Author: Sarah Kanwal

CCI Q1 Results

 

Current price: $191      Target price: $210

Position size: 2%           TTM Performance: 12%

 

Key takeaways:

  1. Reported a broad beat across key metrics.
  2. Seeing solid, durable tailwinds on increased spending from the major carriers on 5G spectrum deployment and Dish as a 4th carrier. Dish (as mandated by the FCC due to the TMUS/Sprint merger) is investing in establishing a national 5G network which is a tailwind to CCI.
  3. Seeing record tower growth now; small cell growth will be longer term driver – they are seeing an inflection point in small cell demand that supports long-term revenue growth. In the near-term carriers remain focused on macro-tower spending w/ small cell/fiber occurring at later stages of their 5G rollout. So this business should be a more meaningful growth driver in the future.
  4. Revenue stability & Reasonably valued – 90% of sales is site rental revenues based on long-term contracts (5 to 15 years) w/ limited ability to cancel and fixed escalation clauses (some linked to CPI). The rest of their revenue is Services, which is tied to site development and tenant equipment installation. The stock is reasonably valued trading at ~4% 2022 AFFO yield. With LT AFFO/share growth of 7-8% and >3% dividend yield (which they expect to grow w/ FFO), they should compound total returns low double-digits over a long period of time as demand for their shared infrastructure offering is tied to robust mobile data growth (~30% annually).
  5. Balance sheet strength w/ limited near term exposure to rising rates – They have methodically reduced the risk profile of their balance sheet. Since they achieved their initial investment grade credit rating over 5 yrs. ago, they have increased average debt maturity from 5 yrs. to >9yrs, reduced average borrowing costs to 3% from 3.8% and increased the mix of fixed-rate debt to > 90% from < 70% w/ no meaningful near term debt maturities. So limited near term exposure to rising rates.

 

 

 Additional highlights:

  • Relative to peers (SBAC and AMT), CCI has industry leading organic growth and their domestic footprint has shielded them from the FX headwinds and emerging market challenges currently impacting the other two.
  • Seeing record tower growth now; small cell growth will be longer term driver
    • Customers upgrading existing tower sites as a part of their first phase of 5G build-out.
      • Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
      • Carrier spend is currently focused on deploying mid-band spectrum as this is the first stage of 5G deployment and is often referred to as the “goldilocks” band as it is an ideal balance between bandwidth and propagation (i.e. its ability to carry more data and travel far distances). It can be deployed via towers and small cell, but towers remain the most cost-effective way for carriers to deploy spectrum at scale and establish broad network coverage.
      • Carriers just spent a ton (~$90B) at the recent C-band spectrum auctions… and now they’re focused on deploying it.
      • This near-term carrier focus is on C-Band deployment is stalling small cell deployment growth. C-band spectrum sits next to the spectrum used by air traffic control and is the tied to the FAA concerns in the news. On the call related to this they said, “There has not been any change in their behavior with our customers and we don’t expect there to be any impact to our 2022 outlook.”
    • Small cells are the next stage…
      • High-band (mmWave) spectrum is the next stage and is relevant for what’s often called the “real 5G” which would deliver on the huge gains in performance that 5G promises (step function increase in latency and bandwidth). It has significantly more capacity, but over a fraction of the geographic coverage area (lower propagation) which is why it needs to be deployed using small cells connected to fiber, making it ideal for dense urban areas. This densification is a driver of additional leasing as it’s a critical tool for carriers to accommodate continued growth in mobile data demand b/c it enables carriers to get the most out of spectrum assets by reusing it over shorter and shorter distances.
      • Growth in small cells should drive improving returns as they expect decreasing capital intensity for growth within their small cell and fiber business. With small cells there are “anchor nodes” and “colocation nodes” – the first “anchor” nodes are a lower ROI and additional nodes on existing infrastructure have higher incremental margins. So as lease-up activity continues, their ROI improves.
      • Small cell business is indeed picking up – this is key to the long-term thesis:  the CEO said they are “seeing an inflection in our small cells business” as customers are ” planning for the next phase of the 5G build out” for what they “expect will be a decade-long investment cycle as our customers develop next-generation wireless networks.” The small cell commitments they’ve secured in the last 12 months equate to 70% of the total small cells they’ve booked in their history prior to 2021.
  • Sustainability/ESG considerations…
    • Continue to aim for their goal of carbon neutrality by 2025 for Scope 1 and 2 emissions.
    • With labor shortages and rising prices, they have continued to make an effort to provide value and opportunity for their carriers: “…we’re happy to provide the capital at a much lower cost than what the markets can provide them capital because of the opportunity that we have to see returns from multiple operators across that same asset.”
    • Their solutions also help address societal challenges like the digital divide in under-served communities by advancing access to education and technology. “To date, we have invested nearly $10 billion in towers, small cells and fiber assets located in low income areas.”
    • Enhanced focus on ESG may drive increased revenue opportunities from things like smart cities and “broadband for all” and lower operating costs in areas like tower lighting and electric vehicles.

 

 

Disney and FL Legislation…

Giving an update on Disney and a measure passed today by the Florida legislature that would have a negative impact on the company. The legislation, which now goes to Gov. Desantis for his signature, would dissolve six special districts in the state as of June 1, 2023. One of those is  Reedy Creek Improvement District where Disney World is based. It was created in 1967 to allow Disney to essentially function as its own municipality.

 

Implications?

