Author: Julie Praline

Key takeaways:

 

Current Price: $224                Price Target: $255

Position Size: 2.74%              1-Year Performance: +41%

 

• Total company sales +3%
• Beer organic sales increased by 18% – off-premise consumption helps offset weak on-premise drinking
• wine & spirits grew +8% organically
• Sales, margins and EPS came above consensus
• Beer margin impacted by higher advertising and marketing spending
• total operating margin impacted by 900bps due to wildfires and increased marketing spending
• New guidance for fiscal year 2022 introduced – disappointing on the margin and share buyback front
• CEO quote: “One of the things that we’ve been quite good at over the last several years is running our plants at hyper efficiency. But I think one thing as learning from the pandemic. And I think any good business should have a element of learning when something hits you in the face. In the pandemic certainly did that across many, many, many industries. One of the things we learned is while our efficiency was tremendous. We didn’t have a lot of flexibility in the event that something didn’t go well and so one of the pieces that we are doing with this expansion is not only to meet the hyper growth that we have within our business, but also to create an increasing flexibility in some redundancy within our business.”

 

 

While Q4 results were good, guidance for FY2022 is below expectations, sending the stock price lower today. We think the management team remains prudent as it is stepping up its marketing efforts (new product launch – Corona Seltzer Limonada, new variety pack…), and increasing spending in capex to expand its production capacity in Mexico. For FY22, beer sales are expected to be +7% to +9% (in line with historical average), but beer operating income growth of only 3-5% shows some margin pressure. Inflation is back, with raw materials (such as glass), transportation and labor costs expected to rise.

Wine & Spirits sales are expected to grow +2% to +4% organically following the divestment of lower-end brands – we are finally seeing growth in that segment, driven by premium brands. The company needs to increase its capex spending to increase its capacity at its current Mexican plant, following the Mexicali fall-out with the local government. It is still unclear of STZ will be able to recover its investment in that plant, and the company is taking an impairment charge of ~$660M next quarter. This will limit potential for share buyback this coming year, which was highly anticipated.

Following disruption in its production capacity/supply chain due to Covid, STZ’s management team is looking at expanding its production capacity with some redundancies, in order to avoid future disruptions and increase flexibility.

 

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: $90.8                 Price Target: $102  

Position size: 2.51%                1-Year Performance: -5%

 

• Organic sales growth of 20%, driven by both segments, a big beat from consensus expectations
• Consumer segment up 32% y/y ex-FX
• Flavor Solutions +3.4% y/y ex-FX
• Capacity constraints are easing from FY20, shipment timing helped this quarter’s performance, as MKC is rebuilding its inventory level with retailers
• Increased cooking at home and demand from packaged food manufacturer is offsetting weak restaurant/foodservice providers
• Fundamentals remain healthy
• Margin improvement from operating leverage, favorable mix and cost savings
• ERP spending was put on hold last year, and it hasn’t resumed to its full extent yet (ramp up in spending could come in 2Q)
• FY2021 top and bottom-line guidance raised following a good Q1

 

Yesterday released its earnings for 1Q 21. McCormick had (yet again!) another impressive sales growth this quarter. In the Americas Consumer segment (its biggest in sales), its US branded portfolio grew 15% thanks to repeat purchases and household penetration increase, while the foodservice and restaurant demand declined. In the EMEA region, there was broad based growth due to the same dynamic as in the Americas in Consumers, but restaurant demand declined. In the Asia Pacific region, quick service restaurant, branded foodservice and consumer demand is recovering with double-digit growth. For this coming fiscal year, sales should grow 8% to 10%, with 2% benefit from currency and 3-4% coming from recent acquisitions. Prices increases will be done in 2021 if needed, a good indication of pricing power/leadership. Overall we are please with MKC and the thesis remains in place.

 

 

 

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

 

 

 

 

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

 

We are trimming Sensata 50bps and putting the proceeds to cash (IVV).

Please see powerpoint presentation for details.

