Author: Julie Praline

Key takeaways:

 

Current Price: $117                   Price Target: $130 (NEW from $117)

Position Size: 2.87%                 1-year  Performance: +80%

 

Xylem reported its 1Q 2010 earnings yesterday, largely above consensus both on sales and EPS front. Organic growth of +8% reflects the recovery across end markets, as company guidance was looking for +1% to +3%. Organic orders are up 19% and backlog up 23%. Good productivity efforts drove 510bps EBITDA margin improvement, offset partially by 210bps of cost inflation. All in, EBITDA margin expanded by 480bps. Price increases were announced (similar to peers, facing inflation), and we should this come in Q3 and Q4.  On the balance sheet front, net debt/EBITDA is healthy at 1.6X. Regarding guidance, the management team raised its revenue growth prospects although the electronic chip shortage could pose some shipment delays and limited the upside in EBITDA margin upside potential. The US Utilities have shown resilient maintenance spending on wastewater/mission critical applications, and new projects are coming back online with bidding pipeline building back up.

Sustainability continues to remain in focus, with further executive compensation linked to sustainability performance and 2025 goals. We revised our price target to reflect faster recovery in end markets and margin upside potential.

 

CEO quote:

• “Productivity gains this quarter is helping offset early impact of rising inflation”
• “I think many of us worried that the cause of sustainability might suffer setbacks through the economic hardships of 2020. However, instead of a retreat, we’ve actually seen a broad and energetic global embrace of sustainability. As an enterprise over the last year, we’ve taken several meaningful steps toward our signature 2025 sustainability goals.”

 

Additional 1Q21 results:

Organic growth by end-markets:

• Utilities: +3%
• Industrial: +14%
• Commercial: +5%
• Residential: +31%

 

Organic growth by regions:

• US: -1% but orders up high-teens
• Emerging markets: +33% – China +90% on easy comps
• Western Europe: +11%

 

2021 guidance:

• Organic sales lifted from +3% to +5% to +5% to +7%
• Adjusted operating margin raised from 11.5% to 12.5%  to 12% to 12.5% from cost benefits with favorable volume/price/mix, offset partially by rising inflation and growth investments
• The order trends appears to be recovering, and backlog growth is significant (+16%)
• End markets outlook:
• Wastewater utilities (28% of revenue): modest growth expected, with healthy pipeline in US, robust bid activity in China and India (although India most likely to experience lumpiness due to current Covid situation)
• Clean water utilities (27% of revenue): global chip shortage could pose some constraints. Recent contract wins should provide some growth in 2021, good momentum in test business. Utilities companies continue to show desire to increase technology exposure with smart water solutions and digital offerings.
• Industrial (30% of revenue): light industrial activity rebound globally, dewatering business showing signs of growth due to ease of site access
• Commercial (10% of revenue): new commercial building expected soft this year, recovery in new construction late 2021. In Europe, healthy levels of activity as their supply chains proved resilient vs. peers, eco-friendly products and smart drives
• Residential (5% of revenue): work-from-home in US and Europe pushing demand, high secondary water supply demand in China

 

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

 

Key Takeaways:

Current Price: $81                            Price Target: $90

Position Size: 2.01%                        1-year Performance: +30%

CVS reported 1Q21 earnings this morning that beat consensus expectations thanks to better Health Care Benefits and PBM segments performance. Revenue grew 3.5%, similar to Q4, and adjusted operating margin dropped 240bps in Retail/LTC (lower traffic) while Healthcare Benefits operating margin expanded 70bps (better cost management). Guidance was raised on the top and bottom line, but the management team remained conservative in their raise, as they see areas of uncertainties still such as vaccine costs, vaccine hesitancy allowing a return to business as usual. Urban areas are also slower to return to normal than expected. On the positive side, CVS has won some large PBM contracts from Rx Alliance (Walgreens/Prime). CVS has a relationship with Teladoc for its virtual offering, a key competitive offering. This opportunity to shift members to site of care with lower costs should be a positive over time for costs and membership retention. The combination of in person community sites (Health Hub and MinuteClinic) and telehealth will be a great competitive advantage over time. On the capital allocation front, CVS paid down $3B in debt in the quarter. Net debt/EBITDA is on track to achieve 3X target in 2022. We continue to think CVS’s approach to healthcare as a diversified company provides opportunities to interacts with its customers in various parts of the system and gain market shares. This is a multi-year process though and patience is key to see meaningful results.

