Author: Sarah Kanwal

Share price: $137 Target price: $165

Position size: 2% 1 yr. return: 20%

Disney reported strong Q4 results. Revenue was in-line and they beat on EPS $1.07 vs street $0.95. Reiterated the guidance of DTC for Disney+, Hulu and ESPN+ that was given at the April Investor Day. They also had positive commentary around early results of Disney+ in the Netherlands and have announced new partnerships w/ Amazon Fire, Samsung and LG for streaming Disney+.

Key takeaways:

· Better than expected op income driven mostly by Parks (includes consumer products) and Studio. Studio performance driven by Lion King, Toy Story 4, and Aladdin.

· Better consumer products op income was due to growth in merchandise licensing w/ Frozen and Toy Story merchandise. Better parks op income was driven by their strategy of managing yield (i.e. dynamic pricing) to drive greater profitability. Domestic park attendance was comparable to Q4 last year, and reflects the impact of Hurricane Dorian, which adversely impacted attendance growth by about 1%. Per capita guest spending was up 5% on higher admissions, merchandise and food and beverage spending. So far this quarter, domestic resort reservations were flat YoY. Mgmt says guests are deferring visits to Disney Land and Walt Disney World until the complete opening of Galaxy’s Edge at those respective locations. While int’l parks are being negatively impacted by Hong Kong protests, it was offset by growth in Paris and Shanghai parks.

· Expectations for Disney+, which launches next week, are increasing given new partnerships, better visibility into robust slate of exclusive content, earlier than expected launch in Western Europe and positive commentary around testing in the Netherlands.

· Launch next week is in US, Canada and Netherlands, then Australia and New Zealand the following week and Western Europe in March.

· The new Star Wars series, The Mandalorian, which will be available at launch and exclusive to Disney+ is being heavily hyped after early screening of the first episode. Link to Mandalorian trailer: https://www.youtube.com/watch?v=XmI7WKrAtqs

· Disney+ distribution partners include: Apple, Amazon, Roku, Samsung, Google, Microsoft, Sony, LG.

· Media networks – cable subs down 4% YoY, driven by cord-cutting and in line w/ peers. ESPN+ now has >3.5m subs – up almost 50% QoQ. Hulu now at 28.5m subs and mgmt. announced that FX network will now be exclusive to Hulu for streaming. Additionally, FX will produce new original series exclusively for Hulu, starting with 4 new series in 2020.

Investment Thesis:

1. Disney is a global media and entertainment company that owns a massive library of intellectual property.
2. Their competitive advantage is their evergreen brands and synergistic business model. Disney can create content that builds off existing franchises and can be monetized across all their business, giving them the ability to create higher budget, quality content and an ever growing library of IP.
3. New direct-to-consumer (DTC) initiativewill strengthen synergies between businesses and lead to structurally higher margins and higher multiple on recurring revenue business.
4. Recent Fox acquisition improves their content positioning and global growth opportunities.
5. High quality company with solid balance sheet, strong FCF generation and ROIC.

$DIS.US

[tag DIS]

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: $1,945 Price Target: $2,400

Position Size: 2.5% TTM Performance: -1%

Booking is trading up after reporting better than expected results – a relief especially given EXPE’s report yesterday. BKNG reported in-line gross bookings and better than expected room night growth. While guidance was below consensus, they have a track record of guiding conservatively. Expedia’s earnings miss was on higher ad spend, however BKNG’s ad spend was >200bps lower as a percent of revenue YoY, which is reassuring given their better than expected room night growth. So, EXPE needed to spend more than expected on advertising to beat on room nights while BKNG spent less. They do however face the same pressures from Google that Expedia faces –this has been a theme for many quarters as they try to improve ROI on ad spend and try to get more consumers to their site directly. BKNG does have some structural advantages to EXPE including their focus on the more fragmented European lodging market which leads to higher take rates. They also have higher productivity on ad spend – this is driven in part by higher travel frequency in Europe which leads to more direct traffic and also by having fewer brands/banners than EXPE which results in less efficient ad spend.

Key Takeaways:

· Gross bookings growth was +7% constant currency. Guidance was for +3-5%.

· They booked 223 million room nights in 3Q, up 11% YoY. Guidance was for 6-8% growth constant currency.

· ADR headwind: industry occupancy is peaking and ADR’s are weakening as the lodging cycle matures. Lower ADR’s will be a cyclical headwind as revenue is a % of room revenue. This will impact them more than in past cycles as secular growth is slowing with higher penetration..

