Author: Sarah Kanwal

Alphabet is down pre-market – they reported earnings, missing on the top line and beating on EPS. This is a quick summary – I will follow up with more details. Management attributed the revenue miss primarily to Fx and also the timing of some ad product changes. Revenue was $36.3B vs. consensus of $37.3B, up 19% constant currency (17% reported) – that’s a deceleration from 23% in 4Q18. Excluding the impact of the EU fine EPS was $10.81, better than consensus of $10.53.

$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: $160 Price Target: Raising to $185 from $160

Position Size: 3.8% TTM Performance: 32%

Visa continued to perform well in the second quarter with better than expected revenue and EPS. Net revenues were up 9% (constant currency), dampened by higher client incentives. EPS was $1.31 vs consensus $1.24. They reaffirmed full-year 2019 net revenue growth of "low double-digits" on nominal basis and slightly increased adjusted EPS growth to "high-end of mid-teens," from "mid-teens.” Slight weakness in the quarter was that volume growth decelerated from 11% to 8%. Mgmt said volume growth was impacted by fewer processing days in the quarter and timing of Easter. Processed transactions continued to see double-digit growth. Last quarter they expressed concerns around weakening non-US macro trends and cross border transactions, but this quarter they struck a more positive tone, indicating that cross border had stabilized. Cross border accounts for ~27% of gross revenue and is higher yield. In the first few weeks of Q3, payment vols have accelerated, especially in the US.

Continue reading “Visa 2Q – Beat and slight FY EPS raise”

Current Price: $459 Price Target: $540 (Increasing from $480)

Position Size: 2% TTM Performance: +14%

SHW reported a weak 1Q, missing estimates on lower volumes across all three segments. They saw a slow start to the architectural painting season in N. America and continued challenging conditions in “many end markets outside N. America.” Despite this, the stock is up on positive outlook in N.A. w/ an expected rebound in volumes in 2H and better gross margin performance. Despite miss, management reiterated full year EPS guidance (+13.5% YoY). Very positive commentary on expectations for N. America paint stores (drives majority of their profit) on an expected improvement in housing turnover. In addition, price increases and declining raw material pressure may lead to positive revisions on improved margin expectations.

Key Takeaways:

· SHW is set to benefit from higher product prices, good volume growth, falling raw material costs and an improvement in housing.

· Gross margins improved sequentially, flat YoY, despite the volume shortfall and higher raw material costs. This is encouraging given mgmt. expectation that YoY raw material inflation will be highest in Q1. They expend continued GM expansion and expect volumes to improve over the balance of the year, particularly in the back half.

· They saw broad based softness in Asia and Europe.

· The Americas Group: 55% of sales, +3.6%

o Despite a strong backlog and project pipeline reported by their professional customers, volume growth was slower than expected.

o Weakness this quarter is not a cause for concern. This is the seasonally smallest quarter for their paint stores business, and can be volatile year-to-year. Better indicator of demand is painting contractor’s feedback on project backlog. They are universally optimistic, report seasonably high project backlogs and a very healthy pipeline of new projects.

o They would be a big beneficiary of an improvement in the housing market.

o Opened 15 new stores

· Consumer Brands Group: 16% of sales, down less than 1%

o FX headwinds(-1.6%)

o Most of the softness in demand in the quarter was in markets outside North America, most notably Asia-Pacific.

o Operating margin in the first quarter expanded sequentially and YoY

o “we are very well positioned across all North American retail channels heading into the important spring selling season.”

· Performance Coatings Group: 29% of sales, modest sales growth

o Operating margin improvement despite raw material pressure.

· Guidance Reaffirmed

o Sales guidance for Q2 +2-5%; full year +4-7%

o Reaffirmed full year 2019 adjusted diluted net income per share guidance to be in the range of $20.40 to $21.40 vs $18.53 in 2018. Midpoint slightly below street.

Valuation:

• Expected free cash flow of $2B in 2019, trading at over a 4.7% FCF yield.
• Increased our quarterly dividend by 31%. Dividend yield 1%.
• Given growth prospects, steady FCF margins and high ROIC the stock is undervalued. They deserve a premium multiple based on large exposure to the N. American paint contractor market and no exposure to the cyclical sensitive auto OEM end market.
• Balance sheet leverage from the Valspar acquisition continues to improve; they expect to get to under 3x by the end of the year.
• Buybacks should accelerate in 2019 as Sherwin returns to its historical capital allocation.