Thanks,

Julie

 

 

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: $118                             Price Target: $124 (NEW, increased from $121)   

Position Size: 2.72%                           TTM Performance: +2.2%

 

• 3Q sales (ending January 2021) declined 1% due to December and January resurgence of Covid cases, impacting non-essential surgeries. This wave of covid cases was the worst they have experienced since the beginning of the health crisis
• In terms of geographies, emerging markets were up slightly (+0.8%) with growth in Latin America, Southeast Asia and China (up mid-single-digits), while the US declined 2% and Western Europe down LSD
• Continued market share gains from Boston Scientific exiting the TAVR market, although sales were down MSD (VS flat for competitor EW)
• Ventilator sales high (triple from last year) but softening somewhat – respiratory & patient monitoring grew in the mid-30%
• Pumps in Diabetes was a key driver to growth – segment grew 1%, a sign this business might finally be turning the corner
• Sales of capital equipment for elective surgeries were at a record level this past quarter, which the CEO considers a “really strong leading indicator that hospitals are ramping up in the US for a rapid recovery”
• CEO quotes:
• “we’re seeing it in many hospitals, depends where you are, we’re seeing a snapback” of elective surgeries.
• “when we couldn’t meet with doctors, I was amazed at how digital [technology] came to the rescue”
• 430 bps sequential improvement in operating margin despite covid impact in December and January, thanks to better control of SG&A expenses
• Capital allocation: continues their tuck-in acquisitions with RIST Neurovascular (the 8^th one since January 2020 – for a total value of $1.7B) – and we should expect more to come
• Still no guidance for the year, but expect Q4 to improve throughout the quarter, with organic sales up 30-34%, and sequential margin improvement thanks to top line growth
• Overall we think MDT is on track to accelerate its growth going forward as we come out of the pandemic (thanks to market share gains &  new launches), despite the delays caused by covid.

 

 

 

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

 

Key Takeaways:

 

   

Share price: $168                     Target Price: $182  

Position size: 2.08%                TTM return: +15%

 

Overall Zoetis released another remarkable quarter with companion sales +25%. The management team provided an initial 2021 outlook that is mostly positive, with sales expected in the 9-11% range. Margins should not expand as much as we’ve been used to as the management team wants to invest in its diagnostics business as well as marketing. This most likely explains the lack of reaction in the shares on earnings day. Even with today’s valuation, we remain impressed with the growth story and continue to see upside as new drugs come to market.

 

Revenue growth of 9% (ex-FX): 2% from price, 7% from volume (4% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 1% from other in-line products)

o    For 2020, revenue grew 9%, and similar to 4Q, price added 2% and volume 7% (3% from new products, 3% from key dermatology products, 1% from acquisitions)

o    Companion animal grew 25% in 4Q

o    Simparica Trio launch was slow initially in clinics with covid restrictions, but finished the year with goals achieved

o    Covid created a difficult environment for livestock down 5% – but the company believes consumption patterns will return to normal in 2021, bringing this segment back to growth in the low single digits, while long term it will return to 4-6% growth y/y

o    Diagnostics portfolio grew thanks to a recovery in vet visits

Margin expansion was lower than prior years (+20bps for the year vs. +200bps)

CEO quotes:

o    “Positive pet care trends during the pandemic based on increased adoption and people spending more time with their pets should continue driving market growth in the near-term. Date in the US shows visits to veterinary clinics have rebounded and the average revenue per visit has continued to increase”

o    “We’re also hopeful that you will see an increase in dine out which will send signal to the industry to expand herds”

 

 

Guidance for 2021:

Revenue growth of +9% to +11%, driven by continued launch of Simparica Trio and other parasiticides, dermatology portfolio growth, and diagnostics

• Livestock growth in the low-single-digits, growing in line with the market. Their leading anti-infective product DRAXXIN is facing generic competition. Recovery continues form the African Swine Flu in China
• Companion animal: growth in the mid-single-digits, growing faster than the market
• Launch of the first monoclonal antibody for osteoarthritis pain in dogs (Librela) and cats (Solensia) in Europe in 1H21, followed by the US in 2022 – approval by the FDA seems unlikely in 2H 2021 due to delays and challenges affecting the FDA, related to Covid.

