Sensata 4Q2020 earnings summary

Key Takeaways:

 

Current Price: $54               Price Target: $61

Position Size: 2.18%           1-year Performance: +17%

 

Sensata released its 4Q2020 earnings this morning. Organic sales were up 5.3% (+7.1% including FX benefit) but operating income margin decreased due to Covid-related costs, higher incentive compensation and “Megatrend” investment spending (electrification, smart & connected).

Sales growth by segment was as follow:

  • Automotive organic sales +4.4%: ST outgrew the market by 970bps – growth from emissions, electrification and safety
  • HVOR organic revenue +16.2% y/y: outgrew the market by 990bps – growth from China VI emissions regulations, operator controls
  • Industrial & other: organic revenue +7.7%: growth from HVAC, 5G and supply chain restocking 
  • Aerospace organic growth -25%

 

Free cash flow increased throughout the year, thanks in part to better working capital management (better management of inventory levels), and a recovery in top line growth.

 

Sensata’s content in electric vehicles represents a 20% lift from traditional internal combustion engines. The components made allow longer range and faster charging times, critical for EV increased adoption. In the chart below we can see on the left components that carryover from traditional engines, while on the right, new components specific to EV:

 

 

Sensata continues to expand its electrification capabilities beyond electric vehicles, such as charging infrastructures, energy management expertise, industrial and grid opportunities. As such, they just acquired Lithium Balance, to expand into battery management and energy storage solutions in the heavy vehicle and industrial markets.

 

For 2021, Sensata expects a return to growth for all their end markets, especially North America autos. Organic revenue growth is expected to be between 10-15%, operating margin to expand from 18.5% to 20.7% due to volume and productivity improvements. Their 2021 margin guidance would be below 2019 levels, but reflect the current shortage in semiconductors globally (25-50bps impact).

 

Overall the quarter is as expected, seeing a recovery in most segment, except aerospace. The stock underperformed the market today as guidance for the year did not beat expectations. We still believe the long-term thesis is intact.

 

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

 

 

RMD 2Q FY2021 earnings summary

Key Takeaways:

 

Current price: $200                     Price target: $236  

Position size: 2.82%                    1-year performance: +27%

 

  • Top line growth of 7%, ahead of consensus of 5%
  • Recovery in diagnosis level still below pre-covid in most markets
  • Masks resupply is still elevated (+9% in US) – this represents 80% of US masks sales. Outside the US, masks sales were +12%, with a mix of resupply under the US level.
  • Sale of ventilator for life support to hospitals is now behind them, we should not expect another high level of revenue from this business
  • Home testing is a new trend, created by the pandemic (desire to avoid in center sleep testing). This dynamic could reduce barriers to sleep devices adoption thanks to greater convenience, and possibly lower costs
  • Software-as-a-service business:
    • growth in the mid-single-digit rate
    • Covid impacted surgical procedures thus negatively affecting nursing homes/hospices attendance
    • But recovery of home medical equipment and home health is even better
  • Exiting the portable oxygen market (POC), as reimbursement policies in the US have not been favorable as expected when first entering this market in 2016. The POC market was a way to engage stage 2 and 3 COPD patients. But since, they acquired Propeller, gaining better access to COPD patients (including stage 1). What they have now is better than the POC market:
    • The covid crisis has accelerated the adoption of high-flow therapy, which supports stage 2 and 3 COPD patients – this could become a large opportunity for them
    • They now have a pharmaceutical drug delivery management offer (through Propeller) to support stage 1 and 2 patients
    • Growing use of noninvasive ventilation and life support for stage 3 and 4
  • Reviewing their supply chain resilience, including politics and trade relationships. They think as they gain scale, they will be able to face those headwinds better overtime
  • The CMS announced that the Continuous Positive Airway Pressure (CPAP) industry will most likely escape reimbursement pressure through 2024
  • We should expect some volatility in their sales level in the next few quarters, as the peak of sales of ventilators to hospitals has passed, but vaccine roll-out is not advanced enough to allow a return to normal sales level for their masks/devices
  • Share buyback program is likely to start in the second part of 2021, assuming cash position continues to rise
  • CEO quote: “COVID has highlighted the importance of respiratory health. COVID generally kills people through acute respiratory distress syndrome. And it’s awful, but that has raised the awareness of respiratory hygiene, respiratory health and the field of respiratory medicine. The crisis also showed us the importance of digital health and has accelerated the awareness and adoption of technologies that can be used for remote patient screening, for remote patient diagnosis, remote patient setup, as well as remote patient monitoring and management.

