing alternatives, which are growing in importance as better evidence is required to ensure relevance with payers providers and patients.“

 

ESG developments: recent commitment to net zero emissions by 2040 and participation in the human rights campaigns corporate equality index.

 

Overall we remain confident in Syneos to continue to grow, and take shares from competitors as they offer more than clinical trials, with commercial efforts and medical affaires options. We think the stock is down on readjusting the top line profile as the mix of reimbursable expenses adapt to remote monitoring – but which ultimately is a benefit to the industry: more patients enrollment, higher stickiness of patient profile, lower cost for biotech/pharma companies to run trials.

 

Investment Thesis:

I. Secular growth:

1. Increasingly sophisticated and highly-regulated environment with government increasingly focused on drug pricing à biotech and large pharma need to reduce fixed costs
2. Growing research and development (R&D) spending environment:
• Growing portion of R&D outsourced to Contract Research Organizations (CROs)
• Pharma/biotech clients choosing fewer & higher quality CROs (expertise and scale)
3. Syneos has robust backlog predicting good growth for next 2 years
• Recovery in clinical trials post-covid

II. Competitive advantages:

1. Only company integrating clinical trials (Contract Research Organization -CRO) and commercialization solutions (CCO):
• Offer customized solutions and possibility to lower time to market
2. Top 3 market share within fragmented CRO market
3. Global scale – allows to compete for larger trials, with expertise in complex diseases
4. Diverse client base (large to small pharmaceuticals)

III. Attractive valuation: 45% upside

• Driven by secular growth drivers and margin expansion

 

$SYNH.US

[category earnings] [category equity research] [tag SYNH]

 

 

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:

 Share price: $198                    Target Price: $227  

Position size: 2.22%                TTM return: +18%

 

Zoetis released earnings this morning that were slightly above expectations. Overall sales were up +9%, driven by Companion Animal. This segment continued its solid trajectory with +21% sales growth led by Simparica Trio, key dermatology products and pain medication (Librela/Solensia). Librela is now the #1 pain medication for pets in Europe – a title earned in its first year of launch. Regarding competition in its recent successful launch of Simparico Trio, this is not expected until next year. The recent rise in pet adoption due to the covid pandemic continues to be a tailwind for ZTS. As for dermatology drugs, ZTS estimates 6 million dogs untreated in the US alone, due to lack of awareness by dog owners…any new competitors would help raise understanding of this condition. Livestock declined 6% due to generic competition for Draxxin (similar to last quarter). For this past segment, the management team remains optimistic, targeting a return to mid-single-digit growth in FY23, thanks to international markets exposure. Gross margins helped up well in the face of inflation (69.6% or up 170bps y/y), although SG&A spending came higher and offset some of it. Regarding pricing power, ZTS increased prices by 1% overall in 2021, with the same rate expected in 2022. Pricing is easier to raise in companion animals with leading & innovative brands, while drugs facing generics competition is harder to increase. Overall, ZTS expects price increases to help offset rising inflation.

 Guidance for 2022:

• Revenue growth of +9-11% is respectable especially after a +15% growth rate in 2021
• Operating margin to expand modestly as the company plans to invest behind growth drivers
• Adj. EPS guidance of $5.09-$5.19 is below consensus of $5.21, but this looks to be due to higher FX impact

            

Zoetis investment thesis:

·         Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented

·         ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs

·         ZTS is growing above the industry rate and has proven resilient throughout economic cycle

·         Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013

·         Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability

 

$ZTS.US

[category earnings] [tag ZTS]

 

 

 

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

 

Following a tumultuous week in industrials, I wanted to add some colors on why we are underperforming in our Select Equity industrials portfolio and some actions we are taking:

 

• Adding 50bps each in HON and XYL from cash/IVV: long-term thesis and drivers are still in place; we expect to see a recovery in aerospace (HON) and continued spending by utilities towards clean water across the globe (XYL). Recent supply chain issues are temporary.
• Both should see their multiples expand as they see base business recover from recent turbulences & monetize their growing software offerings over time
• On a DCF basis, HON and XYL have the most upside from current levels

 

Why is our Industrial sector underperforming?

