Research Blog – INTERNAL USE ONLY

Key Takeaways:

Current Price: $84                          Price target: $107

Position size: 1.56%                      1-year Performance: +31%          

 

• Core sales +20.3% missed the street estimates but seems to be due to FX – reported revenue beat consensus by 1%
• Total sales $1,282M vs consensus $1,269M
• Clinical trials net new business grew 22% (4% tied to Covid-19 trials), with Book-to-Bill 1.37x. Their 2Q book-to-bill was the second-highest in the group behind competitor PPD
• Clinical revenue +31%
• Commercial net new business grew 51%, with book-to-bill 1.14x
• Commercial sales +13.2% y/y
• 80% of sites permit physical visits, an improvement from 70% in 1Q
• Recovery continues with good enrollment for covid and non-covid trials
• Gross margin expanded 110bps from 2Q2019
• Adjusted EBITDA margin of 13.6% vs. consensus 13.7%
• Operating margin expanded 220 bps y/y and 70bps vs. 2Q19
• EPS of $0.97 beat consensus by $0.02
• Share repurchases: $73M bought back in 2Q, leaving $182.5M through year end 2022
• Net leverage stands at 3.8x, lower from 4.1x in 1Q, on its way to reduce leverage of its balance sheet to 3.0-3.5x by year-end

 

• Revenue and EBITDA guidance for the year tightened on the lower and higher ends
• Sales $5.18B-$5.3B from $5.125B-$5.325B
• EBITDA $750M-$780M from $745M-$785
• EPS raised to $4.25-$4.43 from $4.17-$4.42

 

CEO quotes:

• “Clinical awards also included several COVID-19 related projects. Although, this category including treatment therapeutics remained at less than 4% of our backlog at the end of the quarter. Given this limited backlog concentration of COVID-studies, we expect our robust revenue growth in 2022 will be driven by the strength of our non-COVID backlog”
• “Syneos 1 our innovative end-to-end product development methodology continues to provide a competitive advantage across both segments. We are particularly excited about the Syneos 1 contribution to growing the pipeline of potential commercial awards and revenue with the first of many Syneos 1 portfolio assets set to begin commercialization in the third quarter”

 

 

 

 

 

 

 

 

 

While the quarter was good and comments on the call were promising for 2021-2022, the stock is trading down 4% as guidance was not increased for the year.

Sales returned to positive growth ~+4% overall, with clinical trials segment up 3.9% organically and commercial still negative -1.8% (but a 720bps sequential improvement). The management team expects a acceleration in sales growth throughout the year, driven by backlog (up 22.5% this quarter) in Covid and non-Covid trials. Covid is only 4% of backlog (and $25M in revenue last year). They currently have 22 Covid-related projects, with an additional 23 more. Covid is created interest in their integrated platform.

 In clinical solutions, they experienced a record level of awards, and patient enrollment remains high. On the commercial side, consulting services is seeing double digits revenue growth, and the entire segment should see double digits organic growth in 2Q, while both commercial and clinical trials should grow mid-single-digits in the second half of the year. Syneos continues to invest in the decentralized trial model to grow its business – Illigworth being the latest addition on this front.

Its Syneos One offering is gaining traction with small and mid-sized customers and we should see some of that towards 2H2021, and the Synteract acquisition is increasing exposure to emerging biopharma as well. On the large pharma side, capabilities and penetration is good, and Syneos scale (vs. top player) is not an issue for large pharma customers. On the balance sheet front, the company continues to deleverage, now at 4.1X, and with a target of 3-3.5X by the end of year.

Overall we remain positive on Syneos and expect the recovery to accelerate throughout the year to see the investment thesis play out.

 

Investment Thesis:

I. Secular growth:

1. Increasingly sophisticated and highly-regulated environment with government increasingly focused on drug pricing à biotech and large pharma need to reduce fixed costs
2. Growing research and development (R&D) spending environment:
• Growing portion of R&D outsourced to Contract Research Organizations (CROs)
• Pharma/biotech clients choosing fewer & higher quality CROs (expertise and scale)
3. Syneos has robust backlog predicting good growth for next 2 years
• Recovery in clinical trials post-covid

II. Competitive advantages:

1. Only company integrating clinical trials (Contract Research Organization -CRO) and commercialization solutions (CCO):
• Offer customized solutions and possibility to lower time to market
2. Top 3 market share within fragmented CRO market
3. Global scale – allows to compete for larger trials, with expertise in complex diseases
4. Diverse client base (large to small pharmaceuticals)