Thesis:

• SHW is the largest supplier of architectural coatings in the US. Sherwin-Williams has the leading market share among professional painters, who value brand, quality, and store proximity far more than their consumer (do-it-yourself) counterparts.
• Their acquisition of Valspar creates a more diversified product portfolio, greater geographic reach, and is expected to be accretive to margins and EPS. The combined company is a premier global paint and coatings provider.
• SHW is a high-quality materials company leveraged to the U.S. housing market. Current macro and business factors are supportive of demand:
  • High/growing U.S. home equity values. Home equity supportive of renovations.
  • Improving household formation rates off trough levels (aging millennials).
  • Baby boomers increasingly preferring to hire professionals vs. DIY.
  • Solid job gains and low mortgage rates support homeownership.
  • Residential repainting makes up two thirds of paint volume. Homeowners view repainting as a low-cost, high-return way of increasing the value of their home, especially before putting it on the market.

$SHW.US

[tag SHW]

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: $1,737 Price Target: $2,400

Position Size: 2.6% TTM Performance: -6%

Key Takeaways:

· Slight miss on revenue, beat on EPS. While revenue was below consensus, it was ahead of the high-end of their guidance.

· Weak guidance: disappointing Q1 guidance driven by a weakening European market (the vast majority of their revenue) and higher ad spend.

· 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.

· Europe softening – they witnessed a slow start to the year, primarily in their core European markets, which they believe is largely due to overall macroeconomic factors. Average daily rates were a little weaker than expected and they guided to a meaningful deceleration in room night growth.

· 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 250 bps for the full year and 500 bps for the first half.

· Investing for growth: this will compress Q1 margins by ~350bps and 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.

· 171 million worldwide room nights booked in Q4, up 13% YoY and ahead of the high-end of guidance.

· Gross bookings of $19.6B were a little lower than expected (+13% constant currency) a slight deceleration from +14% last quarter.

· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. For the first time they disclosed revenue for this business – it now makes up 20% of revenue. They also said 40% of Booking’s active customers booked an alternative accommodation property at some point during the past 12 months.

· Growth vs. margins: They have been trying to “optimize” ad spend for several quarters by spending 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.

· Direct channel mix increased again (“well over 50%” of booked room nights). Probably not a coincidence that they now say over 50% of their bookings come from mobile devices, as mobile traffic is more likely to be direct (via app).

Continue reading “Booking Holdings 4Q Earnings Update”

Current Price: $50 Price Target: $60 (updated for the stock split)

Position Size: 3.6% TTM Performance: 29%

TJX reported Q4 EPS that was in-line with the street and much better than expected SSS (+6% vs consensus +3.5% (guidance was 2-3%). Guidance was a little below expectations due to higher wage and freight costs and currency headwinds. For Q1 wage and freight will be a 7% drag on earnings, for the full year these are expected to be a 4% drag. It’s been a very mixed quarter of results for retailers so far. WMT, COST, TGT and now TJX have all stood out with strong results while others reported a poor holiday season, particularly department stores. TJX, along with other off-price retailers, captured market share in the US. TJX’s sales have doubled over the last 10 years despite a changing retail environment.

Key takeaways:

· TJS Q4 SSS were an impressive +6%. Traffic was again the biggest driver (SSS numbers do not include e-commerce).

· Performance was solid across all divisions and geographic regions.

· Core Marmaxx division (60% of revenue) delivered SSS growth of 7%.

· For the full year, HomeGoods was their fastest growing division with 10% square footage growth and 4% SSS.

· The margin pressure they are expecting from freight and wage increases is a continuation of trends they saw last year.

· Q4 gross margins were flat and inventories grew less than sales. For fiscal 2019 merchandise margin was essentially flat despite a significant increase in freight costs. Ex-freight, merchandise margins improved significantly.

· Optimistic comp guidance: Fiscal 2020 EPS outlook is based on SSS growth of 2%-3% (3%-4% at Marmaxx). This is notably positive because for at least the last 6 years, they have started the year with comp guidance of 1-2% and have ratcheted up that guidance as the year progresses.

· Announced they are launching e-commerce for Marshall’s later this year.

· Tariffs: when asked on the call about the impact of tariffs on product availability, mgmt. said longer term it’s probably going to be a benefit for them because any chaotic change in the way vendors manage or allocate product will ultimately benefit them.

· Continue to take share in Europe: In Europe comp sales grew 3% despite the challenging retail landscape. They have over 500 stores in Europe- in mainland Europe, they are in only 4 markets: Austria, Germany, Poland and the Netherlands. They also have stores in the UK

Continue reading “TJX 4Q19 Earnings Update”