 

  • Florida Association of Special Districts leader David Ramba said “For Disney, the main effect is more red tape. Disney would no longer be able to grant itself permission to renovate buildings or to build a new road. Instead, park officials would have to go to the county governments for every request.” Which Ramba indicated was more of an annoyance than a threat to the parks. He also indicated that despite the legislation passing, legislators could simply reverse themselves during the next regular session in January, after election season ended.
  • The dissolution of the district could inhibit Disney’s ability to borrow in the $4 trillion state and local debt market, impacting the company’s access to cheaper tax-exempt financing through that special district, and could potentially cost Disney more to finance projects w/in that district.
  • Reedy Creek would likely be absorbed by the local government which would become responsible for things like sewer and road maintenance. In exchange, the counties would collect the tax revenue that Disney currently pays itself. Local governments would also absorb all of the district’s liabilities, including about $1 billion of municipal bonds currently outstanding, according to Bloomberg. Reedy Creek historically operates at a loss of approximately $5 to $10 million per year which Disney subsidizes.
  • There is some uncertainty as to how this proceeds, some, including Disney executives, seem to have the view that the Legislature can’t dissolve the district without the approval of voters.

 

Below are some snippets from an article in the LA Times that gives a good summary of the situation…

 

Why does Disney have these special powers?

 

“When brothers Walt and Roy Disney were looking to create another theme park on the East Coast, they took with them lessons from operating Disneyland in Anaheim, where it opened in 1955. Dealing with local regulations and government building inspections was a hassle. Disney wanted a way to achieve its sprawling ambitions without being so encumbered by municipal bureaucracy. The original idea for Epcot, in fact, was that it would essentially function as its own city.

 

And so the company worked with lawmakers to establish the Reedy Creek Improvement District. Walt Disney died in 1966, the year before the Reedy Creek law passed and a few years before Walt Disney World Resort opened in 1971.

 

The district, spanning roughly 40 square miles in both Orange and Osceola counties, provides everything from fire protection and emergency medical services to water systems, flood control and electric power generation. Its boundaries include four theme parks, two water parks, a sports complex, 175 miles of roadway, the cities of Bay Lake and Lake Buena Vista, utility centers, more than 40,000 hotel rooms and hundreds of restaurants and retail stores, according to its website. A five-member board of supervisors, elected by landowners, governs the district.

 

Its creation allowed Disney to transform acres of uninhabited pasture and wetland into a massive driver of tourism.

 

The powers granted were broad, making it much easier to move forward on building something like, say, the 183-feet tall Cinderella Castle, experts said. The district’s charter left open the possibility of Disney building its own airport or nuclear power plant if it wanted to. This was done to anticipate whatever needs might come up.

 

“They knew they were going to have one shot at these powers, because Florida needed Disney more than Disney needed Florida,” said Richard Foglesong, author of “Married to the Mouse: Walt Disney World and Orlando.” “They could get these powers at the opening, but they weren’t confident that they could add to their powers down the road. And so it was understandable that attorneys, I have no doubt, said, ‘Let’s get all we can now.'”

 

How would Reedy Creek be dissolved?

 

“Though the Florida Legislature is moving rapidly, the end of Reedy Creek wouldn’t happen immediately. Its dismantling would take effect June 1, 2023, along with that of a few other districts, giving Disney and the state about a year to resolve their issues. It also leaves the door open for special districts affected by the legislation to be reestablished.

 

Some lawmakers who oppose the move against Disney question whether the Legislature has the power to eliminate the company’s powers. Florida House Rep. Carlos Smith, who opposes the bill targeting Reedy Creek, tweeted an image of a section of a Florida statute indicating that dissolving an active special district would require the votes of landowners in Bay Lake and Lake Buena Vista. Disney holds the vast bulk of the voting power.”

 

How would this affect Floridians and Disney?

 

“Some lawmakers say the decision, if it takes effect, could create a significant financial hit for the counties affected by the Reedy Creek district. Disney finances the services the district provides, which would normally be paid for by local municipalities. Disney effectively charges itself property taxes to finance these services. For law enforcement, Disney pays the Orange County Sheriff’s Office.

 

If the district is dismantled, those responsibilities could fall to local municipalities and taxpayers, experts said. So could the district’s debt-load. The district’s long-term bonded debt totaled more than $977 million as of September, according to Reedy Creek’s annual financial report. State Sen. Stewart tweeted that removing the district “could transfer $2 Billion debt from Disney to taxpayers” and could have “an enormous impact on Orange & Osceola residents.”

 

“The fallout for Disney is also uncertain. While Disney pays for its own services in the district, it does get some benefits. It can issue municipal bonds, which get a lower interest rate than corporate debt. Disney is also exempt from certain fees and may save money by contracting local sheriff’s deputies, according to Foglesong. But the main benefit over the decades has been the flexibility the designation affords Disney.”

 

“They’d rather have it their way, where they can do things for themselves, rather than have to depend upon government,” Foglesong said.

 

Disney will probably fight back. It can’t pick up Walt Disney World and move it to a friendlier state, the way it can threaten to take the production of Marvel movies out of Georgia.”

 

 

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

 

ADBE 1Q Results

Current Price:   $431                  Price Target: $650

Position Size:    2.9%                  TTM Performance: -2%

 

Key Takeaways:

  • Q1 results were a slight beat, 2Q guidance disappointed slightly, but full year 2022 guidance maintained. They lapped an extra week in Q1 2021 which was a headwind to headline growth numbers. Demand commentary continues to be very positive.
  • Russia/Ukraine impact – They halted new sales in Russia and Belarus and eliminated annual recurring revenue from these regions and from Ukraine – collectively it’s less than $100m in annual recurring revenue impact.
  • Announced select price increases – they won’t meaningfully impact results until the second half of 2022. Price increases were already contemplated in previous 2022 guidance. They’ve had no meaningful price increase since 2018.
  • No change in thesis – fundamentals continue to be strong. The recent sell off in the stock is all multiple contraction.