III. Attractive valuation: 45% upside

• Driven by secular growth drivers and margin expansion

 

$SYNH.US

[category earnings] [category equity research] [tag SYNH]

 

 

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: $275                     Price target: $322 NEW ($236 prior) 

Position size: 3.09%                    1-year performance: +57%

 

• Revenue growth of +10% y/y ex-FX;- +8% for the full year
• Only competitor Philips unable to supply devices due to recent large recall – this should boost market share gains near term – this is largely priced in the stock, up 30% since the announcement
• Extra sales from recall amount to $300-350M in FY22 – a 10% market share gain in devices -some of which could revert in FY23
• Supply chain constraints also affecting RMD: will slow the ramp up of production, and could last another 12-18 months
• Devices sales +12%:
• New patients starts show recovery post-covid, and boost from competitor recall
• US devices sales were +30%
• Rest of world devices sales -6% due to covid and tough comps y/y with ventilator sales
• Masks segment +10%
• US masks sales +5%
• Ex-US market +24%
• Software-as-a-service business: +5% growth, thanks to resupply program

 

• Gross margin -260bps y/y (-70bps for the full year) due to higher freight costs (to continue in FY22) and product mix
• Manufacturing efficiencies to ramp up in 2-3 quarters
• FY22 guidance:
• Sales higher from recall by $300-350M
• Near term earnings cut 1-2% from higher costs
• Investor day scheduled for September 8th
• CEO quote: “During the quarter, we saw the ongoing recovery of core sleep apnea and COPD patient flow across our business, as healthcare systems continue to adopt new models of patient care”

 

Our long-term view on the stock is still valid, with the global sleep apnea market only ~20-30% penetrated, and market volume growth rate ~10% per year – an attractive market where Resmed and Philips play in duopoly.

 

Thesis on RMD:

• Leading position in the underpenetrated sleep apnea space
• Duopoly market
• New product cycle
• Returns of capital to increase: ~1% share buyback/year (back in FY18), dividend yield of 2%

 

$RMD.US

[category earnings] [category equity research] [tag RMD]

 

 

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:

 Share price: $203                    Target Price: $213 NEW ($182 prior) 

Position size: 2.24%                TTM return: +29%

 

Zoetis continues its great performance in Q2, with sales up 22% ex-FX and adjusted net income up 28% ex-FX. Demand in Companion Animal segment remains solid, with strength in Simparica Trio (now at $139M sales in the quarter, only 15 months post-launch – with lower cannibalization of base product than expected!) & parasiticides and dermatology products. CT scan images business is progressing well, and Diagnostics posted 38% growth as access to vet clinics improves. China and Brazil grew 30% and 40% respectively. In the US, the livestock segment had some weakness in cattle and poultry. The company cited some competition and soft-end market as the reason for US decline. Thanks to the mix (companion growth > livestock growth), gross margin beat expectations and came at 71%.

 

Going forward, catalysts will be:

• increased clinic visits & dollar spent
• broader utilization of diagnostics
• strong execution in international markets

 

Yesterday the company announced the acquisition of Jurox, an Australian animal drugs manufacturer, and is expected to close in 1H22. Australia is ZTS’ 5^th largest market, and this acquisition will bring some drugs with global expansion possibilities. Following 2Q results, ZTS is raising its 2021 full year guidance by ~1% on the top line and $0.05 on the EPS line. Some of the upside seen in 2Q is being reinvested in the business, something typical for ZTS.

 

CEO quotes:

o    “The entire portfolio is benefiting from strong pet care trends in terms of increase in clinic visits rising spend per visit, and a focus on diagnostics and specialty care especially among newer and younger generations of pet owners”

o    Livestock: “in the US data suggests the foodservice and restaurant industry has continued to recover in the second quarter, which is a crucial dynamic for demand of our premium products”

o    Diagnostics: ” So it’s in relative terms, it’s not the largest proportion of our of our revenue streams certainly, but we are very, very much excited about the potential for the future”; “We are well positioned to grow faster than the diagnostics market, which is expected to grow double-digits”

 

Guidance raised for 2021:

