Key Takeaways:
· Slow-down in all geographies due to COVID-19, but China recovering
· Margins held well due to restructuring actions (not likely to continue in Q2 with large drop in sales expected)
· Vontier IPO on hold until market conditions improve
· Guidance for the year removed
Key Takeaways:
· While sales growth was as expected in the early part of the quarter, the business was impacted by the COVID-19 crisis in March 2020
· Last week of March, sales were down 30%
· Expect a recovery in China in Q2 while other countries will get worse in early Q2, before recovery takes place in US and abroad
· Forecast a sales decline in April of 35-40%
Current Price: $186 Price target: $232 (NEW)
Position size: 2.63% 1-year Performance: -1%
Stryker released their 1Q20 results with organic sales up +2.4%, operating margins declined 110bps and EPS -2%. While only a few months ago Stryker was not seeing any impact from COVID-19 on its business, things have turned quite the opposite way towards the end of the quarter with global delays in elective surgeries. SYK withdrew its guidance for the year due to the uncertain scope and timing of COVID-19 and return to “normal”. About 40-50% of SYK’s revenue base includes procedures that are elective or can be deferred for some time. The stay-at-home orders have also caused a reduction in its trauma segment (reduction in construction and reduced activities). 15% of sales are “capital equipment” that have seen an increase in demand (you have probably seen the Stryker beds in the news covering the crisis in hospitals). In response to the drop in sales, SYK is lowering expenses by reducing travel, furloughing employees if/when needed. During the call, the management team noted that their sales people are doing well engaging virtually with doctors (for training purposes for example), and this could become a new normal. The price target is reduced to $232 to reflect 2020 lower numbers. Overall we still believe SYK will do well in the long-term as demand recovers, and remain positive on the stock.
SYK Thesis:
$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
Key Takeaways:
· Revenue up 17%, operating profits up 31% from mix and manufacturing/procurement efficiencies
· Rapidly pivoted their business to produce more ventilators (life-support and non-invasive)
· SaaS growth of 12%
· Dividends maintained
Current price: $155 Price target: $168
Position size: 3.77% 1-year performance: +49%
Resmed reported sales and profit results above expectations, helped in part by the increased demand for ventilators. Results were good worldwide: the US/Canada/Latam saw a 12% growth, Europe/Asia/Row grew 27%, and SaaS +12%. Profits increased thanks to mix and operational efficiencies. The company highlighted in its presentation its efforts to help with the COVID-19 crisis, seeking a fair and ethical allocation of products globally, as well as transitioning its production lines to support the need for ventilators:
o ventilators production tripled to meet demand
o ventilation masks up 10x
The management team believe this crisis will accelerate the need to monitor patients remotely (a big part of RMD’s growth strategy prior to the virus pandemic). See the chart below on how they are offering digital health solutions:
Thesis on RMD:
$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
Key takeaways:
· MSFT beat across all segments. Total revenue growth accelerated to +16% on a constant currency basis vs +15% the past two quarters.
· COVID-19 had minimal net impact on total revenues as strength in some areas offset weakness in others. Cloud strength was a key theme.
· Guidance better than feared…high end of their guidance for Q4 was ahead of consensus. Assumes advertising spend levels from March do not improve in Q4, which will impact Search and LinkedIn.
· Satya Nadella said, “we’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security”…”There is both immediate surge demand, and systemic, structural changes across all of our solution areas that will define the way we live and work going forward.”
Additional Highlights:
· Cloud strength was a key theme. They saw increases in cloud usage, particularly in Microsoft 365/Teams, Azure, Windows Virtual Desktop, advanced security solutions and Power Platform. Azure sales were +61% constant currency. Gaming along with Windows OEM and Surface also benefitted from these trends, partially offset by supply chain constraints in China that began improving in March. Strength in cloud also slightly offset in the last few weeks of the quarter by a slowdown in transactional licensing especially in SMB and LinkedIn ad spending.
· Productivity & Business Processes segment and Intelligent Cloud segment were both ahead of the high end of their guidance. And for More Personal Computing –they had removed guidance in March related to potential impact to PC supply from Covid-19, but results ended up being within guidance.
