Author: Julie Praline

Key Takeaways:

Current Price: $76 Price Target: $87 (under review)

Position Size: 2.19% 1-year performance: +7%

Fortive released 4Q18 results with sales up 7.4% organically (+11.4% reported), and adjusted EPS up 30% from last year (helped by lower interest expenses and lower tax rate). While China was highlighted as strong in 4Q18, the company did warn that there was some early buying that pulled forward some sales (70-100bps of growth) as companies were buying ahead of possible tariffs. Management thinks North America will remain solid in 2019, while Western Europe and China could experience some slowing down. Those assumptions are driving the 3% core top line growth guidance for 2019, and the high end of 5% assumes there is no slow down. Operating margins increased 40bps (excluding the recent acquisitions dilutive effect), helped by 80bps price increases. During the call, the company highlighted accelerating their portfolio transformation towards less cyclical markets and more secular growth drivers, also increasing in the recurring revenue base. This is part of our buy thesis on the name and reassuring to hear the transformation is going in the right direction. Continue reading “Fortive 4Q18 earnings summary”

Key Takeaways:

Current Price: $42.5 Price Target: $51

Position Size: 1.65% 1-year Performance: +7%

Sanofi reported 4Q18 sales results containing no surprises, with sales up 3.9% and EPS +4.7%. Flu vaccines was a growth driver this past quarter, while the diabetes franchise remained weak. The divestiture of Zentiva, its European generic business as well as growth of Dupixent will boost margins going forward. The Dupixent sales increased thanks to advertising and the recent US launch in asthma (the drug is approved for severe form of eczema and asthma). Sanofi new R&D chief is pruning the portfolio to focus on better prospects, accelerating research on 17 programs while discontinuing 25 others. The firm is putting cancer treatment on its priority list, and removing diabetes from it, which had been a major growth driver for the company in the past (with drug Lantus). In addition, the company is refocusing its segments in order to “unlock organizational efficiencies”… we have heard that from other companies in the past, and we remain unconvinced about the value of such reorganizational efforts. But on the positive side, Sanofi’s dividend yield is now an attractive 4.2%, which offers good support to the stock. Continue reading “Sanofi 4Q18 earnings summary”

Key Takeaways:

Current Price: $49 Price Target: $61

Position Size: 2.13% 1-year Performance: -10%

Sensata reported slower revenue growth sequentially, a miss vs. consensus as well. Organic sales growth was +3.5%, with an overall Chinese business organic growth rate of 4.3%, which we think is respectable given the recent business volatility cited by the company and peers. Although the Chinese auto production end market declined 15% in 4Q (way beyond their expectations) and drove most of the slowdown in their overall results in 4Q18, Sensata had an impressive +1560bps sales above the auto end market production. The company noticed a small slowdown in Europe as well, but a strong North America growth. For 2019, management expects +400-500bps relative outperformance over the global auto production. While China’s economy is still growing, volatility is expected to continue in 1Q19. Regarding its other end markets, aerospace was strong but industrial weak driven by the Chinese slowdown. Margins expanded 80 bps in the quarter despite lower volume and unfavorable impacts from tariffs. Their business model enables continued profitability, even in down cycles, as they have a highly variable cost structure. While today’s results were below expectations, investors were expecting much worse. It is reassuring to see the company able to protect its operating margins in a volatile environment, a proof of the company’s strong business model. Continue reading “Sensata (ST) 4Q18 earnings summary”

Key Takeaways:

Current Price: $76 Price Target: $86

Position Size: 1.74% 1-year Performance: +11.8%

Exxon reported 4Q18 results, with continued production improvements and earnings ahead of consensus ($1.20 vs. 1.07). Permian production came ahead of expectations, with close to a 90% increase y/y, thanks to an increase in rigs. XOM’s CEO sees very good returns in the Permian even if the price of oil comes down to $35/barrel. On the other hand, growth in its other 4 pillars won’t be seen until 2020. Refining profits more than doubled as margins increased. Free cash flow covered their dividends. Capex spending slowed in 4Q as oil prices declined but Capex for 2019 is now guided up +16% y/y vs. management’s previous guidance numbers ($30B vs $28B previously). Overall we see Exxon moving in the right direction, and importantly staying the course on its strategic investments. Continue reading “Exxon (XOM) 4Q18 earnings summary”

Key Takeaways:

Current Price: $176 Price target: $198 NEW ($188 old)

Position size: 3.70% 1-year Performance: -4%

Stryker released continued impressive results with sales up 9.4% (+8.6% organic, the best organic sales growth in a decade). The management team is very bullish on Mako’s growth, especially starting in 2020 once a big wave of training of surgeons on the robot is done in China & Japan. But growth is broad-based, and for 6 years in a row, SYK revenue growth has outperformed its competitors by 200-250bps. This quarter operating margin improved 30bps (40bps for full year) which came from continued good leverage and expenses savings. Recent acquisitions have been dilutive to their margins so they have pushed integration further this year to improve the G&A synergies faster. “Speed of integration” has been a new mantra at Stryker for the past 2 years.

