Author: Julie Praline

Themes & Focus List Stocks: Artificial Intelligence and Medtronic

Going forward we thought it might be helpful to share some insights on how certain themes are present in our portfolio. This week I’m sharing an example of how the theme of Artificial Intelligence is present in our portfolio with Medtronic.
A year ago the company launched GI Genius, the first system worldwide to use Artificial Intelligence to detect colorectal polyps. It provides physicians with a powerful new solution in the fight against colorectal cancer.
The GI Genius module uses advanced artificial intelligence to highlight the presence of pre-cancerous lesions with a visual marker in real-time – serving as a second observer. Studies have shown that having a second observer can increase polyp detection rates. Medtronic also includes AI in its Diabetes solutions with Sugar.IQ (a partnership with IBM). The company’s Minimed insulin pump comes with the Guarduan 3 sensor, which uses AI to help diabetes patients beat high and low blood glucose related events.
Thanks,
Julie

tag: MDT

CVS 3Q20 earnings summary

Key Takeaways:

    

Current Price: $65                            Price Target: $90

Position Size: 1.87%                        1-year Performance: -13%

  • CEO transition announced for February 2021, current CEO Larry Merlo will be replaced by Aetna President Karen Lynch – we’re not expecting any dramatic change to the company’s strategy following the change

  • 2020 guidance increased on the EPS and cash flow lines (higher on better working capital and underlying performance of the business)

  • CEO Merlo quote: “we identified the strategic need to round out our suite of assets with a national health plan business which led to the industry disrupting acquisition of Aetna, and this month marks our two year anniversary as one company and we are now leveraging our local presence and communities to deliver expanded and integrated services to people, wherever they are“

  • Winning quote from the Deutsche Bank analyst during the Q&A session: “congratulations to Larry and to Karen and I’ll say […] it’s always good to see a peaceful transition of power“

  • 6 millions Covid tests administered so far (or 70% of retail setting tests)

  • Flu vaccine administered August-October were up 78% y/y

 

Segments update:

  • Health Care Benefits: membership growth driven by government products up 24% y/y (Medicare and Medicaid) while commercial membership declined 4%

  • Pharmacy Services: revenue slightly down (-0.9%) due to some client losses and price compression, partially offset by Specialty Pharma growth. Operating income grew 12% due to purchasing economics and mix.

  • PBM: 98% retention rate

  • Retail/LTC: sales up ~6%, driven by increased prescription volume (+5.8%), higher front store sales (+2.2%), increased diagnostic testing. Profits were impacted by continued reimbursement pressure and additional COVID-19 costs

 

There are now 450 HealthHub across the US, in over 30 states. In 2021 CVS will expand the offering to add in-person behavioral health support. More visits are now to manage chronic services, which in addition to lowering ER visits and increase adherence to treatment will lower medical costs. Regarding its capital allocation, CVS continues to pay down debt, with the goal to achieve a low 3X leverage ratio.

 

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

Zoetis 3Q20 earnings results

Key Takeaways:

   

Share price: $172                     Target Price: $182 NEW (from $177)

Position size: 2.36%                TTM return: +46%

 

  • Impressive sales growth of 15% (ex-FX):
    • + 18% in the US, driven by demand +21% in companion animals products (paraciticides, vaccines and dermatology products), and +13% in livestock products (rebound from Covid restrictions)
    • Market share gain in paraciticides (+6% share) thanks to Simparicia Trio introduction this year – and cannibalization below expected levels. The Trio offering is attarcting new customers.
    • +11% in International sales (ex-FX), with companion animal sales +20% (strong growth in China) and +6% livestock sales
  • Simparica Trio will continue to be a driver to growth going forward, with heavy investments behind it to gain market share ahead of a competitive launch sometime next year.
  • Potential launch in 1H2021 in Europe of the first injectable monoclonal antibody licensed for alleviation of pain associated with osteoarthritis in dogs.
  • In Q3, there wasn’t an increased number of vet visits, but rather an increase in spending per visit, a positive trend that will continue as long as people spend more time at home with their pet. 
  • There is also an increased use of diagnostics – a good thing as they recently acquired a diagnostics company
  • Guidance for the year increased on good Q3 results, but Q4 is expected to be more moderate
  • CEO quote: “animal health is a steady and reliable sector, even in times of economic hardship. The world’s fundamental need for nutrition, comfort and companionship, provided by animals, has proven durable and enduring over time”.