· Productivity and Business Processes ($11.7B) +16% YoY:
o Strength across all products especially in Office 365 Commercial (up 27%), Dynamics 365 (up 49%) and LinkedIn (up 22%). Office 365 now has 258 million paid seats.
o Teams product is really shining for them right now. Teams now has more than 75 million daily active users. “We saw more than 200 million meeting participants in a single day this month.”
o Organizations are realizing they need a comprehensive solution and Teams is the only solution with meetings, calls, chat, collaboration and with the power of Office and business process workflows in a single integrated user experience with strong security.
o Teams is being used by New York state’s largest health provider to deliver telehealth. Teams powered the virtual NFL draft.
o 20 organizations with more than 100k employees are now using Teams, including Continental AG, Ernst & Young, Pfizer and SAP. Last week, Accenture became the first organization to surpass 500k users.
o Accelerating Teams innovation, adding new capabilities each week and now support meetings of all sizes, meetings that scale from 250 active participants to live events for up to 100,000 attendees to streaming broadcast.
o Teams is not just about having lots and lots of video meetings. Teams is about actually getting work done where meetings and video is one part. The utility of it will only increase as some people go back to working at the office.
o LinkedIn seeing record engagement. 690m professionals. Users watched nearly 4 million hours of content on LinkedIn Learning in March, ~50% increase month-over-month. However, significant reduction in advertising spend, which impacted LinkedIn (and search).
· Intelligent Cloud ($12.3B) +29% YoY:
o Server products and cloud services revenue increased 32% with Azure revenue growth of 61% driven by continued strong growth in their consumption-based business.
o With Azure they have more data center regions than any other cloud provider. This quarter, they announced new regions in Mexico and Spain.
o “Will continue to aggressively expand our cloud infrastructure to support not only the usage surges of today, but the growing customer demand for our unique and differentiated cloud offerings in the future.”
o Enterprise Services revenue increased 7%.
· More Personal Computing ($11B) +4% YoY:
o The supply chain in China returned to more normal operations at a faster pace than we had anticipated. And we saw increased demand from work, play and learn from home scenarios, benefiting Windows OEM, Surface, Office Consumer and Gaming.
o Windows OEM revenue was relatively unchanged year over year
o Windows Commercial products and cloud services revenue increased 18%
o Search advertising revenue excluding traffic acquisition costs increased 1%. In Search ex-TAC in Q4, they expect revenue to decline in the mid-20% range, similar to March.
o Xbox content and services revenue increased 2%. 19 million active users of Xbox Live. Seeing increased monetization of in-game content and services.
o Surface revenue increased 2%
· Commercial Cloud ($13.3B), +40% YoY
o Called out MasterCard, Autodesk, AARP and Coca Cola having signed 5 yr. multi-cloud agreements for Microsoft 365, Dynamics 365 and Azure.
o Gross margin percentage increased 4 points YoY to 67% on significant improvement in Azure gross margins.
o COVID-19 has accelerated the urgent need for every business to create no-code, low-code apps. This is small for them, but important in terms of strategic positioning and future growth. The Power Platform enables non-technical employees to analyze data and create apps/workflows without coding knowledge. For example, Power Platform was used to build a new applications in hours so that first-line workers could track PPE because there was no ERP system that did that.
Valuation:
· FCF was $13.7 billion, up 25%. They returned $10B to shareholders in share repurchases and dividends.
· Recurring revenue is ~60% of total, underpins most of their valuation and is resilient and poised for additional growth. Particularly Azure, Office 365 and Dynamics 365.
· Trading at ~3.5% FCF yield on next year.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$MSFT.US
[category earnings ]
[tag MSFT]
Key takeaways:
· Alphabet reported better than expected results. Revenues better than feared. Search ads saw the biggest fall off in the end of March while Cloud and YouTube fared better.
· Exiting the quarter, search was down mid-teen percent, network ads were down low-double digits, YouTube was growing high-single digits and Google cloud platform (AWS/Azure competitor) was growing “meaningfully higher” than 52%.
· Advertising declines weren’t as bad as some were expecting despite their mix of small-to-mid sized business and exposure to heavily hit industries like retail and travel. Facebook, which reports after the close should see a similar hit.
· No guidance, but 2Q “will be difficult” for their advertising business. They are guiding to spending cutbacks including slowing the pace of hiring. Though they increased hiring by 20% in 2019, so they could still see meaningful growth.
· Planning capex down in 2020 primarily driven by reduction in global office facility investments.
· CEO, Sundar Pichai, offered up some thoughts on what might be a lasting impact, “ultimately, we’ll see a long-term acceleration of movement from businesses to digital services, including increased online work, education, medicine, shopping and entertainment. These changes will be significant and lasting.”…” companies are thinking about their shift to digital in a deeper way.”
Additional Highlights:
· Total revenues were up 15% on a constant currency basis. Currency was a 2pt headwind.
· Search revenue ($24.5B) up 8.6%. Ended the month of March in mid-teens percentage decline YoY. Significant rise in search activity, but reduced spending by advertisers and shift in search away from commercial topics, limiting their ability to show ads.
