Research Blog – INTERNAL USE ONLY

Key Takeaways:

 

Current Price: $55                   Price Target: $61

Position Size: 1.47%               1-year Performance: +26%

 

Sensata released an overall good 3Q report.Sales were +21% overall (~17% organic), with growth by segments as follow:

• Automotive organic sales +5.2%: ST outgrew the market by 1,150bps

• HVOR organic revenue +59% y/y: outgrew the market by 2,400bps

• Aerospace/Industrial sales +8%/+18%, driven by defense product launches and electrification/HVAC

 

Volume and productivity had a 310bps positive impact on operating margin, while supply chain constraints were a 80bps headwind, and will have a greater impact in Q4 (100bps). Because of its solid cash position, Sensata is reinstating its share buyback program in Q4, which we view a bullish for near-term performance. Sensata recently won some new contracts in the EV (electric vehicle) space: electronic stability in brake sensing (supplier Continental), pressure and force sensors in brake system with a leading EV OEM. Those a just a couple of examples of what Sensata sees in content growth in EV in the next 5 years, planning to double its EV content per vehicle vs. a traditional internal combustion engine vehicle, with a dollar content usually 20% higher as well. EV wins have been 50% of new business wins so far in 2021.

 

The new acquisition of Spear Power Systems will enable ST to offer full energy storage solutions. Fun Fact: Spear is enabling the Washington State Ferry system to go electric with battery energy storage.

 

2021 guidance update:

• 4Q guidance is below expectations due to supply chain constraints worrsening
• OEM production outlook for 2021:
• Auto production to contract 3% overall (worse in every regions)
• The aerospace sector overall is expected to contract 8% vs 4% previously guided in July.
• Industrial looks stronger at 13% vs 12% in July
• HVOR is expected at 25% vs. 23% in July.
• Sensata did not provide a 2022 guidance, but believes the IHS view of ~10% auto production growth is too optimistic as the supply chain constraints could continue into 2022.

 

To finish, Sensata published its first Sustainability Report!

 

 

The Thesis on Sensata

• Sensata has a clear revenue growth strategy (content growth + bolt-on M&A)
• ST is diversifying its end markets exposure away from the cyclical auto sector over time through acquisitions, also expanding its addressable market size
• ST is a consolidator in a fragmented industry and still has room to acquire businesses
• Margins should expand as the integration of the prior two deals is under way, regardless of top line growth, and efficiencies in manufacturing are continuously pursued as they are gaining scale
• ST is deleveraging its balance sheet post acquisitions, leaving room for future M&A or a return to share buybacks, and improving EPS growth

 

 

Tag: ST

category: earnings

$ST.US

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

On 10/26, S&P Global announced impressive Q3 earnings with revenue up 13% and operating profit up 18%.  S&P also raised 2021 EPS guidance.  Key takeaways are:

• Dow Jones Indices had a blowout quarter with revenue up 28% and margins up 660 bps!
• S&P Revenue up 13% with solid growth in all four segments
• Expense growth of 7%
• Operating margins expanded 250 basis points to 55.4%
• Expect IHS Markit merger to close Q1 2022 after some divestitures

 

Current Price: $462.60                      Price Target: $480 (raised from $450)

Position Size:   3.10%                         Performance since add on 2/3/21: +43.5%

 

2021 Q3 Highlights:

• S&P Dow Jones Indices
• Asset-linked fees were up 36%! YoY ETF AUM up 43%!
• Revenues benefited from strong price appreciation and inflows
• Strong growth in index fees – ETF AUM was $2.4t up 51% Y/Y
• Revenue grew 28% and operating profit rose 40% Y/Y
• Margins rose +660 bps to 69.2%
• Ratings
• Global bond issuance increased 3%, with strong growth in high yield, Bank Loans and CLOs
• YoY revenue grew 14% and operating profit rose +17%
• Margins rose +160 bps to 63.4%
• Non-transaction revenue (not related to bond issuance) is over 40% of ratings revenue
• Market Intelligence
• Revenue grew +7% Operating profit rose +13%
• Margins increased +190 bps to 35.7%
• Platts
• Revenue grew +8% and operating profit rose +5%
• Margins decreased -110 bps to 54.6%

