Author: Sarah Kanwal

Current Price: $1,736 Price Target: $2,400

Position Size: 2.5% TTM Performance: -20%

Key Takeaways:

· Beat on bookings, slight miss on EPS, 2Q guidance a little weak. Room nights also better than expected.

· Gross travel bookings were +2% (+8% constant currency). Guidance was for +5-7% constant currency. So better than the high end of guidance.

217 million room nights booked in the quarter, which is up 10% YoY, also ahead of the high-end of guidance (+6-8%). Average daily rates were down 2%.

· Outperformance w/ bookings is an important positive because over the last several quarters they have been trying to “optimize” ad spend which has been resulting in weaker bookings. Their goal is to spend less on performance advertising (e.g. Google AdWords) and more on brand advertising (e.g. TV commercials). The idea is that brand advertising drives direct traffic to their site, resulting in a higher ROI. This ad spend/rev growth algorithm will continue to be a focus going forward as clearly the trade-off between growth and spend persist.

· Weak guidance: slightly disappointing Q2 booking guidance but they have a track record of conservative guidance – they almost always come in ahead of the high end of their bookings guidance on a constant currency basis. EBITDA and EPS guidance also a little light.

· Europe softening – the slow start to the year in Europe that they mentioned last call continues. Europe is a key market for them, so this is clearly a drag on their growth right now.

· FX headwind is expected to be significant this year. Current rates assumed in guidance reduces gross booking growth, revenue growth and non-GAAP EPS growth by 300 bps for the full year.

· Investing for growth: this will reduce their full year EBITDA growth by a few percentage points. This reflects increased spend on brand advertising, customer acquisition and incentive programs and spending to support their new payment platform. They are investing in a payment platform that supports non-hotel properties, and will facilitate growth in transport and local attractions business.

· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. This is growing faster than their overall business.

Continue reading “Booking Holdings 1Q Results”

Share price: $135 Target price: $165

Position size: 2% 1 yr. return: 35%

Disney reported a strong 2Q, beating on revenue and EPS. Revenue was $14.92B (+3% YoY) vs consensus $14.54B and EPS was $1.61 vs consensus $1.58. EPS down 13% YoY because of higher tax rate, tough studio compare, Hulu consolidation and DTC investments. Studio and DTC (direct-to-consumer) hindered 2Q growth, but Studio is already re-accelerating on its robust film slate and 3Q DTC losses guided lower than expected. The Parks segment shined in the quarter and strength here is set to continue as they open the biggest expansion in their history later this year w/ the openings of Star Wars lands at Disney World and Disneyland. Performance at Parks and Studio will help offset drag from DTC investments.

Key takeaways:

· Media networks revenue $5.53B, flat YoY. Cable Networks revenues for the quarter increased 2% to $3.7B and operating income increased 2% to $1.8B. Higher operating income was due to an increase at ESPN. Broadcasting revenues for the quarter decreased 2% to $1.8B and operating income decreased 29% to $247m. The decrease in operating income was due to higher programming costs, lower program sales and a decrease in advertising revenue, partially offset by higher affiliate revenue from contractual rate increases.

· Parks, experiences & consumer products revenue $6.2B (+5% YoY). Margin expansion in this segment continues as operating income increased 15% to $1.5B. Operating income growth for the quarter was due to growth at domestic theme parks and resorts. Domestic Parks continue to fire on all cylinders with revenue up 6% YoY. Star Wars: Galaxy’s Edge openings at Disneyland on May 31st and Disney World August 29th will help continue the successes in domestic attendance and spending gains.

· Studio entertainment revenue (-15% YoY). The decrease in theatrical distribution results was due to lapping Black Panther and Star Wars: The Last Jedi from 2Q last year with Captain Marvel and no comparable Star Wars title in the current quarter. Despite tough compares, studio should drive record summer performance w/ Avengers: Endgame, Aladdin, Toy Story 4, Lion King. This will also support growth in consumer products.

· Avengers: Endgame is now the second-highest grossing film of all time and will stream exclusively on Disney+ starting December 11th. It’s #2 only a couple weeks in, so clearly will take the #1 spot. Amazingly, movies from the Marvel Cinematic Universe (includes Black Panther) make up 5 of the top 10 grossing movies of all time.

· DTC & international revenue ~$1B, +15% YoY. Hulu now consolidated in this segment.

· $2B in merger cost synergies reiterated.

· Discussion on the call about the potential to acquire the 1/3 of Hulu that they don’t own from Comcast. Getting full ownership would help solidify int’l Hulu rollout strategy and Disney+, ESPN+, Hulu bundling strategy.

Global Box Office

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

Share price: $92 Target price: Raising to $105 from $96

Position size: 2.9% 1 yr return: 17%

Hilton beat on revenue and EPS. Revenue rose 6% to $2.2B. EPS was $0.80, +16% vs consensus $0.75 (guidance was $0.73-$0.78). System wide RevPAR grew 1.8% on a currency neutral basis, in line w/ full year guidance of +1-3%. EBITDA was $499m, ahead of the high end of guidance and consensus. As a result, full year EPS and EBITDA guidance was raised. They still expect system-wide RevPAR growth to increase 1-3%. They reiterated their plan to return $1.3-$1.8B in capital to shareholders for the year, equating to 5-7% of current market cap.

