Research Blog – INTERNAL USE ONLY

Key Takeaways:

 

·         Sales down -24% but exit rate -10%, margins deleverage due to mix and sales decline

·         No guidance still due to uncertainties

·         Mako robots still in demand despite the crisis; SYK offering financial option to help hospital afford the robot (less upfront capex for hospitals, use of lease agreements)

·         Financial liquidity remains good with $3B of undrawn credit facilities

·         Wright Medical acquisition pending (borrowed $2.3B at low rates), should close in late 3Q/early 4Q – no other major transaction in the foreseeable future

 

 

Current Price: $190                          Price target: $232

Position size: 2.40%                        1-year Performance: -9%          

  

 

Stryker released their 2Q20 results with organic sales down 24% y/y. This decline in sales is related to COVID-19 as close to half of Stryker’s sales are levered to elective surgeries. Within the quarter, trends improved from -36% in April to -10% in June (and even better trend seen in July). Geographically China, Australia, and Germany recovered the quickest, reaching ~85-90% of pre-COVID-19 levels. On the other side, the UK, India, and LatAm are seeing a slower recovery, reaching less than 50%.  The management team commented on the high profitability of the hip/knee/extremities reconstructive surgeries, and the need for the hospitals to get those done, thus accelerating the pace of the recovery for those categories. The rapid expansion of inpatient & ICU capacity globally has pushed up the demand for their beds/stretcher, defibrillators and PPE equipment. While Mako has seen increased competition recently and hospital budgets squeezed, SYK has noted an even faster rate of new accounts deals. We see this as a proof of the quality of its robots and the good job of the sales team during the crisis. On the profitability front, gross margins were down quite a bit y/y (860bps) due to the sales mix and reduced top line (deleverage). The manufacturing capacity stood at 60% in 2Q, and should go to 85% in 3Q, still pressuring margins down. This should reverse towards 2021 as sales bounce back.

Overall the quarter was as expected (aside from Mako sales strength). We think this is a company that should come out of the crisis stronger, between the diversity of its products and resilience of its sales team, it should continue to perform well long-term.

 

 

SYK Thesis:

• Consistent top and bottom line growth in the mid and upper single digits respectively
• Continued operating leverage of current infrastructure
• Strong balance sheet and cash flow used in the best interest of shareholders

 

$SYK.US

[category earnings] [tag SYK]

 

 

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: $409         Price Target: $450 (raising from $414)

Position size: 7.1%          TTM Performance: +92%

 

Key Takeaways:

·         Apple reported very impressive Q3 results. They beat the highest estimates, w/ Q3 revenue up 11% (including a 300bps headwind from currency).  Revenue hit $59.7B vs street at $52.2B. EPS $2.58 vs street $2.07.

·         Broad beat – better than expected revenues across all products, including a surge in iPad and Mac sales and a return to growth w/ iPhones..

·         They saw meaningfully improved sales in May and June which they partly attribute to the stimulus.

·         No specific guidance for Q4 but they did say they expect a continuation of recent performance w/ iPhone and services categories, with some headwinds from AppleCare. Also iPhone 12 release delayed a few weeks

·         Announced 4-1 stock split at the end of Aug.

 

Additional Highlights:

·         Both products and services set June quarter records and grew double-digits and revenue grew in each of their geographic segments.

·         Installed base of active devices reached an all-time high across each product category.

·         Transition to Apple silicon for the Mac – “this two year effort will achieve both unprecedented performance for the Mac and a common architecture across all Apple products.”

·         Gross margin was 38%, down 40 bps sequentially due to unfavorable FX of 90 bps

·         Affordability – This continues to be a growing focus as a way to grow their installed base. They just launched the iPhone SE @ $399. In June, they launched Apple Card Monthly Installments for more products in their US stores allowing customers to pay for their devices all the time with 0% interest.

·         Segment results – Mac and iPad were standouts

o   Mac ($7.1B, +22%) & iPad ($6.6B, +31%)

§  As they said last quarter, they expected iPad and Mac growth to accelerate in Q3 – incredible growth driven by increased WFH. This remarkable performance came in spite of supply constraints on both products.