Flat gross margins as the company is investing behind reference labs and generic competition on Draxxin (and price impact on it). It is possible that near term ZTS does not see high margin expansion as it has in the past but we don’t expect a contraction

 

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

 

 

Key Takeaways:

Current Price: $72                            Price Target: $90

Position Size: 2.04%                        1-year Performance: +4%

 

CVS reported earnings this morning. Revenue grew 3.5% in Q4, and adjusted operating margin dropped 160bps due to Covid costs and decreased traffic in stores. Today, CVS is the largest community testing organization in the US for covid-19. Overall 4Q performance was as expected, although FY21 underwhelmed a bit on the EPS (no lift in guidance from prior commentaries) and cash-flow, with timing of some items pulled into 2020 numbers from 2021, while capex is expected to increase above historical levels. In 2020, full-year cash flow grew 23%, thanks to good performance, working capital improvements and timing of some cash transactions. Net debt/EBITDA is now at 4X, on track to achieve 3X target in 2022. We think CVS 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: +9.6%, thanks to increased membership in government products. The segment’ s profits were impacted by the higher cost of COVID testing and treatment

• Total medical members increased 2.2% y/y
• Medical Benefit Ratio of 86.7% is higher y/y (meaning more of the premiums collected was used to pay for medical expenses – and less left for profits)

·         Pharmacy Services: -1.9% due to some client losses and continued price compression

·         PBM: 98% retention rate

·         Retail/LTC: +6.6% due to increased prescriptions, flu vaccines, Covid testing (worth $400M in Q4). Same-store-sales +5.3%, growth in prescriptions driven by increased adoption of patient care programs

FY 2021 guidance:

• Q1 expected to be the lowest earnings of the year, affected by investments to advance vaccination program, and lower front store traffic due to weak flu season
• Revenue growth between 3%-4.5% – strong growth in Medicare products, specialty pharmacy, brand drug inflation
• Return to normalized medical costs and physicians visits through the year
• Cost savings $900M to $1.1B
• Adjusted EPS $7.39-$7.55 – +4% to +6% (consensus $7.50)
• Capex $2.7B-$3B – higher than prior years as the company plans to invest more in technology and digital enhancements
• CFO $12B-$12.5B
• 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

 

Key takeaways:

 

Current price: $136                           Price target: $153  

Position size: 1.94%                         1-year performance: -6%

 

Overall Pepsi delivered a good quarter with sales beating expectations in a market still impacted by Covid disruptions (away-from-home channels). The stock is not reacting positively however as guidance for 2021 implies flat cash flows from 2020, and as the company focuses on repaying debt and spending more in capex, rather than share repurchases.

 

• Organic sales growth of +5.7% (an acceleration from the 4% last quarter) – to end the full year organic growth at +4.3%. This is above competitor Coke who had -3% organic growth – a proof of PEP business model resiliency
• Sales came above consensus of 4.3% – driven by volume and price/mix equally
• Consumption at home remained strong throughout the quarter, but pressure remains in the foodservice channels.
• Both snacks and beverages grew mid-single digits
• North America grew +5% and International +6%
• Overall profits increased 6% even with Covid-related costs:
• Frito-Lay NA: decline due to Covid charges
• Quaker Foods: profitability increased due to better revenue and productivity savings but also lower advertising expenses
• Pepsi Beverages NA: profitability increased due to better revenue and productivity savings but also lower advertising expenses, and lower commodity costs
• Latin America & Europe: FX impacted the cost of commodities and negatively impacted profits
• Africa. Middle East & South Asia: profits growth driven by revenue growth and productivity savings, as well as the acquisition of Pioneer Foods
• Asia Pac, Australia/NZ and China: growth from productivity savings and revenue growth

 

• Bang Energy Drinks will no longer be distributed by Pepsi starting in Oct 2023
• Gatorade Zero is now a $1B in sales brand
• Covid had an impact on snacking on the go (impulse buy at convenience stores), that was high volume, high margin business. Now people take breaks at home, so Pepsi is selling more multi-pack, small portion format snacks

 

• 2021 guidance:
• Organic sales growth expected in the mid-single digits
• High-single digits EPS growth
• Cash flow outlook no longer provided
• Dividend increase of 5% (total of $5.8B), share repurchase of $100M (vs. $2B in 2020)
• Focus on capex and debt reduction to keep rating vs. buyback this year
• Capex spending used to be around 5% of sales, now will run towards 6% for a couple of years
• expand its digitalization of supply chain and selling system and IT
• increase capacity
• automation

 

 

 

