Author: Julie Praline

Current price: $66 Price target: $77

Position size: 1.67% 1 year performance: +14%

Key Takeaways:

Colgate’s 3Q19 organic sales growth of 4.5% (+1.5% pricing) was the highest in the last 3 years, although helped by easier comps (the truck drivers’ strike in Brazil last year had impacted them). Brazil and China saw a nice rebound from last year, but North America is slowing down, which is impacting gross margins, in addition to higher raw material and packaging costs. Colgate also spent more in advertising and marketing to help lift sales: competition remains tough, especially in toothpaste and manual toothbrushes. The segment that saw the best performance this quarter was Hill’s pet nutrition, up 10% y/y thanks to e-commerce and more natural ingredients. Their 2019 guidance was changed slightly, seeing sales growth between 3-4% (vs. 2-4% previously), but now expects a slight decline in gross margin (vs. slight expansion before). We remain confident the new CEO can continue to bring the company back to top line growth, and eventually margin expansion. Continue reading “Colgate 3Q19 earnings summary”

Current Price: $50 Price Target: $61

Position Size: 2.51% 1-year Performance: +9%

Key Takeaways:

Sensata released 2319 results, with sales contracting 2.7% due to weaker end markets. During the call, the management team commented on not seeing any auto industry relief near term, with the GM strike adding salt to the injury. However, the thesis on the name is still there, with content growth allowing ST to perform better than the industry it plays in. Its balance sheet is much stronger than it was a couple of years ago thanks to aggressive deleveraging, allowing the company to act on opportunities as they come.

Segments review:

· Automotive organic sales decline of -0.4%: in China, they saw an improvement over last quarter, but sales were still down. In North America, the sector still has positive growth, but they were impacted by the General Motors strike. The European auto market is still weak.

· HVOR organic revenue growth was -6.2% y/y: construction and agriculture end markets are incrementally weaker, experiencing inventory destocking.

· Aerospace & industrial: organic growth was -6.3%, worse than last quarter. China exports were weak, HVAC was impacted by lower demand of refrigerated trucks. Aerospace remains the bright spot.

Based on current market conditions, ST lowered its growth outlook for 4Q19. They also did a good job during the call at providing more details on future growth projects, for example the role they can play in helping fleet managers reduce downtime and become more efficient though the use of truck-to-trailer link and a telematics ecosystem (a $6B market). This is a place where ST can become a key data insight partner.

Continue reading “Sensata (ST 3Q19 earnings summary”

Current Price: $215 Price target: $240

Position size: 2.79% 1-year Performance: +36%

Key Takeaways:

Stryker released 3Q19 results with organic sales up +8.6%, a sequential decline – if you exclude 1% from the extra selling day – that bears are hanging on to. Pricing was somewhat negative across the segments this quarter, but made up largely by volume growth. The K2M salesforce integration is somewhat slower than expected, impacting the spine segment’s performance, but this should be resolved in the coming quarters. The operating margin improved 50bps y/y thanks to lower SG&A and R&D.

Results by segments:

· Orthopedics organic sales were up +8.8%. There were 51 Mako robots sold (vs. 37 in 3Q18), in spite of the competitive Rosa launch by Zimmer.

· MedSurg organic sales were up +8.8%.

· Neurotechnology and spine organic sales up +7.6%.

The management team reiterated their guidance for the year (7.5-8% organic sales growth), although seeing the higher end as most likely. Overall the thesis on SYK is intact. Continue reading “Stryker 3Q19 earnings summary”

Current Price: $69.9 Price Target: $86 (NEW – lowered from $91)

Position Size: 2.22% 1-year performance: -6%

Key Takeaways:

Fortive released its 3Q19 earnings, with core sales growth of 2%, thanks to high growth in its Industrial Technologies business, making up for weakness in its short-term cycle businesses. Retail fueling (gas pump upgrading to chip card reader) continues to be a bright spot globally.

The management team further reduced its 2019 guidance, lowering organic sales growth and EPS as macroeconomic trends are worse than expected and possibly could continue into 2020. We are lowering our price target to reflect weaker sales in 2019 and possible continued slowdown in early 2020. Overall we think the long-term thesis around increasing SaaS as a % of revenue and moving away from cyclical businesses is still intact. Continue reading “Fortive (FTV) 3Q19 earnings summary”

Key takeaways:

Current Price: $192 Price Target: $226 (NEW)

Position Size: 2.52% 1-Year Performance: +15.5% (since inception 12/20/2018)

Constellation Brands released their 2Q FY20 earnings results this morning. While their beer performance was stellar as usual (+7.5% depletion), it was overshadowed by their cannabis investment. Canopy Growth proves to be more challenging, with close to $500M in losses this quarter, and STZ recognizing a $839M decrease on its equity fair value. This is not totally surprising as STZ ousted Canopy’s founder and CEO Bruce Linton this summer, being “not pleased” with Canopy’s results, announcing this summer that they needed 3-5 year to turn profitable.

The FY20 guidance of 7-9% beer sales and operating income growth was maintained, while its wine sales decline is now better at -15% to -20% (vs. prior -20% to -25%). The divestment of the lower-priced wines is now expected to close at the end of 3Q FY20, explaining why the adjusted sales and EPS guidance was raised slightly to account for a later divestment date than expected. Gross margins expanded 45bps.

We are excited to hear that Constellation is expanding its Corona line with the launch of a Corona Hard Seltzer next year (a high growth drink category). We are updating our price target to $226 to account for the sale of the lower priced wine & spirit brands (lowering FCF $).

Below is a picture of the new product (not yet released by the company – this was found on a blog…)

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]

$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: $167 Price Target: $174 (NEW)

Position size: 2.80% 1-Year Performance: +26%

McCormick released 3Q EPS that beat expectations with sales +2.2% (ex-FX), thanks to positive volume/mix in its Consumer segment: sales were +4%. Consumer operating margins expanded 250bps y/y, leading adjusted consolidated margins higher 160bps y/y. Their Flavor Solutions segment proved once more to be volatile quarter-to-quarter as sales were down 0.4%. The company had a warehouse transition to support its future growth which had a negative impact on sales as well. The management team raised the EPS guidance for the year to $5.30-$5.35 from $5.20-$5.30 but this is mostly driven by lower taxes as sales growth (ex-FX) was narrowed down to 3-4% from 3.5% and operating income from 8-10% to 8-9%. As the reduction in leverage is ahead of schedule, MKC announced being on the hunt for companies to acquire. The company is also expecting to spend more in advertising in the fourth quarter, an important season for the company with the Holidays and home cooking. While the quarter was good, we think the stock is reacting very well today (+7%) as the management team highlighted during the call that the growth in the private label category recently moderated significantly. The competition from private labels has been strong in the past years, so we see this as a good explanation for today’s move back to prior trading levels the stock reached this summer (the stock had been weak after a sell-side analyst downgrade in August). We are updating our price target to $174.

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]

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