§  Mac grew double digits in each geographic segment and set all-time revenue records in Japan and rest of Asia-Pacific as well as June quarter records in the Americas and Europe.

§  Customer response to new MacBook Air, MacBook Pro, and iPad Pro launches has been extremely strong.

§  Half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and iPad reached a new all-time high.

o   iPhone ($26.4B, +2% YoY)

§  iPhone returned to growth. Customer demand improved as the quarter progressed.

§  In April, they said they expected YoY performance to worsen, but they saw better-than-expected demand in May and June. They attributed this increase in demand a strong iPhone SE launch and continued economic stimulus.

§  Strong response to SE, but iPhone 11 continues to be their most popular phone.

§  Active installed base of iPhones has reached an all-time high.

o   Services ($13.2B, +15% YoY)

§  Hit milestone set in 2016 of doubling this business in 2020.

§  All-time revenue records in the App Store, Apple Music, video and cloud services as well as elevated engagement on iMessage, Siri and FaceTime.

§  Strong double-digit growth in the App Store, Apple Music, video and cloud services.

§  Results for advertising and AppleCare were impacted by the reduced level of economic activity and store closures – in line with their expectations.

§  Growing customer engagement in their ecosystem – the number of both transacting and paid accounts on their digital content stores reached a new all-time high during the June quarter with paid accounts increasing double-digits in each geographic segment.

§  Paid subs grew by 35m sequentially to 550m. Goal of 600m by year end.

o   Wearables, Home and Accessories ($6.5B, +17%)

§  Wearables growth decelerated as we expected, but still grew by strong double-digits and set a revenue record for a non-holiday quarter.

§  Now the size of a Fortune 140 company

§  >75% of Apple Watch purchasers were new to the product

·         Valuation:

o   Trading at a >4% FCF yield. Higher than the S&P. Apple’s FCF generation is about the same as the other FAANGs combined.

o   Ended the quarter with net cash of $81B ($194B in cash and debt of $113B) or about 5% of their market cap.

o   Returned $21B to shareholders during the March quarter, including $3.7B in dividends.

o   Maintaining target of reaching a net cash neutral position over time.

 

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

 

$AAPL.US

[category earnings]

[tag AAPL]

 

Current price: $170          Target price: $190

Position size: 2.7%           TTM Performance: 31%

 

Key Takeaways:

·         CCI reported mixed 2Q  results. They saw slightly lower than expected revenue and AFFO, but maintained full year guidance.

·         Minimally impacted from COVID-19 given durability of demand for their critical infrastructure and long-term contracted revenues. Tower leasing activity should ramp in 2H20 w/ TMUS merger.

·         Refreshing board and reviewing executive compensation structure following Elliott Management’s letter to the company. During the quarter, Elliott announced a stake and sent an open letter w/ multiple suggestions to the mgmt. team.

 

Additional Highlights:

·         Lower than expected revenue driven primarily by lower services revenue, but this is a timing issue. Mgmt. expects an acceleration in 2H20 as carrier customers invest to improve their existing networks and as 5G starts to ramp – in particular w/  increased TMUS and DISH network activity. “Full rebound in overall industry activity on towers is taking a bit more time to materialize than we previously expected, we remain on track to generate at least 7% growth in AFFO per share this year.”

·         While they responded to Elliott regarding board structure and compensation, they did not disclose a significant change to their business model or capital allocation strategy.

·         Minimal COVID-19 impact.  Construction in small cells and fiber has continued. CCI is working closely with municipalities and state governments to facilitate small cell and fiber deployments. As a provider of critical telecommunications infrastructure that is considered essential to public health and safety, they have continued to construct and install customers on their infrastructure.

·         Customers continue to invest in their networks by deploying additional spectrum and new cell sites to keep pace with the 30% to 40% annual growth in data demand.

·         The company has limited exposure to SMB customers.

