Research Blog – INTERNAL USE ONLY

On 4/20, Travelers reported a Q1 EPS of $2.73, ahead of estimates of $2.40.  Positives for the quarter were improving margins, core return on equity of 11.1% and continued strong pricing gains in business and personal insurance lines. 

 

Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks. 

 

Current Price: $156                                Price Target: $170 (raised from $160)

Position Size:   1.71%                              TTM Performance: +59.6%

 

Thesis Intact. Key takeaways from the quarter:

 

1.       Core business results were solid, beating estimates

·         Combined ratio improved 1.8 points to 89.5%

·         Net premiums increased 2% for quarter

·         Strong pricing with renewal premiums up

o   Business +8.0%

o   Bond & specialty +10.8%

o   Homeowners +7.7%

o   International +6.9%

·         The industry has faced several headwinds – higher cat losses, negative tort trends and falling yields.  As a result, industry wide pricing has been strongest in 10 years.

               

2.       Total net Investment Income rose $71m due to strong returns in private equity investments as returns from fixed income investments fell $31m.

 

3.       Strong financial position

·         Debt to capital ratio of 20.5%

·         Most of debt is long term – just issued a 30yr bond yielding 2.5%

·         98.2% of fixed income portfolio is investment grade with average rating of AA

·         Strong rankings from rating agency relative to peers

 

4.       TRV continues to return capital with dividend yields 2.24% and shareholder yield over 6%

·         Raised dividend 4%

·         Book value growth of 9%

·         Over past 10 years shares outstanding have fallen by 53%!

·         Management has a long history of employing capital wisely! Instead of investing in mature business with spotty pricing, they have returned excess capital to shareholders

 

The Thesis on TRV:

·         We expect TRV will be able to grow book value per share in the mid-single digits over the near-medium term, and generate ROE in the 10-14% range

·         Industry leader with disciplined underwriting and investment portfolio track record  

·         Consistent returns in the low to mid double digits

·         Responsible capital allocation and proven desire to act in the best interests of shareholders

 

Please let me know if you have any questions.

Thanks,

John

 

$TRV.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

 

On 4/15, Bank of America (BAC) reported core Q1 EPS of $.86 well ahead of estimates of $.65.  Positives for the quarter were strong deposit growth, stable net interest margin (NIM) and resumption of share buybacks with a new program of $25b. 

 

Current Price: $38.5                         Price Target: $40 (up from $36)

Position Size:   2.39%                       Trailing 12-month Performance: 82.7%

 

Highlights:

• Deposits surged 25% YOY spurring balance sheet growth of 4.4% YOY
• Strong metrics for loan quality throughout pandemic
• Return of excess capital built up over the pandemic – $25b share buyback which is worth 7.5% of outstanding shares

Concerns:

• Elevated expenses
• Negative loan growth

 

Deposits have grown 25% 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 0.37% of loans.  Last year this ratio peaked at 0.46%.  For comparison during 2010, the charge-off ratio peaked at 3.8% showing the relative severity of the Great Recession.
• With improving economy and outlook, BAC released $2.7b from loss reserves

Net interest income roughly flat from last quarter with margin at 1.68%

• NIM growth will remain sluggish until we see a sustained economic recovery and continued increases in interest rates.

Excess capital

• BAC announce a $25b share repurchase program which is worth 7.5% of outstanding shares. 
• Current dividend yield is 1.86% for a shareholder yield over 9%.

Negative loan growth

• Loans outstanding fell 8% YOY. Corporations and consumers continue to pay down balances.  Some of the YOY decreased is due to elevated loan balances at Q1 last year during the onset of the pandemic.

 

BAC Thesis:

 

• Over the years BAC has dramatically improved their Consumer Banking unit, leveraging technology and their digital platforms which has 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 build capital which should lead to increased dividends and buybacks

 

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: $387        Price Target: $469  

Position Size: 2.98%      1-year Performance: +4%

 

Lockheed released another good quarter, beating on the top and bottom line, and raising guidance for the year by 1% for revenue and 2% for EPS (all as usual).