 

Additional highlights:

  • Conference call quotes…
        • CEO said…”I feel more positive about our business moving forward than I ever have.”
        • “The acceleration to all things digital has made content and creativity more important than ever before. Everyone needs to express themselves digitally, from the individual on social media to the student creating a more compelling school project to the creative professional making the next marketing campaign”…”we’re building applications for every surface and every audience across web, mobile and desktop.”
        • “We’re seeing tremendous interest for Substance 3D and our new 3D Modeler beta, as brands bring together the physical and digital worlds and begin their journeys to become “metaverse ready.” Substance is already being adopted by global brands like Coca-Cola, NASCAR and Nvidia for marketing and e-commerce.”
  • Long runway for growth…
      • Less than 10% penetration on 2024 TAM expectations of >$200B (updated in Dec). That includes ~$110B for Digital Experience and ~$95B for Digital Media (~$63B for creative ($25B creative professionals; $31B communicators; $7B consumers) and ~$32B for document cloud ($10B knowledge workers; $8B communicators; $14B document services/APIs)). 
      • Benefiting from secular growth driven by digital transformation, device proliferation, rising content creation and evolving content mediums including voice, augmented reality and virtual reality.
      • Adobe is a rare company w/ >90% recurring revenue, double digit top line growth and ~40% FCF margins. Accelerated secular tailwinds around digital transformation, along w/ continued share buybacks, will be a long-term benefit and driver of them continuing to compound FCF/share double digits.

 

    • Digital Media segment (+17% YoY adjusted for extra week in ’21; ~71% of revenue): “unleashing creativity & accelerating document productivity”
      • Comprised of Creative cloud (~60% of total revenue, +16% YoY) and Document Cloud (11% of total revenue, +17% YoY). Q2 total segment growth guided to +14%. Segment Annualized Recurring Revenue (“ARR”) grew to $12.57B w/ Creative ARR of $10.54 billion and Document Cloud ARR of $2.03 billion.
      • Creative Cloud is benefiting from “exploding” content creation and consumption across phones, tables and desktops. Seeing strong retention and renewal across all Creative products and customer segments.
      • Growth drivers in creative cloud – increasing focus on new and emerging content creation categories including video, 3D, Virtual Reality, Augmented Reality and immersive content for emerging metaverse platforms.
      • Document Cloud – “powering the paper-to-digital revolution” “we’ll continue to gain significance as hybrid work becomes the standard.” Using the power of AI with Adobe Sensei, Document Cloud is automating workflows across web, desktop and mobile. Going forward, Document Cloud will increasingly make up a larger mix of net new Digital Media ARR.
    • Digital Experience segment (+20% YoY adjusted for extra week in ’21; ~29% of revenue): “powering digital businesses”
      • Digital Experience subscription revenue was $932, +22% YoY. Q2 guided to +18%. Segment revenue includes: subscription revenue, professional services revenue, and “other”, which includes perpetual, OEM and support revenue.
      • Beneficiary of growing e-commerce penetration – Adobe offers a digital commerce platform (Magento) that competes w/ Shopify and BigCommerce which benefits from growing e-commerce spending. Named a 2021 “Leader” in the Gartner Magic Quadrant for Digital Commerce

 

 

FCF estimates for FY 2022…increased last year and have remained steady

 

 

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

 

$ADBE.US

[tag ADBE]

[category earnings]

 

 

CRM Earnings update

Current Price: $210          Price Target: $320

Position size: 3%                TTM Performance: +11%

 

Key Points:

  • Beat expectations – Reported a top and bottom line beat and increased FY23 revenue guidance (+21% YoY) and saw record levels of revenue, margin and cash flow.
  • Attrition improved – in Q3 they drove attrition rate to below 8% for the first time in company history…and ended Q4 w/ attrition between 1-7.5%
  • Seeing solid margin expansion – op margins should be up >100bps this year. Mgmt. continually reiterated their focus on cost discipline and efficient growth.
  • Extremely positive demand commentary – saw strong demand across all of their products, regions and customer sizes. Sales cloud growth accelerated to 15% YoY, service cloud growth has accelerated to 23% and industry cloud growth was 58% (~$2B ARR, but an increasing part of the mix).
  • Contracted revenues underscore demand strength and provide visibility – Remaining performance obligation (RPOs), representing all future revenue under contract, ended Q4 at ~$44B, +21% YoY. And Current RPOs or cRPO (all future revenue under contract that is expected to be recognized as revenue in the next 12 months) was ~$22B, up 24% YoY.

 

  • Quotes from the call
    • “we don’t see any demand pull-forward”…this has been pointed to by bears as a concern saying that there has been a pull forward in demand w/ covid and that growth would slow in enterprise software…the rest of the quotes (along w/ their guidance and RPOs) also run counter to this argument…
    • “The dynamics we’re seeing in customer engagement is absolutely fantastic. Just over the past few months I’ve done more than 75 meetings with C-suite executives and the accessibility, that sense of urgency and interest from the highest levels of companies is incredible and shows no signs of slowing down. What’s clear is there is a tremendous appetite for digital transformation and we fully expect that to continue.”
    • “…despite inflation, the crisis, the supply chain, the conflict in Europe…the problems that we solve for our customers are as urgent as ever”…” it’s not just sales opportunity management anymore, it’s really every aspect of the customer experience. And it means that we’re starting conversations in every department of every single one of our customers and have the opportunity to expand really…”
    • “Our progress in the enterprise continues with our largest deals getting even larger. The number of seven-figure deals signed in Q4 grew 34% year-over-year and in Q4 the number of eight-figure deals more than doubled.”
    • “Our customers, it doesn’t really matter by geography or by industry, are very deeply committed to their digital transformation to their businesses. I think that if the pandemic put a light on anything for them it was that their businesses were not going to have a future, if they did not go through a digital transformation. And that these digital transformations as I said in my comments, we’re going to begin and end with the customer.”
  • CRM is coming up on their 23rd anniversary…at 23 years old, their inaugural product, their Sales Cloud is ~$6B in annual revenue, close to ¼ of revenue and still growing at 17% which is amazing.
  • ESG comments…
    • They’ve progressed from being a “net zero company” to being “fully renewable.”
    • “A lot of the companies that I met with [recently] were mostly Fortune 100 CEOs, they crave to have that same net zero and renewable profile, which is very exciting to see the world having this kind of sustainability focus.”
    • Companies are using salesforce’s sustainability cloud to track their carbon footprint and other climate related initiatives.
  • Reasonable valuation & strong balance sheet
    • Expect CapEx to be ~2% of revenue in FY ’23 resulting in FCF growth of ~25% to 26%, an acceleration from last year.
    • Net leverage ratio <2x. In August they issued $8 billion of senior notes (to fund Slack deal) with a weighted average interest rate of 2.25 % and weighted-average maturity of 20 years. Concurrent with that, S&P upgraded their credit rating to A+.
    • Trading at a big discount to peers at <7x calendar ’23 revenue. Inexpensive for a high-quality, high moat company w/ a large TAM and multiple secular tailwinds, driving double-digit top line growth at scale.

