Author: Julie Praline

Medtronic (MDT) 1Q FY20 earnings summary

Key Takeaways:

Current Price: $108 Price Target: NEW $115 (OLD $100)

Position Size: 3.27% TTM Performance: +15.7%

Medtronic released their 1Q FY20 results this morning, with organic revenue growth of 3.5%, a +90bps adjusted operating margin expansion and +7.7% adjusted EPS growth. Growth was broad based across the portfolio despite tough y/y comparisons, and with no issues impacting sales or margins. The next catalyst for the stock is the introduction of its new robot Hugo (general surgery) in the fall, a new insulin pump and a less-invasive heart valve, creating some excitement around new pipeline projects, and helping growth to reach a 4-5% growth in 2H20. We are updating our price target to $115 after updating our model for the new fiscal year and new guidance provided. We were previously worried competition was increasing and would negatively impact free cash flow margins but recent results shows the management team has been able to manage this pressure.

Updated FY20 guidance:

Organic revenue growth +/- 4% (unchanged)

Operating margin increase of 40bps (ex-FX)

EPS increased $0.10 to $5.54-$5.60 (+8-9% growth y/y) – some of the increase in EPS comes from lower interest expenses linked to the recent July debt refinancing

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

[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

#researchtrades adding to FTV, ST and CVS

Hello,

Based on recent review of the stocks, we are adding 50bps each to ST, FTV and CVS. The investment thesis of those companies are not broken, and we see opportunity for upside at these levels.

• ST: content growth is still intact, as sensor business is growing above auto market. Portfolio is also evolving away from auto into more secular growth areas

• FTV: the short-cycle slowdown is temporary, we think the evolution of their portfolio from recent acquisitions will provide greater stability

• CVS: Aetna merger is on track, and the PBM business is showing signs of recovery post 1Q. Rebate threat has diminished

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

CVS 2Q19 earnings summary

Key Takeaways:

Current Price: $57 Price Target: $90

Position Size: 1.64% 1-year Performance: -17%

This morning CVS published its 2Q19 earnings results, with EPS above expectations (an 11% beat) thanks to higher revenue and gross margins. Revenue was up 3.7%: pharmacy same-store-sales were +4.7% (comparable scripts were up +7.2% thanks to better adherence to taking medication) and front end same-store-sales were +2.9% (although 80bps of that was a shift in Easter holiday date y/y). On the PBM side, claims were up 4% y/y, a growth in volume that helped boost margins 9.7% y/y. Net new business is still negative (-$7.6B, on the loss of Centene and lower new contracts) but this result was better than the previously negative $8.7B provided at the June investor day. Aetna is performing well, with synergies expectations now to be $400M in 2019 vs $300-350M previously announced: formulary optimization and transition of functions happening faster than initially thought (such as consolidation of the mail operations and pharmacy). The management team raised its FY19 guidance to $ $6.89-$7.00 from $6.75-$6.90. Its 2020 EPS is currently $7, which appears conservative at this point. We believe sentiment around this name will improve as regulatory concerns dissipate and we gain more clarity on PBM business wins during the year. Continue reading “CVS 2Q19 earnings summary”

Sensata (ST) 2Q19 earnings summary

Key Takeaways:

Current Price: $47 Price Target: $61

Position Size: 1.88% 1-year Performance: -10%

Sensata released disappointing 2Q19 results, with organic sales of -1.6%, below management’s guidance of -1% to +2%. ST lowered its 2019 sales guidance by 3% due to lower end market growth assumptions in auto, HVOR and industrial. In 2Q19, the China auto industry was down 20% and European auto down 10%, much lower than anticipated. Despite weak top line, operating margins remained flat as the company actively managed its expenses and benefited from capital deployment initiatives. Additional actions are being put in place to align its cost structure to the lower market demand, as well as other restructuring actions (2 years payback on the restructuring already started).

Sensata reduced its market assumptions again:

· global auto market: -5%; vs -3% to -4% before

· China auto: -11% to 12-%; vs. -5% to -6% before

· European auto down 4-5%; vs. -4% before

o The auto slowdown is being offset by continued content growth such as electric vehicles battery subsystems

· Industrial -6%; vs. -1% before

· global HVOR market: -4%, vs. -2% before

On the positive side, Sensata continues to outperform the sectors it plays in, and is advancing its initiatives in the electrification theme (partnership with Lithium Balance). Even though the traditional Chinese auto market slowed down quite a bit, ST has been able to increase content per vehicle, allowing them to be somewhat flat in growth this quarter. They see China as the fastest EV market grower, helping sustain ST’s content growth in the future. Despite a weak quarter, the long-term content growth thesis remains intact, and the incremental $500mn buyback program announced today offers some support to the stock.

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]

$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

Fortive (FTV) 2Q19 earnings summary

Key Takeaways:

Current Price: $77 Price Target: $91

Position Size: 2.08% 1-year performance: +0.7%

Fortive released its 2Q19 earnings, showing a mixed quarter with softer organic growth (+2% vs. 3-4% guidance) due to a worsening of its short-cycle business, much more so than when it was last discussed by management during 2Q (something that HON also mentioned being cautious about last month). Because of this, FTV is cutting its full year guidance: EPS is now expected to be $3.45-3.60 from $3.55-3.65 (~2% cut) due to lower top line growth (from 3-5% previously now 2.5-3.5%) and macro uncertainty. On the bright side, its EMV business (fuel retailing) is picking up momentum, and recent acquisitions should start contributing to organic growth in 4Q. Continue reading “Fortive (FTV) 2Q19 earnings summary”

ResMed (RMD) 4Q19 earnings results

Key Takeaways:

