Author: Julie Praline

Key Takeaways:

Current Price: $102 Price Target: $136

EOG reported better well productivity that led to oil and total production levels above expectations. Following 3Q results, the company is lifting its 2018 oil volume guidance by 1%, although total production remains below consensus (lower natural gas production). On the negative side this quarter, the 3Q18 oil production increase came with an increase in capex (and a 2018 capex guidance increase of 4%). We believe the stock is weak today as the management team is expecting slower growth in 4Q18 and 1Q19, since it plans on slowing down drilling activity. On the positive side, EOG maintained its 5% well costs reduction target in 2018 and even further reduction in 2019. FCF should also inflect positively in the coming year as capex shouldn’t increase as it did in 3Q, and capital efficiency should rise. We are not changing our price target or position size.

Continue reading “EOG 3Q18 earnings results: stock weak on recent higher capex levels and lower production near term but long term thesis intact”

Key Takeaways:

Current Price: $44.8 Price Target: $51

Position Size: 1.56% 1-year Performance: -8.6%

Sanofi reported 3Q18 sales results 3& above expectations thanks to a strong rebound in vaccines (strong Flu shipments with $985M in sales +4% y/y, and recovery in Pediatric $511M in sales, +18% y/y) & in Emerging Markets. Regeneron added positively to its income, helping the 8% EPS beat vs. consensus. Sanofi raised its 2018 EPS outlook from 3-5% to 4-5%, as the strong momentum in Vaccines should continue in 4Q18, as guidance was raised to mid- to high-single-digit growth. Sales of Praluent (cholesterol drug) reflected the continued significant payer utilization restrictions in the US and limited market access in Europe. Sanofi’s Diabetes business continues to struggle (down 11% y/y – Lantus had $897M in sales, down 20% y/y), but the recent Bioverativ and Ablynx acquisitions should help drive growth going forward. Dupixent in Immunology is reaching an attractive level ($225M in sales, up 200%). Aubagio that treats multiple sclerosis, grew 12% ($426M in sales) and is the second biggest selling drug. Overall results were reassuring that Sanofi could return to top and bottom line growth after a couple years of disappointment.

Continue reading “Sanofi 3Q18 earnings results”

Key Takeaways:

Current Price: $47 Price Target: $61

Position Size: 1.26% 1-year Performance: -3%

Sensata (ST) reported strong 3Q18 earnings, with sales up +7.9% on an organic basis and adjusted EPS up +12.3%. The sales result is a clear testimony of Sensata’s secular content growth opportunity, and its ability to offset the well-publicized auto industry slowdown. The company raised its 2018 organic revenue growth guidance to 7% from 6%. EBIT margin should improve in 4Q as the recent quarters were impacted by new product launches, design and tariffs costs. The management team estimates that the recent Gigavac acquisition will help double the value of its content per electric vehicle. The company completed its $400M share repurchase program and initiated a new $250M authorization. This quarter reinforced our positive view on the name.

Continue reading “Sensata 3Q18 earnings results confirm our thesis on the stock”

Key Takeaways:

Current Price: $73.30 Price Target: $87

Position Size: 2.09% 1-year performance: -1.4%

Fortive released 3Q18 results with sales +9.2%, of which organic growth was +3.2% (below expectations), acquisitions added +7.2% and FX removed 1.2%. Gross margins grew 40bps to 50.2% but SG&A expenses increased 410bps, leading Fortive’s core margin down 25bps (reaching 17.5%). Both tariffs and inflation of raw materials impacted gross margins, while hurricane Florence and unfavorable portfolio mix impacted operating margins. EPS grew +11.7% y/y. Free cash flow increased 23% y/y on better operating cash flow. 4Q18 revenue growth acceleration is expected as some hurricane-related backlog in 3Q will be fulfilled in 4Q. There were also some delays with defense contractors during the quarter that have since been reversed in October. We heard some positive comments on a new fast-charging station technology for electric vehicles that can be globalized with their large-scale network clients (gas stations for example). Their core Gilbarco business (card readers at gas stations) is seeing an acceleration as well. Pricing is increasing towards the end of the year. Even though this quarter saw some one-time items impacting revenue growth and margins, the thesis on this name remains intact.