• Revenue growth of +12.5% to 13.5% from +10.5% to +12% due to better than expected results and confidence in the portfolio’s performance
• Adjusted net income range increased to $2.135B and $2.175B, with operational growth of 13% to 15%
• Adjusted EPS guidance raised to $4.47-$4.55 from $4.42-$4.51

 

Zoetis investment thesis:

·         Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented

·         ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs

·         ZTS is growing above the industry rate and has proven resilient throughout economic cycle

·         Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013

·         Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability

 

$ZTS.US

[category earnings] [tag ZTS]

 

 

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                            Price Target: $90

Position Size: 2.04%                        1-year Performance: +29%

CVS reported 2Q21 earnings this morning that beat consensus expectations thanks to strong revenue growth of 11.1% as care return to normal levels and vaccines boosted sales. An employee wage hike to $15/hr minimum by the end of July 2022 will increase costs (current rate is $11/hr). The CEO thinks this is necessary to retain employee in a tight retail labor market (see quote below). On the Health Care Benefits side, covid-related care costs were a bit higher than expected, and a return to normal level of care (ex-covid) pushed expenses higher, raising the Medical benefit ratio higher to 84.1% from 70.3% in 2Q 2020. CVS will host its Analyst Day in December, and the event could be a catalyst for the stock, as the new management team will provide some clarity around earnings growth for 2022 and capital spending strategy. The company remains cautious as the pandemic is not yet over and cases climb again, so its 2021 guidance raise was not sufficient to lift the stock higher. Another rise in costs to treat covid patients and/or deferral of doctor’s visits (and subsequent drug purchase) could be detrimental to CVS revenue growth.

Segments update:

• Health Care Benefits: +11% revenue growth

·         Medical Benefit Ratio of 84.1% as the company returns to normalized utilization rate vs historically low in 2Q2020 due to covid – non-covid related utilization emerged favorably, while covid-related expenses were higher than expected

• Pharmacy Services: +9.8% revenue growth thanks to higher volume, driven by Specialty Pharmacy growth of 8.9% due to new business wins & brand inflation  
• Retail/LTC: +14.2% revenue growth. Same-store-sales +12.3%. Pharmacy SSS grew 12.4% and front store sales +12%  
• Covid update: 29M tests administered, 30M vaccines administered total. 40% of vaccines administered in the last 2 months were to members of under-represented communities

FY 2021 guidance:

·         Revenue growth raised to 4.5%-6.25% from 4%-5.75% – due to all segments expecting better performance

·         Cost savings $900M to $1.1B reiterated

·         Adjusted EPS raised to $7.70-$7.80 from $7.56-$7.68

·         CFO raised $0.5B to $12.5-$13B

CEO quotes: 

• “I would highlight a couple things in front of us. One is that, as you know, we have more opportunities and expanding our digital access and digital connections. We’ve seen across the board with our next best actions, using digital connections. We’ve seen — for those individuals, we’ve seen reductions in overall medical costs. We also have the opportunity to expand our home service and delivery.”
• “we are seeing 65% of our employees that are hourly are already at or above $15 an hour. So this is a very targeted investment for our pharmacy technicians, our front store colleagues. And we will start a series of wage increases beginning in September, which is really what’s driving that $125 million impact to the latter half of the year. Obviously, it’s a tight labor market. We are paying attention. We’ve got a lot of hiring to do to support growth. And so far, we see pressure, but we’ve been managing through it. But we’re watching that labor market. We’re seeing impacts in the stores. And that’s part of why we’re making this wage investment today”

Thesis on CVS

• Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.
• Aetna acquisition makes it vertically integrated.
• Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.
• shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)

 

$CVS.US

Category: earnings

tag: CVS

 

 

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: $128                   Price Target: $139 NEW (from $130)

Position Size: 3.08%                 1-year  Performance: +71%

 

Xylem reported its 2Q 2021 earnings this morning, beating estimates on the top and bottom line, as demand was strong in all segments. Organic sales were up 11%, and leading indicators are showing good momentum: orders were up +29% and backlog +35%. EBITDA margin grew 200bps, as pricing, volume and mix added 330bps, offsetting part of COGS inflation (-370bps), and productivity efforts adding another +390bps. We are pleased to hear the company’s strong operating execution is yielding margin expansion, even with rising inflation and component shortages. The management team raised its full year guidance, but the raise implies lower growth in 2H21 vs. current consensus. We think this will lead sell-side analysts to raise their numbers and price targets for this name. We revised our price target to reflect faster recovery in end markets and greater margin upside potential. The next investor day will be held September 30^th, when they will share some strategic update.