 

Investment Thesis:

  • Strong moat – dominant front office software that is mission critical and productivity enhancing to customers with high switching costs and an ecosystem advantage
  • Solid long-term secular growth drivers – digital transformation, multi-cloud, industry verticals and international expansion
  • Improving unit economics – growth strategy should yield higher quality (lower attrition) and higher recurring revenue cohorts which should improve margins over time and support their multiple
  • Reasonably valued – high quality franchise, growing double-digits and trading at a discount to peers

 

 

 

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

 

TJX Q4 Results

Current Price:   $66                        Price Target: $83

Position Size:    3.7%                      TTM Performance: 30%

 

Key takeaways:

  • Positive call; seeing robust demand – Revenue was strong but slightly below consensus. Sales levels are well ahead of pre-pandemic. For the year, “open-only” SSS were +15% (in the US +17%). These open-only same store sales compare FY22 sales (calendar 2021) to FY20 sales (calendar 2019). HomeGoods remained the standout, with comps +22%.
  • Sales were trending higher before Omicron surged.
  • Seeing higher than expected freight and wage pressure – margins were negatively impacted but somewhat offset by operating leverage on higher sales and higher merchandise margin (driven by multiple factors including mix and taking price in select categories). When freight pressures abate, margins will expand.
  • Seeing extremely plentiful inventory buying opportunities – “we can’t emphasize this enough, availability of quality branded merchandise is excellent across good, better and best brands.”

 

Additional Highlights:

 

  • Quotes from the call…
    • “we remain highly focused on improving our pre-tax margin profile. We continue to believe that our initiatives to drive sales are the bast was to offset the current levels of cost pressures we-re facing.” Mid-single-digit top line growth combined with margin expansion and buybacks should lead to compounding FCF/share double digits.
    • “I’m looking at this inflationary price increase as a major opportunity for us at TJX, to get even more aggressive about adjusting our retails than we’ve been”…”we’ve had such strong success if you look at Q4 merchandise margin”… “we are feeling like there’s more significant room for improvement over the next year or two.”
  • Sales are tracking ahead of pre-pandemic levels…
    • Overall fully year sales were $48.5B, over $7 billion more than calendar 2019, pre-pandemic despite significant store closures internationally during the year.
    • FY open-only comp sales vs pre-pandemic (calendar 2021 vs calendar 2019)
      • Overall: +15%
      • Marmaxx U.S. +13%
      • HomeGoods U.S. +32%
      • Canada +8%
      • International +6%
  • For the full yr. merchandise margins were up despite higher wages and higher freight– They’re offsetting higher costs w/ strong mark-on and lower markdowns. Incremental freight costs in 4Q weighed on GM, were a 200bps headwind for the full yr., and are expected to peak in Q1, but should moderate in 2H23. HomeGoods margin is disproportionately impacted by freight increases due to its product mix. While higher wages will stay, freight pressures are expected to improve, which should benefit margins.
  • Long-term thesis intact – Relative to other brick-and-mortar focused retailers, TJX  continues to have a superior and very differentiated model. They acquire their inventory from an enormous (and growing) network of vendors, acting like a clearing mechanism for the retail industry…essentially opportunistically buying leftover/extra product that constantly flows from retailers, branded apparel companies etc. Growth of e-commerce has led to better inventory opportunities/ selection, not worse. They leverage their massive store footprint and centralized buying to merchandise their stores and e-commerce sites w/ current on-trend product. No one else does this at the scale they do. Their immense buying, planning and allocation, logistics teams are helping them navigate the current environment. They have very quick inventory turns and can be nimble and re-active w/ their inventory buys and are an important partner to their sources of inventory…and becoming even more important. It’s a powerful model that continues to take share and, while they have a growing e-commerce business too, their store model has been very resistant to e-commerce encroachment. Moreover, they have a thriving Home business, a growing e-commerce presence, an expanding international store footprint and a track record of steadily positive SSS. Prior to last year, in their 44 year history they only had 1 year of negative SSS (this is unheard of!). So, with steadily positive SSS, a slowly growing store footprint and an emerging e-commerce business, TJX steadily grows their topline w/ consistent margins that are about double that of department stores.
  • Valuation: strong balance sheet, they’ve returned to their capital allocation program w/ dividend and buybacks and the valuation is reasonable at >4% FCF yield on next yr.

