Author: Sarah Kanwal

Current Price: $284                         Target Price: $324 (raised from $297)

Position size: 2.3%                          Performance since inception: +43%

 

Key Takeaways:

·         HD reported very strong Q2 results, beating on revenue and EPS which included elevated costs related to COVID-19.

·         Incredibly strong SSS for the quarter (overall SSS +23.4%; US SSS +25%), with similar trends extending into the first couple weeks of August. They are taking share in home improvement with sales that were well ahead of expectations (+8.8%).

·         Omni-channel strategy shines. E-Commerce sales were mid-teens % of sales in the quarter, up+100% YoY, with >60% of online sales picked up in store.

·         Mgmt. quote from call…”the home has never been more important to the customer”……”despite the significant uncertainty in the current environment, we do believe in the resilience of home improvement demand over the long term. The home typically represents our customers largest asset. The housing stock is aging, and we believe the capabilities we are investing in, across our interconnected platform will position us well to continue capturing market share in any environment.”

 

Additional Highlights:

·         Elevated opex (benefits/wages) used to support employees during the pandemic – was an additional $480m in Q2. This eroded margins in the quarter, but they should see improvement –increased benefits margins were a -125bps impact.  Despite this, op margins increased 10bps aided by higher sales volumes and strong expense control.

·         Saw healthy growth from both DIY and Pro customers

·         E-commerce channel was so strong that they had to temporarily convert a store fulfillment center to be an additional dedicated e-commerce direct fulfilment center.

·         Macro commentary:

o   Strong housing market heading into the pandemic continues – underpinned by low inventory, rising prices, low interest rates and aging housing stock. In normal, non-housing led recession, they would expect flat SSS.

o   Substantiating this, robust residential starts (+22.6%) and build permits (+19%) just reported.

·         SSS Details:

o   They saw broad strength across merchandise categories, big ticket items, geographies and customer cohorts (DIY & Pro).

o   By month, SSS were +27.3% for May, +27.3% for June and +21% in July.

o   Both ticket and transaction were up double digits. Ticket was +10% and transaction was +12%.

o   Big ticket (over $1000) transactions were +16%. Strength in appliances, riding lawn mowers, patio furniture offset weakness in products that require indoor installation which were impacted by Covid (e.g. kitchen installations).

o   13 of their 14 merchandizing departments posted double digit sss. Strongest was lumber, weakest was Kitchen & Bath which still had high-single-digit sss – that weakness driven by indoor installation headwinds w/ Covid .

o   Seeing significant increase in Pro sales as markets re-open from stay at home orders. Notable strength w/the “low spend Pro” – they were less impacted by the pandemic. Higher spend Pro impacted w/ restriction on permitting and inspections – that is continuing to rebound. Multifamily property managers are weakest – rebounding w/ re-opening but delays on major rehabs and capital projects due to social distancing and lack of access to units.

·         Capital allocation: suspended share repurchase, dividend maintained.

·         Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and trading at ~3.8% FCF yield on this year (fiscal 2021).

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$HD.US

[tag HD]

[category earnings]

 

 

Current Price: $42                            Price Target: $58 (lowering from $63)

Position size: 3.1%                          TTM Performance: -18%

 

Key Takeaways:

·         Top line and EPS beat overshadowed by weak top line guidance and CFO departure.

·         Macro environment is a headwind but the LT story is intact. Aging network infrastructure needs to be upgraded. Growing use of new technologies and increased data demand places increased importance on this.

·         Mix shift to software and recurring revenue should continue as an increasing number of their products are to be offered this way.

·         Cost cutting amidst headwinds to help preserve earnings power – mgmt. announced $1B in annual cost reductions to be implemented over next few quarters.

·         CEO Chuck Robbins said…” the pandemic has had the most impact on our enterprise and commercial orders driven by an overall slowdown in spending. We are seeing customers continue to delay their purchasing decisions in certain areas, while increasing spend in others until they have greater visibility and clarity on the timing and shape of the global economic recovery.”

 

Additional Highlights:  

·         Q4 sales -9% YoY and EPS +22%. FY20 rev -5% and EPS +4%. Q1 revenue guided to -9-% to -11%.

·         Generally weaker demand commentary relative to last quarter. For reference, Gartner expects global IT spending to decline -7.3% in 2020. Within this there are pockets of strength, like public cloud spending as companies shift IT budgets to areas of immediate need. For much of Cisco’s products the needs are less immediate, but the LT drivers still exist.

·         Advances in technology require updates to networks, but will occur over time and can be subject to the macro environment. CEO says…”I have had a lot of customers who are not at the center of this crisis who realized during this pandemic that they have a fair amount of technical debt, and they have a lot of aged equipment. And so we don’t know what the time frame is, but many of them have said this is a wake-up call, and this is going to actually give us air cover to talk to our senior leadership team about upgrading and building out a more robust, modernized infrastructure.” Right now, this is occurring more w/ public sector customers and larger, well capitalized enterprises and not w/ SMB’s which make up the their “commercial” business.