 

IHS Markit merger update

• Closing target Q1 2022 from second half 2021
• IHS Markit will divest OPIS, Coal, Metals & Mining (CMM), and PetroChem Wire businesses to News Corp and Base Chemicals business
• S&P Global will divest CUSIP Global Services and Leveraged Commentary and Data, together with a related family of leveraged loan indices.
• Despite divestitures, S&P has raised cost synergies to $530m-$580m (from $480m) and revenue synergies to $330m-$360m (from $350m)

Growth initiatives

• Implementing new ESG offerings across platform – ESG revenues up 40%
• Technology expertise – Kensho AI initiatives
• RiskGuage, ProSpread, Riskcasting Indices, Moonshot index, Kensho Scribe and many others combining data and analytics
• Merger with IHS Markit

Capital allocation

• SPGI has a current yield of .67%
• SPGI has repurchased 14% of outstanding shares over past 5 years
• Currently, share buybacks are on hold with the pending merger of IHS Markit.  SPGI has $5.8b of cash piled up on the balance sheet.  Expect some of  this excess cash and ~85% of annual free cash flow to be returned to shareholders post-merger.

 

S&P Global Investment Thesis:

• S&P Global is a highly profitable company that has established businesses with deep moats in attractive industries
• S&P Global is focused on shareholders and returns 75% of free cash flow in dividends and share buybacks
• Over the past several years, S&P Global has demonstrated an enviable history of revenue growth and margin expansion
• With the merger of IHS Markit, S&P Global will combine many unique data sources, enhance data analytics capabilities, and broaden addressable markets.

 

 

Please let me know if you have questions.

Thanks,

John

 

[category Equity Earnings]

[tag SPGI]

$SPGI.US

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Current price: $180         Target price: $201

Position size: 2.3%           TTM Performance: 12%

 

 

Key takeaways:

• Beat estimates and issued solid FY22 guidance
• Solid AFFO/share growth – Maintained AFFO/share guidance for FY21, implying +12% YoY growth, meaningfully above their long-term annual target of 7% to 8%. FY22 guidance issued ahead of the street, implying +8% YoY growth.
• Their business is seeing tailwinds as the 5G investment cycle is (finally) ramping – first stages of 5G investments resulting in record level of tower activity. Small cell growth is slower but should improve in later stages of what should be a massive, decade-long investment cycle.

• Dividend raised 11%. Well ahead of long-term dividend growth targets as they are growing the dividend in line w/ AFFO growth.

 

 

Additional highlights:

• Quotes from the call: “With history as a guide, we believe the deployment of additional spectrum on existing cell sites will not be enough to keep pace with the persistent 30% plus annual growth in mobile data traffic….As a result, we expect cell site densification to remain a critical tool for carriers to respond to the continued growth in mobile data demand.”
• “When the current cell site upgrade phase shifts to densification phase, we believe the comprehensive offering of towers small cells and fiber will be critical for our customers and provide us with an opportunity to further extend the runway of growth in our business.”
• 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.
• 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.
• Balance sheet strength – They continue to 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 3.1% 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.
• Sustainability/ESG considerations…
• Just announced goal of carbon neutrality by 2025
• “Our business model is inherently sustainable and shared solutions limit infrastructure in the communities in which we operate and minimize the use of natural resources.”
• “Our business finished just one ton of CO2 per $1 billion of enterprise value which is 90 times more efficient than the average company in the S&P 500 based on industry estimates.”
• 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.
• Reasonably valued – trading at >4% 2022 AFFO yield. With LT AFFO/share growth of 7-8% and >3% dividend yield, 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).

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$CCI.US

[category earnings]

[tag CCI]

 

On 10/21, Schwab hosted their Fall Update detailing quarterly earnings and outlook.  Schwab Q3 results showed continued strong asset growth, good expense control and earnings above estimates.

• Strong new asset growth of 8% – $396b YTD, showing strength of Schwab’s platform
• Profitable franchise – pre-tax margin of 44.0% and ROE of 12%
• Earnings are highly levered to short-term interest rates – 25 basis point increase in Feds Funds rate will increase earnings 4%-5% over following 12 months!

