Author: Julie Praline

Key Takeaways:

MMM reported 2Q18 revenue that were better than expected, with EPS in line after removing the one-time gain from the sale of its Communications Markets business. Revenue grew +7.4% y/y (+5.6% organic ex-FX), gross margins expanded by 120bps y/y, and operating margin increased 100bps mostly from better volume and productivity actions. Sales growth was broad based, with all segments seeing organic growth. Some of the beat this quarter was due to US customers accelerating their purchases ahead of an ERP roll-out in the US in Industrials, Safety & Graphics and Electronics & Energy (this has been implemented in Europe in the last 18 months). The impact from this implementation is a +50-100bps of growth pulled forward to 2Q18. Adjusted EPS grew 27% y/y thanks to organic growth, productivity efforts and a lower tax rate.

MMM returned $2.4B to shareholders via dividends and share repurchases this quarter. The management team increased the lower end of its share repurchase guidance to $4-5B from $3-5B.

The stock initially sold off as the management team adjusted its top-end EPS guidance for the year due to the sale of a business, but recovered since as the underlying fundamentals remain strong. Overall MMM has some good momentum in its pricing power, offsetting raw-material inflation. The new tariffs have little effect so far on the company’s costs, only estimated at 1c/share. However the management team is monitoring the impact from any increase in tariffs and possible retaliations, and could change sourcing and/or pricing increases if necessary. We are not changing our price target or position size at this point.

Continue reading “MMM 2Q18 earnings”

Key Takeaways:

Schlumberger 2Q18 earnings results were generally in line with expectations, with revenue +6% quarter/quarter, and margin +75bps q/q. Technology and software, differentiating factors for SLB’s margins, were offset by startup costs and transitory operational delays. Cameron (offshore activity) is slow to rebound, but should contribute to growth in 2018-2019. Management had a positive outlook for its international business, seeing positive pricing trends, projecting it to strengthen in 4Q. Initial guidance is for double digit growth in its international business in 2019, while capex needs remain at $2B, lifting the company’s FCF. Its equipment will be fully deployed by the 4th quarter, setting the stage for greater pricing power in 2019. However, its North American geography is projected to get worse before it gets better. During the quarter, SLB repurchased 1.5M shares. On the negative side, 3Q18 guidance came below consensus, with EPS up 10-15% q/q. Overall we are pleased with the results, and believe patience is key with this stock to see improving free cash flow.

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

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!

Key Takeaways:

UNP reported revenue growth of 8%, but an operating ratio of 63% above consensus of 62% (lower is better). Fuel prices had a negative impact on margin of -100 bps (fuel costs +48% y/y), as the company passes on the increased fuel expenses to clients with a lag. The services related costs increase offset the productivity gains this quarter. UNP noted some one-time challenges that impacted performance: a tunnel collapse being out of service from May 29 to June 20 (this added 4-5 days for some freight as trains had to be re-routed), and train-crew shortages (which is improving). While those costs should persist in 3Q, overall 2H should show some productivity gains. Another negative point highlighted during the call was the decline in Permian volumes Frac Sand, as local sand mines come online. Freight revenue experienced positive performance: +4% volume (accelerating from 2% in 1Q18), +2% core pricing, +3.5% fuel surcharge, and a -1% mix impact. Free cash flow was better than expected, but helped by lower capex than estimates. The management team is more positive in its business environment outlook, and lifted its volume growth guidance for 2018 to low-to-mid single digit growth (from low single digit).

Volume growth will be supported by:

o future plastic shipments (chemical plants coming on stream)

o truck drivers shortages pushing conversion to rail in intermodal

o e-commerce supporting shipment of parcels.

So far UNP is being lifted by positive trends lifting volumes and prices, but a couple of one-time items impacted its productivity, masking any improvement in its operating ratio. We will monitor the fuel cost increase to make sure it is being passed on to customers in the coming quarters. We are not lifting our price target at this time, as we need to see its operating ratio improve at this stage of the economic cycle.

Continue reading “UNP 2Q18 earnings recap: underlying business trend is good, one-time items hit its operating ratio”

Key Takeaways:

Pepsi released Q2 earnings that were better than expected (granted on recently lowered sell-side expectations). Organic growth was +2.6% (consensus +2.2%). North America beverages remains soft, but saw sequential improvements following additional advertising efforts + new products (Bubly and Gatorade Zero), and should see continued positive momentum in 2H18. Frito Lay’s good performance in price and volume helped lift the overall company’s gross margin (positive mix impact). The emerging markets had strong growth +6% even with the Brazil truck driver strike limiting distribution of goods. As I had mentioned leading up to this earnings season, the company (as well as other consumer staples) is experiencing higher commodity and freight costs. Since a good portion of this quarter’s growth came from one-time items (Thailand beverage refranchising for example), the quality of growth going forward needs to be monitored. The company reiterated its FY18:

ü organic revenue growth of at least +2.3%

ü EPS +9% y/y.

Continue reading “Pepsi 2Q18 earnings: some relief from good growth but margins going forward still need monitoring”