Author: Julie Praline

Key Takeaways:

 

·         Sales and margins decreased were better than feared, thanks to recurring revenue base, resilient retail fueling business in North America (+MSD growth) and good performance at the recently acquired ASP business

·         Strategy of targeting recurring revenue base is proving its value: now 35% of revenue base is providing some stability

·         3Q sales guided to 5-8% decrease, and ~35% decremental margins

·         Vontier spin-off on hold until market conditions improve

 

Current Price: $71                Price Target: $78

Position Size: 2.14%            1-year performance: -7%

 

Fortive released its 1Q20 earnings last night, with core sales contraction of -16%, higher than the 20-25% decline projected by management in Q1. Decremental margin of 33% was also better (company was guiding to 35-40%) as sales exceeded plans and costs cutting action. Free cash flow has been resilient too, thanks to working capital management (+93% increase y/y). The company noted that their ASP elective surgeries business was back to 90% of pre-COVID levels in China, ~85% in Western Europe and ~85-90% in North America, and they had a great opportunity with the N95 respirator reprocessing. Matco (automotive hand tools) saw a direct impact from the stay-at-home orders but a bounce back once local economies reopened towards the end of the quarter. GVR (retail fueling business) was impacted by COVID (social distance requirement and lack of access to customer sites). This segment did well in the US and better than expected in W. Europe but saw significant pressure in India (lockdowns in place). On the positive side, bookings are up mid-single-digits in 1H2020, a good sign of upcoming sales if lockdowns lift near term. In its comments, the management team remains cautious on the 2020 outlook as the US sees increased COVID cases.

Overall, Fortive printed good results with margins impacted less than expected. Its strategy to acquire businesses with recurring revenues is showing its value by providing some revenue stability.

 

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

 

 

Key Takeaways:

 

·         Q2 organic sales -34% but still outperforming its end-markets (down 40%) and improving intra-quarter

·         Cash flow remains positive thanks to cost reductions, capex and working capital management

·         Liquidity is sufficient and we see no risks to trigger any debt covenants

·         M&A: acquired PRECO Electronics a leader in radar sensing solutions, as the company continues its push into autonomous vehicle/electrification trends

·         Q3 trend expected to see continued ramping up in auto production, although guidance is more conservative than industry forecast due to COVID-19 spikes in the US

 

Continue reading “Sensata 2Q20 earnings summary”

Key takeaways:

 

·         Orders remain robust with book-to-bill at 1.4x

·         Only modest F-35 supply chain disruption risks from COVID-19, with growth expected in the double-digits this year

·         Government support had a small impact on CF as the company accelerated its payments to suppliers

·         Door open for M&A – Jim Taiclet has a track record of M&A at his prior position at American Towers:

o   an interesting option if the defense budget declines with potential new president (which explains some of the recent decline in multiples from Biden advancing in polls – even though he has made no statement on his DoD budget intentions)

o   Commercial aerospace is not of interest to him

·         Committed to its dividend policy (HSD growth likely), while share repo halted until 2021 (mostly to offset dilution)

·         2020 guidance raised, now above January’s initial guidance:

o   Sales guidance increased by +2%

o   Segment EBIT, EPS and cash flow guidance increased by +5%

 

 

Current Price: $393        Price Target: $469  

Position Size: 3.53%      1-year Performance: +1%

 

Lockheed released its 2Q20 earnings results yesterday, with organic sales +12% (7% above consensus) in a tough environment, segment operating margins +20bps, and EPS +7% ex-one time impairment charge on the sale of a JV. Lockheed continues to impress with its organic growth, one of the best in the industry, while maintaining good liquidity and balance sheet (net debt/EBITDA at 1.1x – giving it flexibility for M&A). Book-to-bill (a measure of future demand) is still positive at 1.4x. The sales growth this quarter came from the F-35 and missile platforms, both having reached some scale with maturing production programs, leading to higher margins.