 

Current Price: $83.6                         Price Target: $90 (increased from $78)

Position Size:   2.72%                       Performance TTM: 109%!

 

Schwab is building scale and platform as a premier asset gather. 

• YTD Schwab recorded 5,988k new brokerage accounts in the first half of this year 
• Schwab is succeeding with millennials.  60% of new-to-firm households were under the age of 40.

Expenses

• Versus last quarter, total expenses are down -8%.
• Through merger with TD Ameritrade, SCHW expects $1.8b-$2.0b in expense savings over next 3 years, which equates to ~20% of total expenses.

 

Quarter over Quarter revenue was up +1%

 

 

Profitability – industry leader

• ROE of 12% and pre-tax profit margin of 44%.  Expect margins to continue to expand over the next 2-3 years due to cost savings and scale from the mergers
• Current expenses are elevated due to mergers

Capital allocation

• Schwab plans to build capital on the balance sheet due to rising deposits and mergers, which may temper share buybacks.
• Dividend yield of 1.05%

 

Schwab Thesis:

 

• Expect Schwab’s vertically integrated business model to drive AUM growth.  Schwab has averaged 6% organic core net new asset growth as retail clients and advisors are attracted to Schwab’s low-cost trading and custody services.
• Conservative, well-managed firm who is a leader in online trading and focused on leveraging platform. 
• Schwab has experience material AUM growth with USAA and TD Ameritrade mergers.  Expect SCHW to reduce costs and continue to leverage platform.

 

 

Please let me know if you have questions.

Thanks,

John

 

[category Equity Earnings]

[tag SCHW]

$SCHW.US

 

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Key takeaways:

 

Current Price: $164      Price Target: $200 

Position size: 2.05%     1-Year Performance: +11%

 

 

• 3Q2021 results:

 

• Overall sales +10% organic, adjusted EPS +16.4%

 

• Pharma segment performing well with sales +13% organically, higher than last quarter of +11%
• Covid vaccine sales below expectations, but still expect and additional 300bps growth from vaccine sales for the year
• Oncology +16.5% – growth in multiple drugs (Darzalex, Imbruvica)
• Infectious diseases +60% strong growth (covid vaccine added growth vs. last year)
• Immunology +12% growth in Stelara (Crohn’s disease, Tremfya for psoriasis)
• Pulmonary Hypertension +16% – share gains in Opsumit and Uptravi
• Cardiovascular/other only sub-segment negative growth -12% due to biosimilar competition
• Consumer segment: +4% growth
• Growth driven by over-the-counter (OTC) drugs +18%
• Medical Devices: +7% organic sales growth
• Growth driven by market recovery post pandemic, new product introduction success
• Modest impact from covid Delta

 

• EPS growth driven in part by lower taxes

 

• Surgical robot Ottava for general surgery is delayed another 2 years … this is a positive for Medtronic that is developing a similar robot.

 

• Earnings call quote:
• Robot: “a first in-human delay of approximately two years from our earlier projections of the second half of 2022, reflecting technical development challenges and COVID-19 related disruptions, including supply chain constraints being experienced broadly across all industries.”
• Labor shortages: ” When we look at quarter four, we do expect to see continued improvement. We do expect hospitals are going to have to continue to manage through labor shortages, I don’t expect that to get better in quarter four nor in 2022, but they’ve been quite masterful and how to manage patient close.”
• ” We are, when I talk to hospital systems over the past three weeks in particular, in the United States, they are ramping up again and resuming elective procedures.”

 

• New CEO Joaquin Duato to transition January 2022

 

• 2021 guidance raised:
• Revenue raised slightly on the lower end due to core sales growth – nothing meaningful though but a positive signs in the wake of the Delta variant
• Tax rate is lowered  due to one-time benefits
• EPS increased due to good operational growth and lower tax rate

 

 

 

 

Thesis on JNJ:

• High quality company with consistent 20% ROE, attractive FCF yield,
• Investments in the pipeline and moderating patent expirations create a profile for accelerated revenue and earnings growth
• Growth opportunity: Medical Devices and Consumer offer sustainable growth and potential for expansion internationally
• Strong balance sheet that offers opportunities for M&A.

