Author: Julie Praline

Key Takeaways:

 

Current Price: $55                   Price Target: $61

Position Size: 1.47%               1-year Performance: +26%

 

Sensata released an overall good 3Q report.Sales were +21% overall (~17% organic), with growth by segments as follow:

• Automotive organic sales +5.2%: ST outgrew the market by 1,150bps

• HVOR organic revenue +59% y/y: outgrew the market by 2,400bps

• Aerospace/Industrial sales +8%/+18%, driven by defense product launches and electrification/HVAC

 

Volume and productivity had a 310bps positive impact on operating margin, while supply chain constraints were a 80bps headwind, and will have a greater impact in Q4 (100bps). Because of its solid cash position, Sensata is reinstating its share buyback program in Q4, which we view a bullish for near-term performance. Sensata recently won some new contracts in the EV (electric vehicle) space: electronic stability in brake sensing (supplier Continental), pressure and force sensors in brake system with a leading EV OEM. Those a just a couple of examples of what Sensata sees in content growth in EV in the next 5 years, planning to double its EV content per vehicle vs. a traditional internal combustion engine vehicle, with a dollar content usually 20% higher as well. EV wins have been 50% of new business wins so far in 2021.

 

The new acquisition of Spear Power Systems will enable ST to offer full energy storage solutions. Fun Fact: Spear is enabling the Washington State Ferry system to go electric with battery energy storage.

 

2021 guidance update:

• 4Q guidance is below expectations due to supply chain constraints worrsening
• OEM production outlook for 2021:
• Auto production to contract 3% overall (worse in every regions)
• The aerospace sector overall is expected to contract 8% vs 4% previously guided in July.
• Industrial looks stronger at 13% vs 12% in July
• HVOR is expected at 25% vs. 23% in July.
• Sensata did not provide a 2022 guidance, but believes the IHS view of ~10% auto production growth is too optimistic as the supply chain constraints could continue into 2022.

 

To finish, Sensata published its first Sustainability Report!

 

 

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

category: earnings

$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

 

Key takeaways:

 

Current Price: $164      Price Target: $200 

Position size: 2.05%     1-Year Performance: +11%

 

 

• 3Q2021 results:

 

• Overall sales +10% organic, adjusted EPS +16.4%

 

• Pharma segment performing well with sales +13% organically, higher than last quarter of +11%
• Covid vaccine sales below expectations, but still expect and additional 300bps growth from vaccine sales for the year
• Oncology +16.5% – growth in multiple drugs (Darzalex, Imbruvica)
• Infectious diseases +60% strong growth (covid vaccine added growth vs. last year)
• Immunology +12% growth in Stelara (Crohn’s disease, Tremfya for psoriasis)
• Pulmonary Hypertension +16% – share gains in Opsumit and Uptravi
• Cardiovascular/other only sub-segment negative growth -12% due to biosimilar competition
• Consumer segment: +4% growth
• Growth driven by over-the-counter (OTC) drugs +18%
• Medical Devices: +7% organic sales growth
• Growth driven by market recovery post pandemic, new product introduction success
• Modest impact from covid Delta

 

• EPS growth driven in part by lower taxes

 

• Surgical robot Ottava for general surgery is delayed another 2 years … this is a positive for Medtronic that is developing a similar robot.

 

• Earnings call quote:
• Robot: “a first in-human delay of approximately two years from our earlier projections of the second half of 2022, reflecting technical development challenges and COVID-19 related disruptions, including supply chain constraints being experienced broadly across all industries.”
• Labor shortages: ” When we look at quarter four, we do expect to see continued improvement. We do expect hospitals are going to have to continue to manage through labor shortages, I don’t expect that to get better in quarter four nor in 2022, but they’ve been quite masterful and how to manage patient close.”
• ” We are, when I talk to hospital systems over the past three weeks in particular, in the United States, they are ramping up again and resuming elective procedures.”

 

• New CEO Joaquin Duato to transition January 2022

 

• 2021 guidance raised:
• Revenue raised slightly on the lower end due to core sales growth – nothing meaningful though but a positive signs in the wake of the Delta variant
• Tax rate is lowered  due to one-time benefits
• EPS increased due to good operational growth and lower tax rate

 

 

 

 

Thesis on JNJ:

• High quality company with consistent 20% ROE, attractive FCF yield,
• Investments in the pipeline and moderating patent expirations create a profile for accelerated revenue and earnings growth
• Growth opportunity: Medical Devices and Consumer offer sustainable growth and potential for expansion internationally
• Strong balance sheet that offers opportunities for M&A.