 

 

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

 

Thesis on RMD:

  • Leading position in the underpenetrated sleep apnea space
  • Duopoly market
  • New product cycle
  • Returns of capital to increase: ~1% share buyback/year (back in FY18), dividend yield of 2%

 

$RMD.US

[category earnings] [category equity research] [tag RMD]

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

 

Colgate 4Q 2020 earnings summary

Key Takeaways:

 

Current price: $78.9              Price target: $94 (New down from $96)  

Position size: 1.5%                1 year performance: +15% 

 

Colgate released its 4Q2020 earnings this morning. Overall the company published another quarter of high sales level, with positive comments for the first part of 2021, while 2H21 should see some moderation from the vaccine rollout.

  • Colgate finished the year with the highest revenue growth rate since 2008, helped by the continued shift in consumer behavior due to the pandemic (more cleaning product and personal hygiene sales, and more pets at home), and the new strategy put in place by the new CEO
  • Organic sales +8.5% – bringing overall 2020 sales growth to +7%
    • EM sales +8.5% – led by Latin America +10.5%, similar to last quarter
    • Developed markets: +9%, and increase from last quarter’s +6.5%
    • Hill’s pet nutrition +14.5%
    • Market share gain (including online)
  • Operating margin impacted by increased advertising expenses (-100bps)
  • FCF increased 18% y/y
  • 2021 guidance initiated:
    • Top line growth to moderate from 2020 levels, and be between 4-7% and organic sales to be 3-5% (in line with its long term target)
    • Gross margin expansion (no exact range given)
    • EPS growth lmid-single to high-single digits growth
    • Capital allocation plans: debt paydown and share repurchase
  • We are reducing our price target slightly as we roll over our model to 2021 and assume 2020/1H21 higher level of sales will not continue in out years

 

 

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

 

 

SYK Q4 2020 earnings summary

Key Takeaways:

Current Price: $232                          Price target: $293

Position size: 2.49%                        1-year Performance: +8%          

  • Sales in the quarter declined 1% organically (+3.2% reported includes acquisition) due to Covid pressure coming back in November and December, delaying non-emergency surgeries again (which represents nearly half of its business)
  • Emergency procedures did well: neurotech +5%, Medical +10%, and trauma & extremities +27% (includes Wrights acquisition)
  • Adjusted operating margin expanded 90bps, adjusted EPS increased 13%
  • Wright Medical integration moving according to plan – this is a big acquisition for them and will take time
  • 2021 guidance:
    • Organic sales growth of 8-10% from 2019 numbers (a better baseline than 2020), forecasting a recovery in 2H21
      • This includes 10-12% volume growth but 1% of price decline per year
    • EPS to grow 6.5% to 11% from 2019
    • Margin to expand 30-50bps excluding the dilutive acquisition of Wrights
  • Smaller bolt-on acquisitions going forward as SYK integrates Wrights

 

Overall SYK had earnings that were as expected, considering the Covid disruption, and a 2021 guidance that looks promising. We’ll keep an eye on Mako robots sales progress, as competitors launched other robots that compete with SYK. It is hard to see if the slow-down in knees comes from competition or Covid delays.

   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

 

 

JNJ 4Q2020 earnings summary

Key takeaways:

 

Current Price: $170      Price Target: $200 (NEW – from $175)

Position size: 2.43%     1-Year Performance: +12%

 

 

  • 4Q 2020 results:
    • Overall sales +7% organic, adjusted EPS -3.2%. last 12 months FCF ~$20B ($19.9B last year)
    • Pharma segment had good results across the board, and market share in Darzalex (multiple myeloma), Stelara (growth in Crohn’s disease application). In immunology, growth remains below pre-covid level though.
    • Consumer segment: oral & wound care, skin health & beauty growth were offset by lower over-the-counter sales due to reduction on cold/cough/flu medicine, as well as SKUs rationalization
    • Medical Devices: China grew double-digits but US and Europe declined. Hospitals volume decline no more than 10-15% in the most affected areas by covid delays.