 

 

 

[category Equity Earnings]

[tag JNJ]

$JNJ.US

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

On 10/14, Bank of America (BAC) reported strong Q3 EPS of $.85 ahead of estimates of $.71.  Highlights for the quarter were 12% revenue growth, declining expenses and ROTE of 15.8%. BAC’s earnings remain levered to rising interest rates – a 100 basis point increase in yields would increase earnings $7.2b or 8%. 

 

Current Price: $46.4                         Price Target: $50 (raised from $40)

Position Size:   2.62%                       Trailing 12-month Performance: 96%

 

Highlights:

• Revenue growth of 12% to $22.8b
• Deposits continued their strong growth – 15% YOY
• Strong metrics for loan quality throughout pandemic. BAC had a loss ratio of 20 basis points the lowest in 50 years.
• Over $26b of excess capital – returned $12b to shareholders in Q3.
• Good expense control with noninterest expenses down 4% QOQ

• Loan growth turned positive, growing 6% QOQ.  In prior quarters, loan growth was negative due to high levels of mortgage refinancing.
• Net Interest Margin (NIM) rose to 1.93% from 1.83%, but remains depressed due to low interest rates. 

 

• Deposits have grown 14% YOY
• BAC ranked #1 in deposit share
• Fiscal stimulus programs have supported consumers
• BAC pays just .03% on deposits

• BAC has managed the pandemic well with strong credit performance.
• Net charge-offs only 0.20% of loans, which is a 50-year low.  Last year this ratio peaked at 0.45%.  For comparison during 2010, the charge-off ratio peaked at 3.8% showing the relative severity of the Great Recession and the current strength of the U.S. banking system.
• Excess capital
• In Q2, BAC announce a $25b share repurchase program which is worth 7.5% of outstanding shares. 
• Returned $11.6b to shareholders with $9.9b in share repurchases.  Dividend yield is 1.80% and shareholder yield is above 10%

BAC Thesis:

 

• Over the years BAC has dramatically improved their Consumer Banking unit, leveraging technology and digital platforms which has improved margins and driven earning’s growth. 
• BAC has a high-quality loan book which was seen during the pandemic as loan loss metrics were best among peers
• BAC has strong earnings power, generating over $5b a quarter in earnings

• BAC continues to generate excess capital which should lead to increased dividends and continued share buybacks
• BAC’s earnings are sensitive to rate increases. 

 

Please let me know if you have questions.

Thanks,

John

 

[category Equity Earnings]

[tag BAC]

$BAC.US

 

 

 

 

 

 

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Key takeaways:

 

Current Price: $216                Price Target: $251 NEW (from $255)

Position Size: 2.26%              1-Year Performance: +18%

 

• Total company sales +5%, core beer demand remains elevated, Wine & Spirits finding its new growth level post-divestitures
• Overall demand for core beer brands is robust, supporting future growth of the portfolio
• Beer sales increased by 13.8% organically (volume +11.7%)
• Modelo Especial demand remains robust with +16% growth – remains #1 brand in high end beer market, and fastest market share gainer
• Wine & spirits grew +15% organically, driven by high end portfolio
• Hard seltzer: still an opportunity, but the management team is not relying on this category to drive growth – lots of consolidation in the space
• STZ working on different flavors, packaging (single serve in convenience stores for example), low-carb/low calories/functional offerings
• Supply chain issues:
• Some shipping delays due to severe weather: 2-3pts impact on shipping growth
• Inventory levels should return to normalized levels by FY22 Q4
• Beer operating margin was impacted by higher marketing expenses and SG&A in general
• One-time charge regarding hard seltzer inventory obsolescence ($0.25 EPS impact a 2-3% impact for the year) impacted gross margins 350bps
• Wine & spirits operating margin declined 15% y/y due to higher SG&A (marketing spend), but gross margin increased from 42% to 45.2%
• Remains on track to reach 30% operating margin by FY23 as portfolio reshaping is taking place (divested ‘cheap” wines, keep high end ones)
• Guidance for fiscal year 2022 EPS increased by $0.15 thanks to better beer performance – raise of guidance is due to good fundamental performance
• Beer net sales increased to 9-11% from 7-9%, and operating income growth 4-6% from 3-5%
• Beer margins to reach 39-40% in FY22
• Wine & Spirits to decline -22% to -24% (due to sale of business). Excluding divestment, sales would be +2% to +4%
• Higher share buybacks
• Valuation: while we lowered our PT slightly to account for supply chain issues lasting a bit longer than expected in FY22, we still believe there is long-term value to be made in this name. On a P/E basis, the stock trades at a discount vs. its historical P/E. Our DCF shows upside as well.