·         Site rental revenues +4%

o   Tower leasing (~2/3 of property revenue) – grew 3.2% YoY, poised to benefit from a re-acceleration in tower leasing activity in 2H20 as carriers ramp their 5G network investment and new T-Mobile begins to integrate its network following its merger completion on April 1.

o   Fiber solutions (~1/4 of property revenue) – grew 3% YoY – benefiting from bandwidth upgrades from large enterprises. SMB exposure appears minimal (5% of fiber solutions revenue).

o   Small cells business (~10% of property revenue) – grew 17% YoY

·         Strong balance sheet. No meaningful debt maturities until 2022. During the quarter raised $3.75 billion in senior unsecured notes across two separate offerings with a weighted average maturity and coupon of approximately 17 years and 2.8% to refinance existing debt.

·         Q2 dividend of $500m, +7% YoY

·         Trading at ~3.5% FFO yield and 2.8% dividend yield.

 

 

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]

 

Key takeaways:

 

·         Sales down 12%, better than expected thanks to resilient utility end-markets (50% of revenue)

·         Issued a $1B green bond at 1.95% and 2.25% rate, in efforts to improve sustainability and financing strategy

·         Full year guidance not reinstated as uncertainties remain

 

 

Current Price: $74                      Price Target: $81

Position Size: 2.46%                 Performance: +12% (since inception on 04/07/20)

 

Xylem reported total organic growth declining 12% in the quarter (better than the 20-20% decline initially predicted, in line with preannounced earnings a couple weeks ago) as the utility sector proved more resilient. As seen towards the end of Q1, China recovered, now in positive territory (+6% growth). Margins were impacted by the lower volume, which was partially offset by productivity improvements. Free cash flow grew as working capital improved y/y and capex was lower.

 

Organic growth by end-markets:

·         Utilities: -9%

·         Industrial: -16%

·         Commercial: -10%

·         Residential: -15%

 

Organic growth by regions:

·         US: -15%

·         Emerging markets: -15%

·         Western Europe: -4%

 

Some interesting tidbits from the quarter:

Wastewater utilities trends:

·         Increased emergency clogs from disposable wipes and more household waste (as people stay at home more)

·         Potential medium-term impact on utilities capex budget  from reduced revenue but more partnerships opportunities

Clean water utilities trends:

·         Large projects postpones but expect growth to recover as social distancing requirements ease

·         No cancellation of awards or projects in the bidding process but some delay in decisions

Industrial sector trends:

·         Limited access to visitors, causing slower orders

·         Modest recovery as activity resumes

 

Fundamentals accelerated by this crisis:

·         Need for essential water services & safety

·         Interest in digital adoption

·         Shift in the way Xylem works internally and with customers

This in turn has pushed XYL’s investments in remote monitoring, connectivity & interoperability and focus in high growth markets.

 

Looking forward, with a backlog up 10%, we have a good indication for 2021 and beyond. Regarding 3Q forecasts, revenue are expected between -8% and -12%, and a sequential margin improvement from 2Q but still lowered y/y.

 

 

 

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

 

 

Current price: $198         Target price: $210

Position size: 4.3%          TTM Performance: 7%

 

Key takeaways:

·         Visa reported slightly better than expected revenue and EPS.

·         Cross-border headwind until travel recovers: weak cross border volumes continue to be a headwind. Still down 44% in July as travel restrictions prevent higher volumes.

·         Sequential improvement in volumes: saw spending improve each month as most countries began to relax domestic restrictions.

·         Current environment could be secular growth catalyst: While cross-border will be headwind for the foreseeable future, current environment may be a catalyst to further displacement of cash aided by faster uptake of contactless and higher e-Commerce penetration.

 

Additional Highlights:

·         Net revenues in the fiscal third quarter were $4.8 billion, a decrease of 17% or 16% in constant dollars. All of the business drivers were significantly impacted by the pandemic – as payment volume was down 9.9% and cross border was down 37%.

·         Notably, total credit volume was down 20.4% (cc) while total debit volume increased 2.7% (cc). 

·         U.S. debit volume up 8% vs. credit down 21%, while international debit volume was down 2.7% vs. credit -19.9%. In the US, government assistance issued via Visa Prepaid cards added “several points” to debit in May and June.