·         Positive commentary points to continued software/services mix shift and strength in new products –This includes strong demand for their Catalyst 9000, security, WebEx and other SaaS-based solutions. Software mix was 31% of revenue in Q4, w/ 78% of software sold as subscription (+8pp YoY). That means almost 1/4 of total sales is from software subscriptions sales (or close to $12B). Additionally, 27% of rev is services with much of that from maintenance/support which tend to be recurring. So overall recurring revenue could be 40% or more (they don’t break it out specifically). So while top line growth has been weak, the mix shift happening w/in their business should be supportive of their multiple and their margins. They intend to grow this mix over time…as they “accelerate the transition of the majority of our portfolio to be delivered as a service.”

·         Security is a bright spot. Security rev was +10% YoY. Security is a big and growing TAM for them and should be a key growth driver as this becomes a more meaningful piece of their business. It’s also a differentiator as competitors do not have the integrated security that they do. Their massive installed base is an opportunity to continue to cross-sell their security products.  

·         Momentum w/ web-scale cloud providers – the positive commentary from last quarter continued. This is an end market where they lost share to Arista in the past, but their positioning is improving w/ new products announced last Dec. That being said, this is still early stages – mgmt. indicated it may take a year or two for this to be a meaningful top line contributor.

·         Executive departure is concerning. Kelly Kramer, CFO (52 years old) is “retiring” and staying on until a replacement is found. She joined Cisco in 2012 and became CFO in 2015, the same year Chuck Robbins became CEO. With her departure, and the announcement at the end of June that the head of Strategy (Anuj Kapur) would be leaving – the leadership changes are starting to add up. Kapur only took on that role in 2018. Those changes come after Rob Salvagno, head of Cisco venture and acquisitions unit departed in Jan 2020 and a couple other execs in Dec 2019 that left as well. So there have been significant leadership changes made in the last 7 months or so. These changes coming amidst a strategy shift and continued acquisitions is a little concerning. Not seeing this talked about on the sell-side.

·         Valuation: trading at a 7.5% FCF yield on 2021. This is well below S&P average of <4%, for a strong balance sheet, high FCF generative business w/ a growing mix of software and recurring revenue. Despite macro headwinds, fundamentals continue to be supported by business transformation/digitization trends at a reasonable valuation while much else in tech has seen substantial multiple expansion. Additionally, their valuation is supported by a 3.4% dividend yield which they easily cover. They have ~$15B in net cash on their balance sheet, or >8% of their market cap.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

Current Price: $79            Price Target: $85 (raised from $80)

Position Size: 2.6%          TTM Performance: 32%

 

 

Key Takeaways:

 

·         Better than expected revenue and EPS. Full year guidance better than expected. Exceeded expectations on higher origination volumes and continued improvement in data and analytics sales.

·         Lower foreclosures is a headwind: as they indicated last quarter, they are seeing lower foreclosure-related volumes in their Specialty Servicing software business due to the foreclosure moratorium.

·         Data & Analytics accelerated (+21% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.

·         CEO Anthony Jabbour said… “the solutions that we are driving in this digital mortgage world that we’ve been talking about many times on these calls…the pandemic has accelerated the need for them. So we’re just in a great spot right now.”

 

Additional Highlights:

·         Q4 Revenues were -1% and adj. EPS was +6%.

·         Mgmt. highlighted several new client wins in Servicing and Origination and the recent completion of the Bank of America implementation this past week.

·         Their stake in D&B is now worth $1.4B w/ the recent IPO. They invested just under $500m in their D&B stake ~1 year ago giving them a pre-tax unrealized gain of ~$900m.

·         Optimal Blue acquisition which enhances their origination and Data & Analytics businesses – expected to close in Q3.

·         Data analytics segment (~15% of revenue) revenues were up 21%, an acceleration from 16% last quarter. Driven by growth in their property data and portfolio analytics businesses.

o   EBITDA margin +970bps YoY.

o   Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals. They continue to see promising momentum in this business.

o   Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US. This is helping w/ loan origination despite social distancing, and implementing forbearance plans. They’ve seen significant interest in and adoption of their expedite e-close and e-sign solutions as well as their loss mitigation solution since the beginning of the pandemic.

·         Software Solutions segment (~85% of revenue) down -4%.

o   Within this segment servicing (~70% of revenue) was down -12.5% driven by previously discussed headwinds – a client de-conversion and lower foreclosure related volumes due to the foreclosure moratorium as part of the CARES Act.

o   They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages is >60%.

o   Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 36% in Q2 – an acceleration from +18% last quarter. Volumes were stronger than expected. Lower rates help this business. Growth driven by new clients, a tuck-in acquisition, as well as higher refinanced volumes in their Exchange and e-Lending businesses.

o   Segment EBITDA margin down 70bps YoY.