 

CEO quotes:

• M&A: “we still are going to be disciplined around returns and […] making sure margins are accretive. There’s a technology component we believe is very important that there is a services recurring revenue component that are very attractive.
• ESG: “ I’m very proud of what the entire team has done here on making sure that sustainability for us and the broader ESG is not just some kind of stand-alone thing. It’s deeply integrated into our business. It’s what we do as a company, and it’s in our operating processes”

 

Additional 1Q21 results:

Organic growth by end-markets:

• Utilities: +6%
• Industrial: +17%
• Commercial: +12%
• Residential: +29%

 

Organic growth by regions:

• US: +5%
• Emerging markets: +18%
• Western Europe: +17%

 

2021 guidance raised:

• Organic sales lifted from +5-7% to +6-8%
• Water Infrastructure up mid-single-digits
• Applied Water up low-double-digits
• Measurement & Control up mid-single-digits
• Adjusted EBITDA margin 17.2%-17.7%: cost savings benefits with favorable volume/price/mix, balanced by rising inflation, component shortages and prioritized growth investments

 

Xylem’s investment thesis is:

 

• Xylem has strong sustainable secular growth drivers in a fragmented industry:
• Access to clean water is a necessity
• Population growth & urbanization
• Aging infrastructure

 

• More defensive sales base thanks to:
• 50% of sales to utility sector
• sticky client base due to high switching costs
• high level of replacement parts demand
• Long-term contracts with ½ of the revenue base recurring

 

• Margin expansion overtime from productivity efforts

 

• M&A strategy has increased their scope in the water cycle

 

• Valuation is attractive today

 

XYL.US

Category: earnings

Tag: XYL

 

 

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

 

Share Price: $126            Target Price: $150

Position Size: 2%              1 Yr. Return: +71%

 

 

Key takeaways:

• Better than expected RevPAR and EPS. Q2 system-wide RevPAR grew 234% YoY

• Performance was driven by strong leisure demand and rate growth
• Expect  return  of  capital  program  in  early  2022
• Solid unit growth (+7% YoY) and additions to pipeline, come in ahead of mgmt. guidance. Provides key support to LT growth story as industry leading RevPAR premiums continue to drive a high quality pipeline.
• CEO Chris Nassetta said, “things have been coming back more quickly, then we would have thought. We knew they’d come back, obviously you all know, I’ve been optimistic about the recovery, but it’s even better than our thought”…”when we look back on this recovery, the most unusual thing relative to any other period in my for almost 40 years of doing this will be just the rapid return of rate.”

 

 

Highlights:

• Demand is recovering:
• While limited international travel weighed on overall performance, strong leisure demand and rate recovery drove improving trends. In Q2 systemwide RevPAR was down 36% from 2019. This continues to improve…w/ June RevPAR down 29% from 2019. China has rebounded with RevPAR now trending above 2019 levels
• In the 7 trailing days prior to the earnings call, system-wide occupancy was running at 74%. This is a very short term data point, but it’s a very positive one. It’s similar to pre-Covid and implies very strong mid-week travel which requires meaningful business demand especially in certain markets.
• Leisure is leading the recovery w/ record performance
• For the quarter, US leisure demand exceeded prior peak levels with rates at 90% of prior peaks.
• In July system wide leisure room nights and rate exceeded 2019 levels
• Business transient improved meaningfully throughout the quarter
• Recovery driven by small and medium-sized businesses. Pre-COVID, 80% of their business travel was SMBs.
• In June Business transient room night demand was 70% 2019 levels with rate over 80% of 2019 levels. In July rates were at 90% of 2019 levels.
• Group is expected to take longer to recover; 2022 should be very strong
• Group performance driven primarily by social groups given seasonally higher leisure demand and ended June at more than half of 2019 levels
• Planning lead times for large business conferences means it takes longer to recover
• They think 2022 will be a “barn burner” year for their group business
• Group bookings for next year are at rates above 2019 peak.
• “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.”
• Pipeline – Stable unit growth underpins the story
• For 2021, expect net unit growth in the 5% to 5.5% range, above prior expectations given the pace of openings year-to-date.
• Unit growth in Q2 was 7% YoY and the pipeline increased to a total of approximately >400K rooms. That represents 40% room growth from their current installed base of rooms.
• 62% of their pipeline is located outside the US (mid-tier focus tied to growing global middle class) and more than half are under construction (helps underpin several yrs. of predictable growth).
• Had a record number of conversion signings in the quarter, representing 30% of total signings
• “The system is performing at the highest levels from a market share point of view that it’s ever performed in our history. And I think that’s a great leading indicator for opportunities to convince folks who are independents to come into the fold. As well as folks that have weaker brands that are looking for a better performance to come into the fold, both of which are happening, a little bit better than our expectations.” 
• China development activity is particularly strong – increased regulatory activity in property sector could add a headwind to development activity.
• Continued strength in their market leading RevPAR index. RevPAR index is their RevPAR premium/discount relative to peers adjusted for chain scale. 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. i.e. they would likely take more pipeline share if lending standards tighten. The other countercyclical aspect of their pipeline growth is conversions (an existing hotel changes their banner to Hilton). I.e. Hampton Inn (35 year old brand) has a RevPAR index of 120.