Key takeaways:

· Both system-wide and US RevPAR grew 1.8%, outperforming the chain scale weighted industry data due to strong market share gains across all brands and major regions.

· Mgmt points to market share gains as a leading indicator of what should happen with their network effect because that attracts more capital. It’s why you see the pipeline growing and rooms under construction growing. Last year was the first time in history they grew market share everywhere in the world, including the US.

· Group business continues to be solid with RevPAR up 3.7%

· On 1.8% RevPAR growth in 1Q, they grew EBITDA 12%.

· Net unit growth of 7% is running ahead of targeted 6.5% for the year.

· Development pipeline grew to 371k rooms from 364k rooms last quarter – equates to 40% of room count. Over half of pipeline is under construction.

· >50% of pipeline is outside of the US.

· In a sensitivity analysis to a market downturn, mgmt. said they would expect flat to slightly positive growth in adjusted EBITDA and positive growth in free cash flow in an environment where RevPAR were to decline 5% to 6%. This is b/c Hilton is structurally different than it was last cycle – asset light means less operating leverage and less volatile earnings stream if RevPAR continues to weaken. Moreover, unit growth will aid EBITDA growth regardless of RevPAR trends.

· Loyalty members hit 89m from 85m last quarter and account for >60% of system-wide occupancy. Goal is to have 100m members by the end of the year.

· The stock is undervalued, trading at 7.5% FCF yield on 2019.

· ESG: ranked number one on Fortune’s Best Companies to Work For list in the US – the first hospitality company in history and the first non-tech company since 2004 to achieve this number one rating.

Investment Thesis:

∙ Hotel operator and franchiser with geographic and chain scale diversity of 14 brands, 5,400 hotels and 880k rooms across 106 countries (Hilton, Hampton Inn & Hilton Garden Inn ≈ 2/3 of portfolio).

∙ Network effect moat of leading hotel brand and global scale lead to room revenue premiums and lower distribution costs.

∙ Shift from hotel ownership to franchising results in resilient, asset-light, fee-based model.

∙ Record pipeline generating substantial returns on minimal capital will lead to increasing ROIC and a higher multiple.

∙ Unit growth and fee based model reduce cyclicality – Lower operating leverage vs ownership reduces earnings volatility and unit growth offsets potential room rate weakness.

∙ Generating significant cash which is returned to shareholders through dividends and buybacks.

$HLT.US

[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

Share price: $54 Target Price: Raising to $60 from $55

Position size: 2.2% TTM return: 12%

Key Takeaways:

· Slight beat on revenue and EPS, guidance maintained. Revenue was $283 (+5%) vs street $282 and EPS was $0.44 vs street $0.43.

· Adjusted EBITDA was $137 million, an increase of6%. Adjusted EBITDA margin was 48.4%, an increase of 50bps.

· By segment, management continues to expect 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 (~15% of revenue) revenues were up 6% driven by growth in their property data and portfolio analytics businesses. This segment is lower margin, but margins are improving – EBITDA margins were up 200bps for the quarter.

· Software Solutions segment (~85% of revenue) was up 4% driven by higher average revenue per loan and loan growth on their core servicing software solution.

o Within this segment servicing (~75% of revenue) grew 4%. This is steadier than their originations revenue. They continue to dominate first lien loans with 62% share and are growing share in second lien loans. They have high-teens share of second lien and expect to reach 30% once current commitments are implemented.

o Originations (~10% of total revs) made up of new loans and refi’s. Grew 7% primarily driven by 25% growth in their loan origination system solutions from new clients, partially offset by lower professional services and the effect of lower refinance origination volumes.

· Despite the economy being strong, their end markets (U.S. mortgage originators and Servicers) are actually weak. “Based on market conditions we’re in the midst of our clients recession. I know the economy is doing well and other industries are doing well, but with rates rising, it’s caused pain.”

· BKI has consistently performed well through a tough time for their end clients, partly because they’re providing them with solutions that solve their problems like increasing efficiency and maintaining regulatory compliance.

Continue reading “Black Knight 1Q19 Earnings”

Apple beat on revenue and EPS and issued solid guidance. Midpoint of 3Q revenue guidance was better than street. Key positive is that the beat was driven by better than expected iPhone and services revenues. Better Q3 guidance suggests demand for iPhones has stabilized after a disappointing holiday period. Increasing their buyback program by $75B as they head to their goal of net cash neutral.

Key Takeaways:

· Q2 revenues of $58 billion, beating estimates of $57.5B.

· Q2 EPS of $2.46, beating expectations of $2.37.

· Q3 forecast of between $52.5B and $54.5B, beating estimates of $52.22B.