·         Full year 2020 outlook:

o   Revenues of $1,170 million to $1,184 million. Lower-end increased slightly – guidance reflects the expected lower foreclosure related volumes as a result of the foreclosure moratorium. ~$39m headwind in 2020.

o   Adj. EPS of $1.94 to $1.99 (previously $1.90 to $1.97), street at $1.93

o   Adj. EBITDA of $572 million to $583 million (previously $568m to $583m)

Valuation:

·         Trading at <4% FCF yield on 2021 –valuation is getting more expensive but supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex which should taper as they grow.

·         $1B in net debt – that puts their leverage ratio at 1.7x. This will go up to >3x with Optimal Blue acquisition.

·         Capital allocation priorities include opportunistic share repurchases, debt pay down and acquisitions.

Thesis:

• Black Knight is an industry leader with leading market share of the mortgage servicing industry. 
• Stable business with >90% recurring revenues, long-term contracts and high switching costs.
• BKI has high returns on capital and high cash flow margins.

 

.UA

[tag BKI}

[category earnings]

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$BKI.US

[category earnings]

[tag BKI]

 

 

Current Price: $1,778      Target price: $2,400

Position Size: 1.8%          TTM Performance: -8%

 

 

Key Takeaways:

·         Better than expected results aided by cost cutting. Beat on revenue and EPS.

·         Demand continues to improve each month since April. Improved from April room nights down 85% YoY to July room nights down 35% YoY.

·         Seeing strongest trends w/ domestic driving travel and alternative accommodations (e.g. home rentals). Alternative accommodations were 40% of booked room nights. Europe and the US had the highest contribution to the improved domestic booking trends.

·         Weak environment strengthens their position w/ suppliers as they are a key source of demand. Dramatic demand mix shift away from business towards leisure benefits BKNG’s leisure focus.

·         CEO Glen Fogel said…”as business travel has been significantly curtailed…it may be a help to us in the long term. As the shift from business to leisure continues for a long time, we will be in a better position with our supply partners because we’re able to provide them with what they need, which is heads in beds.”

 

Additional Highlights:

·         Revenue down 84% and net income down 88%. Net income was $122M, but this includes a gain on marketable securities – excluding that, they had a net loss of $443m.

·         Room nights booked down 87% YoY. That number includes cancellations. Newly booked room nights, excluding the impact of cancellations, declined 68% in the quarter.

·         Improving trends – Once shelter-in-place rules were relaxed in a geography, they saw booking trends improve quickly. Saw the greatest negative impact from the virus in April as newly booked room nights in that month declined over 85% YoY. After April, room night trends steadily improved with newly booked room nights in July declining 35% YoY. Notably, this is better than EXPE, which reported a weakening in July compared to June.

·         Strength in domestic travel – booking trends were primarily driven by domestic travel with international trends seeing much more limited improvement. In July, they had slightly positive YoY growth for overall domestic newly booked room nights – though there were still many countries that had negative YoY growth rates. Domestic business obviously  benefiting from prohibitions/restrictions on international travel, which forces consumers who want a holiday to travel domestically. Note that “domestic” is just intra-country, so travel between countries w/in Europe is international.

·         Weakness in areas w/ new outbreaks – “in some regions, they’re dealing with new outbreaks after having significantly lowered their infection rates. As a result, after a period of relatively steady improvement in many geographies, in recent weeks, we are seeing these growth rates worsen in some countries.”

·         Cost cutting – big headcount reductions with more to come. Also cutting marketing expense which is the biggest part of their cost structure – typically ~30% of rev. This is an important lever for cutting costs. As direct traffic grows as a % of bookings (over 50% now and increasing), this is an area where margins can structurally improve over time.

·         Connected trip is a long-term growth driver – The long-term vision for them continues to be the “connected trip.” The idea is to be a platform for not just hotel, but a portal for all aspects of travel including flights, activities, restaurants etc. A key part of this is building up the “supply” (e.g. tour operators). The current environment could be a catalyst for supply as weaker travel trends spur suppliers to look to Booking as a necessary source of demand. They continue to invest behind this despite the current environment including their payment platform which enables payment to companies like tour operators through their platform.

·         Cost cutting and improved marketing efficiency likely to lead to profitability recovering before top line does. Additionally, the current environment may be a catalyst to traction in their new growth areas – alternative accommodations and “connected trip”.

·         Stock is cheap and expectations are reasonable. Trading at >5% yield on 2021. Which still presumes revenue well below 2019 baseline.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$BKNG.US

[category earnings ]

[tag BKNG]

 

Current Price: $127         Price Target: $165

Position size: 1.5%          TTM Performance: -9.5%             

 

Key Takeaways:

·         Miss on revenue, but big beat on EPS as cost cutting and lower sports programming amortization mitigated losses from park closures.

·         Strong Disney+ performance – Overall, Disney+ continues to ramp better than expected w/ 60.5m subs currently. June 30 quarter end sub number (57.5m) was below expectations (59m), but current number is ahead.

·         Growing DTC plans – trialing pay-per-view DTC premier for Mulan in place of theaters, launching a Star-branded DTC service in international markets in calendar 2021 and planning an upcoming investor day related to DTC plans.

