Author: Julie Praline

Key Takeaways:

 

·         4Q19 results were better than expected

·         2020 guidance reflects conservatism due to current oil prices: greater focus on cost reductions and less so on oil production growth

·         Dividend increase of 30% reflects management’s conviction in their premium strategy. Even if oil prices dip below $40/barrel, EOG can cover its dividend without issuing equity

 

Continue reading “EOG 4Q19 earnings summary”

Key Takeaways:

 

·         Quarterly sales came below expectations but margins expanded

·         Management team qualified those items impacting sales as “one-time” events, however we see one of them as simple poor execution from the team

·         Coronavirus impact is not included in future guidance at this point

 

Current Price: $112.5                         Price Target: $121   

Position Size: 3.19%                           TTM Performance: +22%

 

Medtronic released their 3Q FY20 results yesterday, with organic revenue growth of +2.6%, a +90bps adjusted operating margin expansion and +11.6% adjusted EPS growth. While the organic sales growth was below expectations (+3.5% consensus), the operating leverage was substantial considering the top line miss. The management team highlighted a couple of one-time items impacting the top line: delays in client purchasing activities ahead of new products launch and the US & Canada ERP system upgrade affected products availability (problem resolved). In the US, their TAVR business grew below market as their sales team is taking longer to reach full productivity (new hiring in process to cover the 700 US centers performing TAVR surgery). We do not see this as a “one-time” item but rather poor execution from the company. In Diabetes, the US still faces challenges due to competition and patients waiting to upgrade their existing pump to the next-gen platform.    

The company is unwilling to quantify the impact of COVID-19 on 4Q, but noted a lower volume of procedures in China as patients avoid hospital visits and ~12,000 physicians & nurses were sent to the Hubei region to deal with the crisis. The impact of the coronavirus will be released on May 21 during the next call.

During the call, Medtronic’s CFO implied a 4% growth rate in FY21, below the current expectation of 4.9%, although they remain confident sales will reaccelerate into FY21 and FY22 from the disappointing 3Q.

Overall this quarter showed the difficulty for a company this size to keep all the balls in the air at the same time… this quarter some fell on the ground…

 

Updated FY20 guidance:

Organic revenue growth +/- 4% (unchanged)

Operating margin ex-FX +40bps

EPS increased to $5.63-$5.65 but does not include the coronavirus impact

 

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

 

 

The Financial Times has an article about the sales impact from the coronavirus. Adidas guidance is way worse than any other companies that talked about the impact during earnings so far, but we suspect it will not be the last one. As more info comes in, Q1 (and maybe beyond) could be pretty negative.

               

https://www.ft.com/content/473b1eeb-72a9-3da4-96bf-3f2e7e1e7b23

 

Companies: German sportswear makers Puma and Adidas, which generate about a third of revenues in the Asia-Pacific region, have warned of disruption in their business in China as they have closed stores there. Puma envisages a hit in the first quarter while Adidas notes an 85 per cent decline in business activity in the world’s second-biggest economy.

 

FYI China is 18% of sales for Adidas and 16% for NKE.

 

 

Key takeaways:

 

·         Performance in line with expectations, with broad based growth

·         2020 guidance slightly below consensus but most likely conservative

·         CAGNY conference (major consumer staples companies attending) is next week, where new products are usually presented

 

 

Current price: $146                          Price target: $153 (NEW)

Position size: 2.32%                         1-year performance: +28%

 

Pepsi released their 4Q19 earnings results this morning: +4.3% organic sales was above consensus of 3.9% and EPS of $1.45 was roughly in line with consensus of $1.44. As shown below, growth was broad based across segments and regions. The productivity initiatives made by CEO Ramon Laguarta seems to be working, and should sustain the 7% EPS growth targeted for 2020. The company continues to invest in its manufacturing, procurement and marketing. As discussed on the call, smaller packaging continue to have traction with consumers. To summarize an uneventful quarter, results were a reflection of the steady performance we can expect from Pepsi.