While guidance was raised, the “bears” argue it implies a slowdown in 2H. We would counter argue that LMT has a tendency of providing conservative guidance, adding to the list COVID-19 uncertainties and a new CEO. Regarding increased costs related to the COVID-19, the company is in discussion with the Department of Defense over a settlement, although this could end up being negotiated on a smaller scale with individual customers.

Overall this was a good quarter from the company, which we view as core to our industrial sector exposure. We remain overweight this name in Focused Equity.

 

 

LMT Thesis:

·         Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships

·         Excellent management team focused on returning capital to shareholders

·         Strong cash flow and financial position

    

[category earnings] [tag LMT] $LMT.US

 

 

 

 

Committed to dividend, does not expect any changes to that priority. HSD increased in coming Qs

Repos has a place in capital allocation but pausing near term. Has done ~$1B

 

 

 

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: $147     Price Target: $175

Position size: 2.52%     1-Year Performance: +12%

 

·         Guidance for the year raised (a reminder that it was lowered last quarter) as its medical devices segment bounded back quicker than expected:

o   Medical devices results -33% vs guidance of -50%

o   Operational sales growth of -0.8% to +1% (from -3.0% to +0.5% last Q but overall still down from its initial guidance of +5.0-6.0%)

o   EPS raised to $7.75-$7.95 (from $7.50-$7.90 last quarter but still down from initial guidance of $8.95-$9.10).

 

·         Pharma segment showed steady performance with ~4% organic growth

·         Consumer segment down (-3.6% organic sales) due to competition in Pepcid, lower beauty and women’s health sales (Covid impact)

·         Improving office visits trends within the quarter

·         Delay in its robotic surgery program, as it combines its recent Auris business acquisition with its Verb prototype, and is changing its FDA filing

 

Overall JNJ posted sales higher than expected as its medical devices segment recovered faster than expected. Organic sales overall were down 9% while earnings dropped 35% (due to medical devices segment earnings decline). But to tamper this good medical devices rebound news, JNJ now expects Q4 recovery to be lower than previously thought in April, with sales down 15% to flat in Q4 vs. 0% to +10% previously guided in April  (see chart below showing the evolution of guidance in its medical devices sales). The office visits improved during the quarter, recovering from a 70% drop to -15% decline in late June. JNJ said its vaccine is on track for a potential approval in early 2021 (human trials starting on July 22^nd) and capacity of 1B dose in 2021.

Overall we think the diversified business model of JNJ will help the company navigate today’s environment, while the management team reiterate its desire to find a vaccine for COVID-19 on a non-profit basis (positive company image/government discussion on other drug pricing maybe but no impact to bottom line).

 

 

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:

 

·         Diversified profile is proving its value: snacks/food growth helping offset some temporary beverages category weakness

·         No change from 1Q20: 2020 guidance withdrawn given COVID-19 uncertainties, dividends and share repurchases remain

 

 

Current price: $137                          Price target: $153  

Position size: 2.23%                         1-year performance: +1%

 

 

Pepsi released its 2Q20 earnings this morning. Organic sales of -0.3% beat consensus expectations of a 3% decline. Its Frito-Lay and Quaker Foods divisions experienced some nice volume growth (and some pricing in snacks), while beverages pretty much across the globe saw volume contraction due to lower on premise & convenience stores sales. For the year, margins might contract a bit from 2019 due to additional virus disruptions and investments in manufacturing automation and distribution systems. COVID related expenses were a 250bps drag on operating margins this quarter. Which mean that removing the COVID impact, operating margins would have improved 50bps y/y. Sales next quarter are expected to improve sequentially in the low single digits, which we view as positive given the current trend in COVID cases in the US (and we think the management team has included that into its guidance for the quarter).