· Guidance: Management provided Q4 guidance below consensus with bookings growth decelerating to +4% YoY at the high-end of the range.

· Total ad spend declined~233bps YoY as a percentage of revenue, with direct traffic growing faster than pay channels.

· What’s driving advertising spending issues? The driver is less efficient search engine optimization (SEO). SEO refers to where their sites fall in rankings based on search results. The goal is to be at the top and get organic (free) traffic. They also advertise to get traffic. Both EXPE and BKNG spend a ton (>30% of revenue each) on advertising to drive revenue. The goal is to get more direct (go to the app or directly to the website) and/or SEO traffic to the site. The problem is that Google has reformatted how search results show up (a box appears ahead of listed results) which drives traffic to their own sites (this is a source of antitrust scrutiny) and pushes BKNG’s and EXPE’s sites lower in the search results. The consequence of this is exacerbated on small mobile screens, where an increasing amount of the traffic comes from. Yelp has been a vocal critic of Google’s behavior on this same issue.

· Alternative accommodations: “growth outpacing the overall business.

Valuation:

· Repurchased $1.4 billion of stock in Q3 – $13 billion outstanding under repurchase authorization – expect to complete this authorization in the next 2-3 years assuming stable business and market conditions.

· The stock is still undervalued – trading at ~6.5% FCF yield on 2020.

Thesis:

1. Booking is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.

2. BKNG has several competitive advantages relative to Online Travel Agent (OTA) peers:

· Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings

· They operate largely on an agency basis which allows them to continue to grow their network and do so profitably

· Strong position in China/South East Asia via Ctrip and Agoda

3. Booking’s addressable market is growing driven by:

1.) Alternative accommodations

2.) Increased penetration (growth of mobile/internet)

3.) Global growth of travel spend > GDP.

4. Their asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.

$BKNG.US

[tag BKNG]

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

Share price: $57 Target Price: $60

Position size: 2.2% TTM return: 27%

BKI reported in-line revenue and better than expected EPS. Revenue guidance was lowered to the low end of original guidance but in-line with consensus. EPS guidance range was also lowered but the midpoint was still slightly ahead of the street. Revenues and adj. EPS were both +6%. The stock is down because of announced lawsuits between Black Knight and a client, PennyMac. PennyMac is making anti-trust claims against Black Knight and Black Knight is alleging breach of contract and misappropriation of trade secrets by PennyMac. PennyMac has been a customer of Black Knight’s mortgage software products since 2008 and claims that “due to limitations of BKI’s MSP product” they made some efforts to customize and enhance some modules of BKI’s software that they are now trying to claim as their own. Given BKI’s market share leading position, high retention rates and ability to replace the custom in-house solutions of large banks, the claims against them seem surprising and retaliatory. The lawsuit is concerning but does not suggest a change in thesis at this point.

Key Takeaways:

· Given the de-conversion of a specialty servicing client that impacted guidance last quarter and now the PennyMac situation, they are seeing some unusual headwinds into 2020 (~5% hit to top line). Long term targets continue to be 6-8% revenue growth and mid-teens EPS growth. By segment, the expectation is mid to high-single digit growth in Servicing, high-single to low-double digit growth in Origination, and low to mid-single digit growth in Data & Analytics.

· Data analytics segment (~14% of revenue) revenues were up 9% driven by growth in their property data and portfolio analytics businesses.

· Software Solutions segment (~85% of revenue) was up 5%.

o Within this segment servicing (~70% of revenue) grew 1%. This growth was impacted by the client de-conversion and early client termination mentioned on their 2Q earnings call. They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages has grown from 49% in 2010 to 63% as of the end of Q3.

o Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 25% – lower rates help, but growth also aided by an acquisition and a termination fee.

Valuation:

· Trading at ~4.5% FCF yield on 2020 –valuation is 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 (~9% of revenue now) which should taper as they grow.

· Leverage ratio now at 2.8x, high because of Dun & Bradstreet but decreasing.

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

$BKI.UA

[tag BKI}

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

PLEASE NOTE!

We moved! Please note our new location above!

AAPL reported better revenue and EPS than estimates. Guidance for next quarter, which is seasonally their largest, was also ahead of expectations. By product, iPhone sales were down less than expected. They beat everywhere except Macs. However, for 2019 overall they generated the highest annual revenue ever for Mac.

Key Takeaways:

· Services growth accelerated to +18% and saw double-digit growth in all regions. They have several new services that aren’t making much of a contribution yet (Arcade, Apple News+, Apple TV+).