 

Additional Highlights:

·         Revenue was $11.8B vs $12.4B expected. Despite revenue down 42% YoY, driven largely by an 85% YoY drop in Parks segment revenue, Disney managed to post positive op income and FCF for the quarter. Op income was ~$1B vs expectations of about -$900M loss.

·         Collectively, management estimated COVID-19 had a net adverse op income impact of $2.9B, which was felt most in Parks segment. They were able to offset this across the business w/ cost cutting.

·         Overall, a very encouraging and upbeat call with an upcoming investor day in the coming months that mgmt. seemed very positive about. They’ll likely update Disney+ profitability guidance given it’s tracking way ahead of original targets. Additionally, the long-term speculation has been for a DTC model for ESPN – so this could be a potential topic.

·         Media:

o   Media Networks revenues for the quarter decreased 2% to $6.6 billion, and segment operating income increased 48% to $3.2 billion. Op income was up in Q3 due to higher results at both Broadcasting and Cable.

o   Broadcasting op. income was up due to lower programming and production costs, an increase in affiliate revenue, higher program sales and lower marketing costs. These increases were partially offset by lower advertising revenue.

o   Cable op income up due to increases at ESPN and FX Networks. ESPN benefited from lower programming and production costs and, to a lesser extent, higher affiliate revenue, partially offset by lower advertising revenue. ESPN’s lower programming costs were due to the deferral of rights costs for the NBA and MLB. The rights costs will be incurred as games are played in future quarters.

o   Several live sporting events have already returned to ESPN this quarter including Major League Soccer on July 8, Major League Baseball on July 23, and the NBA last Friday.

·         Parks, Experiences and Products:

o   Segment revenues decreased 85% to $1B, and segment op income decreased $3.7B YoY to a loss of $2B.

o   They are seeing a positive net contribution from re-opened parks in Orlando and Shanghai. Phased reopening of Shanghai, Paris, Tokyo, and Orlando, as well as the shopping and dining area at Disney Anaheim. Hong Kong opened then closed after less than 1 month due to government order.

o   Florida performing below expectations due to second wave of Covid, but still a positive net contribution. Shanghai performing better than expectations.

·         DTC:

o   Between Disney+, ESPN+, Hulu they now have >100m paying subs.

o   Int’l Star launch – in lieu of Hulu int’l. Will be a general entertainment offering under the Star brand in calendar year 2021. Primarily owned content from ABC Studios, Fox Television, FX, Freeform, 20th Century Studios and Searchlight.

o   60m subs at Disney+ was originally targeted for 2024, so they hit their 5 year target in about 8.5 months. And said they’re ahead of expectations in every geo, with big launches still ahead. They said India is 15% of subs. ARPU is $4.62, or $5.31 ex-India.

o   They launch Disney+ in the Nordics, Belgium, Luxembourg and Portugal in September, and in Latin America this November. And rolling out Disney+ Hotstar on September 5 in Indonesia, one of the world’s most populous countries. By year-end, Disney+ will be available in 9 of the top 10 economies in the world.

·         Studio:

o   Op income decreased as higher TV/SVOD distribution results, lower home entertainment marketing costs and lower film impairments were more than offset by lower theatrical distribution results. No significant titles released in the quarter. Lapping comparison of Avengers End Game from last year. No new TV and film production since March.

o   With Mulan they are primarily skipping theaters b/c of closures and going direct to platform on pay-per-view basis @ $30. This highlights their alternatives in their studio business. While studio has been a very profitable segment and is their content R&D factory, w/ DTC they can pivot on distribution and do so profitably. While they have no current plans to abandon the theater model and are considering this a test case, it’s important that they have options.

o   They need lower household penetration w/ DTC to be channel agnostic. With theater distribution, there is heavy marketing spending and their box office take rate is 45-50%. This is higher than other studios b/c of their clout w/~40% box office share and a heavy slate of blockbuster titles. So they would need to generate less than half the revenue w/ DTC release than theater release to achieve the same revenue. And the $30 per household grosses up to >$60 at the theater which is higher than typical household theater/movie spend, so from a household penetration perspective it would be even lower than 50% to be even. Additionally, a DTC launch could spur additional subs which have far higher lifetime value than their net profit after a 45% take rate at the theater. Finally, sidestepping the movie theater and having the direct transaction w/ the consumer gives them more data to drive other parts of their business…i.e. promos for consumer products or parks.

·         Balance sheet remains strong w/ plenty of liquidity.

·         No decision on dividend yet. Semi-annual and July dividend was suspended. They expect a decision in late Nov or early Dec.

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$DIS.US

[category earnings ]

[tag DIS]

 

Current Price: $1,482      Price Target: $1,650

Position Size: 5.2%          TTM Performance: +26%

 

Key takeaways:

·         Alphabet reported better than expected results. Revenues better than feared- down 2% YoY (flat in constant currency).

·         Advertising down 8% driven by mix of small-to-mid sized business and exposure to heavily hit industries like retail and travel. Advertising improved toward the end of Q2 through July.

·         Strong growth in non-Ad revenues, particularly from Cloud, Google Play and YouTube Subscriptions.