 

 

 

 

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

 

 

$TJX.US

[tag TJX]

[category earnings]

 

Home Depot Q4 Earnings

Current Price: $308                     Target Price: $410

Position size: 2.3%                       TTM Performance: +15%

 

Key Takeaways:

  • Recommend buying on weakness to ensure full position size
  • Better than expected results but conservative guidance  – SSS were +8.1% as elevated home improvement demand persists. They issued conservative guidance given uncertainty around inflation, supply chain dynamics and how consumer spending will evolve through the year.
  • Long-term growth drivers for home improvement sector remain intact –  while rising rates may be a headwind to home prices, low housing inventory is an offset that supports prices and drives new housing construction. That combined w/ an aging housing stock all drive repair & remodel activity.
  • CEO transition – New CEO Ted Decker was COO and w/ HD since 2000. Craig Manear will now serve as Chairman.
  • Increased dividend and buybacks – increased quarterly dividend by 15%. Returned $22B to shareholder through buybacks ($15B) and dividends ($7B).
  • CEO Quote: “The broader housing environment continues to be supportive of the home improvement. Demand for homes continues to be strong, and existing home inventory available for sale remains near record lows, resulting in support for continued home price appreciation. On average, homeowners’ balance sheets continue to strengthen as the aggregate value of US home equity grew approximately 35% or $6.5 trillion since the first quarter of 2019. The housing stock continues to age, and customers tell us the demand for home improvement projects of all sizes is healthy.”

 

Additional Highlights:

  • Secular tailwinds persist…more homes need to be built. This should be a LT secular driver for HD.
    • Undersupply of homes continues to support pricing and years of underbuilding has shifted the age of the existing US housing stock – both of which support home improvement spending.  
    • According to a recent study by the National Association of Realtors, due to years of underbuilding, the US is short 6.8 million homes.
    • Building would need to accelerate to a pace that is well above the current trend…. To more than 2 million housing units per year vs a ~1.6m annual rate for starts.
    • From the NAR report released in June…“Following decades of underbuilding and underinvestment, the state of America’s housing stock, which is among the most critical pieces of our national infrastructure, is dire, with a chronic shortage of affordable and available homes to house the nation’s population. The housing stock around the nation has been widely neglected, with a severe lack of new construction and prolonged underinvestment leading to an acute shortage of available housing, an ever-worsening affordability crisis and an existing housing stock that is aging and increasingly in need of repair.”
  • Updated their total addressable market (TAM) estimates…
    • They updated their N. American TAM estimate from $650B to $900B with Pro and DIY each representing 50% and with MRO accounting for $100B of Pro. They also provided a long-term sales target of $200B. At a mid-single-digit CAGR, they would hit this in 2029. HD has about 17% share and LOW has ~11%… the other ~72% is pretty fragmented providing lots of opportunity to take share which is supportive of their LT growth targets.
  • Solid current trends:
    • Hit >$150B in revenue in 2021. They’ve grown their business by over $40B in the last 2 years after double-digit comp growth for fiscal 2021 on top of nearly 20% comp growth in fiscal 2020.
    • SSS of 7.3% in November, 10.2% in December and 7% in January. SSS in the US were positive 7.6% for the quarter, with SSS of 7.2% in November, 10.9% in December and 5.4% in January.
    • Inflation in things like lumber is a significant tailwind to SSS – in Q4 alone, the pricing for framing lumber ranged from approximately $585 to over $1,200 per thousand board feet, an increase of more than 100%.
    • Pro sales growth outpacing DIY – Pro is now 50% of total, increasing as a part of the mix as consumers resume large projects and return to pre-pandemic activities. 
    • GM was 33.6%, a decrease of approximately 30bps from last year, primarily driven by product mix and investments in their supply chain network.
    • Big-ticket comp transactions or those over $1,000 were again up approximately 18%, indicative of strong consumer environment
    • E-commerce sales were +9% for the yr. and up >100% over the past 2 years.
  • Why we like it…

·         Multiple long-term growth drivers: durable housing trends, taking share in a fragmented home improvement market w/ DIY & Pro, and growing their more nascent MRO business (particularly after HD Supply acquisition) and leveraging their best of breed omni-channel model.

·         Best of breed omni-channel model drives productivity: 

o   By adding specialized warehouse capacity and enhancing digital capabilities (online and in the store), HD is uniquely positioned to leverage their existing retail footprint (not really growing stores) and drive steadily high ROIC that is ~45% (which is incredible). They continue to add new bulk distribution centers (used replenish stores with lumber and building materials), flatbed distribution centers (which are often tied to the bulk distribution centers), MDOs (market delivery operations are used to flow through big and bulky products, particularly appliances). and adding direct fulfillment centers for e-comm fulfilment which will allow them to cover 90% of the country in same or next-day delivery.

o   They dominate the category, are the low cost provider, have a relentless focus on productivity and can continue to flow an increasing amount of goods through their big box stores w/ omni-channel. This is a highly efficient model as 55% of online sales are picked up in-store which HD can fulfill from the store or nearby warehouses.

·        Capital allocation: they’ve resumed share repurchases and remain committed to growing their dividend over time.

·        Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and a reasonable valuation, trading at >5% forward 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

 

 

$HD.US

[tag HD]

[category earnings]

 

 

Hilton 4Q21 Results

Share Price: $150            Target Price: $170 (increased from $160)

Position Size: 2.1%          1 Yr. Return: +32%

 

 

Key takeaways:

  • Very positive quarter and strong progress on recovery – RevPAR continues improve vs. 2019 baseline, w/ RevPAR for the quarter down -13% vs 2019…US leisure travel continues to be a key demand driver and is expected to stay strong. Recovery of group, business transient and Chinese and European markets will all be added tailwinds going forward.
  • Saw some weakness w/ omicron but outlook is very positive – Seasonally softer leisure demand coupled with incremental COVID impacts due to the Omicron variant tempered recent trends (January system-wide RevPAR was ~75% of 2019 levels). Despite near-term choppiness, they remain very optimistic about accelerated recovery across all segments throughout 2022.
  • Solid unit growth, ahead of guidance (+5.6% YoY) – they expect 5% this year, accelerating to 6-7% longer term. This provides key support to LT growth story, as industry leading RevPAR premiums continue to drive a high quality pipeline.
  • China is not a problem – China is an important part of their pipeline and growth there is intact. Commentary around China was very optimistic.
  • Expect to reinstate buybacks and quarterly dividend in Q2