· Services segment accounted for 20% of revenue and 33% of gross profit. Positive commentary around launch of Apple Card. Apple Pay transactions more than doubled YoY to >3B transactions. Exceeding PayPal’s number of transaction and growing 4x as fast.

· Strong wearables performance (>50% growth YoY) driven by Beats, Watch and air pods. Set a Q4 records for Wearables in each and every market they track.

· iPhones declined 9% in Q4, but beat estimates (improvement from 15% decline they saw across the first three quarters). iPhone 11 is their best-selling iPhone.

· China improved – Greater China revenue at $11.1bn declined 2% Y/Y (up YoY in constant currency), improving from the 4% decline in FQ3. Management called out strong Wearables performance and double-digit Services growth as it saw more gaming approvals in the quarter.

· In general, they seem to be easing on iPhone pricing and it’s helping units. They lowered price points of the new lineup and have taken “lower exchange rates” in some markets internationally. Additionally, being promotional in the sense that customers can purchase their new iPhone with the Apple Card and pay for it over 24 months with zero interest and 3% cash back. With it they also get a year of free Apple TV+.

· Comment on tariffs: “We are paying some tariffs today as you know, some that went into effect pre-September, and some others that went into effect in September. So we are paying some that’s been comprehended. But in general, my view is very positive in terms of how things are going, and that positive view is obviously factored in our guidance as well.”

· They reiterated goal of being net cash neutral “over time.”

Valuation:

· Trading at about a 1.2% dividend yield, and ~5.5% FCF yield.

· They have about $103B in net cash on the balance sheet. That’s over 9% of their market cap.

· The stock is undervalued and substantial buyback from management’s goal of net cash neutral will support valuation.

· In addition to the >$100B in net cash they already have, they produce about $60B in FCF annually. That’s more than all the other FAANGs combined.

The Thesis for Apple:

• One of the world’s strongest consumer brands and best innovators whose product demand

has proven recession resistant.

• Halo effect -> multiplication of revenue streams: AAPL products act as revenue drivers

throughout portfolio – iPhone, iPod, MacBooks, iPad > iTunes, Apps, Software, Accessories,

• Strong Balance and cash flow generation.
• Increasing returns to shareholders via dividends and buybacks.

$AAPL.US

[tag AAPL]

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: $1,257 Price Target: $1,350

Position Size: 4.7% TTM Performance: +18%

Alphabet reported mixed results, beating on the top line and missing on EPS. Revenue growth was +22% ($40.5B vs. consensus of $40.3B) driven by better than expected ad revenue. Net advertising revenue totaled $26.4B compared to consensus at $26.3B. While some cost pressures moderated, they also had some one-time hits that impacted earnings including a $1.5B unrealized loss on investments in other companies. They are an active venture capital investor (Capital G), but didn’t say which investments contributed to the loss. They also took a hit from a $554 million legal settlement in France. TAC as a percent of revenue decreased and capex was lower than expected. Reuters reported yesterday that Google made an offer to buy Fitbit, sending Fitbit shares up 30% yesterday, but mgmt. wouldn’t comment about this on the call.

Key takeaways:

· Interestingly, they’ve recently been evolving the way they talk about their mission. They used to say it was to “organize the world’s information” – now they say, “we’ve evolved from a company that helps people find answers to a company that helps you get things done.” Shift suggests growing focus on cloud, AI and hardware.

· Two significant technology advances:

1. “Dramatic improvement” in their search algorithm b/c of a new type of neural network based technique called BERT. Here’s an article about it: https://techcrunch.com/2019/10/25/google-brings-in-bert-to-improve-its-search-results/

2. Quantum supremacy – Google’s 53-qubit quantum machine, Sycamore, successfully performed a test computation in just 200 seconds that would have taken the most powerful supercomputers many years to accomplish. “Distinct milestone in our effort to harness the principles of quantum mechanics to solve computational problems.” For anyone who is interested, you can learn more about this here: https://www.ft.com/video/48d44362-3926-4111-b19b-037c0394a85c?emailId=5db6d71006676700047a9d10&segmentId=13b7e341-ed02-2b53-e8c0-d9cb59be8b3b&playlist-name=editors-picks&playlist-offset=4

· Top growth drivers were mobile search, YouTube and cloud.

· Key expense lines:

o Higher cost of revenues as a % of sales driven by costs associated with data centers including depreciation, content acquisition costs (primarily for YouTube), and impact of Pixel 3a hardware costs, offset by lower % of TAC.

o Higher than expected opex driven by legal settlement in France. Headcount is also key driver in opex increases. Sizable headcount increase focused on cloud business.