·         Share buyback authorization increased $28B.

·         CEO, Sundar Pichai said…”We see two distinct trends as businesses embrace the future of work. First, the future of business will be more digital. Customers are choosing Google Cloud to either lower their costs by improving operating efficiency or to drive innovation through digital transformation….Second, the future of work will be more collaborative. Virtual collaboration is critical in order to adapt and succeed in the changing global landscape.”

 

Additional Highlights:

·         Total revs were $38.3B down 2% YoY (flat in constant currency). YoY declines in ad revenues from Search and Network were offset by growth in Google Other and Google Cloud revenues.

·         “Like other companies, this quarter we saw the early signs of stabilization as users return to commercial activity online. This is true across most of our advertising verticals and geographies. Of course, the economic climate remains fragile.”

·         Google Shopping came up multiple times on the call. Looking to help merchants lower their cost and increase their reach like removing the commission for merchants to be on the platform. Also opening their platform to 3^rd party providers including PayPal and Shopify.

·         Search revenue ($21.3B) -10%. saw a gradual return in user search activity to more commercial topics throughout the quarter, followed by an increase in spending by advertisers with Search revenues essentially flat to last year by the end of June.

·         YouTube ad sales ($3.8B) were +6%, growing faster than search revenues. Ongoing substantial growth in direct response, offset by a continued decline in brand advertising which then moderated toward the end of the quarter.

o   YouTube watch time has also significantly increased, particularly live streams. Andrea Bocelli’s live stream on Easter had 39m views.

o   YouTube brand advertising growth accelerated in the first two months of the quarter, but started to experience headwinds in the middle of March.

o   Direct response ads continued to have substantial year-on-year growth throughout the entire quarter.

·         Network ad revenues: $4.7B, -10% YoY, trends improving somewhat towards the end of the quarter as advertisers’ spend began to return.

·         Google cloud (GCP and G Suite): was $3B, +43%.

o   Overall, the deceleration in Google Cloud revenue growth in 2Q reflects the fact that G Suite lapped a price increase that was introduced in April last year.

o   GCP, however, maintained the strong level of revenue growth it delivered in Q1 and its revenue growth was again meaningfully above Cloud overall. Growth again led by Infrastructure offerings and Data and Analytics platform.

o   Saw headcount increases.

o   Called out GCP clients: Keurig, Dr. Pepper, Deutsche Bank, Loews, Telefonica, Orange, also helping many government agencies deliver care for their citizens, including the States of Oklahoma and New York, and Italy and Spain.

o   G Suite maintained healthy growth in average revenue/seat as well as seat growth, which does not include customers who took advantage of free trials as they shifted their employees to WFH.

o   Saw continued demand from customers using G Suite to help their employees work-from-home, including Wipro in India and expanded their relationship with the State of Arizona.

o   Meet: In Q2, we peaked at more than 600 million Meet participants in a single week. As one example, PwC employees reached nearly 10 million hours of video conferencing in Google Meet in a single month.

·         Other Revenues ($5.1B, +26%) – primarily driven by growth in Play and YouTube non-advertising revenues.  Google Play App and Game downloads were up more than 35% year-over-year.

·         Other Bets – Waymo announced Fiat Chrysler as strategic partner for L-4 autonomous technology across their full portfolio. Also entered into a partnership with Volvo Car Group to integrate the Waymo Driver into an all-new electric vehicle platform for ride-hailing services.

·         Margin contraction: driven by higher costs associated with depreciation, data centers, higher content acquisition costs for YouTube, and headcount (up 4,450 from Q1). Most sizeable headcount increases were again and Google Cloud.

·         Total TAC was $6.7B or 22% of total advertising revenues, and down 8% YoY. Slightly up as a % of ad revs given decline.

·         Outlook: No specifics.

o    “Ads revenue gradually improved during the quarter across Search, YouTube and Network. However, we believe it is premature to gauge the durability of recent trends, given the obvious uncertainty of the global macro environment.” Advertising spending closely correlates with the overall health of the economy.

o   Continue to plan for lower capex largely driven by lower real estate expense.

o   Overall spend on tech infrastructure should be the same YoY. More spend on servers than on data center construction.

o   Although we still expect the pace of headcount growth to decelerate somewhat in 2020, we’re continuing to hire aggressively in priority areas like Cloud.

·          Q2 FCF was $8.6B and they ended the quarter with cash of $121B. They have ~11% of their market cap in net cash. The stock is still reasonably valued, trading at a ~4% FCF yield on 2021.

 

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

 

 

 

$GOOGL.US

[category earnings ]

[tag GOOGL]

 

Current Price: $409         Price Target: $450 (raising from $414)

Position size: 7.1%          TTM Performance: +92%

 

Key Takeaways:

·         Apple reported very impressive Q3 results. They beat the highest estimates, w/ Q3 revenue up 11% (including a 300bps headwind from currency).  Revenue hit $59.7B vs street at $52.2B. EPS $2.58 vs street $2.07.