 

 

 

[category Equity Earnings]

[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

 

Key takeaways:

 

Current Price: $216                Price Target: $251 NEW (from $255)

Position Size: 2.26%              1-Year Performance: +18%

 

• Total company sales +5%, core beer demand remains elevated, Wine & Spirits finding its new growth level post-divestitures
• Overall demand for core beer brands is robust, supporting future growth of the portfolio
• Beer sales increased by 13.8% organically (volume +11.7%)
• Modelo Especial demand remains robust with +16% growth – remains #1 brand in high end beer market, and fastest market share gainer
• Wine & spirits grew +15% organically, driven by high end portfolio
• Hard seltzer: still an opportunity, but the management team is not relying on this category to drive growth – lots of consolidation in the space
• STZ working on different flavors, packaging (single serve in convenience stores for example), low-carb/low calories/functional offerings
• Supply chain issues:
• Some shipping delays due to severe weather: 2-3pts impact on shipping growth
• Inventory levels should return to normalized levels by FY22 Q4
• Beer operating margin was impacted by higher marketing expenses and SG&A in general
• One-time charge regarding hard seltzer inventory obsolescence ($0.25 EPS impact a 2-3% impact for the year) impacted gross margins 350bps
• Wine & spirits operating margin declined 15% y/y due to higher SG&A (marketing spend), but gross margin increased from 42% to 45.2%
• Remains on track to reach 30% operating margin by FY23 as portfolio reshaping is taking place (divested ‘cheap” wines, keep high end ones)
• Guidance for fiscal year 2022 EPS increased by $0.15 thanks to better beer performance – raise of guidance is due to good fundamental performance
• Beer net sales increased to 9-11% from 7-9%, and operating income growth 4-6% from 3-5%
• Beer margins to reach 39-40% in FY22
• Wine & Spirits to decline -22% to -24% (due to sale of business). Excluding divestment, sales would be +2% to +4%
• Higher share buybacks
• Valuation: while we lowered our PT slightly to account for supply chain issues lasting a bit longer than expected in FY22, we still believe there is long-term value to be made in this name. On a P/E basis, the stock trades at a discount vs. its historical P/E. Our DCF shows upside as well.

 

Overall we still see long-term opportunity for growth in this name (including cannabis), and believe it is a good name to hold in staples.

 

Investment Thesis:

• STZ helps position our portfolio to be more defensive at this stage of the economic cycle
• Management team focused on high quality brands and innovation
• STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
• STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex
• Growth optionality from cannabis investment

 

[tag STZ] [category earnings]

$STZ.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

 

Key Takeaways:

 

Current Price: $82.6                 Price Target: $102  

Position size: 2.05%                1-Year Performance: -14%

 

• Revenue growth remains elevated thanks to recovery in Flavor Solutions (+20.6%), while Consumers laps last year’s high demand (+1.2% this quarter).
• Packaged food companies having high demand
• Away-from-home is recovering as people go back to the office
• Integrating 2 recent acquisitions: Fona and Cholula
• Inflation expected to continue to be a challenge going into next year for packaging, transportation and labor costs.
• Expects labor costs to remain elevated, now being a new baseline, don’t expect salaries to come back down over time, but increase to moderate sometime next year.
• Pricing and some costs management will offset higher inflation in the coming 2 quarters
• ERP replacement program that had been delayed during early pandemic is back on track, will increase expenses by $350-400M
• Guidance for the year adjusted:
• Sales growth of 12-13% (from 11-13%)
• Mid-single digits cost inflation is pushing operating income growth down from 10-12% to 6-8%
• EPS growth of +5% to +7% (lowered from +6-8%)
• Long-term thesis is intact. We see the inflation situation and pressure on margin as a temporary impact, as the company will raise prices to offset a major portion of it (showing pricing power as a market leader).
• CEO quote: “the packaged food industry is experiencing the highest inflationary period of the last decade, or even two“.