·         In terms of geographic performance for payments volume, every region was down with the sharpest decline in Asia Pacific (-16.1%) follow by Canada (-15.2%),LAC (-12.6%), Europe (-10.2%), U.S. (-7%) and CEMEA (-5%).

·         Improvement in US volumes: “For the quarter U.S. payments volume declined 7%, a sharp decline from mid-April was followed by a V-shaped domestic spending recovery. Volumes declined 18% in April, before returning to positive territory in June. July volumes through the 21st are up 7%. This recovery was jump-started by the economic impact payments and enhanced unemployment benefits, helped along by pent-up demand fulfillment and accelerated by the relaxation of shelter in place requirements.”

·         Cross border ex. intra-Europe (-47%) was worse than overall cross border (-37%), as some level of intra-Europe travel is occurring. A key variable to improving net revenue growth is an improvement in this cross border ex. intra-Europe. This will likely be one of the last metrics to fully recover to pre-COVID levels. As boarders re-open there could be pent-up demand for travel, subject of course to any weakening in the macro environment. Mgmt. said that in corridors where restrictions have been relaxed, such as U.S. to Mexico & Caribbean or Switzerland to Germany & France, cross-border volumes have recovered quickly.

·         Cross-border e-commerce continues to grow – while overall cross-border volumes are down, transactions have done better. This is the result of a mix shift from higher ticket travel expenses like hotels to lower ticket e-commerce purchases. Growth in cross border e-commerce spend ex-travel has been up high-teens to low-twenties since mid-April.

·         Continued move away from cash – “card not present” spend ex-travel grew 25% every week since mid-April which is 2x the pre-COVID growth rate. There is still $18 trillion transacted in cash and check globally.

·         Card present spending improved steadily through the quarter as re-openings went into effect from declining almost 50% in early April to declining in the high single-digits by late June, but there has been little improvement since.

·         Spending impact by category, each are ~1/3 of US spending volume:

o   Covid beneficiaries (i.e. food and drug stores, home improvement and retail goods) – These categories have consistently grown at or above their pre-COVID growth rates in the high teens or even higher every week since mid-April.

o   Modestly hit categories – This group includes categories that experienced spend declines between 10% to 50% in April and had all recovered to growth by the end of June. These segments include automotive, retail services, department and apparel stores, health care, education, government and business supplies.

o   Hardest hit categories – These categories declined over 50% in April and are still declining year-over-year, although, each improved by between 20 to 45 points during the quarter. This group includes travel, entertainment, fuel and restaurants. Travel remains the most impacted category still down over 50%. Fuel gallons purchased are growing again, but spend is down more than 15% in July driven by lower prices.

·         Continued growth in new flows (i.e. P2P, B2B, G2C): Key growth area which they identify as a $185T opportunity.  In the US, Visa Direct was up over 75% this quarter due to strong growth in a variety of use cases ranging from P2P, to insurance payouts, to payroll. In P2P Visa announced a global partnership with PayPal including its Venmo, Braintree, Zoom, iZettle and Hyperwallet brands. This is an extension of a long-standing regional partnership with PayPal. Visa reported US P2P up 80%. In G2C the U.S. Treasury distributed nearly four million economic impact payments via Visa prepaid cards.

·         Capital allocation: Buyback plans and their dividend policy remain unchanged. In Q3 they returned ~$1.5B to shareholders through dividends and buybacks.

·         Valuation: trading at a ~3.5% FCF yield on 2021 vs S&P ~3.9%….reasonable for a company w/ high moat, powerful  brand, vast global acceptance network and LT secular growth – despite near term headwinds.