 

Overall we still see long-term opportunity for growth in this name (including cannabis), and believe it is a good name to hold in staples.

 

Investment Thesis:

• STZ helps position our portfolio to be more defensive at this stage of the economic cycle
• Management team focused on high quality brands and innovation
• STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
• STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex
• Growth optionality from cannabis investment

 

[tag STZ] [category earnings]

$STZ.US

 

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

Key Takeaways:

 

Current Price: $82.6                 Price Target: $102  

Position size: 2.05%                1-Year Performance: -14%

 

• Revenue growth remains elevated thanks to recovery in Flavor Solutions (+20.6%), while Consumers laps last year’s high demand (+1.2% this quarter).
• Packaged food companies having high demand
• Away-from-home is recovering as people go back to the office
• Integrating 2 recent acquisitions: Fona and Cholula
• Inflation expected to continue to be a challenge going into next year for packaging, transportation and labor costs.
• Expects labor costs to remain elevated, now being a new baseline, don’t expect salaries to come back down over time, but increase to moderate sometime next year.
• Pricing and some costs management will offset higher inflation in the coming 2 quarters
• ERP replacement program that had been delayed during early pandemic is back on track, will increase expenses by $350-400M
• Guidance for the year adjusted:
• Sales growth of 12-13% (from 11-13%)
• Mid-single digits cost inflation is pushing operating income growth down from 10-12% to 6-8%
• EPS growth of +5% to +7% (lowered from +6-8%)
• Long-term thesis is intact. We see the inflation situation and pressure on margin as a temporary impact, as the company will raise prices to offset a major portion of it (showing pricing power as a market leader).
• CEO quote: “the packaged food industry is experiencing the highest inflationary period of the last decade, or even two“.

 

 

 

 

 

The Thesis on MKC:

• Industry Leader: McCormick & Company (MKC) is a leading manufacturer of spices and flavorings. MKC has been in business for 120 years and the founding family still has ownership interest
• Growth opportunity: Spice consumption is growing 3 times faster than population growth. With the leading branded and private label position, MKC stands to be the biggest beneficiary of this global trend
• Offense/Defense: MKC supplies spices to major food companies including PepsiCo and YUM! Brands giving it a blend of cyclical and counter-cyclical exposure
• Balance sheet and cash flow strength offer opportunities for continued consolidation through M&A in the sector

 

$US.MKC

[tag MKC]

[category earnings]

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

Current Price: $325     Price Target: $355 (increased from $310)

Position size: 4.6%       Performance since inception: +47%

 

 

Key Takeaways:

• Strong results and guidance. Revenue (+21%) in line w/ high end of guidance range. Upped full year revenue growth guidance to +12-15% YoY (7-10% organic) from previous guidance of +10% to +11%.
• Broad based strength in demand – They saw double-digit growth across all markets, all industry groups and all services. Consulting revenues for the quarter were $7.3B, up 29% and Outsourcing revenues were $6.1B, up 19%.
• Increased dividend 10% and increased buyback authorization