 

  • Full year 2020 results overall: +1.5% organic sales. Pharma sales growth helped offset medical devices decline due to delay in doctor’s visits and surgeries. Adjusted EPS -7.8%
    • Company has 28 products & platforms with sales above $1B in 2020.

 

  • Vaccine phase 3 update will be provided next week. On track to manufacture 1 billion doses in 2021. More details on pricing and economics of this vaccine will come during the 1Q21 earnings call

 

  • 2021 guidance issued:
    • Revenue of $90.5B-$91.7B (+8% to +9.5%), above consensus, and excluding any potential revenue from the vaccine
      • Pharma to continue driving overall growth, and cautious optimism on the medtech segment recovery in 2H21
    • Operating margin to grow 200bps y/y due to leverage, recovery in medtech procedures and cost improvement initiatives
    • EPS $9.40-$9.60 above consensus
    • Opioid litigation payout to happen in 2021 vs. 2020 initially

 

 

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

 

 

Lockheed Martin (LMT) 4Q 2020 earnings summary

Key takeaways:

 

Current Price: $333        Price Target: $469  

Position Size: 2.80%      1-year Performance: -23%

 

Lockheed released its 4Q20 earnings results and 2021 forecast yesterday.

  • Revenue growth of 7% and segment operating margin +14% (+70bps expansion)
  • Backlog still solid at $147B but moderated in growth (+2% y/y but down 2% q/q)
  • Book to bill continues to decrease moderately which is something to keep an eye on as a predictor of future growth.
    • But, since the company pre-funded a portion of its pension in 4Q20, it should help cash flow in the out years with less funding required. That resulted in 2022 and 2023 cash flow guidance to increase by $500M
    • FCF implied guidance for 2021 is $6.6B with flat capex
  • Slight increase in top line growth guidance: revenue and segment profit margins expected to grow between 3-5% y/y

 

Sales per segment were as follow:

  • Aeronautic +5.2% (higher volume in F-16 and F-35),
  • Missiles and Fire Control +3.5% (higher volume in Patriot and THAAD programs),
  • Rotary and Mission Systems +8.3% (higher volume at Sikorsky helicopter programs)
  • Space Systems +14.1% (higher volume on Next Gen OPIR and hypersonic development)

 

Here’s Goldman Sachs forecast on the F-35 revenue.

 

Overall this was a good quarter, but the focus remains on the Department of Defense budget, even though LMT has a pretty consistent and growing revenue stream coming from solid programs. We are not changing our price target or position size at this time.

 

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

 

 

Constellation Brands (STZ) FY 21 3Q earnings summary

Key takeaways:

 

  • Overall sales +22%!
  • Beer sales increased by an impressive 28%, wine & spirits grew 13% organically
  • Sales, margins and EPS came above consensus
  • Hard Seltzer to double in capacity, as they are back to gaining market share following some Covid-related slow-down in production
    • Currently only have 1 SKU, will launch another variety pack in FY22 (pineapple, strawberry, raspberry and passionfruit)
    • New projects to be announced soon
  • Lower end wine & spirits brands divestiture to Gallo finally closed – focus back on higher end wine & spirits and beer business
  • New $2B share repurchase program authorized (in addition to the $1.9B remaining)
  • Cannabis business remains an opportunity with Democratic win

 

 

Current Price: $230                Price Target: $255 (NEW)

Position Size: 2.65%              1-Year Performance: +22%

 

Company sales increased 22% this past quarter, showing its ability to grow nicely in the at-home consumption channel as COVID continued to impact bars & restaurant sales. Beer sales were up 28%, due to consumer demand but also catch up in inventory stocking from the prior quarter (now largely restored). The wine & spirit segment is seeing improvement (organic sales ~13%). Operating profit margins expanded 340bp thanks to leverage and timing of marketing spend. EPS was well above consensus numbers.