·         Broad beat – better than expected revenues across all products, including a surge in iPad and Mac sales and a return to growth w/ iPhones..

·         They saw meaningfully improved sales in May and June which they partly attribute to the stimulus.

·         No specific guidance for Q4 but they did say they expect a continuation of recent performance w/ iPhone and services categories, with some headwinds from AppleCare. Also iPhone 12 release delayed a few weeks

·         Announced 4-1 stock split at the end of Aug.

 

Additional Highlights:

·         Both products and services set June quarter records and grew double-digits and revenue grew in each of their geographic segments.

·         Installed base of active devices reached an all-time high across each product category.

·         Transition to Apple silicon for the Mac – “this two year effort will achieve both unprecedented performance for the Mac and a common architecture across all Apple products.”

·         Gross margin was 38%, down 40 bps sequentially due to unfavorable FX of 90 bps

·         Affordability – This continues to be a growing focus as a way to grow their installed base. They just launched the iPhone SE @ $399. In June, they launched Apple Card Monthly Installments for more products in their US stores allowing customers to pay for their devices all the time with 0% interest.

·         Segment results – Mac and iPad were standouts

o   Mac ($7.1B, +22%) & iPad ($6.6B, +31%)

§  As they said last quarter, they expected iPad and Mac growth to accelerate in Q3 – incredible growth driven by increased WFH. This remarkable performance came in spite of supply constraints on both products.

§  Mac grew double digits in each geographic segment and set all-time revenue records in Japan and rest of Asia-Pacific as well as June quarter records in the Americas and Europe.

§  Customer response to new MacBook Air, MacBook Pro, and iPad Pro launches has been extremely strong.

§  Half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and iPad reached a new all-time high.

o   iPhone ($26.4B, +2% YoY)

§  iPhone returned to growth. Customer demand improved as the quarter progressed.

§  In April, they said they expected YoY performance to worsen, but they saw better-than-expected demand in May and June. They attributed this increase in demand a strong iPhone SE launch and continued economic stimulus.

§  Strong response to SE, but iPhone 11 continues to be their most popular phone.

§  Active installed base of iPhones has reached an all-time high.

o   Services ($13.2B, +15% YoY)

§  Hit milestone set in 2016 of doubling this business in 2020.

§  All-time revenue records in the App Store, Apple Music, video and cloud services as well as elevated engagement on iMessage, Siri and FaceTime.

§  Strong double-digit growth in the App Store, Apple Music, video and cloud services.

§  Results for advertising and AppleCare were impacted by the reduced level of economic activity and store closures – in line with their expectations.

§  Growing customer engagement in their ecosystem – the number of both transacting and paid accounts on their digital content stores reached a new all-time high during the June quarter with paid accounts increasing double-digits in each geographic segment.

§  Paid subs grew by 35m sequentially to 550m. Goal of 600m by year end.

o   Wearables, Home and Accessories ($6.5B, +17%)

§  Wearables growth decelerated as we expected, but still grew by strong double-digits and set a revenue record for a non-holiday quarter.

§  Now the size of a Fortune 140 company

§  >75% of Apple Watch purchasers were new to the product

·         Valuation:

o   Trading at a >4% FCF yield. Higher than the S&P. Apple’s FCF generation is about the same as the other FAANGs combined.

o   Ended the quarter with net cash of $81B ($194B in cash and debt of $113B) or about 5% of their market cap.

o   Returned $21B to shareholders during the March quarter, including $3.7B in dividends.

o   Maintaining target of reaching a net cash neutral position over time.

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$AAPL.US

[category earnings]

[tag AAPL]

 

Current price: $170          Target price: $190

Position size: 2.7%           TTM Performance: 31%

 

Key Takeaways:

·         CCI reported mixed 2Q  results. They saw slightly lower than expected revenue and AFFO, but maintained full year guidance.

·         Minimally impacted from COVID-19 given durability of demand for their critical infrastructure and long-term contracted revenues. Tower leasing activity should ramp in 2H20 w/ TMUS merger.

·         Refreshing board and reviewing executive compensation structure following Elliott Management’s letter to the company. During the quarter, Elliott announced a stake and sent an open letter w/ multiple suggestions to the mgmt. team.

 

Additional Highlights:

·         Lower than expected revenue driven primarily by lower services revenue, but this is a timing issue. Mgmt. expects an acceleration in 2H20 as carrier customers invest to improve their existing networks and as 5G starts to ramp – in particular w/  increased TMUS and DISH network activity. “Full rebound in overall industry activity on towers is taking a bit more time to materialize than we previously expected, we remain on track to generate at least 7% growth in AFFO per share this year.”

·         While they responded to Elliott regarding board structure and compensation, they did not disclose a significant change to their business model or capital allocation strategy.

·         Minimal COVID-19 impact.  Construction in small cells and fiber has continued. CCI is working closely with municipalities and state governments to facilitate small cell and fiber deployments. As a provider of critical telecommunications infrastructure that is considered essential to public health and safety, they have continued to construct and install customers on their infrastructure.