 

Updated guidance for 2020:

Revenue guidance increased now +7% to +8% (prior 3%-6%) due to better 3Q results than expected

EPS now $3.76-$3.81 from prior $3.52-$3.68

 

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

Vontier: recommend selling VNT and adding the proceeds to FTV – #researchtrades

After further review, we recommend selling the small VNT position that came out of the FTV spin-off and put the proceeds into FTV.

 

Reasons for the sale:

 

Risks are greater than opportunities:

 

  1. 70% of 2019 sales came from their GVR business (retail fueling stations). We see the longer term risk no so much the decline in chip card readers in the US in 2021 (that can be offset by growth in other markets), but rather the upcoming obsolescence of gas stations as electric cars become a greater part of the vehicle pool globally. While currently only 1% of the car pool today, EV are estimated to be 10% of the car pool in 10 years. This could prove conservative as more countries ban ICE. And as car manufacturers increase production of EV that get better and better. The UK banning the sale of ICE starting in 2035 (including hybrid vehicles). France is planning the ban for 2040. Diesel cars will be banned sooner in some cities (2025 for Paris, Madrid, Mexico City, Athens). See the list below of all the countries that have announced an upcoming ban – this include China that is thinking about a ban as well.
  2. The switch to electric vehicles will also have an impact on their Matco Tools business (20% of sales): EV engines have 1/3 of the ICE engines maintenance. This is due to the fact that ICE engines contains hundreds of moving parts in its motor and drivetrain, vs. and EV engine that contains roughly 20. Less parts means less maintenance, and less trips to the auto repair shop.

While those two major risks to VNT are longer term in nature (short-term, the company could benefit from the increased sale of used cars due to COVID and emerging markets growth), it would require extensive M&A to shift the business towards the electric vehicle trend and/or the smart cities theme that is also growing but only 1% of sales today.

 

So what about Fortive now?

Fortive is focused on products that provide critical workflow solutions in productivity and safety. In addition to instruments that measure and control, they are also adding a set of Software solutions and data analytics capabilities.

3 segments targeting the control/sensor/measuring of liquids/gas/electricity in various end markets:



Some examples of what they actually make:

Gems: this company makes various sensors and control systems that find application in numerous end markets. Below are only a few:
  • In healthcare: pressure switch to measure the cooling system of medical imaging equipment, fluid control for medical lasers.
  • In the Alternative Energy space Gems makes sensors critical for wind turbines, by monitoring the hydraulic pressure that maintains the blade pitch, essential to maximize the amount of power generated, while protecting the blade from damage.

  • Gems sensors are also used by the Marine markets, both commercial and military. Since a picture is worth a thousand words, here’s where you can find their sensors on boats:




Dynapar: its products are also used across many end markets such as aerospace & defense, elevatorsm passenger rails and even medical imaging.
  • Example of and encoder used in the medical imaging field: “MRI is a noninvasive diagnostic technique that uses nuclear magnetic resonance to produce cross-sectional images of organs and other internal body structures. Dynapar offers a range of industry duty encoders designed to comply with FDA manufacturing guidelines for MRIs and X-Ray imaging. In x-Ray machines our encoders move water in and out of the machine, while in CT Scan and MRI machines they move patients in and out and measure the rotating speed.”



Anderson-Negele: hygienic sensors for the food, beverages, and life sciences industries:  
  • They have a product called a refractometer: it measures the sugar content in orange juice to guarantee a consistent taste experience (thank you!!).
  • Their turbidity sensor measures the wine clarity: even before the smell and taste experience, the color and clarity of the wine needs to be consistent and pleasant. A California-based wine maker installed the ITM-4 sensor to monitor the turbidity in their clarification process prior to bottling. This allowed increased production yields and consistent monitoring (Thank you again!!).