 

 

 

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

 

$V.US

[category earnings]

[tag V]

 

Key Takeaways:

 

·         Sales and margins decreased were better than feared, thanks to recurring revenue base, resilient retail fueling business in North America (+MSD growth) and good performance at the recently acquired ASP business

·         Strategy of targeting recurring revenue base is proving its value: now 35% of revenue base is providing some stability

·         3Q sales guided to 5-8% decrease, and ~35% decremental margins

·         Vontier spin-off on hold until market conditions improve

 

Current Price: $71                Price Target: $78

Position Size: 2.14%            1-year performance: -7%

 

Fortive released its 1Q20 earnings last night, with core sales contraction of -16%, higher than the 20-25% decline projected by management in Q1. Decremental margin of 33% was also better (company was guiding to 35-40%) as sales exceeded plans and costs cutting action. Free cash flow has been resilient too, thanks to working capital management (+93% increase y/y). The company noted that their ASP elective surgeries business was back to 90% of pre-COVID levels in China, ~85% in Western Europe and ~85-90% in North America, and they had a great opportunity with the N95 respirator reprocessing. Matco (automotive hand tools) saw a direct impact from the stay-at-home orders but a bounce back once local economies reopened towards the end of the quarter. GVR (retail fueling business) was impacted by COVID (social distance requirement and lack of access to customer sites). This segment did well in the US and better than expected in W. Europe but saw significant pressure in India (lockdowns in place). On the positive side, bookings are up mid-single-digits in 1H2020, a good sign of upcoming sales if lockdowns lift near term. In its comments, the management team remains cautious on the 2020 outlook as the US sees increased COVID cases.

Overall, Fortive printed good results with margins impacted less than expected. Its strategy to acquire businesses with recurring revenues is showing its value by providing some revenue stability.

 

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

 

 

Current price: $635         Price target: $660

Position size: 3.7%          TTM Performance: 25%

 

 

Key Takeaways:

·         SHW reported better than expected revenues and EPS and increased guidance. Sales down 5.6% in line with guidance. Estimated impact from COVID-19 on sales during the quarter was approximately -8%.

·         Big GM expansion (>300bps improvement), driven by strong volume, improved pricing, and lower raw material cost. Raw materials expected to be down mid-single-digit for the year compared to prior estimate of down LSD. Driven by lower resins and solvents.

·         Sequential improvement in demand across all end markets. Industrial end markets remain the weakest.

·         DIY business is strong: Surge in DIY (up double digits) demand across all channels, especially Home Improvement retail. Should switch back to DIFM – contractors seeing increased bids, including increased demand for interior projects.

 

Additional Highlights:

·         Sequential improvement: sales were down by a mid-teens percentage in April, but came out of the quarter with June flat to last year.

·         DIY business growing at an “unprecedented pace” and was robust throughout the quarter. After DIY new residential, and residential repaint were the best performers in the quarter. Both recovered to deliver positive growth in June.

·         From a product perspective exterior paint is recovering faster than interior paint due to social distancing requirements. Exterior paint sales increased by mid-single digit percentage in the quarter.

·         Input costs were down MSD in 1H and expected to be down the same in 2H. This along w/ 2% pricing taken in the beginning of the year benefited margins. Raw materials costs are key as they represent ~80% of COGS for paint.

·         Multiple signs of health in residential end markets. Contractors are seeing requests for quotes in June above June 2019 levels. Spray equipment pump sales (a good indicator of future demand) were down mid-single digits in the quarter but recovered to finish strong in the month of June.

·         America’s Group:

o   Same store sales decreased 6.9%. Strong DIY growth (up double digits) offset by soft residential and commercial end markets.

o   Sales improved sequentially through the quarter, driven by recovery in new residential and residential repaint which both delivered positive growth in June.

o   Segment margin increased 160 basis points to 23.8%

o   Largest sales decrease in Eastern division, followed by Canadian, Midwestern, South Western and Southeastern divisions.

·         Consumer Brands Group:

o   Sales increased 22% driven by strong North American DIY demand throughout the quarter. Strong growth across entire retail channel. Solid growth in Europe; China and Australia soft.

o   Adjusted segment margin increased by 620bps. Margin improvement driven by volume leverage, lower input costs and good spending controls, as well as actions taken over the past year to improve international operating margins.

·         The Performance Coatings Group:

o   Sales decreased 16.5% (-3% impact from FX). Saw sequential improvement throughout the quarter. Packaging remained strong, up high-single-digits. Coil, Industrial Wood, General Industrial and Automotive Refinish demand negatively impacted by COVID-19 pandemic. Auto is tied to miles driven (auto refinish) and not car sales as they’re not exposed to OEM auto. General industrial weak but improving.

o   Sales decreased across all regions: low-single-digit declines in Asia, all other regions down by double-digit percentages.

o   Adjusted segment margin contracted by 190bps.