• Highly cyclical names have outperformed since early 2021 (airlines / construction)
• We don’t have highly cyclicals names in industrials portfolio
• XYL, ST, FTV and HON are high quality names with good growth drivers

 

• “green” stocks have underperformed (after outperforming in 2020) – in part due to:
• Rising interest rates (inflation) means higher cost of doing business for non-profitable businesses is tough to weather (think solar/renewable energy companies)
• Investor getting out of those names into more cyclical companies: I think XYL was thrown out with the bath water – our worst performer YTD in Industrials
• Multiple contraction & delay in transforming orders into sales due to supply chain issues

 

• Defense names have done better due to Russia/Ukraine fear. Reminder that LMT top line and FCF profile is not as attractive as it was pre-2021: expect top line decline in 2022 and low 2% growth in 2023 with FCF drop in 17% drop in FCF in 2022 and 2% growth in 2023…not exciting

 

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: I recommend trimming CVS by 1% following a strong year of performance. FY22 should see lower FCF (some pull forward into 4Q21) due to lower covid-19 positive impact on pharmacy, so I prefer lowering our active exposure. We are adding the proceeds to SYNH where I see higher upside, after a pullback in the name YTD.

Current Price: $105                            Price Target: $118

Position Size: 2.65%                          1-year Performance: +50%

CVS reported 4Q21 earnings this morning with EPS largely ahead of consensus, up 52.3% y/y and revenue growth of 10.6% reflecting growth across all segments. Health Care Benefits grew 10%, with medical memberships growing 1.7% (driven by government contracts up 7.7%). Pharmacy services grew 8.2%, thanks to 8.2% growth in claims, specialty pharmacy (+12%) and brand inflation. The Retail/Long-term care segment grew 12.7%, helped by front store volume growth & covid-19 vaccinations/testing, while reimbursement pressure continues. Their retail pharmacy market share (based on total scripts) grew 60bps y/y (now 26.7%). Overall CVS benefitted from the Omicron surge as Q4 saw strong vaccine & testing demand ($1.2B in sales in Q4 alone), which we don’t expect to continue at this time. On the other side, a reduction in sickness will help their Health care benefits segment with lower expenses.

Regarding the civil investigative demand received January 2022 from the DOJ on pharmacy practices around opioid prescriptions, CVS defended itself by saying they were filling up prescriptions written by doctors…

CEO quote: “our stance here is very similar to where it’s been all along. Our fundamental position is that these prescriptions were written by doctors, not pharmacists. We did not manufacture or market these. And the healthcare system does rely on pharmacists to fill legitimate prescriptions that doctors are deeming necessary. So, based on that, we strongly disagree with the recent Court decision in Ohio. And we look forward to appeal a Court review of that case. And I’ll remind you there that was a ruling on liability only, not on damages”

 

FY22 guidance update from December investor day since we now have 2021 numbers to compare:

·       Revenue growth 4%-6%

·       Adjusted EPS $8.10-$8.30 (consensus at $8.27)

·       CFO $12-$13B – was reduced by $0.5B from previous guidance on the lower end due to timing of collection in 2021 from 2022

CVS expects COVID-19 vaccine volume to decline 70-80% from 2021 levels and covid testing to decline 40-50%, not surprising as we move further away from the pandemic into an endemic situation. This assumes no 4^th booster shot to be done.

CVS will be adding another business to its portfolio over time, adding primary care groups through M&A. The CEO is looking for regional or national groups who can handle the complexity of Medicare patients. CVS will be looking for teams to add that have a solid management team that they can retain through the merger, with a clear pathway to profitability. And while primary care is their focus right now, home health follows on the list of potential adds over time.

