Author: Julie Praline

Key Takeaways:

 

Current Price: $74.3                       Price Target: $88 (from $83)  

Position Size: 1.91%                       1-year performance: +24%

 

Fortive reported 2Q earnings above expectations and raised its 2021 guidance.

• Organic growth of +21.3% (+26.7% reported includes FX and acquisitions). Compared to Q2 2019, sales grew 13%

o    All three segments had positive sales growth:

Ø  Advanced Healthcare Solution +11% organic (24% of revenue): slower recovery of elective procedures business, but is expected to improve in 2H21 – and 4Q growth rate expected to be 26-27%. Hospitals allowing vendors back in, increasing activity

Ø  Precision Technologies +22.2% organic (36% of revenue), led by growth at Tektronix that introduced new products (automated test solutions for high-speed data centers)

Ø  Intelligent Operating Solutions +26.8% organic (41% of revenue), led by growth at Fluke

• Software-as-a-service grew in the low double-digits
• Adjusted gross margin 57.3%, +100bps y/y, with 130bps coming from price increase, especially in their hardware business
• Adjusted operating margin 22.2%, +240bps
• Adjusted EPS $0.66, +53.5% y/y

 

Fortive has significantly reduced its leverage post Vontier spin-off:

• Net debt/EBITDA stands at 1x, with expectations to be at 1.2x by year end
• Recent acquisition of ServiceChannel (announced in early July): high growth software business, enhancing FTV’s ability to service needs of facility owners. Closing of the deal is expected in Q3.

 

FY21 guidance:

• Organic growth raised to +10.5% to +12% (vs +7% to +10% previously)
• Reported sales to be +13.5% to 15%
• Adjusted operating margin of 22.5-23.5%, up 50bps
• Adjusted EPS raised to $2.65-$2.75 from $ (+27-32% y/y growth) from $2.50-2.60

 

CEO quotes:

• “We still are in a very good shape relative to price cost, not only because of price, but also because we’ve done a nice job on the cost reduction side as well“
• “I think sustainability is becoming such an important topic for companies around the world and not just large cap. I mean, just about every company in the world now is trying to understand their carbon footprint, they are trying to understand how to action sustainability work and we’re just so well positioned with Intelex, ehsAI around those trends, I think it’s hard to call out anything better than that, just given the massive amount of work and effort that’s been going into sustainability everywhere in the world. So I think that’s certainly a secular driver that we knew was good a few years ago when we bought into Intelex.”

 

We are raising our price target to $88 based on good results and comments for the rest of 2021 and early 2022 expectations. As the company continues its Software-as-a-Service portfolio, it deserves a higher FCF margin in the out years, which we updated in our model.

 

FTV Thesis:

• Market leader:
• Leadership position in most of the markets they serve
• Experienced leadership team
• Above industry margins with strong cash flows
• Quality:
• FCF yield ~5%
• Organic growth target of 3-3.5% (4-5% in last 2 quarters after being under the target in prior quarters)
• M&A strategy to enhance top line growth
• Margins expansion from new products introduction, continued application of the Fortive Business Systems and M&A integration
• Shareholder friendly:
• Management team focused on shareholder wealth creation through top line sustainability and margin expansion

$

FTV.US

Category: earnings

Tag: FTV

 

 

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: $79                 Price target: $94  (under review)

Position size: 1.39%              1 year performance: +4% 

 

THE INVESTMENT THESIS IS UNDER REVIEW – DO NOT ADD TO PORTFOLIOS

 

Colgate released its 2Q2021 earnings this morning. Results for the quarter were in-line with expectations, but the company lowered full-year profit guidance due to cost pressure, which is driving the stock lower today. Reported sales were up 9.5%, with every regions expect North America in positive territory, and despite tough comps from consumer pantry loading last year. Adjusted EPS was up 8%, lower than sales as gross margin declined 80bps due to higher costs (raw materials and transportation). The company expects easing material costs in 2022. Free cash flow for 1H21 is 40% below 1H20 and 10% below 1H19, as cash flow from operations is lower while capex is increasing to fund future projects. While we understand the cost pressure companies are facing in 2021, we think a market share leader such as Colgate should be able to weather this better in our eyes.  