 

Thanks,

Julie

Colgate 3Q20 earnings summary

Key Takeaways:

 

Current price: $78                   Price target: $84 (from $82)  

Position size: 1.68%                1 year performance: +12% 

 

  • Overall great quarter, showing strategy of innovation & premium products is a positive for sales and margins
  • Organic sales +7.5%!! above consensus of 3.9%
    • EM sales +8.5% – led by Latam +11.5%
    • Developed markets: +6.5%
    • Hill’s pet nutrition +11%
    • Market share improvement
  • Gross margin increased 220bps, operating margin up 120bps
    • Innovation strategy to lift pricing & top line growth through premium rather than promotions is positive impact to margins
  • 2020 guidance updated:
    • Top line growth + mid-single-digits (organic sale at the high end of MSD)
    • Gross margin expansion
    • EPS $3.00-$3.03 (consensus $2.97)
  • Debt down payment and share repurchase to continue in 4Q
  • We are upgrading our price target slightly to account for better profitability

 

 

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

 

 

Fortive 3Q20 earnings summary

Key Takeaways:

 

Current Price: $61.4                Price Target: $72 (NEW – down from $78 on VNT divestment)

Position Size: 1.88%                1-year performance: +8%

  • Sales recovered quarter/quarter, to reach flat organic growth (+2.3% including acquisitions)
  • Adjusted operating margins improved as well +140bps, leading to an 8% EPS growth y/y
  • The ASP business (Advanced Sterilization Products) has seen a nice recovery: elective procedure volumes are back to ~90% of pre-COVID levels in North America; and to ~95% in both China and Europe – However in Japan, they have seen a reduction in elective surgeries with the resurgence of cases – something to watch for going forward with our medtech names
  • Software businesses providing resiliency, but still have some Covid-related pressure (customer access & budgets)

 

 

Despite COVID, Fortive saw its sales jump 2.3% boosted by acquisitions, while margins increased nicely. Going forward, the company is focusing on adding more Software-as-a-Service businesses to complement its instrumentation products.

As for the use of cash, FTV remains committed to reducing its leverage and looking for M&A opportunities. We should expect additional debt reduction following the disposition of the 19.9% stake in Vontier (no date provided yet).

Q4 guidance is for a 0%-3% top line growth, and some margin expansion. Overall the quarter had no surprises, and we remain confident in FTV’s ability to generate shareholders returns over time. We are updating our price target to reflect the Vontier spin-off.

The company is updating its segments following the recent Vontier spin:

 

 

 

 

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

 

 

Sensata 3Q 2020 earnings summary

Key Takeaways:

 

Current Price: $44.5              Price Target: $53

Position Size: 2.08%             1-year Performance: -5.6%

 

  • Sales show a bounce back from last quarter up 37% quarter/quarter, thanks to auto and truck markets recovery
  • Margins contracted due to weaker volume, reversal of temporary cost cutting and mix shift (lower sales from higher margins aerospace and industrial clients)
  • New business wins are positive, and above last year’s level – with a majority coming from new megatrends opportunities in electrification and smart & connected solutions
  • CEO quotes:
    • “we continued to be confident that we will sustain our market outgrowth for 2020 in the range of 600 basis points to 800 basis points for our heavy vehicle off-road and 400 basis points to 600 basis points for automotive, consistent with our long-term goals and supported by our higher levels of new business wins”
    • “we have closed electrification new business wins with some of the largest and the most innovative automotive OEMs around the globe. In our core markets, the average content on battery electric vehicle now materially exceeds that of the average internal combustion vehicle”
    • Content in electric cars battery is $50, vs. $38-$40 for internal combustion
  • 4Q20 sales guidance is above estimates but margins below
  • Agreement reached to install and operate their “smart & connected” hardware and data services with a heavy duty vehicle fleet manager
  • Move towards data analytics/subscription basis service is advancing: first commercial agreement achieved, with multiple trials moving forward toward commercialization (a $6B market)
  • If Biden wins, it would be a positive for the company as Biden signaled his desire to increase fuel standards (something that does not happen overnight but long-term positive impact)