Segments update:

·         Health Care Benefits: +6.7% revenue growth, thanks to increased membership in government products

·         Total medical members flat y/y

·         Medical Benefit Ratio of 83.2%

·         Pharmacy Services: +3.2% revenue growth, driven by Specialty Pharmacy growth of 7.2% (new business wins and inflation)

·         Retail/LTC: +2.3% revenue growth. Same-store-sales +0.4% impacted by tough y/y comps (pantry loading last year). Pharmacy SSS grew 4.1% due to market share gains, vaccinations, while a weak cold/cough season was a negative

·         250 additional Health Hubs added (total 800) – 1,000 targeted by the end of the year

·         90% second dose of Covid-19 vaccine compliance at CVS Health locations, and 1/3 of vaccination patients in retail pharmacies from under-represented populations

FY 2021 guidance:

·         Revenue growth raised to 4%-5.75% from 3%-4.5% – due to good momentum YTD. Possibility of a booster for Covid vaccine not in the company’s outlook for 2021.

·         Cost savings $900M to $1.1B reiterated

·         Adjusted EPS raised to $7.56-$7.68 from $7.39-$7.55

·         Unchanged capex guidance $2.7B-$3B – higher than prior years as the company plans to invest more in technology and digital enhancements

·         CFO $12B-$12.5B – unchanged guidance

·         Continued Covid testing, but covid impact should be immaterial to EPS

·         Flat dividend and no buyback

 

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: $80.9              Price target: $94  

Position size: 1.43%              1 year performance: +18% 

 

Colgate released its 1Q2021 earnings last Friday. Overall the quarter was good, but developed markets saw a faster slow down than expected, largely offset by emerging markets.

• Colgate saw a greater deceleration in its developed markets than expected (although its improved recently)
• In emerging markets, growth continues thanks to innovation in premium products (leading to price increases)
• Expect uneven recovery across geographies due to vaccine roll-out, stimulus and oil prices (higher oil prices benefits emerging markets -> higher GDP)

 

• Organic sales +5%, beating street expectation of +3.6%. Pricing was +4.6% and volume/mix 0.5%
• EM sales +11.5% showing continued high growth levels in those markets. Pricing helped by 6%, while volume was +5.5%
• Developed markets flat, as pantry-loading last year makes for tough comps this year,  a US warehouse transition issue (resolved), and the February winter storms
• Hill’s pet nutrition +7%, good momentum thanks to increased pet ownership
• Gross margin higher than peers, a proof of its pricing power. Should help the company offset raw material increases in quarter ahead. Operating margin down 30bps
• Input costs saw significant increases in 1Q (310bps headwind), and are expected to remain elevated in 2021
• Increased advertising
• Benefit from pricing, productivity, mix shift
• Promotion intensity gradually returning post-pandemic
• Digital advertising largely embraced by large companies, and with its higher financial ability to spend on advertising vs smaller players, should be able to regain market shares lost to small players in past years. Algorithms on online search platform tends to presents large known brands on top of search rankings, reinstating barriers to entry that were non-existent initially online, which permitted small unknown brands to gain share.

 

• 2021 guidance reiterated:
• Organic sales to be 3-5% (in line with its long term target)
• Gross margin expansion, and increased advertising spending
• EPS growth mid-single to high-single digits growth – but slightly lower within guidance vs. last quarter due to FX moves, increase in raw material costs and greater cautiousness about its developed markets (recent slowdown)
• 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

 

• CEO quote: “we kind of experienced a perfect storm in the US in the first quarter. Obviously, the category expectations that we had declined more than we anticipated faster and deeper, quite frankly. On top of that, we obviously saw a significant increase in raw materials more than expected. Third, and this was the biggest piece versus our expectations with logistics. Two issues there. Obviously, the capacity and cost of logistics broadly across the US have gone up quite significantly. And that was exacerbated by a specific event that we had in a warehouse that we were opening up and had some transition issues associated with that,”

 

 

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: $72                       Price Target: $83  

Position Size: 2.06%                    1-year performance: +39%

 

Fortive reported sales and EPS above expectations last evening, but guidance for 2Q and implied 2H21 growth rates are driving the stock down today. We think guidance is conservative due to limited visibility, and see 1Q a proof FTV has a portfolio of brands of  quality.

