Author: Julie Praline

Pepsi (PEP) 3Q18 earnings results

Pepsi reported 4.9% of organic revenue growth well ahead of consensus +3.2% outlook, bringing the year-to-date growth to 3.4%. Core EPS (ex FX) grew 9% y/y, while reported EPS grew 18%. Both gross and operating margins contracted this quarter, impacted by higher transportation and commodity (aluminum) costs and additional advertising and marketing expenses. This is a continued trend started earlier this year. A lower tax rate lifted net income by ~$0.07/share vs expectations. North America Beverages improved sequentially, with volume +1% and price +1.5%, the first positive volume growth since 4Q16.

The company raised its 2018 revenue guidance, expecting organic sales to be at least 3% (from ~2.3% before). But reported EPS guidance was lowered by 5 cents due to worse negative FX impact. The CFO replied to a question during the call regarding cannabis, shutting down rumors of entering the cannabis business with cannabis infused drinks. Sadly, this was Indra Nooyi’s last call as CEO, as she is retiring, and a new CEO will lead the company starting tomorrow.

No change to our position size (2.11%) or price target ($123) at this time.

Continue reading “Pepsi (PEP) 3Q18 earnings results”

McCormick 3Q18 earnings results: long term story intact

MKC reported an EPS results a penny above consensus, despite a boost from lower taxes of $0.08, which explains the stock’s negative reaction to results this morning. The long term story is intact, highlighted by its overall organic growth rate this quarter of 4%, thanks to +3.5% from volume/mix and +0.5% from price (reported revenue up +13.5% the recent RB Foods brands acquisition that added 9.6%) and healthy gross margins (+280bps). EBIT margins declined 200bps y/y and missed expectations by 80bps due to additional marketing/promotional spending. Overall adjusted operating margin increased 80bps y/y thanks to RB Foods brands accretive addition and core business shift to more value-added products. The Consumer segment showed results below expectations, while its Flavors segment was strong.

Overall McCormick has been a strong contributor, outperforming the consumer staples index by 33% in the last year. We are raising price target to $131 from $117.

Continue reading “McCormick 3Q18 earnings results: long term story intact”

Union Pacific (UNP) efficiency plans announcement

This week, UNP announced their intention to implement the Precision Scheduled Railroading (PSR) strategy, starting October 1st. The stock reacted positively on the news, however we have some reservations that this strategy will drastically change UNP like it did for other rail companies in the past (CSX being the latest example).

Continue reading “Union Pacific (UNP) efficiency plans announcement”

J&J Pharma business quick overview

This week J&J held their Pharma business investor call, and the below data points are highlighting why J&J holds a superior pharmaceutical portfolio:

· Over 350 R&D programs, with $8.4B invested in 2017

· 14 new products approved since 2011, industry leader in brands over $1B in sales

· 100% of its operational growth comes from volume (not price increase)

· 10 new filings and/or launches anticipated between 2017-2021, each expecting >$1B in sales

[tag JNJ]

$JNJ.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

3M comments at the Morgan Stanley Conference

Today 3M’s CFO presented at the Morgan Stanley conference and provided some outlook comments for 2018 that were slightly more negative than the previous guidance:

· FX now neutral (vs. 10c positive impact previously announced)

· The rising raw material prices will impact earnings by 10 cents/share (vs. 5-10c prior guidance). To offset this, in 1Q 3M increased their prices by 70bps, and in 2Q by 110bps. This price increase remains robust so far, but we shouldn’t expect an uptick from there. This should just offset the costs inflation starting in 2H

· There are signs that the auto production units will be lower than expected

· Healthcare unit growth is now at the bottom of the 4-6% growth previously announced: US oral care has been slower than anticipated, and their drug delivery business is seeing negative growth following a strong 2017

· China: growth now closer to 10% rather than 10-15%: manufacturing and exports out of China have seen less robust growth recently

· Expected 2H18 organic growth of 2-4% (50-100bps of the growth was pulled forward in 2Q from 2H due to their ERP system deployment)

$MMM.US

[tag MMM]

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

Sensata: JP Morgan comments post roadshow positive for ST

JP Morgan published positive comments following their roadshow with Sensata’s CEO this week. A quick summary of what was discussed with investors is below:

· Starting to demonstrate leverage to electric vehicles: average content per vehicle now in line with gasoline vehicle (average is $30/vehicle), and even higher in hybrid vehicles (for example: $80/vehicle on Fiat 500e, $70 on Porsche Panamera, and $45 on Chevy Volt).

· China: this country presents the most upside for the next 3 years, and guidance includes a slowdown in production. The current average content per vehicle is $11, and is expected to rise 50% in the next 3 years.

· Large differences with the typical automotive supplier:

o more diversified end markets exposure (60% auto vs. 100% for other suppliers)

o low customer concentration risk

o cost structure: more variable/less fixed costs (which helped protect margins from experiencing huge swings in 2008)

o better cash flow generation

· Share buybacks more attractive since the re-domiciliation of headquarters to UK.

[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

Medtronic (MDT) 1Q19 earnings recap

Current Price: $94 Price Target: $100 (NEW)

Position Size: 2.96% TTM Performance: +7.8%

Key Takeaways:

Medtronic released their first quarter fiscal year 2019 results this morning. Both revenues -all 4 segments- and EPS beat consensus, but the FY19 organic growth and EPS guidance raise, in addition to upbeat comments from the management team regarding their pipeline, is driving the stock higher today: “we’re executing on the strongest pipeline in Medtronic’s nearly 70-year history”. An increased focus on cash flow generation is positive, with 1/3 of the managers’ compensation tied to free cash flow results. Medtronic can now track free cash flow to a more granular level thanks to a new IT system. The US tax overhaul is increasing MDT’s access to cash to 100% vs. 55% before, opening the door for M&A. On the margin front, the 80bps expansion is good, especially knowing that some of the operating leverage was actually reinvested in the business, pushing R&D higher in cardiovascular and diabetes, which in turn should support organic growth. Their new diabetes pump & glucose monitors were up 26%, lifting the segment’s growth to 6.8% this quarter. We are updating our price target to reflect better focus on FCF, but still think it will be difficult for MDT to get back to past high level of FCF margin as the company needs to spend more on R&D to fight off competitors and sustain top line growth.

Continue reading “Medtronic (MDT) 1Q19 earnings recap”

PEP to acquire SodaStream

Pepsi announced its plan to acquire SodaStream, an Israeli countertop carbonated water machine manufacturer. Pepsi will pay $144/share (an 11% premium to the last closing price). The deal is funded by cash on hand. Closing of the transaction is expected in January 2019. Sodastream’s revenues for 2017 were $543M, a 19.1% EBITDA margin, and has been FCF positive for 2 years.
This deal is a positive for Pepsi, following on its strategic plan to increase healthier drinks and snacks to its portfolio.

No change to our thesis or price target.

[tag PEP]

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

PLEASE NOTE!

We moved! Please note our new location above!