·         Guidance:

·         Sales: flat YoY (reflecting uncertainties of the timing and pace of improvement in the U.S. and global environments). By segment:

o   TAG: Flat to up low-single-digits (previously Flat to down mid-single-digits)

o   CBG: Up high-single-digits (previously +/- low single digits)

o   PCG: Down low to mid-single-digits (previously down high-single-digits to low-double-digits)

·         Adjusted earnings per share: $21.75-$23.25

·         Raw materials: down mid-single-digits (previously down low-single-digits)

·         Well positioned from a balance sheet and liquidity perspective. They have $239 million in cash and $2.5B of unused capacity under their revolving credit facilities. No big near term maturities.

·         Capital allocation: recently increased dividend by 19%, share repurchases on hold, reduced capex.

·         Decreased leverage ratio from 3.2x to 2.8x. No near term debt maturities until 2022 ($660m).

·         Reasonable valuation, trading at ~3.5% FCF yield.

 

 

 

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

 

$SHW.US

[category earnings]

[tag SHW]

 

As virus concerns create fears of a weakening dollar, investors flock to Gold, which has historically given a source of safety and positive returns during market volatility and drops. Yet, even with this recent spur in the value of Gold, we do not see Gold as a necessary investment in our portfolio due to:
1) Similar volatility to the S&P 500, yet lagging relative returns over the long-term;

2) No earnings growth;

3) Allocating to bonds provide better portfolio diversification, risk reduction, and a steady source of income;

4) No valuation method;

5) Low correlation between Gold and inflation over long run.

 

Case For Gold

                Gold has been an asset class that investors look towards as equity returns weaken and fears of a weakening dollar grow. Due to its close-to-zero correlation with other investment vehicles (equities, bonds, etc…) and historically strong returns during a bear market, Gold has been a way for investors to diversify their portfolio while achieving better than market returns during tough times. If bought and sold on the right dates Gold can even be a better performer than the S&P 500! Lastly, it is worth mentioning that monetary debasement fears have helped boost Gold’s growth, especially in recent times.

 

Case Against Gold

                While Gold provides diversification and strong returns during market uncertainty, and has seen an increase in value recently, we do not believe Gold is an asset class worth allocating to in our portfolio.

 

 

1) Similar volatility to the S&P 500, yet lagging returns over the long-term

2) No earnings growth

 

                A concern with allocating to Gold is its lack of financial data. Gold does not have any revenue or earnings to track and project, leaving no way of forecasting the type of growth Gold may have, and ultimately valuing the asset type. On the other hand, equities (stock in particular) do provide this type of analysis allowing us to build different modelling styles to further understand the asset class.

 

                When we look the daily 10-year volatility of Gold (Gold Spot price) against the S&P 500, we see how similar the numbers are (and how much more volatile Gold is compared to the Agg).

	Daily 10 Year Volatility – Annualized
S&P 500	17.52%
Gold	15.57%
Agg	3.42%

 

                And even though Gold has some periods of outperformance, over the long-term Gold drastically underperforms the S&P 500 (especially when accounting for inflation).

	YTD Return	3 Year Return	5 Year Return	10 Year Return	25 Year Return
S&P 500	1.27%	53.72%	75.92%	260.82%	1051.53%
Gold	28.81%	68.58%	64.95%	78.14%	410.20%
Gold (w/ inflation)	17.94%	45.02%	38.12%	37.19%	171.36%
Agg	7.33%	20.86%	24.71%	55.03%	316.22%

 

 

3) Allocating to bonds provide better portfolio diversification, risk reduction, and a steady source of income

 

                If minimizing risk is the concern of a portfolio, bonds provide better diversification to equities compared to Gold. In addition to this, fixed income provides a steady source of income, even when yields are on the rise and are underperforming equities.