• Organic growth of +9% (+13.6% reported includes FX and acquisitions)

o    All three segments had positive sales growth:

Ø   Advanced Healthcare Solution +11% organic (24% of revenue): high growth in China (+50%) for ASP. Elective procedure were 91% of pre-covid levels globally – reassuring for continued growth in coming quarters. Landauer (radiation safety) has grown its EBIT margin 2.5X since acquisition

Ø  Precision Technologies +12% organic (36% of revenue): Tektronix had broad based growth in the low double-digits to mid-20% across geographies

Ø  Intelligent Operating Solutions +6% organic (41% of revenue): broad strength in China for Fluke, expansion in Western Europe for Intelex, and overall better customer site access

o    Software-as-a-service products had low double-digit growth

o    Increased exposure to software and healthcare provides higher recurring revenue base, and sequential expansion as covid restrictions end

 

 

• Adjusted gross margin +90bps y/y, limited impact from higher commodity and logistics costs
• Adjusted operating margin +240bps
• Adjusted EPS $0.63, +37% y/y
• FCF $144M, +50% y/y, driven by strong earnings growth

 

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

• Net debt/EBITDA stands at 1.2X
• $5B in liquidity available
• We should expect some M&A back on the table

 

FY21 guidance:

• Organic growth raised to +7% to +10% (vs +4% to +7%)
• 2Q organic 16-19%, implies 2H21 slows down to 5-7%, which we think is due to limited visibility as we exit Covid
• Q2 quarter guidance is in-line with consensus expectations – margins would see 250bps impact from investments in growth projects and digital transformation
• Company could benefit from the proposed Infrastructure bill
• Adjusted operating margin of 22-23% (unchanged)
• Adjusted EPS raised to $2.50-$2.60 from $2.40-$2.55 (+20-24% y/y)

 

V-shaped recovery for FTV:

 

 

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: $194                     Price target: $236  

Position size: 2.54%                    1-year performance: +28%

 

• Top line flat y/y, missing consensus as the recovery in core business is slow to pick up and ventilator sales no longer tailwind (and also provide tough comparison y/y)
• Adjusting for the $35M sales in ventilators last quarter (due to covid) – sales growth would have been +1% (mostly outside of the US at +6%, as the US benefited less from ventilator sales)
• No ventilators sales this quarter, as previously guided
• New patients starts still struggling with the pandemic to recover, but sequential improvements into April in the US
• US devices sales were -2% despite market share gains from competitors facing supply issues
• Pent-up demand will be met with more at-home testing – likely to come back over time rather than all at once
• Rest of world devices sales still impacted by Covid/lockdowns -18% (ex-FX) – especially large markets in France & Germany
• Masks resupply program still resilient
• US masks sales +7% lifted by resupply but facing tough y/y comps as last year saw beginning of customer stocking
• Ex-US market flat
• Software-as-a-service business: 5% growth with stabilization trend in patient flow in out-of-hospital setting

 

• The Agency for Healthcare Research & Quality (AHRQ) report publish on April 1 shows draft finding on CPAP therapy being not positive, but Resmed believes it is lacking real world outcomes, and the American Academy of Sleep Medicine thinks they did not use all available evidence – final report should come before year-end. This is important as reimbursement adjustments could be made pending this report.

 

• Gross margin fell slightly by 40bps y/y due to mix impact (less ventilator sales), transition to a new site in Singapore and higher freight costs
• To offset that, SG&A fell 7%, thanks to lower travel expenses and cost management strategy
• $255M in tax reserves for a proposed settlement with the Australian Tax Office related to prior transfer pricing issues
• Operating cash flow was lower y/y due to working capital requirements
• Buyback likely to start again in FY22

 

• Guidance for next quarter is for low single digits growth sequentially
• FY22 guidance: double digit revenue growth in 2H2022, thanks to new product launch (AirSense 11) – guidance this early is unusual but needed to clarify the impact of ventilator sales from Covid, and recovery in core business from there.