• Total organic sales were +5%, and details by region is listed below. Overall pricing was +2.5% and volume +2.5%
• North America sales decline is mostly due to lower volume y/y in the US in personal and home care. This was due to logistics issues and promotional abilities in the market

 

 

• Operating profits: the decline is due to significant higher raw material costs, higher logistics costs and increased advertising expenses, partially offset by some pricing increase

 

• 2021 guidance reiterated:
• Organic sales to be 3-5% (in line with its long term target), reported sales +4-7%
• Gross margin now expected to decline (previously expected expansion), and increased advertising spending
• EPS growth now expected at the lower end of its mid-single to high-single digits growth
• Capital allocation plans: dividend,  debt paydown and share repurchase increased. They see some strategic gaps they want to fill in their portfolio with M&A

 

• Earnings call quote:
• “We are also dealing with the impact of COVID, restrictions in several markets, economic and political uncertainty, strong competitive activity. And of course, significantly heightened raw material and logistics headwind . We expect that all of these factors will continue to impact our business”
• Latam comments: “So obviously the market seems to be returning despite the fact that would definitely not out of the woods relative to COVID”

 

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] [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: $270                          Price target: $293

Position size: 2.38%                        1-year Performance: +38%          

 

Stryker released its 2Q 2021 earnings last evening. Sales were up +9.3% organically form 2019 (+43% from 2020). Lower COGS and SG&A expenses due to cost discipline and leverage helped margins, although the company is not back to full spending post-covid.

The portfolio performance improved sequentially, and pushed the management team to raise its full year guidance.

• The US knee business is back in positive territory (+4%), although below pre-covid level (+8%). Orthopedic surgeries are elective in nature and thus still seeing some impact from covid. Surgeries are moving to various settings such as surgery centers (away from hospitals), but this does not seem to affect tool/products used by surgeons.
• In MedSurg, hospitals capital equipment orders is strong, a positive leading indicator.
• The Wright acquisition -its largest ever- is going better than expected and added 7% to top line this past quarter.

 

The disruption from the Delta variant is baked into their updated guidance, while some care continues to be deferred and will be a tailwind in 2022. For 2021, sales guidance was lifted on the lower end to +9-10% from 2019 levels, and EPS guidance lifted as well by the $0.11 beat, thanks to 2Q performance (implying 2H unchanged). Operating margin guidance is unchanged, remaining at +30-50bps from 2019, excluding M&A impact.

 

Overall this was a good quarter, but the evolution of the recent rise in covid cases across the globe will dictate how 2H21 turns out. We remain positive on this name long-term and maintain our price target unchanged due to remaining uncertainties for the rest of 2021.

 

CEO quote:

• “On hip and knee, what we’re seeing is really a gradual increase. We’ve seen throughout the year a return of elective procedures. These are deferrable procedures that need to be done at some point. And yes, with the Delta variant, you’re starting to see pockets of disruption, but overall, the hospitals are very capable of being able to deal with this.”

 

 

 

   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

[category earnings] [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: $54.5               Price Target: $61

Position Size: 1.47%               1-year Performance: +30%

 

Sensata released its 2Q21 earnings this morning. Sales grew 63% organically thanks to end-market recovery and their own market outgrowth, while operating income grew 179% due to top line growth and productivity. The China VI regulations has led to a nice content per truck increase. The management team remains cautious in its auto production growth, expecting a rebound still from 2020 but lowering it to +5% globally for the year, while IHS predicts a 9% growth rate. On the positive side, ST now sees better recovery in Heavy Vehicles and Industrials end markets. The chip shortage situation is impacting the auto and heavy vehicles production, but Sensata’s industrial portfolio came in stronger than expected. The current cash balance is $1.9B, leaving plenty of room for additional M&A. Net leverage ratio is 2.7X, decreasing from 2.9X last quarter. The stock is trading down slightly today due to the reduction in auto production outlook for the rest of 2021. We think the company has plenty of opportunities going forward thanks to its push in the electrification theme and see the near-term auto production downgrade as a minimal risk to the investment thesis.