• Quotes from the call…
• “Technology is the single biggest driver of change in companies today and the depth, breadth and scale of our technology capabilities across our services is unmatched. We see the demand environment shaping up for FY ’22 to be more of the same… The vast majority of companies are early in their transformation and whether digital leader, leapfrogger, laggard or in between, all face multi-year journeys ahead of them because the re-platforming in the cloud and use of new technologies across the enterprise is a once in a digital era profound transformation.”
• “There remain entire parts of the enterprise for which digitization and the move to the cloud has only just begun. In particular, both the things companies make and the way they make things are being dramatically changed by technology and that is the focus of our Industry X business, which we believe is the next big digital frontier. In fact, a 2021 Gartner Survey of Board of Directors indicates that 93% expect that the number one business priority that we’ll see transformational improvement from digital technology is manufacturing, distribution and supply chain.”  Their “Industry X” business is now ~$5 billion in revenue growing 36%.
• “sustainability is a critical area for which technology is still evolving. We believe that every business must be a sustainable business and yet companies are at very early stages of figuring out how to make this shift. Last year, building on years of investment and experience, we’ve launched our sustainability services under our new Chief Responsibility Officer and Global Sustainability Services Lead. We have continued to accelerate our focus in this expanding and changing market and are proud of the work we are doing with leading partners like Mastercard as we enhance its ability to track and analyze the carbon emissions of their suppliers and help decarbonize the UK Energy system with clients such as National Grid.”
• “With McCormick, a global leader in flavor in the food industry where we are partnering on a strategic transformation program encompassing finance, supply chain, logistics and plant maintenance. The new cloud-based platform and innovative data-driven approach will help standardize processes, increase efficiencies and support their goal of doubling in size quickly.”
• Bookings growth demonstrating momentum in the business –  20% increase in bookings to $59 billion. Overall book-to-bill of 1.1. Consulting book-to-bill of 1.1 and outsourcing book-to-bill of 1.2.
• Continued margin expansion – saw 30bps op margin expansion for the Q and 40bps for the full yr. despite higher attrition and significantly reinvesting in the business. They expect another 10 to 30bps expansion in FY22.
• Elevated utilization and attrition metrics driven by strong demand trends – Utilization remains elevated (~92%) as they try to keep up w/ demand. Attrition went up from 17% to 19%. This is slightly ahead of pre-pandemic levels and seems driven by incredibly high demand for talent in the current environment (as opposed to cultural issues w/ attracting/retaining talent) which could negatively impact profitability. Related to this, their record level “billable headcount” additions (~54K) this quarter is re-assuring.
• Demand outlook remains strong & Accenture is well positioned and taking share – Digital transformation is long-term secular growth driver to their business. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has an advantage w/ their unique positioning of trusted partner w/ leading edge technology expertise (they have >8K patents and their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise. No competitor has their scale, breadth of services and cross-industry insights, which gives them an advantage in serving “compressed transformations.” “Our clients know that through our investments and focus on innovation, we will help future-proof them.”
• Accenture shines from an ESG perspective. They are a real leader in addressing how they create value for all of their stakeholders (employees, customers, vendors, shareholders) – it’s a constant theme on their calls, particularly w/ respect to their employees which is important as the “social” factor for them is very material b/c their industry is a “people business” w/ >600K employees across the globe. For instance:
• They’ve been heavily investing in upskilling their employees – they spent ~$900m in training this yr.
• Their workforce is now ~46% women; on track for their 2025 goal of a 50-50 gender balance.
• They have a top 3 ranking in the Refinitiv Global Diversity and Inclusion Index for the 4^th consecutive year.
• They now have 50% renewable energy now powering their offices globally.
• They recently started their “360 degree value initiative” – aimed at helping their clients achieve responsible business goals – they say their clients are increasingly focused on sustainability, inclusion and diversity (rise of ESG is a catalyst to this) and that they are in a unique position to help companies w/ this.
• Capital allocation: exceeded original guidance for capital allocation by returning ~$6B of cash to shareholders while also investing >$4B (up from $2B) in acquisitions and >$1 billion in R&D. For FY22 they expect FCF of $7.5B to $8B and to return at least $6.3B through dividends and share repurchases.
• Valuation:
• The stock is undervalued trading at close to a 4% forward yield and they have an easily covered 1.2% dividend and no net debt.
• Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).
• They have $8B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.

 

 

 

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

 

$ACN.US

[tag ACN]

[category equity research]