With the end of the fiscal year approaching, and good results this past quarter, STZ reinstated its FY 21 guidance: beer sales +7% to +9%, wine & spirits sales -9% to -11% (due to divestiture), operating profits +8% to +10% for beer, decline of -16% to 18% for W&S; EPS in the $9.80-$10.05 range.

Overall we are very pleased with the results, and raise our price target to reflect better W&S sales going forward as the focus is back on higher end brands, new projects in seltzer that should help STZ gain market share to reach #3 market share, and continued beer portfolio performance.

 

 

 

 

 

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

 

 

CVS selected to administer recent Covid-19 therapy to patients in long-term care facilities & at home

CVS announced today that it was selected by the US Department of Health & Human Services to administer the recent Eli Lilly monoclonal antibody treatment to patients in long-term care facilities and in their homes. Coram, the specialty pharmacy & infusion care business of CVS will administer the intravenous therapy. Coram has over 800 trained nurses in the US. Coram will begin administering 1,000 doses of monoclonal antibody therapies for the treatment of COVID-19 in seven cities and their surrounding communities starting Thursday, December 3, including Boston, Chicago, Cleveland, Los Angeles, Milwaukee, Minneapolis and Tampa.

 

This is a good example of CVS diversified health business, and how it can meet patients needs in various ways.

 

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

 

 

McCormick quick news update

McCormick finalized the acquisition of Cholula Hot Sauce yesterday, for a purchase price of $800m (financed by cash on hand and commercial paper). The transaction should be accretive to FY21 adjusted earnings.

Cholula Hot Sauce is a premium Mexican hot sauce, broadening MKC’s offering in the high growth hot sauce category. A few years ago, MKC acquired RedHot a US hot sauce brand.

 

The company also went through a 2 for 1 stock split, finalized today. The last time the company completed one was in 2002.

 

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

 

 

Latest on the Affordable Care Act and the Supreme Court

As most of you know, this week was the third time the Supreme Court heard a challenge to the Affordable Care Act (last times were in 2012 and 2015). Striking down the ACA today would add over 21M uninsured people, close to a 70% increase.
The Supreme Court needs to answer 2 questions before being able to dismantle the ACA:
1/decide of the lawsuit has a standing,
2/decide if the individual mandate is constitutional. The payment penalty for being uninsured was removed in 2017 – which was deemed a tax in prior hearings and thus not falling under the Supreme Court authority. The penalty now removed by Republicans, the lawsuit was started again this year by Texas & other states, while California is defending the law.
A decision will most likely not be made until June.
So far the comments that have transpired were in favor of maintaining the ACA in place.  At least 5 Supreme Court justices (including 2 conservatives) indicated they would reject the attempt to kill the ACA. Both Roberts and Kavanaugh said striking down the individual mandate did not require to struck down the law in its entirety.
  • Roberts said to the Texas Solicitor General Hawkins “I think it’s hard for you to argue that Congress intended the entire act to fall if the mandate were struck down when the same Congress that lowered the penalty to zero did not even try to repeal the rest of the act. […] I think, frankly, that they wanted the court to do that. But that’s not our job.”
  • Justice Alito said: “At the time of the first case, there was a strong reason to believe that the individual mandate was like a part in an airplane that was essential to keep the plane flying,” Alito said. “But now the part has been taken out, and the plane has not crashed. So, if we were to decide this case the way you advocate, how would we explain why the individual mandate in its present form is essential to the operation of the act?”
  • Justice Sonia Sotomayor said that the argument for striking down the whole law, without proof of substantial harm to anyone, including Texas and other conservative states, did not make much sense. “At some point, common sense seems to me would say, ‘Huh?’ “
Based on the above, I do not believe we need to make changes to our healthcare holdings. Biden could reinstate some taxes such as the 2.3% medtech tax (part of the ACA) that was ended by Trump – but I have not seen in listed in its health care plan so far.
Thanks,
Julie