 

 

Highlights:

  • Q4 RevPAR was roughly 87% of 2019 levels with ADR nearly back to prior peaks. More moderate than Marriott’s 81% due to Marriott’s higher mix of luxury/urban/corporate.
  • By geography…RevPAR in EMEA (+7% vs 2019) and US (-11% vs 2019) were strongest while China (-24% vs 2019%) and Europe (-25% vs 2019) were weakest given lingering Covid restrictions.
  • By demand segment…
    • Leisure is leading the recovery w/ record performance which continues to exceed 2019 levels. Their strong leisure demand over the holiday season drove U.S. RevPAR to more than 98% of 2019 levels for December. They anticipate strong leisure trends to continue again this year driven by pent-up demand and nearly $2.5 trillion of excess consumer savings.
    • Business transient room nights were approximately 80% of 2019 levels, but management’s outlook is very positive. They expect growth in GDP and non-residential fixed investment coupled with more flexible travel policies across large corporate customers to drive an improvement in business transient trends. About 80% of their corporate demand is from SMBs – they’re getting close to 2019 levels while large corporates are down >30% from 2019. As a positive indication of business transient recovery…at the beginning of January midweek U.S. transient bookings for all future periods were down 13% from 2019 levels and improved to just down 4% by the end of the month.
    • Group – December room nights were just 12% off of 2019 levels. Performance was largely driven by strong social business, while recovery in company meetings and larger groups continued to lag. Group demand takes longer to recover given planning lead times for large social events and business conferences. Future group booking are occurring at higher rates than 2019. They are seeing huge amounts of pent-up demand and think 2022 will be a “barn burner” year for their group business. “Rates are up because we’re being super disciplined recognizing that there is a limited amount of meeting space is going to be a gargantuan amount of demand and we can be a bit patient.”
  • Margins going up…
    • 2021 margins were +500 basis points above 2019 peak levels reaching ~66% for the full year despite full year RevPAR and adj. EBITDA being 30% below 2019 peak levels.
    • Inflation is also a tailwind. They have pricing power, re-price their product daily and have a significant portion of their revenues that are royalties tied to top line. Franchising is almost 2/3 of EBITDA and tied to top line, managing is another 25% of EBITDA where the fee stream is a mix of base management fees (% of room revenue) and incentive management fees (% of hotel profitability). So, in an inflationary environment, pricing power = margin expansion.
    • They expect permanent margin improvement versus prior peak levels in the range of 400 to 600 basis points over the next few years aided by cost efficiencies gained through Covid, including lowering labor intensity.
  • Inflation and pricing power…
    • “It has been hard to hire labor, we do need to bring some of those service standards back, obviously everybody knows what’s going on with inflation and wage inflation. But of course the flip side of that on inflation is that helps on the revenue line, right? We reprice the rooms every night. If inflation is a headwind on the cost side, it’s going to be a tailwind on the revenue side and the revenue base is obviously bigger than the expense base. And so, that ought to lead to higher margins coming out the other side. So, when you put that all together, we think we can do a better job for customers, give them what they want, take away what they don’t want, and what they won’t pay for, and use driving revenue through an inflationary environment to get our owners to be higher margin businesses coming out the other side.”
    • “we’re going to have more inflationary environment broadly. Thank you, Federal Reserve and the US Congress for fiscal and monetary stimulus, …we could debate transitory or otherwise. But those things are translating into broadly, a more highly inflationary environment and that applies to us too, and that obviously is helping from a pricing power point of view.”
  • Pipeline – Stable unit growth underpins the story
    • Development activity continues to gain momentum across the globe as the recovery progresses.
    • China development activity is particularly strong – “most of the development trends have been following the trend of the virus. So meaning, as the world has been opening up in those regions you see a pretty direct correlation to signing activity and approval activity in those regions… China has been kind of the exception to that rule, meaning even with lockdowns and people not moving around and you would think not being able to travel across the country would slow the pace of activity, but that just hasn’t been the case.”  Mgmt. says the addressable market there is enormous (easily 20K hotels or more). This will be a LT source of growth for them.
    • Unit growth in Q4 was 5.6% YoY and the pipeline increased to >400K rooms. That represents ~38% room growth from their current installed base of  >1 million rooms and more than half are under construction (helps underpin several yrs. of predictable growth).
    • 62% of their pipeline is located outside the US (franchise and mid-tier focus, tied to growing global middle class)
  • Continued strength in their market leading RevPAR index. RevPAR index is their RevPAR premium/discount relative to peers adjusted for chain scale. I.e. Hampton Inn (35 year old brand) has a RevPAR index of 120. They are the market leaders – this is helpful because it’s what leads to pipeline growth (hotel operators want to associate w/ the brand that yields the best rates and occupancy) and is helpful in a macro downturn because it’s even more crucial for a developer to be associated with a market leading brand to get financing. The thought is that they would likely take more pipeline share if lending standards tighten and that’s exactly what we’ve seen during Covid. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton). They continue to see strong conversions which were 20% of openings in the quarter.
  • ESG – named the number three World’s Best Workplace by Fortune
  • Capital returns resuming –In 2019 they returned more than 8% of their market cap to shareholders in the form of buybacks and dividends. They intend to return to their historical capital return model.