·         Customers continue to invest in their networks by deploying additional spectrum and new cell sites to keep pace with the 30% to 40% annual growth in data demand.

·         The company has limited exposure to SMB customers.

·         Site rental revenues +4%

o   Tower leasing (~2/3 of property revenue) – grew 3.2% YoY, poised to benefit from a re-acceleration in tower leasing activity in 2H20 as carriers ramp their 5G network investment and new T-Mobile begins to integrate its network following its merger completion on April 1.

o   Fiber solutions (~1/4 of property revenue) – grew 3% YoY – benefiting from bandwidth upgrades from large enterprises. SMB exposure appears minimal (5% of fiber solutions revenue).

o   Small cells business (~10% of property revenue) – grew 17% YoY

·         Strong balance sheet. No meaningful debt maturities until 2022. During the quarter raised $3.75 billion in senior unsecured notes across two separate offerings with a weighted average maturity and coupon of approximately 17 years and 2.8% to refinance existing debt.

·         Q2 dividend of $500m, +7% YoY

·         Trading at ~3.5% FFO yield and 2.8% dividend yield.

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$CCI.US

[category earnings]

[tag CCI]

 

Current price: $198         Target price: $210

Position size: 4.3%          TTM Performance: 7%

 

Key takeaways:

·         Visa reported slightly better than expected revenue and EPS.

·         Cross-border headwind until travel recovers: weak cross border volumes continue to be a headwind. Still down 44% in July as travel restrictions prevent higher volumes.

·         Sequential improvement in volumes: saw spending improve each month as most countries began to relax domestic restrictions.

·         Current environment could be secular growth catalyst: While cross-border will be headwind for the foreseeable future, current environment may be a catalyst to further displacement of cash aided by faster uptake of contactless and higher e-Commerce penetration.

 

Additional Highlights:

·         Net revenues in the fiscal third quarter were $4.8 billion, a decrease of 17% or 16% in constant dollars. All of the business drivers were significantly impacted by the pandemic – as payment volume was down 9.9% and cross border was down 37%.

·         Notably, total credit volume was down 20.4% (cc) while total debit volume increased 2.7% (cc). 

·         U.S. debit volume up 8% vs. credit down 21%, while international debit volume was down 2.7% vs. credit -19.9%. In the US, government assistance issued via Visa Prepaid cards added “several points” to debit in May and June.

·         In terms of geographic performance for payments volume, every region was down with the sharpest decline in Asia Pacific (-16.1%) follow by Canada (-15.2%),LAC (-12.6%), Europe (-10.2%), U.S. (-7%) and CEMEA (-5%).

·         Improvement in US volumes: “For the quarter U.S. payments volume declined 7%, a sharp decline from mid-April was followed by a V-shaped domestic spending recovery. Volumes declined 18% in April, before returning to positive territory in June. July volumes through the 21st are up 7%. This recovery was jump-started by the economic impact payments and enhanced unemployment benefits, helped along by pent-up demand fulfillment and accelerated by the relaxation of shelter in place requirements.”

·         Cross border ex. intra-Europe (-47%) was worse than overall cross border (-37%), as some level of intra-Europe travel is occurring. A key variable to improving net revenue growth is an improvement in this cross border ex. intra-Europe. This will likely be one of the last metrics to fully recover to pre-COVID levels. As boarders re-open there could be pent-up demand for travel, subject of course to any weakening in the macro environment. Mgmt. said that in corridors where restrictions have been relaxed, such as U.S. to Mexico & Caribbean or Switzerland to Germany & France, cross-border volumes have recovered quickly.

·         Cross-border e-commerce continues to grow – while overall cross-border volumes are down, transactions have done better. This is the result of a mix shift from higher ticket travel expenses like hotels to lower ticket e-commerce purchases. Growth in cross border e-commerce spend ex-travel has been up high-teens to low-twenties since mid-April.

·         Continued move away from cash – “card not present” spend ex-travel grew 25% every week since mid-April which is 2x the pre-COVID growth rate. There is still $18 trillion transacted in cash and check globally.

·         Card present spending improved steadily through the quarter as re-openings went into effect from declining almost 50% in early April to declining in the high single-digits by late June, but there has been little improvement since.

·         Spending impact by category, each are ~1/3 of US spending volume:

o   Covid beneficiaries (i.e. food and drug stores, home improvement and retail goods) – These categories have consistently grown at or above their pre-COVID growth rates in the high teens or even higher every week since mid-April.

o   Modestly hit categories – This group includes categories that experienced spend declines between 10% to 50% in April and had all recovered to growth by the end of June. These segments include automotive, retail services, department and apparel stores, health care, education, government and business supplies.

o   Hardest hit categories – These categories declined over 50% in April and are still declining year-over-year, although, each improved by between 20 to 45 points during the quarter. This group includes travel, entertainment, fuel and restaurants. Travel remains the most impacted category still down over 50%. Fuel gallons purchased are growing again, but spend is down more than 15% in July driven by lower prices.