 

Segment details:

 

2020 guidance:

Organic growth of 4%

EPS of $5.88 (+6%) below consensus of $5.95

 

Tag: PEP

category: earnings

$PEP.US

 

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

 

 

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:

 

·         Quarter results were in-line with expectations

·         Simparica Trio launch on track, to contribute $150M to sales in 2020

·         Development of the labs/diagnostics portfolio should provide more growth in years to come, although the company spending money behind it now

 

 

Share price: $143               Target Price: $156

Position size: 1.54%          TTM return: +62%

 

This morning Zoetis released its 4Q19 earnings results that were in line with expectations, with sales growth of +7% (+9% organic) and EPS growth of +13% (mostly helped by lower taxes as expenses were higher). For the whole year, ZTS grew top line 10% (including 2% from the Abaxis acquisition) which is well above the 3-4% rate of the animal health market. Lately, ZTS added to its Labs/Diagnostics portfolio with another acquisition, a sign the management team is accelerating its strategy to be a top 3 competitor in the space that is showing a 10% growth per year. To support its growth plans, the company is spending more on direct-to-consumer advertising and increasing its sales force globally. Regarding the Coronavirus, the company sources some ingredients from China and possible ports closures could have an impact if it remains so for an extended period of time, however ZTS has adequate supply for multiple months. Another impact could be less pet owners travelling to the vet and/or less meat consumptions as the economy slows down, but it is too early to tell. One of the big drivers of 2020 is the expected launch of the Simparica Trio, which is expected to be 6-8 weeks after the regulatory approvals. We maintain a positive view of ZTS and see the thesis as intact.

 

Segment details:

Livestock: flat growth as the US saw a -3% decline while international grew 2%

Companion animal: +18%, thanks to 23% growth international and 15% in the US

 

2020 guidance:

Animal health market growth of 4-5% (higher than in 2019)

Revenue between $6.650 billion to $6.800 billion (+7 to +9.5% ex-FX)

Adjusted diluted EPS between $3.90 to $4.00 (+8 to +11%)

 

 

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

 

 

Key Takeaways:

 

·         Slow down continues in short-cycle business but had some stabilization in North America

·         The Fortive Business System (concept of continuous improvement) has proven its value with margin expansion despite the top line slow down

·         The filing for the IPO of Vontier is targeted for Q1 2020 but the management team wants to do things when time is right

·         We still see upside to the current company, but we’ll have to re-evaluate the stock once we get more information on the 2 entities later this year

 

[more]

 

Current Price: $78.5            Price Target: $86 (updated last quarter)

Position Size: 2.27%            1-year performance: +4.6%

 

Fortive released its 4Q19 earnings, with core sales growth of 0.4% (+14% reported due to recent acquisitions), a continuation of prior quarters slow down. But Fortive showed its strength in leveraging the business even with slower sales: margins expanded 60bps (+150bps excluding recent M&A) and EPS increased 13%. FCF also increased this quarter, up 17% y/y.

The short-cycle businesses continue to face a slowdown (Fluke & Tektronix) in China and Western Europe but North America is stabilizing. The retail fueling upgrade continues to grow in the US (with an October 2020 deadline to convert the stations to the chip enabled payment centers). Their GVR business is gaining traction in installing EV- charging stations in its legacy client base. And at Matco, new products introduction is driving sales growth in the MSD rate.

 

The management team introduced its 2020 guidance:

·         Core Revenue Growth (Y/Y): low single digits

·         Core operating margin: +50bps

·         Adjusted Operating Margins: ~22%

·         Adjusted Diluted EPS: $3.68 to $3.78 (+6% to +9%)

·         The coronavirus is expected to have a minus impact ($0.02/share) in Q1

 

By the end of 2020, Fortive will separate into 2 companies: Fortive (the industrial technology company) and Vontier (the retail and commercial fueling, fleet management, and automotive service and repair solutions). So far, FTV has accomplished the following steps towards the split: announced key members of the senior management team, launched the brand, and made progress against other significant milestones over the past few months.