 

 

Thesis on CVS

• Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.
• Aetna acquisition makes it vertically integrated.
• Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.
• shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)

 

$CVS.US

Category: earnings

tag: CVS

 

 

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: $90                     Price Target: $114 NEW  

Position Size: 2.63%                 1-year Performance: -8%

 

Xylem reported its 4Q 2021 earnings yesterday. Organic revenue declined 3% due to delays from supply chain impacting the Utilities end market. Organic orders were up +23% and backlog up +55%. On the margin front, inflation had a 560bps negative impact, while productivity added 310bps and pricing +200bps. The global chip shortage will continue to impact their business, especially the highest margin digital products business (microcontrollers – difficult to substitute), which is embedded in their 2022 outlook. Their secured chip supply is only 50% of current needs, but we should expect this to improve to 75% as we move through the year. So far Xylem has not experienced cancelled orders due to delay delivery, and end-markets demand remains healthy. A sign that the management team sees this disruption as temporary is the increase of their dividend by 7%. While we understand why the stock traded down on the soft (and prudent) guidance, we don’t think the long-term story has changed, and we like having exposure to the “clean water” theme in our portfolio. We reduced the price target a bit to account for risks in the supply chain/chip recovery timing.

 

Organic growth by end-markets:

• Utilities: -9%
• Industrial: +7%
• Commercial: +1%
• Residential: -4%

 

Organic growth by regions:

• US: -5%
• Emerging markets: flat
• Western Europe: +1%

 

2022 initial guidance:

• Organic sales +3-5%
• Water Infrastructure up mid-single digits
• Applied Water up mid-single digits
• Measurement & Control flat
• Adjusted EBITDA margin -100bps to flat

 

 

 

 

Xylem’s investment thesis is:

 

• Xylem has strong sustainable secular growth drivers in a fragmented industry:
• Access to clean water is a necessity
• Population growth & urbanization
• Aging infrastructure

 

• More defensive sales base thanks to:
• 50% of sales to utility sector
• sticky client base due to high switching costs
• high level of replacement parts demand
• Long-term contracts with ½ of the revenue base recurring

 

• Margin expansion overtime from productivity efforts

 

• M&A strategy has increased their scope in the water cycle

 

• Valuation is attractive today

 

XYL.US

Category: earnings

Tag: XYL

 

 

 

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:

Overall we think the stock move yesterday was overdone, in light of results that were ok for 4Q (with miss due to delayed collection of sales) and FY22 guidance in line with long-term objectives. Fortive showed some strength in its business model, with the ability to grow operating margins in 2021 by 190bps while most companies suffered from inflation.

 

Current Price: $66                          Price Target: $88   

Position Size: 1.90%                       1-year performance: 0%

 

 

Fortive (FTV) reported 4Q FY21 earnings yesterday. Largely due to continued supply chain constraints and the unexpected surge of Omicron, FTV missed on revenue (+1% vs 4-6% guide due to delayed sales) although adjusted operating margins expanded 210bps to 24.4%, a good indicator of the company’s flexibility and pricing power, something they have always talked about but that we can see playing out during hard times.

• Organic revenue growth of +1.0% (+3.8% total growth)

o   Segments detail:

Ø  Advanced Healthcare Solution -0.8% organic (25% of revenue): Consumables were down, yet seeing strong momentum from growth investments and pricing actions

Ø  Precision Technologies +2.6% organic (35% of revenue): Some shipment challenges hindered growth, but was outweighed by strong demand and orders

Ø  Intelligent Operating Solutions +0.8% organic (40% of revenue): Strong growth and momentum in orders, retention, and bookings

• Software-as-a-service grew low-20%: FTV is building scale and differentiation with its software offerings: bookings were up over 100% with continued strength in improved up-selling, cross-selling, and adding new customers. Expecting revenue to grow to roughly $950M in 2022.
• Adjusted operating margin 24.4%, +210bps: strong software demand, continued evolution of products, the acquisition of Provation, and robust expansion across all segments helped increase operating margin
• Even with continued supply chain constraints, management is expecting strong, sustainable organic growth and margin expansion due to high customer demand, secular tailwinds, and record backlog
• Maintaining capacity (~$5b) for M&A activity over the next 3 years – increasing assets increases FTV’s value proposition and positions within each segment