Emerging markets are only 6% of sales which presents a huge opportunity for the company. During 4Q18, EM growth was broad-based:

· Russia performing well

· Latam strong after some leadership changes

· Bought out a distributor in Turley and now performing strongly

· Strong performance in China

· Tough early in India, but management changes, and 4Q strong with bright outlook

2019 Guidance:

Organic sales to grow 6.5-7.5% (with ramp up in Q3 and Q4)

30-50bps EBIT margin improvement

Adjusted EPS $8.00-8.20

Valuation: we are increasing our price target to $198 as we roll over our model to 2019. We see a premium valuation justified as growth is consistent and should continue in the near future.

SYK Thesis:

• Consistent top and bottom line growth in the mid and upper single digits respectively
• Continued operating leverage of current infrastructure
• Strong balance sheet and cash flow used in the best interest of shareholders

$SYK.US

[tag SYK]

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: $288 Price Target: $388

Position Size: 3.47% 1-year Performance: -17%

Lockheed’s 4Q18 earnings results were good enough with sales 5% above consensus, while EPS missing by a penny. What was really positive this quarter was the leading indicator for future demand known as book-to-bill ratio reaching 1.46x, and backlog hitting $130B (+19% sequentially). Margins increased 60bps in the quarter. Production improvements with the F-35 will help its margin by 50bps, as they are hitting a more mature cadence. F-35 is on track so far for 2019: deliveries should reach 131 in 2019 (+40 vs 2018) and keep growing until it reaches 160 in 2021. There were some cash collection delayed to 2019, providing a $250M boost to 2019 cash flows. On the cash flow front, the company transferred some pension liability to Prudential, thus mitigating volatility on $2.5B of pension obligations. This covers 41,000 current retirees (25% of their retired pension population). We remain positive on the company’s outlook where fundamentals are resilient and the end markets are supported in part by the US Defense budget growth.

Continue reading “LMT 4Q18 earnings summary”

Key Takeaways:

Current Price: $197.6 Price Target: $215

Position Size: 2.37% 1-year Performance: -24%

MMM released its 4Q18 earnings results this morning, with organic growth standing at 3%, and EPS up 10% y/y. Latam/Canada had the strongest growth at +5%, followed by the US +4.4%. No business stood out as outperforming or struggling this quarter but 3M cited weak customer demand for its auto and electronics business in China having dampened revenue in 4Q18. On the positive side, the company lowered its estimate of the Trade impact on earnings from $100M to $70M. Overall tariffs and raw materials costs impact should be lower in 2019 than in 2018. The current CEO has been cutting forecasts pretty consistently since he took over as CEO in July 2018. Looks like he needs to manage expectations a bit better!

Continue reading “MMM 4Q18 earnings summary”

Key Takeaways:

Current price: $62.8 Price target: $67

Position size: 1.8% 1 year performance: -18.7%

Colgate released its 4Q18 and 2019 initial guidance today. While 4Q18 sales results were slightly better than expected, margins and the initial 2019 guidance were below. Organic sales were sequentially accelerating reaching +2%. Emerging markets are improving, even with China’s continued de-stocking. Two markets had specific issues this past quarter though:

· France: yellow vest impact on consumption -40bps on growth

· US: shift of major promotional activity from 2018 to 2019. This had a 120bps impact on organic growth pushed from 4Q18 into 1Q19

Gross margins declined 100bps and expenses increased, causing a 220bps operating margin contraction. In 2019, the company is planning to reinvest behind its brands to push organic sales growth. As the management team recognizes prior errors (mostly thinking its portfolio was good enough to win), we can now expect portfolio evolution, as well as a push towards different distribution channels. We think expectations have been lowered enough now and are attainable. Continue reading “Colgate 4Q18 earnings summary”

Key Takeaways:

Current Price: $123.8 Price Target: $129 NEW (from $131 in September)

Position size: 2.96% 1-Year Performance: +23.7%

McCormick released its 4Q18 results and 2019 guidance that are both disappointing vs. consensus. 4Q18 sales ended up 3% below expectations as they were impacted by two events causing a 3% hit to sales in its Consumer Americas business: 1/ some key customers reduced their inventory levels during the quarter, an odd timing per McCormick as the Holiday season usually sees good demand; 2/ a large customer had a change in its internal store replenishment system that caused re-ordering issues. On the positive side, the management team insisted during the call that consumption trends are still strong. Operating margins declined 70bps, were below as well impacted by lower sales and higher raw material costs. Free cash flow was favorably impacted by better working capital management (see chart below) and lower capex.

We are updating our price target slightly down to $129 after including the new 2019 guidance numbers in our model. Our long-term view on MKC is unchanged and we maintain it as a core holding in our consumer staples portfolio. Continue reading “MKC 4Q18 earnings summary: long-term thesis intact, 4Q impacted by one-time event”