Thesis on Pepsi:

• Global growth opportunity with about 40% of profits coming from outside the US. CSD is only 25% of sales (and Pepsi brand only 12%)
• Strong market share in high growth emerging markets where there is low penetration and rising per capita consumption
• Resilient snack business provides pricing power and visibility to future cash flows (more than half of sales are from snacks not beverages). CSD is only 25% of sales (and Pepsi brand only 12%)
• Several Great brands driving global growth: Frito Lay, Quaker, Gatorade
• Strong balance sheet and cash flows support a solid dividend yield and share buyback program

 

 

Tag: PEP

category: earnings

$PEP.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: $69                       Price Target: $83 NEW  

Position Size: 2.06%                    1-year performance: +2%

 

• During the fourth quarter, Fortive business returned to growth across all segments, and profitability continued to improve
• Organic growth of +0.7%, reported growth (includes acquisitions and FX) +4.9%
• Adjusted grows margin +160 bps y/y
• Adjusted operating margin +100bps
• Adjusted EPX +18.6% y/y
• FCF +39% y/y
• Results per region varied: Asia Pacific saw low single digits growth (China + high single digits), Western Europa had high single digits growth, and North America was the only negative being down slightly
• Customer site access has been difficult, slowing down growth
• Fortive has significantly reduced its leverage post Vontier spin-off:
• Debt reduction of $3B
• Net debt/EBITDA stands at 1.3X (from 2.5X), which leaves room for future acquisitions – FTV is willing to stretched its balance sheet to up to 3.5X for the right deal
• Fortive’s strategy to move its portfolio towards more technology focused businesses (higher growth/higher recurring revenue) has taken a big jump forward with the spin-off of Vontier
• Recurring revenue now 39% of sales
• FY21 guidance:
• Organic growth of 4-7% (total reported 6.5%-9.5%)
• Adjusted operating margin of 22%-23%
• Adjusted EPS +15%-22%
• FCF won’t grow as much in 2021 as the company is facing a $50M headwind related to the CARES Act (paying back some taxes), and less working capital improvements as it is growing some new businesses
• We increased our price target to reflect the good guidance for 2021

 

 

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

 

Key takeaways:

 

Current Price: $98                      Price Target: $117

Position Size: 2.79%                  Performance: +49% (since inception on 04/07/20)

 

Xylem reported its 4Q 2020 earnings this morning, with sequential improvements in all of its markets. Sales came better than previously guided (-2%  on an organic basis vs. -8% to -6%), as demand is stabilizing. The US continuous to have some softness due to Covid, and the delay in projects deployments. New projects have been temporarily delayed due to site access restrictions, which should ease towards the end of Q2. Their analytical and advanced solutions businesses saw high single digits growth and partly offset the decline in new projects starts. Total backlog is up 16% on an organic basis, which is encouraging for the upcoming quarters.

On the profitability side, productivity improvements of 520bps only partially offset some of the negative effects of lower volume (-390bps) and cost inflation (-250bps), but margin still came above guidance. So while top line was below 2019 levels, the company saw overall FCF grow 5% over the prior year, thanks to multiple years of efforts to improve its working capital. On the capital allocation front, dividend was raised by 8%.

 

CEO quote:

• “backlog in our advanced digital solutions grew 70% year-on-year. Although it’s from a small base, the trajectory is clear. It puts us in a very attractive position as we grow not only in software platforms but in all will be digitally enabled parts of our portfolio”
• “Short-cycle orders and project activity are definitely beginning to pick-up but are still likely to be limited by COVID impacts in the near term.”

 

Additional 4Q20 results:

Organic growth by end-markets:

• Utilities: -3%
• Industrial: -3%
• Commercial: flat
• Residential: +15%

 

Organic growth by regions:

• US: -6%
• Emerging markets: -2%, with China leading at +18%
• Western Europe: +6%

 

Xylem provided its initial 2021 guidance, which we believe is conservative due to the continued Covid environment:

• Organic sales of +3% to +5% (and for 1Q 2021 should be 1% to 3%)
• Adjusted operating margin between 11.5% and 12.5% – still below 2019 level, mostly due to mix: lower margin business recovering faster than higher margin one
• The order trends appears to be recovering, and backlog growth is significant (+16%).

 

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