· Q2 iPhone revenues of $31B, beating estimates of $30.5B. iPhone revenue down YoY, but better than expectations and mgmt. said sales improved throughout the quarter.

· They saw strength across all segments except the Mac.

· Services revenue of $11.45B, +16%, an all-time record. Accounted for 20% of sales and 1/3 of gross profit.

· Wearables +50% on strong Apple watch results and huge demand for air pods.

· iPad up 22% – strongest iPad growth in 6 years due to their strategy shift: new Pro models last year and new cheaper, mid-range models (the iPad mini and iPad Air) this year.

· Europe, Greater China, and Rest of Asia Pacific segments were all down YoY, but the Americas and Japan were both up slightly. Greater China sales down 22% YoY.

The following excerpt from the call highlights Apple’s opportunity to grow services given their massive installed base of over 1.4 billion active devices:

“We believe we’re really just beginning to tap into what we can do to help our users actively manage their health and well-being. For example, last month Stanford Medicine reported results of the Apple Heart Study, the largest study ever of its kind, which enrolled over 400,000 participants from all 50 states in a span of only eight months. And hundreds of institutions are now supporting health records on iPhone with recent additions including Michigan Medicine and UT Health Austin.

In February, we announced that we are working with the U.S. Department of Veterans Affairs to make health records on iPhone available to veterans. This will be the first record sharing platform of its kind available to the VA, which is the largest medical system in the U.S. providing service to more than nine million veterans across more than 1,200 facilities.”

Valuation:

· Returned over $27B to shareholders through share repurchases and dividends. Board authorized an additional $75 billion for share repurchases.

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

· Trading at close to a 1.8% dividend yield, a ~6% FCF yield.

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

Apple is up ~5% after-hours after reporting a strong 2Q. They beat on revenue and EPS and issued solid guidance. Midpoint of 3Q revenue guidance was better than street. Key positive is that the beat was driven by better than expected iPhone and services revenues. More details after the call.

$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: $1,191 Price Target: $1,350

Position Size: 4.6% TTM Performance: 18%

Alphabet reported earnings, missing on the top line and beating on EPS. Management attributed the revenue miss primarily to Fx and also the timing of some ad product changes. Total revenue was $36.3B vs. consensus of $37.3B, up 19% constant currency (+17% reported) – that’s a deceleration from 23% in 4Q18. Currency was a $1B headwind, so pretty much all of the miss. This was partially offset by lower TAC which only grew 9%. That put net revenue up almost 19%. Excluding the impact of the EU fine EPS was $10.81, better than consensus of $10.53.

Key takeaways:

· Management attributed the broad-based slowdown to product changes but did not elaborate further. Lack of detail here is largely the reason for the selloff.

· Trend of lower TAC continues – decreased from 24% of rev to 22%.

· Alphabet accrued a 1x fine from the European Commission this quarter for €1.5B ($1.7B) related to agreements in the AdSense business that were found to be in restraint of competition.

· Operating expenses were $12B, up 20% YoY. The biggest increase was in R&D expenses with headcount growth in Cloud as the largest driver.

· Capex of ~$4.6BN decreased materially vs. $7.3BN in 1Q18 as they lapped the purchase of office space in New York City in 1Q18.

· ESG:

o Google data centers use 50% less energy than a typical data center, while delivering 7x more computing power than they did five years ago.

o Since 2017, they have matched 100% of the electricity consumption of their operations with purchases of renewable energy and is now the world’s largest corporate buyer of renewable energy.

Segment performance:

As a reminder, they report in 2 segments: “Google” and “Other Bets.” Google segment revenue is comprised of: Google Sites, Network Partners & Google Other Revenue. The first two are ad revenues and make up the majority of total revenue. Other Revenue includes hardware and cloud. “Other Bets” are their moonshots like Waymo – they’re a tiny part of the business and losing money.

· Google ~$30B in ad revenue, +15% YoY.

o Google Sites: revenues were ~$25B, +17%YoY (includes roughly 2 pts drag from Fx). In terms of dollar growth, results were led again by mobile search with a strong contribution from YouTube, followed by Desktop Search.

o Network: revenues were $5B, +8% YoY, continuing to reflect the performance of the primary drivers of growth, AdMob, followed by Google Ad Manager.

· Other revenues for Google were $5.4 billion, up 25% year-over-year, fueled by Cloud and Play and partially offset by Hardware (slowing growth of premium smartphones resulted in lower Pixel sales). “Today 9 of the world’s 10 largest media companies, 7 of the 10 largest retailers and more than half of the 10 largest companies in manufacturing, financial services, communications and software use Google Cloud.”

· Other Bets – Revenues were $170 m, primarily generated by Fiber and Verily. Loss increased from $600m to ~$900m.

Valuation:

· Trading at below average P/E ratio (see above) and about a 4.5% FCF yield.

· $110B in net cash, 13% of their market cap.

· Repurchased ~$3B worth of shares during quarter. $11B remaining on the existing share repurchase authorization.

$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