 

 

 

 

 

The Thesis on MKC:

• Industry Leader: McCormick & Company (MKC) is a leading manufacturer of spices and flavorings. MKC has been in business for 120 years and the founding family still has ownership interest
• Growth opportunity: Spice consumption is growing 3 times faster than population growth. With the leading branded and private label position, MKC stands to be the biggest beneficiary of this global trend
• Offense/Defense: MKC supplies spices to major food companies including PepsiCo and YUM! Brands giving it a blend of cyclical and counter-cyclical exposure
• Balance sheet and cash flow strength offer opportunities for continued consolidation through M&A in the sector

 

$US.MKC

[tag MKC]

[category earnings]

 

 

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: $134                             Price Target: $150 NEW (prior PT $124)   

Position Size: 2.66%                           TTM Performance: +28%

 

• 1Q sales (ending July 2021) came at +19%, and +27% if adjusting for the extra selling week last year
• Segment results:
• Cardiovascular: +15% growth
• The company gained 300bps market share in the Cardiac Rhythm Management market thanks to its Micra pacemaker
• MedSurg: +25% growth
• Continued global procedures recovery
• Hugo robot : initial urology cases performed in Latin America, supporting regulatory approvals globally (US trials starting soon, CE Mark pending)
• Neuroscience: +26% growth
• Capital equipment business is doing well, a sign that hospital capex spending continues to recover
• Diabetes: sales down 3%
• Delay in new pump launch in the US
• Has lost market share in that category in past years as competitors introduced new products, innovation should help going forward
• Delta variant expected to have a slight negative impact on business, explaining the small change in guidance.
• Covid had an impact on August numbers so far, and the trend should persist into September
• Expecting peak in hospitalizations form covid in September, then easing in October with vaccinations peaking back up
• Operating margin came ahead of expectations at 28.3%, ahead of its guidance of 27-27.5% – but ramping up on investments in renal denervation and Hugo robot will be a ~$400M headwind this year
• The management team is raising the lower end of its EPS full-year guidance from $5.60 – $5.75 to $5.65 – $5.75. Organic revenue growth guidance remains +9%
• Cardio: 10-11%
• Med Surg: 8-9%
• Neuroscience 10-11%
• Diabetes flat
• Medtronic will hold its first ESG Analyst Day in October, a first for the company

 

 

 

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

Category: Equity Earnings

 

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

 

Key Takeaways:

Current Price: $84                          Price target: $107

Position size: 1.56%                      1-year Performance: +31%          

 

• Core sales +20.3% missed the street estimates but seems to be due to FX – reported revenue beat consensus by 1%
• Total sales $1,282M vs consensus $1,269M
• Clinical trials net new business grew 22% (4% tied to Covid-19 trials), with Book-to-Bill 1.37x. Their 2Q book-to-bill was the second-highest in the group behind competitor PPD
• Clinical revenue +31%
• Commercial net new business grew 51%, with book-to-bill 1.14x
• Commercial sales +13.2% y/y
• 80% of sites permit physical visits, an improvement from 70% in 1Q
• Recovery continues with good enrollment for covid and non-covid trials
• Gross margin expanded 110bps from 2Q2019
• Adjusted EBITDA margin of 13.6% vs. consensus 13.7%
• Operating margin expanded 220 bps y/y and 70bps vs. 2Q19
• EPS of $0.97 beat consensus by $0.02
• Share repurchases: $73M bought back in 2Q, leaving $182.5M through year end 2022
• Net leverage stands at 3.8x, lower from 4.1x in 1Q, on its way to reduce leverage of its balance sheet to 3.0-3.5x by year-end

 

• Revenue and EBITDA guidance for the year tightened on the lower and higher ends
• Sales $5.18B-$5.3B from $5.125B-$5.325B
• EBITDA $750M-$780M from $745M-$785
• EPS raised to $4.25-$4.43 from $4.17-$4.42

 

CEO quotes:

• “Clinical awards also included several COVID-19 related projects. Although, this category including treatment therapeutics remained at less than 4% of our backlog at the end of the quarter. Given this limited backlog concentration of COVID-studies, we expect our robust revenue growth in 2022 will be driven by the strength of our non-COVID backlog”
• “Syneos 1 our innovative end-to-end product development methodology continues to provide a competitive advantage across both segments. We are particularly excited about the Syneos 1 contribution to growing the pipeline of potential commercial awards and revenue with the first of many Syneos 1 portfolio assets set to begin commercialization in the third quarter”

 

 

 

 

 

 

 

 

 

While the quarter was good and comments on the call were promising for 2021-2022, the stock is trading down 4% as guidance was not increased for the year.