During the call, the management team highlighted focusing on the following factors to assess the health of its markets:

 

·         #1 overall mobility in the country

·         #2 universe of stores that are opened (mostly in developing markets). They have observed that when the infection rate goes up in a developing country, there’s about 10% to 15% of the stores that close which drives a lot of the performance

·         #3 where do people eat most of their meals (at home/outside)

·         #4 income/unemployment/government help – no impact in the US yet but they have seen some impact in other countries

 

The e-commerce shift happened faster than they expected prior to COVID. To adapt, PEP worked with all retailers to keep its products in stock, favoring best-selling SKUs and eliminating smaller SKUs. Pepsi has also adjusted its delivery schedules. The company is not providing a 2020 outlook due to COVID-19 but has seen an improvement during the quarter in its business performance and channel mix. Overall we remain positive on Pepsi as a long-term holding in the portfolio.

 

Thesis on Pepsi:

• Global growth opportunity with about 40% of profits coming from outside the US. CSD is only 25% of sales (and Pepsi brand only 12%)
• Strong market share in high growth emerging markets where there is low penetration and rising per capita consumption
• Resilient snack business provides pricing power and visibility to future cash flows (more than half of sales are from snacks not beverages). CSD is only 25% of sales (and Pepsi brand only 12%)
• Several Great brands driving global growth: Frito Lay, Quaker, Gatorade
• Strong balance sheet and cash flows support a solid dividend yield and share buyback program

 

 

Tag: PEP

category: earnings

$PEP.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:

 

·         Consumer segment saw good growth this quarter on pantry loading, and demand is expected to continue

·         Food away-from-home category (20% of sales) impacted by restaurants/food services closed, and recovery will be difficult in 2020

·         Margins higher on mix and cost cutting

·         Raising our price target on better consumer trends expected for the rest of the year

 

 

Current Price: $177           Price Target: NEW $191 (prior $162)  

Position size: 3%                1-Year Performance: +17%

 

 

McCormick reported results better than expected, with sales up 9.6% ex-FX thanks to its consumer segment (+26%), offsetting weakness in its flavor solutions segment (-18.5% due to struggling restaurants/food service). This quarter includes the initial pantry loading in the Americas and EMEA, and replenishment in China. The shift to at-home consumption continued throughout the quarter, and is expected to see incremental demand throughout the year. Although the company is still not providing a 2020 guidance, it reaffirmed its long-term goals and gave some expectations around demand in its 2 segments. The management team believes the packaged food companies will return to pre-crisis levels, while food away from home – 20% of sales – will experience a harder time bouncing back. Consumers will continue to cook more from home in 2H2020 per their expectations. As noted last quarter, MKC is reducing some expenses and delaying some programs, which resulted in a 210bps increase in its operating margin, on top of the higher margin Consumer segment growing faster that its lower margin Flavor Solution business. We are raising the price target to account for better results than expected and lower discount rate in our DCF. The stock is up +56% since it bottomed in March this year.

 

 

The Thesis on MKC:

•          Industry Leader: McCormick & Company (MKC) is a leading manufacturer of spices and flavorings. MKC has been in business for 120 years and the founding family still has ownership interest

•          Growth opportunity: Spice consumption is growing 3 times faster than population growth. With the leading branded and private label position, MKC stands to be the biggest beneficiary of this global trend

•          Offense/Defense: MKC supplies spices to major food companies including PepsiCo and YUM! Brands giving it a blend of cyclical and counter-cyclical exposure

•          Balance sheet and cash flow strength offer opportunities for continued consolidation through M&A in the sector

 

$US.MKC

[tag MKC]

[category earnings]

 

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

 

Key Takeaways:

 

·         Quarterly sales decline 25% as April included in the quarter

·         US has a 33% decline in April sales while China -21%, improving from its -46% in February/March

·         Margins impacted as company continues to invest, contrary to other medtech firms

·         Cash position is robust, dividend increased

 

Current Price: $97                               Price Target: $121   

Position Size: 2.91%                           TTM Performance: +3.5%

 

Medtronic released their 4Q FY20 results last week. Organic revenue was down 25% as the pandemic diverted healthcare resources away from elective procedures and bulk purchases. The decline in revenue impacted earnings as well, with non-GAAP EPS down ~63%. Margins have been compressed from COVID related expenses, and mix shift towards lower margin products and an increase in China tariffs, but also because it is not lowering salary expenses.