 

 

 

 

$HLT.US

[category earnings]

[tag HLT]

 

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

 

 

Disney Q1 earnings

Current Price: $151     Price Target: $215

Position size: 1.44%    TTM Performance: -22%   

 

 Key Takeaways:

  • Better than expected revenues, EPS and subscriber numbers (Disney+ subscribers 129.8 million, +37% YoY, estimate 125.1 million). This is very positive after Netflix’s weak subscriber numbers.
  • They continue to expect growth in the back half of the fiscal year to exceed growth in the first half (based on cadence of new content releases).
  • Significant increased investment on content – should continue to support Disney+ ramping ahead of initial expectations but with no change to breakeven guidance for their streaming platform.
  • Record performance w/ domestic parks – despite capacity constraints and lack of international visitors. This business should see higher margins post-pandemic.

 

Additional highlights:

  • Quotes…
    • On the strength of their business model: “We have diverse revenue streams that span business models and industries, but which all are interconnected to create entertainments most powerful synergy machine. We have the country’s top news organization and the most trusted brand for funneling sports, and our theme parks continue to be the most magical places on earth. In short, our collection of assets and platforms, create capabilities and unique place in the cultural zeitgeist that give me great confidence that we will continue to define entertainment for the next 100 years.”
    • On the metaverse: “You want to call it metaverse, you want to call it the blending of the physical and digital experiences, which I think Disney should excel at”….”we realize that it’s going to be less of a passive type experience where you just have playback, whether it’s a sporting event or whether it’s an entertainment offering and more of an interactive lean-forward, actively engaged type experience. And this is a very top of mind thing for us, because we are continuing over time to augment our skills and the types of people that we attract into The Walt Disney Company to reflect the aggressive and ambitious technology agenda that we have. You probably noticed that one of my three pillars is innovation and specifically technological innovation, because we realize that this is going to be an important part of telling story in that third dimension, that lean forward interactive dimension. So it is absolutely top of mind.”
  • Strong streaming performance – they now have 196M subs across Disney+, Hulu and EPSN+. That is second only to Netflix, which has a ~220M….Disney’s achieved that in a little over 2 years. Disney+ now has 130M subs, Hulu is ~45M and ESPN has ~21M. Disney+ in the US is 1/3 penetrated of total broadband homes. Slightly over 50% of consumers on Disney+ do not have kids.
  • ARPU should steadily rise over time – in Q1 it was better than expected across Disney+, ESPN+ and Hulu. In general, their ARPU is lower than peers and is also weighed down by lower Disney+ fees outside the US, but they will gradually raise prices over time and they have ways (other than sub fees) to make money off of their content w/ advertising, parks and consumer products (especially w/ content like Pixar, marvel, star wars).
  • Higher content spend and global rollout will continue to support sub growth – key to this is that they can leverage their content investments better than anyone else. What separates them from Netflix is their LT success in branded storytelling – the quality and depth of their “evergreen” content is a driving force behind their streaming services.
  • Strong ad revenue – delivered record advertising revenues as they continue to see strong demand for live sports and streaming and digital businesses. ESPN benefited from the start of a normalized NBA calendar and increased viewership for football.
  • Parks set to thrive post-pandemic…
    • Record revenue and profits at domestic parks despite capacity constraints and haven’t yet seen return of int’l guests (historically 18% to 22% of Walt Disney World guests come from outside the US).  Q1 rev and op income exceeded pre-pandemic levels w/ per capital spending at domestic parks up more than 40% versus Q1 2019, driven by a more favorable guest and ticket mix, higher food, beverage and merchandise spending.
    • This supports the outlook for structurally improved economics post-pandemic as they employ technology to create efficiencies like new tools to personalize guest visits, virtual queues, mobile food ordering, mobile hotel check-in and dynamic pricing to strategically manage attendance.
  • Strong balance sheet (~2x levered). FCF should double this yr. and double again next year as they recover from pandemic related disruption and step up in content costs.

 

Disney 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) initiative will strengthen synergies between businesses and lead to structurally higher margins and higher multiple on recurring revenue business.
  4. High quality company with solid balance sheet, strong FCF generation and ROIC.

 

 

 

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]

 

FISV Q4 Results

Current price: $102                          Price Target: $137

Position size: 2.75%                        TTM Performance: -10%

 

Key Takeaways:

  • Results were largely in-line with expectations. They had 11% organic revenue growth in both Q4 and full year, at the high-end of 7% to 12% outlook.
  • Analyst day in the next few weeks could be a positive catalyst – the meeting will be focused on their merchant acceptance segment which continues to be the key growth driver for the business. Clover, which is their main product in merchant acceptance, underpinned Value Act’s thesis in taking a stake in FISV.
  • Acquiring the remaining ownership interest in Finxact, a leading developer of cloud native banking solutions. Should be growth driver in FinTech segment

 

Additional highlights:

  • Consolidated organic revenue growth of +11% Y/Y in-line with Street expectations
    • Acceptance +19% YoY – merchant platforms Clover for small and medium-sized businesses and Carat for enterprises are showing very strong growth. Had a 10% increase in merchant locations. Clover saw 50% GPV growth ($201B annualized volume). Acquisition of BentoBox is helping them enhance service offerings in restaurant vertical.
    • Payments +8% YoY– w/in the issuer business they saw notable strength in general purpose active accounts, now ahead of pre-pandemic levels. Zelle transactions up 71% and the number of clients live on Zelle was up 57%.
    • FinTech +4% – added 14 new core account processing clients in Q4 and 48 for the year, more than half of which were takeaways; seeing success in cross-selling pan-Fiserv capabilities to clients.
  • FDC acquisition targets being met…
    • Completed cost synergy program in Q4 – achieved target of $1.2B, $300M above original commitment and 2 years ahead of schedule.
    • They’ve seen $480M of revenue synergies and are now at 80% of the increased commitment of $600M. They anticipate obtaining the full $600M by the end of this year, 18 months ahead of schedule.
  • Announced Finxact acquisition…
    • Will aid in serving financial institution clients as they look to launch modern, flexible, personalized digital banking experiences. Finxact helps clients quickly deploy modular banking services including deposits, loans, cards as well as bank-as-a-service.