• Shareholder returns should improve w/ recovery – likely will resume 1H22. In 2019 they returned more than 8% of their market cap to shareholders in the form of buybacks and dividends.

 

 

$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

 

 

Key Takeaways:

 

Current Price: $74.3                       Price Target: $88 (from $83)  

Position Size: 1.91%                       1-year performance: +24%

 

Fortive reported 2Q earnings above expectations and raised its 2021 guidance.

• Organic growth of +21.3% (+26.7% reported includes FX and acquisitions). Compared to Q2 2019, sales grew 13%

o    All three segments had positive sales growth:

Ø  Advanced Healthcare Solution +11% organic (24% of revenue): slower recovery of elective procedures business, but is expected to improve in 2H21 – and 4Q growth rate expected to be 26-27%. Hospitals allowing vendors back in, increasing activity

Ø  Precision Technologies +22.2% organic (36% of revenue), led by growth at Tektronix that introduced new products (automated test solutions for high-speed data centers)

Ø  Intelligent Operating Solutions +26.8% organic (41% of revenue), led by growth at Fluke

• Software-as-a-service grew in the low double-digits
• Adjusted gross margin 57.3%, +100bps y/y, with 130bps coming from price increase, especially in their hardware business
• Adjusted operating margin 22.2%, +240bps
• Adjusted EPS $0.66, +53.5% y/y

 

Fortive has significantly reduced its leverage post Vontier spin-off:

• Net debt/EBITDA stands at 1x, with expectations to be at 1.2x by year end
• Recent acquisition of ServiceChannel (announced in early July): high growth software business, enhancing FTV’s ability to service needs of facility owners. Closing of the deal is expected in Q3.

 

FY21 guidance:

• Organic growth raised to +10.5% to +12% (vs +7% to +10% previously)
• Reported sales to be +13.5% to 15%
• Adjusted operating margin of 22.5-23.5%, up 50bps
• Adjusted EPS raised to $2.65-$2.75 from $ (+27-32% y/y growth) from $2.50-2.60

 

CEO quotes:

• “We still are in a very good shape relative to price cost, not only because of price, but also because we’ve done a nice job on the cost reduction side as well“
• “I think sustainability is becoming such an important topic for companies around the world and not just large cap. I mean, just about every company in the world now is trying to understand their carbon footprint, they are trying to understand how to action sustainability work and we’re just so well positioned with Intelex, ehsAI around those trends, I think it’s hard to call out anything better than that, just given the massive amount of work and effort that’s been going into sustainability everywhere in the world. So I think that’s certainly a secular driver that we knew was good a few years ago when we bought into Intelex.”

 

We are raising our price target to $88 based on good results and comments for the rest of 2021 and early 2022 expectations. As the company continues its Software-as-a-Service portfolio, it deserves a higher FCF margin in the out years, which we updated in our model.

 

FTV Thesis:

• Market leader:
• Leadership position in most of the markets they serve
• Experienced leadership team
• Above industry margins with strong cash flows
• Quality:
• FCF yield ~5%
• Organic growth target of 3-3.5% (4-5% in last 2 quarters after being under the target in prior quarters)
• M&A strategy to enhance top line growth
• Margins expansion from new products introduction, continued application of the Fortive Business Systems and M&A integration
• Shareholder friendly:
• Management team focused on shareholder wealth creation through top line sustainability and margin expansion

$

FTV.US

Category: earnings

Tag: FTV

 

 

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