 

Sales growth by segment:

• Automotive organic sales +75%: ST outgrew the market by 990bps, excluding channel restocking. This is driven by powertrain and emissions, safety, electrification applications despite chip shortage. The company expects restocking to be a further tailwind going forward.
• HVOR organic revenue +96% y/y: outgrew the market by 2,850bps, excluding channel restocking. This is driven by the China VI emissions regulations, operator controls, RADRA safety and tire pressure monitoring applications
• Industrial & other revenue +29%. Growth was driven by heating, ventilation and air conditioning, new electrification launches and restocking.
• Aerospace sales +20.6%, as OEM production improved and air traffic recovery (aftermarket business)

 

2021 guidance was raised to account for the good 2Q results and is now:

• Organic sales +19-21% from +16-21%
• Adjusted EBIT $782M-818M from $755M-805M
• EPS $3.42-$3.62 from $3.20-$3.50

 

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: $368        Price Target: $469  

Position Size: 2.74%      1-year Performance: -4.6%

 

Lockheed released its 2Q21 earnings results this morning. The company missed on the operating profit line due to a one-time charge in a classified program (expected to become a franchise production contract in the coming years) within its Aeronautics segment. While the stock is down, breaking from its usual “beat and raise” trend, the company did not reduce its full-year outlook due to this issue.

 

• Revenue growth of 5% organically and segment operating margin decreased 80bps due to Aeronautics performance issue ($225M loss)
• F35 program sales were higher than expected thanks to increased production
• Sikorsky performing well (adding 6% growth to the Rotary segment)
• Looking into 2022, space & hypersonics, F-16 and helicopter production should be good drivers to top-line growth
• Sales per segment were as follow:
• Aeronautic +3% 
• Missiles and Fire Control +5% 
• Rotary and Mission Systems +5%
• Space Systems +10%: good growth in hypersonics, NexGen Overhead Persistent Infrared (OPIR Satellite)

 

• Book to bill at 0.66X continues to decrease moderately. Backlog was down 4% from the end of 2020
• Cash from operation was $1.3B, and LMT returned $1.2B to shareholders through dividends and share repurchases
• The company made an accelerated $1.4B payment to suppliers, continuing to mitigate the Covid-19 risks
• Total YTD share repo is $1.5B
• Slight 1% increase in EPS guidance, sales & segment EBIT unchanged (EBIT would go up if no charge) , cash from ops reiterated but includes the Aeronautics charge
• Acquisition of Aerojet Rocketdyne (announced in December) is still under review with the FTC

 

• CEO quote: “we’re going to […] make our current and future platforms way more competitive, way more attractive, use our network effect to get more value for money for the money for the government and see how the budget can shift our way“
• CFO quote: “So F-35, rough numbers 27%, 28% of our portfolio, so when you think about where we’re and where we’re going with that program, so we’re right now for production in the midst of our product — what’s called a production rebaseline. And that’s basically due to COVID and trying to get our technology refresh three on Lot 15 and Lot 4 onto Lot 16. The customer — the joint program office is working with all the key constituents to look at what makes sense. As you recall, this year, we’re going to deliver anywhere from 133 to 139 aircraft. What makes sense next year and the next couple years, to make sure we maximize when we put that key technology on that aircraft. So you’re going to likely see once that gets revealed, and hopefully, it’ll be a –we’ll be able to reveal that with the customer when we give trend data in October, but it’s likely to show the plateau of production slightly pushed out to the right but also elongating if you will.“

 

 

 

 

LMT Thesis:

·         Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships

·         Excellent management team focused on returning capital to shareholders

·         Strong cash flow and financial position

    

[category earnings] [tag LMT] $LMT.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: $169      Price Target: $200 