Sales returned to positive growth ~+4% overall, with clinical trials segment up 3.9% organically and commercial still negative -1.8% (but a 720bps sequential improvement). The management team expects a acceleration in sales growth throughout the year, driven by backlog (up 22.5% this quarter) in Covid and non-Covid trials. Covid is only 4% of backlog (and $25M in revenue last year). They currently have 22 Covid-related projects, with an additional 23 more. Covid is created interest in their integrated platform.

 In clinical solutions, they experienced a record level of awards, and patient enrollment remains high. On the commercial side, consulting services is seeing double digits revenue growth, and the entire segment should see double digits organic growth in 2Q, while both commercial and clinical trials should grow mid-single-digits in the second half of the year. Syneos continues to invest in the decentralized trial model to grow its business – Illigworth being the latest addition on this front.

Its Syneos One offering is gaining traction with small and mid-sized customers and we should see some of that towards 2H2021, and the Synteract acquisition is increasing exposure to emerging biopharma as well. On the large pharma side, capabilities and penetration is good, and Syneos scale (vs. top player) is not an issue for large pharma customers. On the balance sheet front, the company continues to deleverage, now at 4.1X, and with a target of 3-3.5X by the end of year.

Overall we remain positive on Syneos and expect the recovery to accelerate throughout the year to see the investment thesis play out.

 

Investment Thesis:

I. Secular growth:

1. Increasingly sophisticated and highly-regulated environment with government increasingly focused on drug pricing à biotech and large pharma need to reduce fixed costs
2. Growing research and development (R&D) spending environment:
• Growing portion of R&D outsourced to Contract Research Organizations (CROs)
• Pharma/biotech clients choosing fewer & higher quality CROs (expertise and scale)
3. Syneos has robust backlog predicting good growth for next 2 years
• Recovery in clinical trials post-covid

II. Competitive advantages:

1. Only company integrating clinical trials (Contract Research Organization -CRO) and commercialization solutions (CCO):
• Offer customized solutions and possibility to lower time to market
2. Top 3 market share within fragmented CRO market
3. Global scale – allows to compete for larger trials, with expertise in complex diseases
4. Diverse client base (large to small pharmaceuticals)

III. Attractive valuation: 45% upside

• Driven by secular growth drivers and margin expansion

 

$SYNH.US

[category earnings] [category equity research] [tag SYNH]

 

 

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: $275                     Price target: $322 NEW ($236 prior) 

Position size: 3.09%                    1-year performance: +57%

 

• Revenue growth of +10% y/y ex-FX;- +8% for the full year
• Only competitor Philips unable to supply devices due to recent large recall – this should boost market share gains near term – this is largely priced in the stock, up 30% since the announcement
• Extra sales from recall amount to $300-350M in FY22 – a 10% market share gain in devices -some of which could revert in FY23
• Supply chain constraints also affecting RMD: will slow the ramp up of production, and could last another 12-18 months
• Devices sales +12%:
• New patients starts show recovery post-covid, and boost from competitor recall
• US devices sales were +30%
• Rest of world devices sales -6% due to covid and tough comps y/y with ventilator sales
• Masks segment +10%
• US masks sales +5%
• Ex-US market +24%
• Software-as-a-service business: +5% growth, thanks to resupply program

 

• Gross margin -260bps y/y (-70bps for the full year) due to higher freight costs (to continue in FY22) and product mix
• Manufacturing efficiencies to ramp up in 2-3 quarters
• FY22 guidance:
• Sales higher from recall by $300-350M
• Near term earnings cut 1-2% from higher costs
• Investor day scheduled for September 8th
• CEO quote: “During the quarter, we saw the ongoing recovery of core sleep apnea and COPD patient flow across our business, as healthcare systems continue to adopt new models of patient care”

 

Our long-term view on the stock is still valid, with the global sleep apnea market only ~20-30% penetrated, and market volume growth rate ~10% per year – an attractive market where Resmed and Philips play in duopoly.