 

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. This temporary set back is a bump on the road and we believe Resmed will performance well as the world reopens post-Covid, with greater emphasis on respiratory health.

 

 

Capital allocation remains on track with long-term targets announced by management:

 

 

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:

Current Price: $83.5                          Price target: $107

Position size: 1.68%                          Performance since inception: +15%          

 

• Sales back in positive territory +4%
• Backlog at record levels
• Operating profits and cash flows higher
• Guidance for the year maintained

 

This morning Syneos released its 1Q 2021 earnings results. 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

 

 

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: $260                          Price target: $293

Position size: 2.54%                        1-year Performance: +40%          

 

Stryker released its 1Q 2021 earnings last evening. Sales were up +4.7%, including its recent Wright acquisition, and +1.8% organically – finally in positive territory. Growth in the US was more subdued (+1% vs international growth of +15% due to timing of the pandemic starting earlier outside of the US). The management team noted an acceleration in demand towards the end of the quarter, a reassuring trend for the coming quarters. Order book activity is firming up as well as we entered April. Hips and knees surgeries are returing to the mid-single-digits growth in April (a trend JNJ mentioned as well), which is encouraging but not surprising as this is a big profit center for hospitals. On the margin front, operating margins declined 160bps over 2019 levels, as the company integrates Wright Medical and ramp up spending to fuel future growth. Overall the recovery in SYK businesses in happening, with future innovation likely to drive growth. Margins expansion is momentarily limited as the company spends on R&D. We remain bullish on the company’s future and maintain our position in the stock.

 

• Guidance in sales for 2021 remains unchanged at +8% to +10% vs. 2019 levels, implying an acceleration throughout the year
• The management team reiterated their operating margin expansion of 30-50bps over 2019 levels
• EPS for the year was raised as the Wright integration is rolling up faster than planned.
• So far competitor’s launch of knee robots have not taken market share away from them (JNJ launching Velys approved in January 2021, Zimmer launch of Rosa), but rather brought more interested and validation to this category
• Mako robot seeing good growth in the US but also outside of the US where regulatory approval was gained in 2020
• CEO quotes:
• “The other thing that makes us very confident on the full-year outlook is the order book for capital equipment, both large capital and small capital, which is both picking up. So overall, we’re feeling bullish.”
• “We are encouraging divisions to ramp up some of their spending to make sure that we are properly positioned for growth, that would also include spending in innovation. And so we are making sure that we are not doing anything to hold back product development and other innovation spending that frankly will be needed to really fuel growth even towards the end of this year or even early into next year.”

 

 

   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: $58               Price Target: $61

Position Size: 1.69%           1-year Performance: +64%

 

Overall results were good and the company is continuing on its growth trajectory, ex-Covid recovery, with its strategic acquisitions in the electrification theme, expanding its addressable market size quite meaningfully year after year.

Sensata released its 1Q2021 earnings this morning. Total sales growth was +21.7% (organic sales were up 18.8%) and operating income margin expanded 330bps thanks to end-market recovery and outgrowth. The chip shortage/extra costs impacted margins by 120bps this quarter, while Covid related costs were 10bps. Looking at Q2, the company is guiding to have 58% to 63% organic revenue growth and a 750bps operating margin expansion y/y. For the whole year, guidance is for 16%-21% organic revenue growth and 230bps operating margin expansion. We believe the stock is trading down today as the management team is taking down their expectation for market growth in the following sectors: aerospace, China, European and North America auto production – mainly due to the global semiconductor chip shortage, which will weigh on their margin upside potential later this year. On the positive side, Heavy Duty /Off-Road vehicles and industrials were revised up.

 

 

Sales growth by segment:

• Automotive organic sales +19.3%: ST outgrew the market by 910bps
• HVOR organic revenue +32.8% y/y: outgrew the market by 1,070bps
• Industrial & other: organic revenue +16.8%
• Aerospace organic sales declined 22.4%

 

On the M&A front, ST acquired Xirgo Technologies, which will help them accelerate their ability to provide data insights to transportation and logistics customers. The cost of capital was reduced by 80bps (now 4.5%). Net leverage ratio was 2.9x at the end of March, but 3.4x including the recent Xirgo acquisition (closed on 04/01).  They are also starting a joint venture with Churod Electronics extending their portfolio in electrical protection contactors. Sensata continues its growth in the electrification theme, which is much broader than just electric cars: charging infrastructures, industrial and grid opportunities as they expand in renewable energy. ST has a portfolio offer in high-voltage protection and battery management systems.