· Google Other Revenues (includes Google Play, Google Cloud, and Hardware)

o $6.4B in revenue vs consensus of $6.3B, up +39% YoY.

o Cloud: No specific detail on cloud. Last quarter they indicated it was at an $8B run-rate. Google had a change in leadership in their cloud business earlier this year and is looking to triple their cloud division sales force over the next few years.

o Announced partnership with Mayo Clinic – they will us Google Cloud to secure and store data and understand insights at scale. The partnership will encompass transforming patient and clinician experiences, identifying new methods of diagnosing diseases, conducting clinical research and finding new models for delivering patient care.

o Hardware:

§ They have long talked about hardware as a growth priority for them.

§ Hardware benefited from the Pixel 3a – their lower priced phone. The phone did a lot better than the more expensive Pixel 3.

§ New products…Nest mini, Pixelbook Go, Pixel 4 and Pixel Buds, similar to air pods.

o Gaming: Stadia, their streaming video game business, will soon be available in the US, UK, Canada, and throughout Europe.

· Other Bets: Waymo continues to progress…expanding in Phoenix and testing long-haul truck driving on Arizona freeways. There will also be heavy-rain testing in Florida and 3-D mapping in Los Angeles.

· Record High Share buybacks – $5.7B in Q3 which brings buybacks to $12.3B YTD. $121B of cash & equivalents on the balance sheet.

Valuation:

· Reasonable valued, trading at >4% FCF yield on 2020.

· $107B in net cash, ~13% of their market cap.

$GOOGL.US

[tag GOOGL]

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: $179 Price Target: $185

Position Size: 4.2% TTM Performance: 29%

Visa reported better than expected Q4 revenue and EPS. Net revenue was +15% and adj. EPS was +23%, $1.47 vs consensus $1.43. Payments volume growth was strong at +9% (constant currency). They introduced full-year 2020 guidance of net revenue growth of "low double-digits" and EPS growth of “mid-teens.” Guidance in-line with consensus but includes higher client-incentive fees due to a high level of contract renewal activity. In general, growth trends of their key business drivers – payments volume, processed transactions and cross-border volume – have been stable.

Key Takeaways:

· They had 47 billion transactions (+12.6%) on their network driving >$2.27T in total volume, +9%, in line w/ last quarter. Credit was +7% and debit was +11%. Cross border was +7%

· US payments volume growth was ~8% with credit growing 7%and debit 10%.

· International payments volume growth in constant dollars was 10%. The UK remains weak, but growth has now improved for two quarters after hitting a low in March.

· Expanding access with new players – This is critical to expanding credentials and acceptance globally. Deepened relationships with several FinTech partners across the globe including Chime, N26, Railsbank and Toss.

· Teaming up with Samsung to allow merchants to accept contactless payments with just an app download and no hardware. So in essence the phone becomes the terminal.

· Launched common button – they’ve been discussing this for a while. This is a joint effort between AmEx, Discover, MasterCard and Visa of a joint click-to-pay button that makes online checkout easier.

· B2B (Visa Direct) was 12% of volume in 2019. Recent developments in B2B include Visa Direct integration with Oracle ERP that allows customers to make payments directly from the account payable system.

· 2020 FCF should be ~$12B and they anticipate returning at least $12B to shareholders through dividends and stock buybacks.

Valuation:

· Strong FCF continues to support buybacks. Returned $2.7 billion of capital to shareholders in Q4 and $10.9B for the full year.

· Trades at a ~4% FCF yield. Reasonable for a company w/ >50% FCF margins, high ROIC, and, absent a recession, should continue growing top and bottom line double digits.

· Announced a 20% increase in their quarterly dividend to $0.30 – puts the payout ratio in 20%-25% range.

Thesis:

· Visa is the number one credit and debit network worldwide – accounting for about half of all credit and roughly three fourths of all debit card transactions.

· We are still in the earlier innings of the digitization of electronic payments. This is a secular tailwind supporting Visa’s growth as 1.) Electronic payments continue to replace cash 2.) Commerce moves online 3.) Consumer spending grows globally

· Visa’s asset light “toll both” business model is characterized by recurring revenues, high incremental margins, low capital expenditures, and high free cash flow.

· Visa’s recent acquisition of Visa Europe should be a nice tailwind over the next few years as the European market is in the earlier stages of electronic payment adoption and Visa is well positioned to gain market share and improve margins in the region.

$V.US

[tag V]

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

PLEASE NOTE!

We moved! Please note our new location above!