 

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

[category earnings] [category equity research] [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

 

Key Takeaways:

 Share price: $203                    Target Price: $213 NEW ($182 prior) 

Position size: 2.24%                TTM return: +29%

 

Zoetis continues its great performance in Q2, with sales up 22% ex-FX and adjusted net income up 28% ex-FX. Demand in Companion Animal segment remains solid, with strength in Simparica Trio (now at $139M sales in the quarter, only 15 months post-launch – with lower cannibalization of base product than expected!) & parasiticides and dermatology products. CT scan images business is progressing well, and Diagnostics posted 38% growth as access to vet clinics improves. China and Brazil grew 30% and 40% respectively. In the US, the livestock segment had some weakness in cattle and poultry. The company cited some competition and soft-end market as the reason for US decline. Thanks to the mix (companion growth > livestock growth), gross margin beat expectations and came at 71%.

 

Going forward, catalysts will be:

• increased clinic visits & dollar spent
• broader utilization of diagnostics
• strong execution in international markets

 

Yesterday the company announced the acquisition of Jurox, an Australian animal drugs manufacturer, and is expected to close in 1H22. Australia is ZTS’ 5^th largest market, and this acquisition will bring some drugs with global expansion possibilities. Following 2Q results, ZTS is raising its 2021 full year guidance by ~1% on the top line and $0.05 on the EPS line. Some of the upside seen in 2Q is being reinvested in the business, something typical for ZTS.

 

CEO quotes:

o    “The entire portfolio is benefiting from strong pet care trends in terms of increase in clinic visits rising spend per visit, and a focus on diagnostics and specialty care especially among newer and younger generations of pet owners”

o    Livestock: “in the US data suggests the foodservice and restaurant industry has continued to recover in the second quarter, which is a crucial dynamic for demand of our premium products”

o    Diagnostics: ” So it’s in relative terms, it’s not the largest proportion of our of our revenue streams certainly, but we are very, very much excited about the potential for the future”; “We are well positioned to grow faster than the diagnostics market, which is expected to grow double-digits”

 

Guidance raised for 2021:

• Revenue growth of +12.5% to 13.5% from +10.5% to +12% due to better than expected results and confidence in the portfolio’s performance
• Adjusted net income range increased to $2.135B and $2.175B, with operational growth of 13% to 15%
• Adjusted EPS guidance raised to $4.47-$4.55 from $4.42-$4.51

 

Zoetis investment thesis:

·         Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented

·         ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs

·         ZTS is growing above the industry rate and has proven resilient throughout economic cycle

·         Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013

·         Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability

 

$ZTS.US

[category earnings] [tag ZTS]

 

 

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: $82                            Price Target: $90

Position Size: 2.04%                        1-year Performance: +29%

CVS reported 2Q21 earnings this morning that beat consensus expectations thanks to strong revenue growth of 11.1% as care return to normal levels and vaccines boosted sales. An employee wage hike to $15/hr minimum by the end of July 2022 will increase costs (current rate is $11/hr). The CEO thinks this is necessary to retain employee in a tight retail labor market (see quote below). On the Health Care Benefits side, covid-related care costs were a bit higher than expected, and a return to normal level of care (ex-covid) pushed expenses higher, raising the Medical benefit ratio higher to 84.1% from 70.3% in 2Q 2020. CVS will host its Analyst Day in December, and the event could be a catalyst for the stock, as the new management team will provide some clarity around earnings growth for 2022 and capital spending strategy. The company remains cautious as the pandemic is not yet over and cases climb again, so its 2021 guidance raise was not sufficient to lift the stock higher. Another rise in costs to treat covid patients and/or deferral of doctor’s visits (and subsequent drug purchase) could be detrimental to CVS revenue growth.