Since Medtronic’s fiscal year doesn’t follow the typical calendar year, their latest quarter includes April, which corresponds to the beginning of the pandemic in the US (48% of sales) and Europe (vs. other medtech names that ends their quarter in March, thus only 2 weeks of the crisis). This gives us some insight into the impact of the virus on sales in developed countries in April (Q2 for most companies) : in April the US showed a 33% decline, Western Europe 32%, and China 21% – China was an improvement from the -46% in Feb and March. A reminder that emerging markets represents 15% of total sales.

In terms of capital allocation, Medtronic will continue to focus on smaller deals (~$1B in size), which should limit the need to issue additional debt. Its cash position is strong (~$11B in cash), no near term debt maturity due and access to $3.5B credit facility.

Regarding expectations for next quarter, it should be slightly worse than Q4 as they will have a full quarter impact of procedures deferrals. The company is not cutting back on investments, hoping to be on the offense. The management team is not providing a detailed FY21 guidance at this point, only that it is expecting a recovery beginning in the second quarter of its fiscal year. We think that Medtronic’s diversified products (especially Respiratory and patient monitoring, as well as life support) should help the company weather the crisis. Near term, unlike others, the company chose to not cut back on its sales team salary as it wants to gain share once the COVID-19 crisis eases (which explains the great deleverage on the EPS line).

Today we see the decline in sales priced in the stock, and the cash position makes us comfortable that Medtronic remains a low-risk, with room for some M&A.

 

 

MDT Thesis:

·         Stands to benefit from secular trends (1) increased utilization from Obamacare (2) developed populations age

·         Strong balance sheet and cash flows. Increased access to non-cash should allow MDT to meaningfully increase their dividend

·         6% normalized Real Cash yield provides solid total return profile over next 2-3 years

·         Ownership interest aligned. Management incentivized to maximize shareholder returns – 14% 10yr average ROIC

Category: Equity Earnings

 

Tag: MDT

 

$MDT.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

 

 

Happy Friday!

 

Below are a few quotes from CEO/executives that came out during this earnings season that we think are helpful to frame themes that have emerged.

 

Have a great weekend,

Julie

 

Xylem (XYL)

Industrials, Machinery

Theme: changes in the work place

 

CFO Mark Rajkowski said “we all recognize in this world that we’ve learned the hard way all of us to be able to do a lot more with less. And that’s all factoring in to our thinking on what the permanent structural changes will be. So more of that to come in our next earnings call.”

 

“Our teams [are] working through what life looks like after the pandemic, where those meetings have changed, a lot of it is virtual, a lot of it is less people than previously done.”

 

Xylem (XYL)

Industrials, Machinery

Theme: China returning to pre-pandemic activity

 

CFO Mark Rajkowski said “you’re now seeing us return to utility activity and quoting bidding activity that returned to pre-COVID levels in China. So that’s an encouraging sign that our teams have seen”.

 

Sensata (ST)

Industrials, Electrical Equipment

Theme: greater use of individual cars at the expense of public transportation

 

Paul Chawla, Executive Vice President, Automotive said: “We’re monitoring a potential trend where consumers now post COVID could be using less public transportation and prioritizing again an individual means of transportation.”