• Revenue growth of +4% and segment operating margin 10.8%
• 2021 revenue guidance of $68B at the mid-point
• Cash flow from ops was $1.75B, guidance for the year raised by $600M to be at or above $8.9B
• Backlog still solid at $147B but flat quarter/quarter
• Book to bill 1.05X
• Balance sheet remains good with leverage of 0.9X and cash position of $2.9B
• The company repurchased $1B of stock during the quarter (vs. none last quarter)
• $4.4B purchase of Aerojet (announced in 4Q) will most likely not require new debt as FCF and cash on hand offer plenty of liquidity
• Aerojet offers opportunities in the growing space & hypersonic sector, a priority in the defense budget
• LMT has exposure to key defense programs such as the F-35, missile and space, all growing areas within defense spending, although the defense budget is likely to decelerate over the next few years

 

Sales per segment were as follow:

• Aeronautic +0.3%, with F-16 and classified contracts growth offset by lower F-35 development contracts and F-22
• Missiles and Fire Control +5%, driven by Patriot programs
• Rotary and Mission Systems +9.6% driven by an international pilot training system and Sikorsky helicopters
• Space Systems +3.4% driven by the Atomic Weapons Establishment and commercial civil space programs

 

 

LMT Thesis:

·         Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships

·         Excellent management team focused on returning capital to shareholders

·         Strong cash flow and financial position

    

[category earnings] [tag LMT] $LMT.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: $166      Price Target: $200 

Position size: 2.23%     1-Year Performance: +7%

 

 

• 1Q2021 results:
• Overall sales +6% organic, adjusted EPS +12.6%
• Pharma segment performing well with sales +7.1% led by key franchises
• Beat largely lead by Darzalex, Xarelto and Tremfya
• Vaccines accounted for $100M in sales
• Consumer segment: -3% due to last year’s customer stocking at home, and lower sales in cough, cold and flu medications
• Medical Devices: showing signs of recovery from last year with +8% sales growth – US grew 5.4% while outside US grew 16.5%
• Management team is bullish on rest of year outlook for this segment, US healthcare system ended the quarter at 90-105% of normal volumes – Europe varies more country by country

 

• Dividend increased by 5%

 

• CFO quote: “So across all three parts of our business I think there is a real good take away there that the business is healthy and strong you couple that with the investment, we continue to make in R&D at elevated levels, I would hope folks feel really good about not just our performance of today, but our future performance on the horizon.”

 

• 2021 guidance narrowed – we view it as conservative, leaving room to be raised as Covid pressures diminish during the year
• Revenue slightly raised: from 8.0%-9.5% to 8.7%-9.9% organic – not including the Covid-19 vaccine sales – a source of upside going forward
• Covid vaccine sales are selling on a not-for-profit basis, but 1Q was impacted by vaccines expenses ($0.05-$0.10) so recouping those costs in future sales is a possibility.
• The management team indicated that once the pandemic is behind us, sales of Covid vaccines could be at a profit
• EPS guidance narrowed: $9.42-$9.57 (vs $9.40-$9.60)

 

• In a separate event, the European Medicines Agency’s Safety Committee completed its review of the vaccine following rare cases of blood clots
• The committee confirm that the overall benefit vs. risk profile of the vaccine remains positive – shipments to Europe to resume
• All cases happened to people under 60 (mostly women) within 3 weeks of receiving the shot
• Not able to identify specific risk factors at this time
• Cases were similar to the Astra-Zeneca vaccine – they both employ a similar adenoviral  vector technology – different from the messenger RNA technology used by Pfizer/BNTX and Moderna
• A notice should be added to the product information
• The US CDC should provide some data on Friday following its planned review meeting

 

 

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

 

Key takeaways:

 

Current Price: $224                Price Target: $255

Position Size: 2.74%              1-Year Performance: +41%

 

• Total company sales +3%
• Beer organic sales increased by 18% – off-premise consumption helps offset weak on-premise drinking
• wine & spirits grew +8% organically
• Sales, margins and EPS came above consensus
• Beer margin impacted by higher advertising and marketing spending
• total operating margin impacted by 900bps due to wildfires and increased marketing spending
• New guidance for fiscal year 2022 introduced – disappointing on the margin and share buyback front
• CEO quote: “One of the things that we’ve been quite good at over the last several years is running our plants at hyper efficiency. But I think one thing as learning from the pandemic. And I think any good business should have a element of learning when something hits you in the face. In the pandemic certainly did that across many, many, many industries. One of the things we learned is while our efficiency was tremendous. We didn’t have a lot of flexibility in the event that something didn’t go well and so one of the pieces that we are doing with this expansion is not only to meet the hyper growth that we have within our business, but also to create an increasing flexibility in some redundancy within our business.”