Current price: $129 Price target: $138 NEW ($112 OLD)

Position size: 2.87% 1-year performance: +14%

ResMed released its 4Q19 earnings with sales up %. Gross margins expanded 120bps thanks to its recent SaaS acquisition consolidation, and better manufacturing and procurement efficiencies. Sales were supported by its SaaS business (+15% growth). Masks keep gaining shares globally: +16% in the US (better adherence and resupply program), +12% outside the US (new product launch). Devices grew 7% in the Americas and were flat outside due to tough comparisons y/y. Going forward we see multiple growth drivers:

· The new “Digital Care Act” passed in Germany should encourage a shift to electronic patient records and broader adoption of digital solutions, favoring ResMed’s product adoption

· A pilot program with Walgreen’s that could bring 5M app users onto RMD’s Propeller offering for monitoring asthma and COPD

The company suffered a large litigation charge ($41M) related to a civil investigation from the US Justice Dept, which other competitors suffered as well and should remain a one-time item. We are raising our price target to $138 after updating our model.

FY20 guidance:

Gross margin consistent with 4Q19 (59.3%)

SG&A 23-25% of revenue

R&D 7-8% of revenue

Thesis on RMD:

  • Leading position in the underpenetrated sleep apnea space
  • Duopoly market
  • New product cycle
  • Returns of capital to increase: ~1% share buyback/year (back in FY18), dividend yield of 2%

$RMD.US

[tag RMD]

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

Lockheed Martin (LMT) 2Q19 earnings summary

Key takeaways:

Current Price: $352 Price Target: $388

Position Size: 3.85% 1-year Performance: +12%

Lockheed’s 2Q19 earnings results were once again good with revenue growth of 8% and EPS +23%, thanks to higher fighter jets and missiles sales. With its bookings trend still positive (1.22X book to bill in the quarter, a good indicator for future demand), the revenue growth continues to look sustainable for the rest of the year. Margins expanded 80bps. While the US Government decided to suspend the F-35 deliveries to Turkey, this only represents about 8 planes/year for a total of 100 planes (131 F-35 will be delivered this year, see graph below for out years schedule). There should be minimal supply chain disruptions on the F-35 production from the Turkish situation. Production costs continue to come down as volume goes up and LMT finds opportunities to improve the program’s profitability. Overall this was a solid quarter. A raise of its full year guidance confirms the strength of LMT’s portfolio.

Continue reading “Lockheed Martin (LMT) 2Q19 earnings summary”

UNP 2Q19 earnings summary

Key Takeaways:

Current Price: $172 Price Target: $177

Position Size: 1.83% 1-year Performance: +16.5%

UNP reported a 2% revenue decline, but this negative was countered by an operating ratio improvement of 340bps, an all-time quarterly record despite weather related challenges (60bps drag). Total volumes were down 4% but pricing up 2.75%. UNP continues its focus on asset utilization, improving its locomotives productivity (+19% this quarter). UNP expects 2H volume to be down 2% (worse than previously thought) but continued pricing gains. Operating ratio guidance is positive reaching under 61% in 2019, and below 60% in 2020. The company now expects 2019 workforce reduction of 10%.

Adjusted net debt/EBITDA has increased in the past year, now reaching 2.5x, something to keep an eye on if volumes continue to decline. Continue reading “UNP 2Q19 earnings summary”

JNJ 2Q19 earnings summary

Key Takeaways:

Current Price: $132 Price Target: $150

Position size: 2.58% 1-Year Performance: +6%

JNJ reported 2Q19 earnings results this morning. Total organic sales were up +3.7% and adjusted EPS up +22.9% ex-FX but including the sale of a business unit. The company is seeing good traction in its Consumer segment which seems to have turned around, growing +2.2%. Pharma was lower than in 1Q but still positive with a +4.4% organic sales growth. Medical Devices had a +3.2% organic sales growth, slightly lower than in 1Q. But the good print can’t erase the risks from the baby talc powder and opioid litigations, which remain a major overhang on the stock. JNJ is awaiting a verdict in the Oklahoma case, and a hearing on talc (July 22) will determine evidentiary standard on 85% of all talc outstanding cases. While JNJ as put money aside for its defense costs ($190M in 2Q19), it hasn’t provisioned any money in the event it loses its defense on talc and opioids, which is a risk for the company. The main risk that we do not see priced in the stock is if they did in fact provide drug compounds to Purdue (the market share leader) as many articles mentioned recently. Although JNJ sold the subsidiary that grew poppy seeds in 2016, a judge could draw the conclusion that JNJ’s market share is actually much higher than 10%, and JNJ should be held responsible to a greater level than currently talk about. We continue to monitor this situation as the risk is tangible. Continue reading “JNJ 2Q19 earnings summary”

Pepsi 2Q19 earnings summary

Key takeaways:

Current price: $131 Price target: $139

Position size: 2.40% 1-year performance: +23%

Pepsi reported +4.5% of organic revenue growth (+2.2% revenue growth), thanks to strong performance from Frito-Lay. Contrary to last quarter, PEP had broad-based revenue growth in all geographies and divisions. Continued growth has been boosted by recent investments in the brands, which the CFO sees as sustainable in the long term. The management team did not increase its 2019 guidance as commodity inflation remains a risk and investments spending is being made in its manufacturing and supply-chain footprint. Its recent drink bubly (introduced last year) is doing well, reaching almost $300M in sales with 11% market share, that is projected by Pepsi to become a $1B in sales in the future. Pepsi and Mountain Dew are turning around after a tougher 2018.The stock has been strong year-to-date so we are not surprised to see it not move higher on solid, but expected results today. Continue reading “Pepsi 2Q19 earnings summary”