 

Honeywell (HON)

Industrials Conglomerates

Theme: greater use of individual cars at the expense of public transportation

 

CEO Darius Adamczyk  said “this is sort of an educated hypothesis is that I actually think the use of automobiles and personal vehicles is going to go up, not down. I think that there is going to be resistance and by the way, this is something we have seen in China… this is something we’ve seen, where the use of personal vehicles is going up, not down after the reemergence. So, I actually think we’re going to see that and the use of mass transit’s going to reduce”

 

 

 

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

 

 

As we discussed this morning during the RM/PM/Research meeting, here is a summary of the themes we have observed this earnings season:

 

1.       Some of the hardest hit industries:

o   SMB’s & highly levered, weaker balance sheet companies. Seeing a consolidation of strength w/ market leaders that could continue

o   Retail, restaurants, travel & entertainment. Companies are saying we may not see a return to pre-crisis levels until vaccine. (BKNG, DIS)

o   Auto – auctions are shut-down. Could see big fall in used car prices

o   Medtech with large portfolio of elective surgeries (such as knee replacement, etc.) as patients and doctors delay non-emergency surgeries

o   Airlines and aerospace: the lockdowns have destroyed demand for travelling by plane, and a return to pre-crisis could take  up to 2 years

 

2.       China:

o   ZTS: China seeing a rebound, and seeing an improvement in US and Europe clinic visits recently

o   XYL: China showing signs of early recovery

o   FTV: China recovering, plants operating at 80% capacity

o   SYK: expect recovery in China in Q2

o   ST: China pointing to recovery

o   Visa:  Hong Kong dropped in early February, along with the rest of China and appears to be recovering in April

o   DIS: Shanghai Disney opened yesterday @ 30% capacity

o   SHW: “We have started to see some recovery in China at a slower pace than anticipated.”

o   Uber said HK is now at 70% of pre-COVID levels

o   AAPL: Supply chain is back to a normal operation. Apple stores open

o   Moving supply chains? Apple defended current structure but wouldn’t rule it out

 

3.       Europe:

o   Europe worse than expected (XYL)

o   Region was already challenged before COVID-19 hit, not activity is worse (FTV)

o   SHW, BKNG talked about weakness. Visa saw the biggest negative impact in central and southern Europe with similar declines as the US

 

4.       How companies adjusting to current environment…

o   Pull forward of digital transformation (MSFT, ACN, ADBE, GOOGL, AAPL)

o   Improving bandwidth/connectivity (CCI, CSCO)

o   Conserving cash

o   Cost cutting

o   Sales team transitioned to virtual sales meeting with doctors and training, and think this could be the new normal (SYK, BKI)

 

5.       How consumers adjusting to current environment…

o   Use of telemedicine and home deliveries of prescriptions (CVS)

o   Could see people using more individual cars rather than public transportation due to COVID-19 change in habits (ST)

o   The management team believe this crisis will accelerate the need to monitor patients remotely (RMD)

o   Utility sector looking for remote sensing and automated operations (XYL)

o   People eating cheaper protein (chicken instead of beef) ZTS

o   WFH/distance learning – likely to continue after the pandemic. Positive implications for the technology that supports this and negative for real estate and travel. (GOOGL, MSFT, AAPL, CSCO)

o   E-commerce – Increase in online spending especially on essential items. Less so on discretionary items. Companies establishing an online presence that didn’t have one before leading to increased e-comm. competition. (V, HD, SHW, TJX, GOOGL, ADBE)

o   Entertainment – Increase in streaming & gaming. (AAPL, GOOGL, DIS)

o   Housing & home improvement – seeing underlying strength in housing, nesting benefiting home improvement. (SHW, HD, BKI)

 

6.       Be careful extrapolating current consumer behaviors into the future

o   Discretionary…trends exaggerated like streaming, gaming, e-comm

o   Staples… shouldn’t extrapolate that center of store food will make a comeback or that cleaning products will be a bigger part of people’s budget

 

Thanks,

Sarah & Julie

 

 

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

 

 

 

 

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:

 

·         COVID-19 is having a positive impact on CVS’s various businesses: greater use of 90-days prescriptions, more purchases made in front of store (in March), lower elective surgeries performed (April) benefitting Aetna’s costs

·         Telemedicine and home delivery saw a sharp increase

·         Liquidity is sufficient and the dividend is maintained

 

Continue reading “CVS 1Q20 earnings summary”