 

 

 

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: $387        Price Target: $469  

Position Size: 2.98%      1-year Performance: +4%

 

Lockheed released another good quarter, beating on the top and bottom line, and raising guidance for the year by 1% for revenue and 2% for EPS (all as usual).

• Revenue growth of +4% and segment operating margin 10.8%
• 2021 revenue guidance of $68B at the mid-point
• Cash flow from ops was $1.75B, guidance for the year raised by $600M to be at or above $8.9B
• Backlog still solid at $147B but flat quarter/quarter
• Book to bill 1.05X
• Balance sheet remains good with leverage of 0.9X and cash position of $2.9B
• The company repurchased $1B of stock during the quarter (vs. none last quarter)
• $4.4B purchase of Aerojet (announced in 4Q) will most likely not require new debt as FCF and cash on hand offer plenty of liquidity
• Aerojet offers opportunities in the growing space & hypersonic sector, a priority in the defense budget
• LMT has exposure to key defense programs such as the F-35, missile and space, all growing areas within defense spending, although the defense budget is likely to decelerate over the next few years

 

Sales per segment were as follow:

• Aeronautic +0.3%, with F-16 and classified contracts growth offset by lower F-35 development contracts and F-22
• Missiles and Fire Control +5%, driven by Patriot programs
• Rotary and Mission Systems +9.6% driven by an international pilot training system and Sikorsky helicopters
• Space Systems +3.4% driven by the Atomic Weapons Establishment and commercial civil space programs

 

 

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: $166      Price Target: $200 

Position size: 2.23%     1-Year Performance: +7%

 

 

• 1Q2021 results:
• Overall sales +6% organic, adjusted EPS +12.6%
• Pharma segment performing well with sales +7.1% led by key franchises
• Beat largely lead by Darzalex, Xarelto and Tremfya
• Vaccines accounted for $100M in sales
• Consumer segment: -3% due to last year’s customer stocking at home, and lower sales in cough, cold and flu medications
• Medical Devices: showing signs of recovery from last year with +8% sales growth – US grew 5.4% while outside US grew 16.5%
• Management team is bullish on rest of year outlook for this segment, US healthcare system ended the quarter at 90-105% of normal volumes – Europe varies more country by country

 

• Dividend increased by 5%

 

• CFO quote: “So across all three parts of our business I think there is a real good take away there that the business is healthy and strong you couple that with the investment, we continue to make in R&D at elevated levels, I would hope folks feel really good about not just our performance of today, but our future performance on the horizon.”

 

• 2021 guidance narrowed – we view it as conservative, leaving room to be raised as Covid pressures diminish during the year
• Revenue slightly raised: from 8.0%-9.5% to 8.7%-9.9% organic – not including the Covid-19 vaccine sales – a source of upside going forward
• Covid vaccine sales are selling on a not-for-profit basis, but 1Q was impacted by vaccines expenses ($0.05-$0.10) so recouping those costs in future sales is a possibility.
• The management team indicated that once the pandemic is behind us, sales of Covid vaccines could be at a profit
• EPS guidance narrowed: $9.42-$9.57 (vs $9.40-$9.60)

 

• In a separate event, the European Medicines Agency’s Safety Committee completed its review of the vaccine following rare cases of blood clots
• The committee confirm that the overall benefit vs. risk profile of the vaccine remains positive – shipments to Europe to resume
• All cases happened to people under 60 (mostly women) within 3 weeks of receiving the shot
• Not able to identify specific risk factors at this time
• Cases were similar to the Astra-Zeneca vaccine – they both employ a similar adenoviral  vector technology – different from the messenger RNA technology used by Pfizer/BNTX and Moderna
• A notice should be added to the product information
• The US CDC should provide some data on Friday following its planned review meeting

 

 

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