 

Sensata released 3Q20 revenue that beat expectations (organic sales down 7.5% vs. down ~34% last quarter). Regarding its end-markets, the company believes the auto industry has consumed in Q3 the inventory built earlier in the year during the shutdown of the economy. In its HVOR segment, the company is starting an attractive recurring sales type of business with a large fleet manager (some potential leads they have manage over 10,000 vehicles). SO here is an example of where Sensata is moving parts of its business: this particular first client opted for a full subscription option, where ST builds the equipment and work with the client to install it. The client then pays for the equipment and data analysis on a subscription basis for the next 6-7 years. Other clients can opt to pay the equipment up-front and only pay for the data services. This looks pretty attractive, and will allow more regular revenue stream for the company (they typically have a more cyclical business with industrial/auto end-markets).

We think the stock was weak today due to the margins comments. While adjusted operating margin was above estimates at 19.6%, it is still a 390bps decrease y/y. Also, the want to continue investing in the megatrends (electrification etc) in the coming year. O offset some of that, the company is starting a new cost reduction program that should save $60-$65M next year. At the end of the quarter, ST had $1.6B of cash on hand. The management team is putting a priority in growing its megatrend business (through R&D and M&A).

We still believe in the long-term thesis of this company, and are not changing our view/price target or position size at this time.

Illustrations of the megatrends opportunities:

 

 

Segments review:

  • Automotive organic sales -7.9%: ST outgrew the market by 290bps thanks to safety related launches, electrification and emissions growth
  • HVOR organic revenue -7.8% y/y: outgrew the market by 860bps thanks to China VI emissions regulations
  • Industrial & other: organic revenue -2.2%:  strength coming from ventilators and factory automation growth
  • Aerospace organic growth -24.4% – new defense products launching

 

 

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

 

 

Lockheed Martin LMT 3Q20 earnings summary

Key takeaways:

 

  • Investors most likely awaiting election results to see impact on defense budget, recent pullback suggest market seeing a Democrat winning the election (and possible decline in Defense Budget) – a Democratic President does not necessarily mean a decline in the Defense Budget! A Biden wins does not mean we need to sell Defense names.
  • Preliminary trends for 2021 look good, but below consensus (+3% sales growth). LMT is always cautious in its initial guidance, and raises it throughout the year. Book-to-bill remains above 1x (1.2X), which is a sign of future sales. Margins should tick higher slightly
  • 3Q20 results were good, sales growth of +9% was driven by all segments.
  • Share repurchase program was increased by $1.3B, with $3B remaining for future repurchase.
  • Leverage remains very low at 0.9X net debt/EBITDA for a company with great cash generation potential. We should expect M&A action near term.

 

Current Price: $375        Price Target: $469  

Position Size: 3.51%      1-year Performance: -1%

 

Lockheed released its 3Q20 earnings results earlier this week. Sales were up 9% y/y and EPS +10%. Sales per segment were as follow:

  • Aeronautic +8% (F-35 and classified contracts),
  • Missiles and Fire Control +14% (higher tactical and strike missile programs),
  • Rotary and Mission Systems +8% (higher Sikorsky helicopter sales)
  • Space Systems +6% (government satellite programs, strategic & missile defense programs)

 

Because of the continued strong results, the company raised its 2020 outlook, higher than the top end of its July’s guidance, for its sales, operating profit and EPS lines. Backlog was up 4.4%, driven by all segments (mostly Aeronautics, which includes their F-35 program). In 2021, Lockheed intends to repurchase over $1B shares. Its pension funding requirement amounts to $1B.

 

Overall, LMT continues to deliver strong shareholders returns. It has outperformed peers in the last 3 years and YTD.