Position size: 2.21%     1-Year Performance: +13%

 

 

• 2Q2021 results were above expectations, and 2021 guidance is conservative in our view:

 

• Overall sales +24% organic, adjusted EPS +48.5%
• Pharma segment performing well with sales +11% organically
• Covid vaccine sales came $164M below $785M consensus expectations
• Key new drugs performed very well, most businesses are back to pre-covid levels
• Oncology +24%, immunology +16%
• Consumer segment: +10% growth
• Over the counter sales growth of +14% drove the beat, recovering from pandemic hit
• Oral care +7%
• Baby care +9% (Aveeno sales online doing well)
• Skin care/beauty +16%
• Medical Devices: +59% organic sales growth (+8% growth vs 2Q 2019)
• All business lines outperformed, rebounding from last year’s covid disruption, and recapturing deferred procedures
• Restocking added 130bps to growth
• US and Asia are above 2019 levels
• Covid remains a disruption in EMEA and Latam

 

• Dividend remains a priority, followed by M&A

 

• The management team did not discuss recent press reports citing a potential spin-off of its talc-based products, nor did it discuss other press reports on possible settlements for the opioid litigation

 

• Operating margins came in line with expectations, thanks to lower COGS (from lower vaccine sales), while SG&A and R&D spending came above

 

• 2021 guidance raised:
• Revenue raised to $91.3B -$92.1B (+9.5%-10%) from $90.6B-$91.6B, excluding sales from the vaccine. We think there is room for further improvement as the raise was pretty conservative following Q2 beat
• 2H outlook: in medtech: management does not expect a linear recovery going forward due to uptick in covid cases. They are seeing some hospitals beginning to defer care due to recent rise in numbers
• EPS guidance raised to $9.60-$9.70 from $9.42-$9.57, this is helped by below the line items like taxes, and non-operating income

 

 

 

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: $87.9                 Price Target: $102  

Position size: 2.24%                1-Year Performance: -3%

 

• Sales growth of 11% was above expectations, driven by the Flavor segment recovery and acquisitions
• Consumer segment sales -2% (organic growth down 7% y/y). Household penetration continues and market share gains in various regions. Acquisitions add 2%
• Flavor Solutions +40%% y/y (+25.5% organic), as foodservices and restaurants returning to growth post-pandemic
• Capacity constraints
• Gross margin declined 190bps as sales shift between segments towards lower margin Flavor segment – but up 40bps vs. 2019 level
• Cost inflation not fully offset by price increase
• Operating margin down 200bps vs last year but up 10bps vs. 2019
• FY2021 guidance
• Organic revenue growth now 8-10% from 6-8%
• Cost inflation on commodities, packaging and freight is worse, in the mid-single digits rate
• Raising prices this year to cover costs, but lagging
• Tough comps ahead for top line in 3Q
• Raising EPS guidance to $3.00-$3.05 from $2.97-$3.02 thanks to better revenue outlook
• Valuation is on the higher end on a P/E and FCF yield but MKC is a solid performer year over year and provide good growth and M&A strategy. Long-term thesis is intact.

 

The company provided these data points on consumer behavior around cooking/eating pre and post-pandemic – which highlight the continued secular growth patterns supportive of MKC’s portfolio of brands:

 

 

 

 

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: $235                Price Target: $255

Position Size: 2.48%              1-Year Performance: +32%

 