 

Monthly 25 Year Correlation

 

Weekly 3 Year Correlation

 

 

4) No valuation method

 

               Gold does not pay a dividend, has no free cash flow, and has no true comparable assets, which makes the asset difficult to intrinsically value. The price and growth is highly dependent on the laws of supply and demand. For the value of Gold to grow, the “next” person needs to be willing to pay more for it than the “previous” person. This lack of fundamental analysis provides little direction as to when and for how long Gold should be allocated to.

 

5) Low correlation between Gold and inflation over long run

 

The debasement of the dollar has seemed to be a reason for large inflows to Gold in recent times, yet when we look at the correlation between inflation (ie. weakening dollar, increasing CPI) and Gold over a longer time horizon, we find close to no relationship (correlation value of 3.9% over a 20 year period). With such a low correlation, we would turn our attention to different investments that more directly protect against inflation (ie. TIPS).

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Key Takeaways:

 

·         Q2 organic sales -34% but still outperforming its end-markets (down 40%) and improving intra-quarter

·         Cash flow remains positive thanks to cost reductions, capex and working capital management

·         Liquidity is sufficient and we see no risks to trigger any debt covenants

·         M&A: acquired PRECO Electronics a leader in radar sensing solutions, as the company continues its push into autonomous vehicle/electrification trends

·         Q3 trend expected to see continued ramping up in auto production, although guidance is more conservative than industry forecast due to COVID-19 spikes in the US

 

Continue reading “Sensata 2Q20 earnings summary”

On 7/21, Schwab hosted their summer update for Q2 earnings of $.48.  Schwab reported solid core new asset growth of 5% as AUM reach $4.1t. Low interest rates remain a headwind with Net Interest Margin (NIM) falling to 1.53%.  Rising deposits have helped offset falling NIM.  Valuation remains attractive.

 

Despite lower interest rates, we remain optimistic that SCHW will continue to grow AUM significantly this year, leveraging its platform to drive ESP growth. 

 

Current Price: $ 34.98                     Price Target: $38 (down from $43)

Position Size:   1.6%                         Performance since initiation on 6/24/19: -9.0%

 

Q2 Highlights:

·         Total client assets rose to $4.1T, with core new asset growth of 5%. 

o   Client assets are up 11% YoY

o   Brokerage accounts up 18% YoY

o   Core asset growth should remain healthy into 2020 with TD Ameritrade acquisition ($1.2t in AUM) which is expected to close second half of this year.  Combined with core new growth of ~6% shows the potential growth in earnings power for SCHW as they lever their platform.

 

• Deposit growth of $24b up 8.6%
  • Schwab continues to increase deposits at a pace faster than AUM growth as market volatility causes clients to raise cash.
  • Investing $24b should increase revenue by $360, which represents a 15% increase in revenue, so these interest earning assets are significant.
• Net interest margin
  • Net Interest Margin (NIM) was 1.53% falling sharply from 2.14% in Q1, more than offsetting the growth in deposits as interest revenue fell 14%. 
  • NIM bottomed in 2013 at low 1.50%, and SCHW indicated that the floor this time might be 1.40%, so NIM will fall a bit from here.  Hopefully we have already seen the sharpest declines and interest income starts to stabilize.
• Advice and Funds
  • Schwab fee based advice solutions assets grew $263b up 2% YoY.
  • Schwab revenue from funds and ETFs rose $452m up 2%
  • Trading revenue fell 7%, but trading revenue has fallen to only 7% of income
• Profitability – industry leader
  • ROE 12% and 40% pre-tax profit margin
  • Expenses up only 8%, of which 6% are due to mergers
• Capital allocation
  • Schwab will look to issue a preferred stock issue as growth in balance sheet and acquisitions will require more capital.  Share buybacks are on hold.
  • Dividend yield of 2.07%
  • Valuation is attractive at 17x earnings.  Target price set at 20x.

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 will experience material AUM growth with USAA and TD Ameritrade mergers.  Expect SCHW to reduce costs and leverage platform.

 

Please let me know if you have any questions.

Thanks,

John

 

 

$SCHW.US

[category earnings ]

[tag SCHW]

 

 

 

 

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