Continue reading “Fortive 3Q18 earnings review: revenue and margin miss this quarter but thesis intact”

Key Takeaways:

Revenue were down 0.5% during the quarter. While pricing was better, volume impacted the overall sales number. In emerging markets, seen as the growth driver for the company, organic sales fell 2% (due to difficulties in Brazil and China). Gross margins missed as well, not surprising as transportation and raw material costs increase and market share eroded. Market share currently stands at 41.9% globally in toothpaste and 32.2% in manual toothbrush. The company is working on it country by country, and a relaunch of Total and oral care should help address this issue in early 2019.

Another negative tainted this earnings results, as the management team lowered yet again its 2018 earnings guidance to $2.95-2.98 which represents only 3-4% EPS growth thanks only to share repurchases.

They lost some volume in Brazil after the recent price increase, as competitors did not follow their lead. The launch of new premium products in the pharmacy channel should help going forward.

Two trends to note about China:

1/premiumization of categories led by some local brands.

2/change in consumption patterns and shopping environment (e-commerce – nothing new). To address those problems, they are bringing Elmex (premium toothpaste) to the online channel with the electric toothbrush and a whitening kit.

Europe grew nicely this quarter. India saw volume and price growth, as share improved after innovation & advertising support. This is supportive of their strategy to focus on innovation & advertising to sustain growth going forward.

They are now OK with changing the shape of the portfolio: now less global brands and more local retail/local brands in response to competitors if its needed.

While the stock has done poorly year-to-date and the market share decline (and its impact on financial results) is concerning, 2018 could prove to be the worst year for Colgate as the management team finally addresses the problems by being more local/nimble and flexible on distribution channels. There is not much they can do regarding raw materials and transportation costs increases if scale diminishes, but as market share improves and brand regains its strength, pricing increase to offset this problem should alleviate any earnings disappointments.

The Thesis on Colgate

• High exposure to fast growing emerging markets (36% of Operating Profit from Latin America; 50%+ from EM)
• Defensive Product set (soap and toothpaste). Product line less vulnerable to trade downs due to low private label exposure in the categories
• Strong balance sheet (net debt/ebitda 1.4x) and highest ROIC in the sector
• 2.64% dividend yield

$CL.US

[tag CL]

Julie S. Praline

Director, Equity Analyst

Crestwood Advisors

Key Takeaways:

Current Price: $140 Price Target: $145

Position Size: 2% 1-year Performance: +27%

UNP reported revenue growth of +9.6% (total car load volume +5.9%, average price +3.9%), an operating ratio of 61.7% impacted by core price deceleration and 2% negative mix (23% frac sand volume decline). Tariffs impacted agriculture products exports (grains) so the company didn’t experience the usual increase in volume for this time of year. A disappointment year-to-date has been lower savings then initially targeted ($45M vs $300-350M announced early 2018). Operating ratio will not improve in 2018, but should in 2019 from productivity improvements (see comments below). On the positive side, UNP didn’t loose time implementing its PSR principles, starting with the deteriorating frac sand segment, which should improve economics. UNP also sees room to improve its network as they currently have low track densities vs. competitor BNSF. So far we remain skeptical on UNP’s ability to improve its operating ratio next year as they implement the PSR principles and will keep monitoring the progress they make.