Segments update:

• Health Care Benefits: +11% revenue growth

·         Medical Benefit Ratio of 84.1% as the company returns to normalized utilization rate vs historically low in 2Q2020 due to covid – non-covid related utilization emerged favorably, while covid-related expenses were higher than expected

• Pharmacy Services: +9.8% revenue growth thanks to higher volume, driven by Specialty Pharmacy growth of 8.9% due to new business wins & brand inflation  
• Retail/LTC: +14.2% revenue growth. Same-store-sales +12.3%. Pharmacy SSS grew 12.4% and front store sales +12%  
• Covid update: 29M tests administered, 30M vaccines administered total. 40% of vaccines administered in the last 2 months were to members of under-represented communities

FY 2021 guidance:

·         Revenue growth raised to 4.5%-6.25% from 4%-5.75% – due to all segments expecting better performance

·         Cost savings $900M to $1.1B reiterated

·         Adjusted EPS raised to $7.70-$7.80 from $7.56-$7.68

·         CFO raised $0.5B to $12.5-$13B

CEO quotes: 

• “I would highlight a couple things in front of us. One is that, as you know, we have more opportunities and expanding our digital access and digital connections. We’ve seen across the board with our next best actions, using digital connections. We’ve seen — for those individuals, we’ve seen reductions in overall medical costs. We also have the opportunity to expand our home service and delivery.”
• “we are seeing 65% of our employees that are hourly are already at or above $15 an hour. So this is a very targeted investment for our pharmacy technicians, our front store colleagues. And we will start a series of wage increases beginning in September, which is really what’s driving that $125 million impact to the latter half of the year. Obviously, it’s a tight labor market. We are paying attention. We’ve got a lot of hiring to do to support growth. And so far, we see pressure, but we’ve been managing through it. But we’re watching that labor market. We’re seeing impacts in the stores. And that’s part of why we’re making this wage investment today”

Thesis on CVS

• Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.
• Aetna acquisition makes it vertically integrated.
• Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.
• shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)

 

$CVS.US

Category: earnings

tag: CVS

 

 

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: $128                   Price Target: $139 NEW (from $130)

Position Size: 3.08%                 1-year  Performance: +71%

 

Xylem reported its 2Q 2021 earnings this morning, beating estimates on the top and bottom line, as demand was strong in all segments. Organic sales were up 11%, and leading indicators are showing good momentum: orders were up +29% and backlog +35%. EBITDA margin grew 200bps, as pricing, volume and mix added 330bps, offsetting part of COGS inflation (-370bps), and productivity efforts adding another +390bps. We are pleased to hear the company’s strong operating execution is yielding margin expansion, even with rising inflation and component shortages. The management team raised its full year guidance, but the raise implies lower growth in 2H21 vs. current consensus. We think this will lead sell-side analysts to raise their numbers and price targets for this name. We revised our price target to reflect faster recovery in end markets and greater margin upside potential. The next investor day will be held September 30^th, when they will share some strategic update.

 

CEO quotes:

• M&A: “we still are going to be disciplined around returns and […] making sure margins are accretive. There’s a technology component we believe is very important that there is a services recurring revenue component that are very attractive.
• ESG: “ I’m very proud of what the entire team has done here on making sure that sustainability for us and the broader ESG is not just some kind of stand-alone thing. It’s deeply integrated into our business. It’s what we do as a company, and it’s in our operating processes”

 

Additional 1Q21 results:

Organic growth by end-markets:

• Utilities: +6%
• Industrial: +17%
• Commercial: +12%
• Residential: +29%

 

Organic growth by regions:

• US: +5%
• Emerging markets: +18%
• Western Europe: +17%

 

2021 guidance raised:

• Organic sales lifted from +5-7% to +6-8%
• Water Infrastructure up mid-single-digits
• Applied Water up low-double-digits
• Measurement & Control up mid-single-digits
• Adjusted EBITDA margin 17.2%-17.7%: cost savings benefits with favorable volume/price/mix, balanced by rising inflation, component shortages and prioritized growth investments

 

Xylem’s investment thesis is:

 

• Xylem has strong sustainable secular growth drivers in a fragmented industry:
• Access to clean water is a necessity
• Population growth & urbanization
• Aging infrastructure

 

• More defensive sales base thanks to:
• 50% of sales to utility sector
• sticky client base due to high switching costs
• high level of replacement parts demand
• Long-term contracts with ½ of the revenue base recurring

 

• Margin expansion overtime from productivity efforts

 

• M&A strategy has increased their scope in the water cycle

 

• Valuation is attractive today

 

XYL.US

Category: earnings

Tag: XYL

 

 

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