·         Continued growth in new flows (i.e. P2P, B2B, G2C): Key growth area which they identify as a $185T opportunity.  In the US, Visa Direct was up over 75% this quarter due to strong growth in a variety of use cases ranging from P2P, to insurance payouts, to payroll. In P2P Visa announced a global partnership with PayPal including its Venmo, Braintree, Zoom, iZettle and Hyperwallet brands. This is an extension of a long-standing regional partnership with PayPal. Visa reported US P2P up 80%. In G2C the U.S. Treasury distributed nearly four million economic impact payments via Visa prepaid cards.

·         Capital allocation: Buyback plans and their dividend policy remain unchanged. In Q3 they returned ~$1.5B to shareholders through dividends and buybacks.

·         Valuation: trading at a ~3.5% FCF yield on 2021 vs S&P ~3.9%….reasonable for a company w/ high moat, powerful  brand, vast global acceptance network and LT secular growth – despite near term headwinds.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$V.US

[category earnings]

[tag V]

 

Current price: $635         Price target: $660

Position size: 3.7%          TTM Performance: 25%

 

 

Key Takeaways:

·         SHW reported better than expected revenues and EPS and increased guidance. Sales down 5.6% in line with guidance. Estimated impact from COVID-19 on sales during the quarter was approximately -8%.

·         Big GM expansion (>300bps improvement), driven by strong volume, improved pricing, and lower raw material cost. Raw materials expected to be down mid-single-digit for the year compared to prior estimate of down LSD. Driven by lower resins and solvents.

·         Sequential improvement in demand across all end markets. Industrial end markets remain the weakest.

·         DIY business is strong: Surge in DIY (up double digits) demand across all channels, especially Home Improvement retail. Should switch back to DIFM – contractors seeing increased bids, including increased demand for interior projects.

 

Additional Highlights:

·         Sequential improvement: sales were down by a mid-teens percentage in April, but came out of the quarter with June flat to last year.

·         DIY business growing at an “unprecedented pace” and was robust throughout the quarter. After DIY new residential, and residential repaint were the best performers in the quarter. Both recovered to deliver positive growth in June.

·         From a product perspective exterior paint is recovering faster than interior paint due to social distancing requirements. Exterior paint sales increased by mid-single digit percentage in the quarter.

·         Input costs were down MSD in 1H and expected to be down the same in 2H. This along w/ 2% pricing taken in the beginning of the year benefited margins. Raw materials costs are key as they represent ~80% of COGS for paint.

·         Multiple signs of health in residential end markets. Contractors are seeing requests for quotes in June above June 2019 levels. Spray equipment pump sales (a good indicator of future demand) were down mid-single digits in the quarter but recovered to finish strong in the month of June.

·         America’s Group:

o   Same store sales decreased 6.9%. Strong DIY growth (up double digits) offset by soft residential and commercial end markets.

o   Sales improved sequentially through the quarter, driven by recovery in new residential and residential repaint which both delivered positive growth in June.

o   Segment margin increased 160 basis points to 23.8%

o   Largest sales decrease in Eastern division, followed by Canadian, Midwestern, South Western and Southeastern divisions.

·         Consumer Brands Group:

o   Sales increased 22% driven by strong North American DIY demand throughout the quarter. Strong growth across entire retail channel. Solid growth in Europe; China and Australia soft.

o   Adjusted segment margin increased by 620bps. Margin improvement driven by volume leverage, lower input costs and good spending controls, as well as actions taken over the past year to improve international operating margins.

·         The Performance Coatings Group:

o   Sales decreased 16.5% (-3% impact from FX). Saw sequential improvement throughout the quarter. Packaging remained strong, up high-single-digits. Coil, Industrial Wood, General Industrial and Automotive Refinish demand negatively impacted by COVID-19 pandemic. Auto is tied to miles driven (auto refinish) and not car sales as they’re not exposed to OEM auto. General industrial weak but improving.

o   Sales decreased across all regions: low-single-digit declines in Asia, all other regions down by double-digit percentages.

o   Adjusted segment margin contracted by 190bps.

·         Guidance:

·         Sales: flat YoY (reflecting uncertainties of the timing and pace of improvement in the U.S. and global environments). By segment:

o   TAG: Flat to up low-single-digits (previously Flat to down mid-single-digits)

o   CBG: Up high-single-digits (previously +/- low single digits)

o   PCG: Down low to mid-single-digits (previously down high-single-digits to low-double-digits)

·         Adjusted earnings per share: $21.75-$23.25

·         Raw materials: down mid-single-digits (previously down low-single-digits)

·         Well positioned from a balance sheet and liquidity perspective. They have $239 million in cash and $2.5B of unused capacity under their revolving credit facilities. No big near term maturities.

·         Capital allocation: recently increased dividend by 19%, share repurchases on hold, reduced capex.

·         Decreased leverage ratio from 3.2x to 2.8x. No near term debt maturities until 2022 ($660m).

·         Reasonable valuation, trading at ~3.5% FCF yield.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$SHW.US

[category earnings]

[tag SHW]