• Total company sales +14%, with market share gains during Cinco de Mayo & Memorial Day, and Hard Seltzer gained shelf space
• Beer sales increased by 14% (volume +10.7%)
• Supply shortage (driven by high consumer demand, weather and delay in Obregon coming online) impacted growth – shipments would have been in the high teens vs. +11%. This pressure should ease as the new Obregon facility fully ramps up in the coming months
• On-premise reopening (bars, restaurants) is a positive with +250% growth y/y. 11% of beer volume was sold on-premise, still below pre-covid levels of 15%
• June depletions are up High-single-digits, showing continued good momentum
• Wine & spirits grew +16% organically, driven by high end portfolio
• Inflation: cost inflation in the low-to-mid-single digits due to labor tightness (including truck drivers), commodity costs (aluminum and glass). Those headwinds are expected to be temporary
• Beer operating margin grew 16%
• Gross margin expanded 124bps, total operating margin +107bps. Higher pricing and SG&A expenses management helped offset higher input costs and marketing expenses
• Guidance for fiscal year 2022 EPS increased by $0.05, thanks to lower share count
• Beer net sales remain +7% to +9%, and operating income growth of +3-5%
• Wine & Spirits to decline -22% to -24% (due to sale of business). Excluding divestment, sales would be +2% to +4%
• Share repurchase was 2.2M during the quarter. Accelerated share repurchase program of $1B for FY22 ($523M done this quarter already)
• CEO quotes:
• “We’re very enthused by how June is setting up and is certainly consistent with our long-term algorithm”
• “Due to benefits from our commodity hedging program, we did not experience the expected cost inflationary pressures during this quarter. However, we expect significant inflation headwinds to ramp up during the second half of our fiscal year as current hedges roll off. In addition, we believe the depth and duration of inflationary pressures are becoming more uncertain as the year unfolds”
• “Our outlook as well as sort of the external advice we get on this is still that inflation is going to have a bit of a spike but it’s going to be temporary in nature. The question just is like how temporary”

 

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

 

 

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

 

Yesterday, Fortive held its Virtual Analyst Day, providing us with a summary of their performance in the last 5 years, and their plan for the upcoming 5. Overall it was pretty positive, and we continue to think this stock should outperform its peers. Recent M&A activity has made its core business performance a bit more difficult to assess, followed by the pandemic, but as we move forward post divestments, we should get a better picture of the quality of its various underlying bsuinesses.

 

How has Fortive evolved in the last 5 years. Here their next 5 years plan:

• Revenue growth went from GDP/GDP+ to mid-single digits, with MSD growth rate for next 5 years
• Recurring revenue from 18% to 38% (and next 5 year target of 45-50%), and software from minimal to 13% of sales (to reach 20% in 5 years)
• Gross margin went from 49% to 58% (and next 5 years target to reach 60%)
• EBITDA from 23% to 24% (and next 5 years target in high 20s)
• FCF guidance for 2021 of $970M to reach over $1.6B in 5 years

 

Three key areas of focus for their Fortive Business System (FBS) – a toolbox set in place to seek outperformance:

1. Innovation: partnered with Pioneer Square Labs to nurture start-ups that will ultimately be part of FTV’s portfolio. >$2B in market opportunities have been discovered via these innovation initiatives
2. Software: to improve business processes, and drive dollar retention. SO far they have seen 400bps in net dollar retention.
3. Data analytics: identified $250M in projects in 2020, driving the next generation of products.

 

How good is Fortive at integrating acquired businesses? Here’s the example of ASP, acquired from JNJ:

FTV had to create their critical business infrastructure, including HR systems, CRM systems, legal entities and transferring business licenses. 10,000 customer contracts were converted, 77 logistics hubs were reduced to 28 (and keeping deliveries on time). The integration process was planned to take 24 months but was done in 10. The customer installed base had been declining prior to acquisition, and is now on track to expand by 6pts between end 2019-end 2021.

 

Segment review:

Advanced Healthcare Solutions: The company in 2021 is expected to see $1.2B in revenue, gross margin of mid-50%, EBIT margin of low-20%,  and market size of $10B and growth of mid-single-digits

Changes made in this segment since 2016:

• Total addressable market grew from $1.1B to $10B
• Revenue grew from $170M to $1.2B
• Recurring revenue from less than 5% to 70%
• Operating margin from 20% to mid-20%

 

Precision Technologies: expect 2021 revenue to reach $1.8B, gross margin in the low 50%, EBIT margin 21-22%, market size of $14B with growth of LSD.