Valuation:

    • Guidance – segments should grow within the medium-term targets, driving double-digit growth in Merchant (+9-12%), mid-single-digits in FinTech (+4-6%), and mid- to high-single-digits in Payments & Network (+5-8%). Overall organic revenue growth of 7-9% YoY in-line with Street +8%
    • Op. margin expansion >150bps
    • FY22 EPS growth of +15-17% (midpoint slightly above street’s +15%)
    • Valuation is attractive at >6% FCF yield.

 

Investment Thesis:

  • High quality company with strong moat – market share leader with deep moat underpinned by their broad position in the money movement value chain and mission critical technology provided to financial services clients with high switching costs.
  • Multiple secular growth opportunities – driven by digitizing money movement and digital transformation in the financial services industry. Open architecture solutions enable financial institutions to leverage Fiserv’s technology and partner with other FinTech providers.
  • Margin expansion potential – driven by First Data synergies, deleveraging, and  operating leverage driven by growth opportunities.
  • Reasonably valued – Compounding FCF per share double digits and reasonable valuation underpinned by secular growth prospects and stable recurring revenue

 

 

 

 

 

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

 

Visa Q1 Earnings

Current price: $233        Target price: $278

Position size: 3.6%          TTM Performance: 17%

 

Key takeaways:

  • Cross border recovering faster than previously expected. They saw a very sharp recovery in cross-border travel in October and November. “This steep travel recovery started to lose momentum in the last week of December as Omicron spread around the globe. We expect this to be short-lived.”
  • Increased guidance: revenues expected to be up at the “high end of the high-teens” for Q2 and FY22.
  • Quote from the call, “E-commerce growth remains robust, even as card present spend continues to recover. U.S. retail spending during the holiday season grew double-digits and more than 40% above 2019 levels.”

 

Additional Highlights:

  • Net revenue $7.06B +24% YoY vs estimate $6.8B
  • Payment volume $2.97 trillion +20% vs estimate $2.86 trillion, +15.2%
  • Cross-border volumes +40% vs estimate +26.5%. Cross-border travel saw immediate recovery as travel restrictions got lifted. This is a key area for them as cross-border is highly profitable. The vast majority of the travel Visa captures on their credentials is consumer, and they are the global leader in travel co-branded cards.
  • They expect accelerated revenue growth versus pre-COVID over the coming years, driven by 3 strategic levers:
    1. Consumer payments – enormous opportunity to displace cash and check globally ($18T) – the pandemic has helped accelerate this. Also a LT opportunity to grow the pie for digital payments w/ the 1.7 billion unbanked. This is driven by growing merchants, grow cardholders and new modes of acceptance. Many current trends in payments, including A2A, RTP, buy now pay later, crypto and wallet are enabling new ways to pay. Mgmt. says these represent opportunities for Visa (“We enable the disruptors”). Key to this is the easy onramp to their network, the instant scalability it provides to these new entrants, the value proposition w/ value identity protection, fraud prevention, dispute resolution, security, loyalty. Visa is agnostic to who wins this. They aim to sit in the middle as a “network of networks” and to continue to offer a high value proposition for the ~15bps that gets charged to merchants.
        • Wallets: increasingly embed Visa credentials in their wallets to aid their own growth, so the consumer can use it anywhere Visa is accepted as well as receive and send cross-border P2P payments Wallet providers have been rapidly issuing Visa credentials that they see value in an open-loop ecosystem. Examples include Naranja X in Argentinian, PayPay wallet in Japan, Safaricom, the operator of M-PESA in Africa.
        • Crypto: “leaning into in a very, very big way, and I think we are extremely well positioned”. Enabling purchases, enabling conversion of a digital currency to a fiat on a Visa credential, helping financial institutions and FinTech’s have a crypto option for their customers and upgraded their infrastructure to support digital currency settlement. They have over 65 crypto platform partners that are working with them. Also working with Central Banks as digital currency is being explored in many nations.
        • E-commerce: closed a U.S. co-brand deal with Shopify. The Shopify Balance card will allow Shopify’s U.S. merchants to access funds from sales by the next business day and receive cash back on everyday business expenses like shipping and marketing.
        • Buy Now Pay Later (“BNPL”): growth is coming in several ways. BNPL FinTech’s are issuing Visa credentials so they can scale through Visa’s broad acceptance. Affirm has chosen Visa as their network partner for the Affirm debit plus card. BNPL FinTech’s are increasingly using Visa virtual cards to settle with merchants. BNPL fintech consumers also continue to use their cards to pay off their instalments. And finally, for traditional issuers, they have a network installment solution called “Visa Installments,” which enables their financial institution clients to seamlessly offer BNPL capabilities through an existing credit credential on any Visa transaction.
    1. New Flows – 10X the opportunity of Consumer payments. With a $185 trillion in B2B, P2P, B2C and G2C. P2P, which represents $20 trillion of the opp., was Visa Direct’s first use case and continues to grow substantially. A key area of future growth is cross-border P2P, or remittance.
    2. Value-added services – includes consulting, technology platforms (e.g. Cybersource, issuer processing, and risk identity and authentication), data and insights, and card benefits, all which will improve with the recovery. Opportunity to increase penetration w/ existing clients. In 2021, 40% of their clients used five or more value-added services and nearly 30% use 10 or more. They expect sustainable high teens growth in this segment.
  • Long-term thesis is intact. Visa is a high moat, duopoly company with extremely high FCF margins (over 50%), strong balance sheet and continued runway for secular growth driven by the shift from cash to card/digital payments and new payment flow opportunities. Trading at >3% 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

 

$V.US

[category earnings]

[tag V]