 

 

While Q4 results were good, guidance for FY2022 is below expectations, sending the stock price lower today. We think the management team remains prudent as it is stepping up its marketing efforts (new product launch – Corona Seltzer Limonada, new variety pack…), and increasing spending in capex to expand its production capacity in Mexico. For FY22, beer sales are expected to be +7% to +9% (in line with historical average), but beer operating income growth of only 3-5% shows some margin pressure. Inflation is back, with raw materials (such as glass), transportation and labor costs expected to rise.

Wine & Spirits sales are expected to grow +2% to +4% organically following the divestment of lower-end brands – we are finally seeing growth in that segment, driven by premium brands. The company needs to increase its capex spending to increase its capacity at its current Mexican plant, following the Mexicali fall-out with the local government. It is still unclear of STZ will be able to recover its investment in that plant, and the company is taking an impairment charge of ~$660M next quarter. This will limit potential for share buyback this coming year, which was highly anticipated.

Following disruption in its production capacity/supply chain due to Covid, STZ’s management team is looking at expanding its production capacity with some redundancies, in order to avoid future disruptions and increase flexibility.

 

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: $90.8                 Price Target: $102  

Position size: 2.51%                1-Year Performance: -5%

 

• Organic sales growth of 20%, driven by both segments, a big beat from consensus expectations
• Consumer segment up 32% y/y ex-FX
• Flavor Solutions +3.4% y/y ex-FX
• Capacity constraints are easing from FY20, shipment timing helped this quarter’s performance, as MKC is rebuilding its inventory level with retailers
• Increased cooking at home and demand from packaged food manufacturer is offsetting weak restaurant/foodservice providers
• Fundamentals remain healthy
• Margin improvement from operating leverage, favorable mix and cost savings
• ERP spending was put on hold last year, and it hasn’t resumed to its full extent yet (ramp up in spending could come in 2Q)
• FY2021 top and bottom-line guidance raised following a good Q1

 

Yesterday released its earnings for 1Q 21. McCormick had (yet again!) another impressive sales growth this quarter. In the Americas Consumer segment (its biggest in sales), its US branded portfolio grew 15% thanks to repeat purchases and household penetration increase, while the foodservice and restaurant demand declined. In the EMEA region, there was broad based growth due to the same dynamic as in the Americas in Consumers, but restaurant demand declined. In the Asia Pacific region, quick service restaurant, branded foodservice and consumer demand is recovering with double-digit growth. For this coming fiscal year, sales should grow 8% to 10%, with 2% benefit from currency and 3-4% coming from recent acquisitions. Prices increases will be done in 2021 if needed, a good indication of pricing power/leadership. Overall we are please with MKC and the thesis remains in place.

 

 

 

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

 

 

 

 

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: $267     Price Target: $295

Position size: 4.2%       Performance since inception (3/11): +61%

 

Key Takeaways:

1. They beat estimates and issued strong guidance. Revenue (+8%) ahead of high end of guidance range and highest street estimate. Upped full year revenue growth guidance to +6.5% to +8.5%, from previous guidance of +4% to +6%.
2. Broad based improvement in demand – digital transformation is long-term secular growth driver to their business.
3. Strong bookings and they continue to take significant market share, signifying solid business fundamentals. Bookings were up 13%.
4. CEO Julie Sweet said…“For digital leaders, we see them no longer strictly competing for market share, but to build their vision of the future faster than the competition. And for digital laggards, they are determined to not simply catch up, but to leapfrog. While COVID has accelerated the demand, the reality is that the extent of transformation ahead is enormous. The move from approximately 20% to 80% in the cloud alone is a huge undertaking and it is just the start, as companies will then continue to invest to grow and innovate on their new cloud foundations.”