 

2022 guidance updated: expecting supply chain constraints to continue, but continued strengthening of orders, price realization, and software growth will help to more than offset disruptions

• Organic sales growth 5.5-8.5%: Fortive expects ramping up from ~3% in Q1 to ~10% in 4Q, with strong order book giving some assurance there. Recurring revenue are expected to be a bigger part of the mix, going from 38% in 2021 to 40% in 2022. Total sales growth guidance of 9-12%
• Adjusted gross margins of ~59% at the mid-point (from 57.4% in 2021)
• Adjusted operating margins at 24-24.5%, expanding 90-140bps from volume recovery, pricing action and continues performance initiatives
• 2022 guidance for adjusted EPS $3.00-$3.13, up 9-14% y/y
• Anticipating strong free cash flow (20% FCF margin), with ~25% growth expected this year

 

Where could they outperform? I think their assumptions on the healthcare sector is conservative (no growth in elective procedures in 2022 from 2021). Supply chain constraints could ease faster than expected (they expect constraints throughout 2022).

 

Aside from earnings results, Fortive has provided an update on the ESG front. Overall data provided looks good vs. peers especially on the emissions reduction targets and diversity (board, supplier program).

 

 

Thanks,

 

Julie & Micah

 

 

 

FTV Thesis:

• Market leader:
• Leadership position in most of the markets they serve
• Experienced leadership team
• Above industry margins with strong cash flows
• Quality:
• Estimated 2022 FCF yield ~5%
• Organic growth target of 1.5-4.5%
• 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
• Aiming to reduce GHG by 50% by 2025 (compared to 2017 levels)

$

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

 

Key Takeaways:

 

Current Price: $195                   Price Target: $280

Position Size: 2.41%                 1-year Performance: +0%

 

 

Honeywell reported 4Q21 earnings this morning. Organic sales were down 2%, with segments as follow:

• Aerospace -3% (commercial aerospace was positive but defense -18%). Defense decline was driven by semiconductor, labor and supply chain issues
• Performance Materials +2%
• Building -1%: decline due to supply chain issues but also lower project volume
• Safety -6% due to lower masks sales and Intelligrated contracts
• Supply chain issues reduced sales in Q4 by `150bps

Margins missed expectations due to Safety & Productivity segment margin decrease of 450bps y/y, although Aerospace (+140bps) and Performance Materials (+430bps) were strong.

 

Honeywell will have its Analyst Day in March, and we think they will provide more color on each segment’s growth drivers. Honeywell has many moving parts within its business, and we don’t expect all of them to go upward at the same time. It is reassuring to see Aerospace recovery (although below expectations).

 

CFO quotes:

• “the backdrop for 2022 does have a number of uncertainties in it, the ongoing global pandemic, continued supply chain constraints, accelerated inflation and labor market challenges”.
• “we continue to see promising signs of recovery unfolds as well as encouraging wins in our key markets”

 

 

FY22 guidance:

• Organic sales growth of 4-7% – with pricing of +4% (market leader indicator) – On the volume side: we think the lower end of guidance at 0% volume growth is disappointing – while 3% seems good at this point of the recovery
• The CEO commented on masks sales in light of guidance as a “bunch of noise” in the first half… overall for the year masks sales are adding 1% growth to top line
• “So we came out with a guidance that I think is fair. I don’t know if you want to call it aggressive or conservative, but it does assume a pretty good step-up in the second half, probably not inconsistent with some of those peers. But what none of us know, and that includes Honeywell and others is, exactly what will happen in the second half. So we’ve built in a ramp, but we also feel like it’s a ramp that can be met. So, we’ll — and we’ll adjust as we go through the year.”

