Author: Julie Praline

Yesterday Constellation Brands announced a partial shut-down of its beer production plant in Mexico, a less drastic move than peers that have completely shut down their plants in the region. STZ is complying with the government’s order to shut down non-essential activities, but wishes to safeguards its environment and avoid irreversible damages to its operations. Ahead of the shut-down the company had accelerated its production of high-volume SKUs. On the bright side, STZ has nearly 70 days of finished goods on hand with 80% already on the US soil. Per the management team, this is enough to avoid near-term service disruption. As for the expansion plans derailment (recent vote by locals to stop the plant construction), STZ continues to have a dialogue with the Mexican government regarding its Mexicali plant and finding a satisfying solution. We believe STZ should be able to recover some of the money lost in the construction of the plant, as the Mexican government would not want to send the wrong message to other foreign companies about future projects in the country.

 

Regarding the latest quarter’s results, STZ performed better than expectations, with beer sales +8.9% (led by Modelo and Corona). Modelo Especial is now the #4 beer brand in the US. The introduction of their newest innovation (hard seltzer) is going well. There is no current guidance for FY21 as the macro environment continues to evolve with the COVID-19 lock-downs. But sales for at-home consumption are high (+24% in the 4 weeks ended 03/22).

 

We remain positive on the long-term story of this company.

 

Investment Thesis:

·         Adding STZ helps position our portfolio to be more defensive at this stage of the economic cycle

·         STZ is down ~20% YTD, giving us a good entry point

·         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

 

[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

 

 

Good morning,

 

We are buying Xylem (ticker XYL) with a 2% position using cash on hand (IVV). Please see presentation attached (not client approved). We will send out the one pager once it is ready.

 

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

 

 

Thanks,

Julie

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

·         FY20 guidance withdrawn, update should be done in June 2020 at the next earnings call

·         COVID-19 in China to have a negative impact on FY20 sales of 1-2%

·         More cooking at home and increased demand from packaged food companies, offset by decrease in demand from restaurants and food service sector

·         ERP system upgrade & some business transformation projects have been delayed (we mentioned this possibility in our debt level analysis earlier)

 

 

Current Price: $141         Price Target: $162 (NEW – to reflect lower 2020 results)

Position size: 2.81%        1-Year Performance: -7%

 

McCormick released its 1Q FY20 earnings results this morning. Organic sales were down -1.4% in the quarter, due to a ~28% decline in China’s Consumer segment. EPS declined 4%. As expected, the COVID-19 impact is being felt in their restaurant and food service end markets, while “cooking at home” and packaged food companies have seen an uptick in demand (pantry stocking). Because each regions MKC serves sees a different mix of end-markets and confinement orders, they cautioned investors from generalizing the sales drop in China in Q1 to the rest of the world for next quarter. The outbreak in China reduced sales by 3% and adjusted operating income by 10% in Q1, but China is less than 9% of company revenue, while away-from-home categories comprise 20%. The management team also withdrew its guidance for the year. As we thought they would, MKC is delaying some of its ERP implementation and business transformation. There is enough liquidity to fund current operations and financial needs so we believe the dividend is not at risk. The long-term thesis is still valid for MKC, even if near-term drivers to the business have shifted due to the coronavirus. We updated our price target to reflect a lower 2020 performance.

 

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

 

 

While we view medtech names somewhat immune to economic cycles and having low correlation to GDP growth, this time has been different, with names down 30-40%.

 

There are 2 reasons for this:

·         Hospitals shifting their focus on treating coronavirus patients rather than performing elective surgeries. Two states in the US have specifically asked their hospitals to stop elective procedures (NY and MA). We could see more states following the same path.

·         Patients also are choosing to delay their surgery out of caution.

 

This has also happened in China and Italy: at a conference, Zimmer Biomet noted a 85-90% decline in elective procedures in China during January and February.

 

While this is not great news, the long term thesis on our medtech holdings is not broken and we do not recommend to sell them.

 

 

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

 

 

The Mexican voted against Constellation’s plant development in Mexicali on fear it would use too much water (it had all the approvals/permits/testing done prior) but local groups pushed for a vote.

The stock is down 8% on the news.

The Mexican government will compensate STZ for the loss, but we do not know yet the terms, and if STZ will recover the $ it put in (total investment was to be $2.5B for the brewery to open in 2021). Constellation will now have to go look elsewhere for its expansion project. The Mexicali plant was being built to support future growth demand for its beer.

This does not affect the current production plant that is located elsewhere (see map).

 

I’ll send more news once the company communicates its next step.

 

 

 

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

 

 

We are trimming IBB by 50bps and allocating the proceeds to ZTS. Valuation for IBB did better relative to ZTS as IBB’s main holding is Gilead, a stock that has moved on the news it is developing a drug to treat COVID-19 (no proven efficacy yet). We want to take advantage of this relative strength and distribute it to a name we have a strong conviction will outperform over time.

 

 

 

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

 

 

I wanted to bring some clarification regarding the US-Mexican border closure announced by the US President: this only restricts tourism and recreation travel. Mexico has yet to instate broad containment measures and has kept airports open, saying a total shutdown would paralyze the economy and hurt the poor.

A reminder that this weekend the Mexicali population will vote on keeping the Constellation brewery plant open or not (on fear it consumes too much water).

 

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

 

 

The stock has held well in this turbulent market until today. A reminder that a small portion of Resmed’s portfolio is the sale of ventilators (Resmed sells a type of ventilator that can be used in hospital settings), but they mostly market sleep apnea/COPD respiratory masks and devices (different machines than ventilators).

 

Here’s a perspective on why the stock is moving so much today:

 

ResMed notes it has not seen sleep apnea demand materially affected to date by COVID-19 but it could still see a slowdown in new patient diagnosis. While a near term drop in new sleep patient setups is possible, we think the long-term thesis of RMD is not affected.

 

On the positive side:

AA Homecare has sent a letter to CMS on recommendations in light of  COVID-19, requesting delaying the implementation of the Competitive Bidding program for one year and suspending all audits to allow suppliers to  focus on emergency activities. This would be positive for ResMed if implemented but would have few implications for near term demand.

 

 

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

 

 

Sensata has traded down ~33% YTD due to car manufacturing disruptions from the coronavirus (plant closures globally and supply chain disruptions). Sensata’s new CEO announced yesterday that their own plants were functioning close to normal levels. A reminder that 60% of ST’s business is related to the auto end market, and ~17% of their sales come from China (~30% in Asia, 28% Europe, 42% Americas).

Continue reading “Sensata comments”

Good afternoon,

As portfolio managers are looking to rebalance portfolios, I would like to offer some options to consider:

Trim CVS: there is a risk until the elections later this year, so even with the pullback it had and cheap valuation, it might not bounce back like others once the market starts to recover

Add to:

ST: see note sent this am

STZ: see note sent this am

ZTS: stock weight has pulled back under 2%, and is below where we bought it initially.

 

 

 

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