Macro drivers:

• Internet-of-things
• Growth in wired and wireless communications
• Need for higher power density given electrification and sustainability push

 

Intelligent Operating Solutions:

2021 guidance: $2.1B revenue ($1.2B in 2016), 66% gross margin, 27-28% EBIT margin, $19B addressable market (%7B in 2016), growing in the mid-single-digits.

Secular drivers:

• an ageing technician workforce
• increasing penetration for software-enabled solutions
• connectedness through the proliferation of sensors
• risk/sustainability management complexity
• competition driving need for productivity improvements
• explosion of data.

 

 

The theme of sustainability was one of the main pillars of their annual investor presentation, a trend that has accelerated most in the last 18 months than in the past 2 decades.

Their 5 pillars are:

1. Empower an inclusive and diverse team
2. Invest in communities served
3. Protect the planet
4. Work and source responsibly
5. Operate with principle

 

FTV increased its goal of reducing scope 1 and scope 2 carbon emissions by 50% 2025 (vs. 40% by 2030).

Similar to Crestwood, FTV is working on increasing its diversity, inclusion and equity.

 

A snapshot of Fortive’s portfolio:

 

How do they look at their Total Addressable Market (TAM):

 

Regarding the balance sheet, Fortive has the lowest leverage vs. peers:

 

FTV Thesis:

• Market leader:
• Leadership position in most of the markets they serve
• Experienced leadership team
• Above industry margins with strong cash flows
• Quality:
• FCF yield ~5%
• Organic growth target of 3-3.5% (4-5% in last 2 quarters after being under the target in prior quarters)
• M&A strategy to enhance top line growth
• Margins expansion from new products introduction, continued application of the Fortive Business Systems and M&A integration
• Shareholder friendly:
• Management team focused on shareholder wealth creation through top line sustainability and margin expansion

$

FTV.US

Category: earnings

Tag: FTV

 

 

 

 

 

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: $167                    Target Price: $182  

Position size: 2.08%                TTM return: +38%

 

Overall Zoetis released another quarter beating expectations with high revenue growth (+21%) driven by both companion animal (+35% thanks to parasiticide and dermatology products) and livestock who appears to finally recover after two years of sub-par results (+9%, driven by International growth of +17%). China grew 75% while Brazil growth was +48%. Overall sales of dermatology products were $245M in the quarter, and should exceed $1B in 2021, making this portfolio a blockbuster sub-segment for Zoetis. Its expanding diagnostics sub-segment grew 47%. Zoetis has advanced its connectivity solutions in veterinary practices, and has received positive feedback on its cloud-based VetScan images platform. During its early launch. Its reference lab integration is advancing as well with good potential for global expansion. On the drug innovation front, its osteoarthritis treatment for dog (Librela) launched in Europe and is having good acceptance, while in the USA it is still pending FDA approval for a 2022 tentative launch date. Once fully launched, this product will be margin accretive for Zoetis as it is expected to sell at a premium.

Gross margins were slightly above consensus. The management team raised its 2021 guidance on the top and bottom line, although the raise was less than the quarter beat, as some of the growth is being reinvested into the business.

So while this was a good quarter, the stock is trading down today as investor were expecting a higher raise in earnings guidance. We continue to think Zoetis is well positioned to continue gaining market share and offer new therapies for companion animals that will lift sales over the coming years.

CEO quotes:

o    “it has been one year since the launch of our triple combination parasiticide Simparica Trio. It is exceeding expectations and it’s been well received by customers with a 90% plus penetration rate”

o    ” We believe the ongoing market shift to e-commerce is another boost for this category, helping to increase compliance and month on therapy and our direct to consumer campaigns for Simparica and Simparica Trio continue showing a solid return on investment in around the world.”

Guidance raised for 2021:

• Revenue growth of +10.5% to +12% from prior +9% to +11% guide, driven by better than expected Q1 and confidence in portfolio diversification and innovation
• Adjusted EPS guidance raised to $4.42-$4.51 from $4.36-$4.46

 In case you need it today, image of a little piglet:

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