 

 

 

• Operating margin is expected to increase 10-50bps (or 40-80bps if they exclude the Quantum computing investments) – this is reassuring to see expansion above current levels, although guidance came below consensus numbers as HON continues to invest in Quantum:
• Quantum computing (“Quantinuum”) should bring in $20m in revenue this year, with a target of $2B in 2026
• The stock is down today as FY22 guidance is lower than the already lowered EPS expectations. The $8.40-$8.70 guide implies a 4-8% EPS growth, below consensus. Most expected 2022 to see the start of the recovery from supply chain issues.
• FCF $4.7B-$5.1B, below expectations of $5.99B. HON continues investing in key growth projects such as Quantum, that will eventually bring in revenues.

 

Overall, this past quarter was soft, as expected from prior comments made by the company and 2022 guidance is embedding some uncertainties in supply chain recovery in 2H, as should be. However, we still think Honeywell long-term thesis is intact, and would take advantage to today’s weakness and add to the position in accounts with a lower position than the model.

 

 

 

 

 

Investment thesis:

 

Secular growth drivers:

A/ Aerospace segment recovery near-term, remains long-term growth driver

1. Air travel recovery
2. Defense exposure provides stability

B/ Tech within Industrial: leveraging its industrial base to build a connected software platform creates a leading market position & increase resiliency across market cycles

1. Quantum Computer
2. Connected Enterprise
3. Automation / integrated supply chain
4. Digital/Cybersecurity

C/ Sustainability focus: increasing demand from customers for solutions that enhance sustainability

1. Sustainable fuel
2. Electric/hybrid aircrafts – partnership with various OEM
3. Plastic recycling
4. Sustainable Buildings

 

Tag: HON

category: earnings

$HON.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: I recommend adding to ST on stock weakness today in accounts that have a smaller position in ST. Long term thesis remains, with attractive long term secular growth drivers and attractive valuation.

 

Current Price: $56                   Price Target: $75 NEW ($61)

Position Size: 1.57%               1-year Performance: +4%

 

Sensata released their 4Q21 earnings report this morning: top line came above expectations, but guidance for margins in FY22 is below top line growth, not surprising considering the inflationary environment, but causing the stock to underperform the market today.

 

• Sales were +3.1% overall (-0.9% organic), with growth by segments as follow:
• Automotive organic sales -12%: ST outgrew the market by 520bps – revenue decline due to OEM production reductions (supply chain constraints)
• HVOR organic revenue +16% y/y: outgrew the market by 1,700bps
• Aerospace sales -1% with 790bps market outgrowth
• Industrials sales up +16% with 850bps market outgrowth – due to HVAC market recovery and launch of new products around electrification needs
• The electrification theme is a big growth driver for Sensata, with the potential to generate $1B in revenue in a few years, in areas such as electric vehicles, heavy vehicles, and clean energy demand

·       As forecasted last quarter, supply chain constraints were higher in 4Q vs prior quarters

·       Adjusted EPS grew 2.4% y/y

·       Net leverage ratio is 2.8x and expected to be 2.2X by year end

·       New buyback authorization of $500M. $48M of shar ebuyback was done in Q4

 

2022 initial guidance:

• Sales up +6% to +10% organically
• End market growth ~4% overall
• OEM production outlook for 2022:
• Auto production +7%
• The aerospace sector +7%
• Industrial -1%
• HVOR flat
• 90 bps impact on margin from increased R&D spending
• Higher labor costs and raw materials will impact earnings in FY22
• EPS $ 3.80 to $4.06 is $0.11 below the Street expectations

 

While FCF was lower this past quarter, we expect a rebound in the coming year as supply chain issues resolve themselves and demand for ST products continue to outperform the market. Below is a graph of Sensata revenue and FCF from 2016-2021 and 2022-2025 expectations -clearly on a growth trajectory from all the recent investments in growth areas (example: electrification of cars):

 

  

 

 

 

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