 

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:

 

·         On track with its Aetna integration to become an integrated health-care solutions provider

·         Integration synergies ahead of initial guidance for 2019 and 2020

·         2020 guidance is underwhelming but most likely conservative

 

Current Price: $73                            Price Target: $90

Position Size: 2.35%                        1-year Performance: +10%

 

This morning CVS published its 4Q19 earnings results, beating consensus estimates as every segments provided positive results. CVS is going through a multi-year integration process of its acquisition of Aetna. While CVS’s CEO said the integration was successful during the call, the prior Aetna CEO made some noise earlier this month by saying he was being pushed out of the board and that the integration was “far from over”. So far integration synergies are ahead of the initial plan, so we’ll take that as a sign that things are progressing in the right direction. It will most likely take another year before we see greater leverage on the top and bottom line of the integration and offering of better solutions to clients. CVS will be

 

Segment details:

·         Pharmacy services: revenues up 6.2% thanks to higher claims volume although generics dispensing rate increased (lower prices)

·         Retail/Long-term care: revenues +2.5% due to higher prescription volume but reimbursement and generic pressure

·         Retail pharmacy: same-store-sales +3.2% with front store sales up 0.7% and pharmacy sales +4.1% (driven by continued adoption of patient care programs)

·         Health care benefits: year-end membership was in line with expectations

 

Initial 2020 guidance:

·         Sales up 2-3.5%

·         EPS of $7.04-$7.17 (consensus $7.15), a 3-5% growth y/y, but we would not be surprised to see this number go up as the year progresses

·         Integration synergies expected to be $800-$900M

·         Enterprise modernization expected to drive a benefit of $450-$550M

·         600-650 HealthHub locations by the end of the year

·         CFO of $10.5-$11B

·         Leverage ratio to be in the low 3x in 2022

 

 

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.
• 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:

 

·         4Q19 results were better than expected as content growth story continues (Sensata’s strategy is to grow the amount of sensors used in a car over time – by making more sensors that answer a manufacturer’s need to comply to changing regulations for example)

·         Coronavirus impact on 2020 results was clearly quantified by the management team, which lifted some concerns on the name

·         2020 guidance showed the power of the company’s strategy, even when end-markets show some weakness

·         Sensata is still attractively priced, with a FCF yield of 5.3%

 

[more]

 

Current Price: $50              Price Target: $61

Position Size: 2.10%          1-year Performance: +2.4%

 

Sensata released 4Q19 results, with organic sales contracting -0.8%, better than guidance and expectations, thanks to strength in its Industrials segment. Free cash flow was better than guided and in line with the prior year, reflecting a better conversion rate from net income. This past quarter, operating income was impacted by sales deleverage, some productivity headwinds and design & development investments. During the year, ST reduced its share count by ~5%, a wise capital allocation decision by the management team in times of high M&A prices and a stock price still attractively priced.

 

Segments review:

·         Automotive organic sales decline of -1%: Sensata outgrew this sector by 490bps, thanks to strong content growth in China (double digit growth), but negative impact of the GM strike in North America and softness of European exports to China

·         HVOR organic revenue growth was -2% y/y: Sensata outgrew this sector by 1190bps, thanks to content growth in China as OEM prepare for the implementation of the China VI regulations

·         Aerospace & industrial: organic growth was +1%: thanks to the double digits aerospace growth

 

The management team provided guidance for 2020 of -1% to +2%, reflecting the impact of the coronavirus on factory closures and supply chain disruptions ($40M sales impact and $20M operating profit hit that will not be recovered later in the year). Without this one-time (hopefully) event that is the virus outbreak, sales and profits would have shown a return to stable demand, which is what consensus was expecting. 1Q20 will be the weakest with -8% to -6% organic growth (Coronavirus impact). The management team assumes global auto market production to decline 5% y/y, China auto down 6% y/y, and the global HVOR market down 9% y/y.

 

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