 

Additional highlights:

• Revenue $12.09 billion, +8% YoY, estimate $11.84 billion. Included 2pt reduction from reimbursable travel costs which are a pass through. Adjusted EPS of $2.03 (+10% YoY) vs. consensus $1.90, driven by 30bps of op margin expansion.
• Consulting revenues were $6.4B, up 4%, which includes a 3pt headwind from lower travel reimbursement.
• Outsourcing revenues were $5.6B, up 14% YoY
• Geographic breakdown: “growth markets” were up 6%, Japan was strongest, up double-digits. Europe was up 3% (Italy & UK were strongest), North America was up 7%.
• Strong bookings of $16B, up 13% YoY – 18 clients had bookings >$100 million. Overall book-to-bill of 1.3. Consulting book-to-bill of 1.2 and outsourcing book-to-bill of 1.4.
• Hardest hit end markets are showing improvement – they saw broad-based improvement across industries and geographic markets
• Similar to last quarter, ~50% of revenues came from 7 industries that were less impacted from the pandemic that, in aggregate, accelerated from HSD to low-double-digits growth.
• ~20% of revenue from clients in highly impacted industries – declined mid-single-digits, but seeing continued improvement this includes travel, retail, energy, aerospace & defense and industrials.
• This underscores the benefit of diversified industry end markets.
• Digital transformation imperative is long-term secular growth driver to their business. Before Covid there was already exponential technology change taking place with every business becoming a digital business. Mgmt. thought it would take a decade, now they think it is more like five years. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has been positioning themselves to be a leader in digital capabilities since 2014, which is why they are the leader, continue taking share and are well positioned in the future. Accenture’s unique positioning of trusted partner w/ leading edge technology expertise (they have their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise are key to this. 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/ ~537K employees across the globe. For instance, they had a special employee bonus paid this quarter to employees below MD level, they’ve been heavily investing in upskilling their employees and they are now ~45% women; on track for their 2025 goal of a 50-50 gender balance. They also 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: they now expect to return at least $5.8 billion in cash to shareholders through dividends and share repurchases, compared with previous guidance of $5.3 billion. Dividend up 10% YoY. They’ve made investments of $1.1B in acquisitions (19 transactions) in the first half of the year and they expect to invest at least $2B in acquisitions this fiscal year.
• Valuation:
• The stock is undervalued trading at a >4% forward yield. They have an easily covered 1.3% 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 $8.7B 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]

 

We are trimming Sensata 50bps and putting the proceeds to cash (IVV).

Please see powerpoint presentation for details.

Thanks,

Julie

 

 

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 2/27, Berkshire Hathaway reported their 2020 Q4 results.  Annual results are accompanied by Warren Buffett’s letter to shareholders (attached), which lacked the usual news-worthy disclosures or sage market advice.   Key takeaways from the quarter and year are as follows:

• Buffett sizably increased share buybacks to $8.97b, which is more than he has ever bought bringing the total buyback for the year to $24.7b reducing share count by 5.2%.
• Cash on books remained steady at $138B. 
• Cash and stock portfolio represent over 50% of the company’s value.
• Sum of the parts valuation shows 25% upside

 

Current Price: $252                         Price Target: $300 (raised from $280)

Position Size: 3.0%                          TTM Performance: 34.4%

 

Segment highlights from the quarter:

• Geico earnings more than doubled on lower loss ratio
• Berkshire Hathaway Reinsurance continues to struggle with $-2.7b in losses
• Low interest rates highlight Berkshire’s competitive advantage of an investment portfolio being invested primarily in equities and being less dependent on bond market yields
• Railroads – YoY revenue fell -11.3% and earnings fell -5.8% with pandemic slowdowns
• Berkshire energy – YoY revenue up 4.5% and earnings up 8.8%
• Manufacturing, service and retail – Profits fell -14% due to pandemic
• $11b write down of Precision Castparts purchased in 2016.  They sell many parts to the aerospace industry

 

Stock portfolio highlights:

• Investment in Apple is worth $120b
• Since 2019 Berkshire has cut allocation to finance stocks from 41% to 24%
• Dumped airline stocks
• Latest filing shows
• Added Verizon which is now 6^th largest holding
• Added Chevron

 

Valuation:  Berkshire is selling at a 25% discount to intrinsic value using sum of the parts.  Their cash of $138b represents $57 per share for B shares. 

 

Berkshire remains a core holding, is currently undervalued and is defensively positioned to take advantage of opportunities as they arise.

 

Please let me know if you have any questions.

 

Thanks,

John

 

($brk/b.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