UP 2020 plan update:

+$500M productivity improvements in 2019 thanks to lower employee expenses and benefits of running smaller locomotive and car fleet – which is achievable regarding of volume growth (to us this is a "show me" story)

Accelerated share buyback program to $20B through 2020 (was 410.6B in the past 3 years)

Continue reading “UNP 3Q18 earnings recap: good average volume growth but negative mix”

Key Takeaways:

Current Price: $188 Price Target: $215 (NEW, prior $220)

Position Size: 2.18% 1-year Performance: -20%

Even though 3M had announced last quarter that 3Q18 sales would see the lowest sales growth of the year, the reported number was below expectations. The pull forward of 3Q18 sales into 2Q18 had its impact as previously highlighted by the company (due to the ERP roll-out in the US). In addition, the following items had a negative impact on sales growth this quarter:

· China’s growth slowed down, especially in industrials

· Lower roof granules demand by shingles manufacturers decelerating production

· An impressive 25% decline in the drug delivery business due to less pharma R&D spending and regulatory cycle

Regarding the Healthcare segment, the management team highlighted that the other businesses were performing well. The drug delivery business is also seeing a strong pipeline for 2019, so a rebound in this category is expected going forward. During the call, it was explained that this business is project-based, and thus more volatile than other healthcare operations they have.

In their consumer segment, the home improvement business had positive low-single-digit sales growth, while all other businesses experienced a decline. Lower demand in Asia Pac and inventory destocking by retailers had a negative impact. As the “office” stores and traditional retailers restructure their operations to a different sales channel (brick-and-mortar to online…who hasn’t heard of Amazon?), inventory have seen that destocking effect. The management team suspects this will continue going forward.

Free cash flow was up 24% y/y, and 3M returned $1.9B to shareholders ($1.1B in share repurchases and $794M in dividends). ROIC is expected to be 20% for 2018. Contrary to last quarter where tariffs had little impact on earnings, the management team now actively looks at ways to change its supply chain, as raw materials costs climbed during the quarter. This should totally be offset by pricing action in the coming months. We are lowering our price target by ~2% to account for slower growth.

Continue reading “MMM 3Q18 earnings: strong sales growth decline and decreased 2018 guidance sends the stock down, but the few 2019 initial comments are positive”

Key Takeaways:

Current Price: $59.2 Price Target: $82

Position Size: 1.73% 1-year Performance: -8%

Schlumberger 3Q18 earnings results were slightly above recently lowered expectations. The growth in North America slowed down from last quarter, constrained by pipeline capacity and workers availability (to be resolved by the end of 2019). The sector is however recovering globally. Ongoing improvements of the oil producers investments level helps lift SLB sales, which increased 8% y/y. Operating margin expanded 15bps y/y, and adjusted EPS grew 10% y/y. FCF yield remains attractive at 4.7%. The management team warned of lower profits in 4Q18 vs. 3Q18, as US fracking activity continues to drop.

Segments review:

Drilling sales +15%: Saudi Arabia and Russia drilling activity helped. margin down 24bps y/y

Production: some slow down following strong growth recently: +13% sales growth y/y but flat sequentially, margins flat y/y

Reservoir Characterization: sales -6% but operating margin expanded 470bps thanks to better product mix

Cameron: continued pressure on their Deepwater business, sales flat y/y, and margin deleverage of 356bps

Geographic review:

North America sales +23% y/y

International sales +1% y/y

SLB Thesis:

1. After 5 years of significant underperformance, The Energy Sector is historically cheap and SLB is

historically cheap relative to the sector – despite being one of the highest quality Energy companies

in the world

2. As the leading Global Oil Services company, SLB is well positioned to benefit from (1) Secular

growth in U.S. shale production and (2) Cyclical rebound in global oil production/oil prices

3. SLB is a high quality company within a highly cyclical industry – SLB has generated 16% annual

Returns on Invested Capital over the past 10 years and throws off a lot of free cash flow

4. SLB’s stock is highly levered to increasing oil prices and will not wait for the turn to make its

move. We are also getting closer to a bottom in EPS estimates and SLB protects better than most

energy stocks on the downside due to its high quality nature – strong balance sheet, ROIC, cash

flows

$SLB.US

[tag SLB]

Julie S. Praline

Director, Equity Analyst

Crestwood Advisors