 

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

 

 

Medtronic Investor Day Summary

Every 2 years, Medtronic presents to the investment community a detailed list of the innovative medical tools they are developing. Here are the main take-aways from the virtual investor day held last week:

 

  • Targeting a 5% long-term top line growth (previously 4%) with change in culture and innovation:

 

1/ CEO pushing for a change in the company’s culture: decentralization is the new operating model, where each segment will act as its own operating unit (20 of them), with its own P&L and sales team to react faster to changes in the market place. This model has been tested in their Restorative Therapies Group while the current CEO was then President of that group. He increased organic revenue growth to 6% and improved profitability. I always thought of MDT as this big boat steady in the storm but slow to navigate. The CEO seems to be addressing this issue by making the company nimbler.

On a side note, the company featured many diverse employees and patients during the presentation, a way to highlight their desire for inclusion and diversity, one of their 5 sustainability tenets.

 

2/ Innovation: 130 new products have been approved since January.

New opportunities:

  • Robotic surgeries – could add +0.50% of growth in that segment, possibly reaching +2.5% extra sales growth by FY23. Looking to differentiate its robot with system modularity within the hospital.
  • Renal denervation – to treat a large population with hypertension (affects 1/3 adults globally, where 50% of patients are non-adherent within 1 year!)
  • Colon cancer screening (partnering with Amazon for the delivery of the PillCam Genius –  a pill-size camera to swallow that detects abnormalities in the colon and communicates with the doctor): 1 in 20 US adults will be affected by colon cancer, with a 90% chance of recovery if treated early.

 

Expanding into existing markets:

  • Diabetes: developed an app + insulin pen to provide intuitive and personalized insulin dosing intelligence. Developing an even smaller pump.
  • TAVR or Transcatheter Aortic Valve Replacement (going on a head to head trial with EW). This market is less than 10% penetrated and growing in the low teens. Edwards Lifesciences is a strong competitor so success there is not guaranteed.

 

As a result of looking to increase top line growth, MDT will spend >$2.5B in R&D per year, above the $2.2-2.3B it has spent the last few years. This amount should grow with sales as well. Tuck-in M&A, venture investments are also part of this strategy. To offset some of the extra spending, the company continues on its cost savings program, as well as a newly launched “Simplification” program, looking to reduce SG&A expenses. So while we are pleased to see an increased sales growth target, earnings growth target does not increase in the same measure as additional investments are necessary.

 

Overall this was a bullish investor presentation, as most are. We hope to see the recent innovations and focus on growth come to fruition in the coming years.

 

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 3Q20 earnings summary

Key takeaways:

 

Current Price: $148      Price Target: $175

Position size: 2.45%     1-Year Performance: +15%

 

  • Guidance for the year raised again as its medical devices segment continues to perform ahead of expectations:
    • Medical devices results were better than expected, thanks to growth in the US and China
    • Operational sales growth of raised ~100bps to 0.5%-1.5%
    • EPS raised to $7.95-$8.05 from $7.75-$7.95

 

  • Pharma segment showed steady performance with 4.7% growth: Darzalex in oncology continued increased patient intake, Stelara and Xarelto performed better than consensus.
  • Consumer segment +3.1%, driven by US sales +12% (share growth for Tylenol, Zyrtec, Listerine and wound care)
  • Medical Devices -3.3%: negative impact came from Orthopaedics knee replacement and Sports (Covid delays), Surgery and Vision delays as well

 

Once more JNJ posted results better than forecasted, and raised its guidance for the year. While JNJ’s Medical Devices results were better than expected (beating consensus by 14%), it appears that the recent trend in September was for a flattening of the growth, which is not surprising considering the increase in COVID cases globally. They are not yet providing full 2021 guidance but guided to a strong double digits growth in Medical Devices and above market growth in Pharma. In Pharma, volume should drive growth, as pricing pressure remains (higher unemployment and potential for HC reform). Operating margins will remain at 2019 levels due to higher R&D expenses (Momenta acquisition bringing some potential blockbuster drugs in autoimmune disorders).

Some Covid vaccine news came yesterday that JNJ was pausing its vaccine trial as a person showed sign of an unexplained illness (similar to AstraZeneca a month ago). This is a normal process in any drug trial, and we think JNJ will ultimately continue its research on finding a reliable vaccine. Overall there is nothing this quarter that is changing our view on JNJ as a core holding in our healthcare portfolio.

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