· YouTube ad sales ($4B) were +33.5%, growing faster than search revenues. Ended the quarter w/ YoY growth rate up high-single-digits.
o YouTube watch time has also significantly increased, particularly live streams. Andrea Bocelli’s live stream on Easter had 39m views.
o YouTube brand advertising growth accelerated in the first two months of the quarter, but started to experience headwinds in the middle of March.
o Direct response ads continued to have substantial year-on-year growth throughout the entire quarter.
· Network ad revenues: $5.2B, +4% YoY, exited the quarter declining mid-double digits percent.
· Google cloud (GCP and G Suite): was $2.8B, +52%.
o Driven by significant growth at GCP and ongoing strong growth at G Suite. Growth rate at GCP was meaningfully higher than that of Cloud overall.
o Saw headcount increases.
o Some deals taking longer to complete.
o 100 million students and educators are using Google Classroom, doubled the number from the beginning of March.
o Meet: schools and businesses, in particular, are using their secure video conferencing platform, Meet. Twitter and Shopify also use Meet. Now adding roughly 3 million new users each day, seen a 30-fold increase since January, now over 100 million daily meeting participants. “Stay tuned for much more.” Announcements coming up later this week.
· Hardware saw a decline in device activations due to falling consumer demand globally. Just launched Pixel Buds 2.
· Downloads of apps from Google Play rose 30% from February to March.
· Massive increase in demand for Chromebook.
· Other bets – revenue primarily generated by fiber and verily. Operating loss increased to $1.1 billion.
· Margin contraction:
o Operating margin contracted 400bps.
o Driven by higher costs associated with depreciation, data centers, higher content acquisition costs for YouTube, headcount and a reserve for estimated credit deterioration as a result of COVID-19.
o Partially offset by lower TAC as a percent of ad revenue, 22.1% vs 22.4%. Reflects a favorable revenue mix shift from network to Google properties.
· Outlook: No specifics. Optimistic on the durability of their business for 2 major reasons:
o 2Q “will be difficult” for advertising
o advertising spending closely correlates with the overall health of the economy
o Cutting back on spending…slowing the pace of hiring. “Looking at levers we have to moderate spending.” Originally said 2020 headcount growth would be greater than the 20% growth in 2019.
o Originally planning an increase in capex this year, now expect modest decrease. Largely driven by lower real estate expense.
o Overall spend on tech infrastructure should be the same YoY. More spend on servers than on data center construction.
o They are seeing early signs that consumers returning to commercial behavior. Since the close of the quarter, management noted that they have not seen further deterioration in YoY declines for search, while YouTube direct response has remained strong while and YouTube brand advertising continued to decline.
o Given that many of the trends they are discussing were abrupt, and are from a few weeks of behavior they cautioned against extrapolating any of the trends.
· Q1 FCF was $5.4B and they ended the quarter with cash of $117B. They have ~11% of their market cap in net cash. The stock is still reasonably valued, trading at a ~4.5% FCF yield on 2021. They plan to maintain pace of share repurchases.
· In terms of recovery with ad spend…Pichai said, “recovery in ad spend will depend on a return to economic activity. There are two key aspects of our business that give us confidence about the future. First, as we saw after 2008, one of the strongest features of Search is that it can be adjusted quickly, so it’s relatively easier to turn off and then back on, and marketers see it as highly cost-effective and ROI based. Second, our business is more diversified than it was in 2008, for example, Cloud.”
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$GOOGL.US
[category earnings ]
[tag GOOGL]
Key Takeaways:
· Q1 saw large end-markets decline globally, with Sensata doing better thanks to content growth
· Q2 to be more challenging (already priced in the stock)
· China pointing to a recovery
· Could see people using more individual cars rather than public transportation due to COVID-19 change in habits
On 4/21, Travelers reported a solid Q1 EPS of $2.62, slightly lower than estimates due to higher than expected catastrophe losses. Travelers took an $86m pretax charge for Covid-19 which was a $0.27 drag on EPS. While some operations are seeing modest effect from the shutdowns, the full effect is still unknown. Balance sheet remains strong and Travelers continues to buy shares and raised its dividend.
We wanted to give some insights into REITs and the changing landscape within this asset class – which has gone from a focus in retail REITs to specialty REITs through this downturn. We wanted to point out that while REITs have been hit YTD, the asset class is not overvalued and pays a strong dividend. Additionally, by investing in funds such as TIREX (TIAA-CREF’s REIT Fund), we are able to take advantage of this changing landscape and produce excess returns through exposure to strong performing REIT sectors.
Please see the graphs (and notes) provided below and the Excel attachment. Within the Excel sheet, the first tab displays the shift in weights within the REIT Index (using VNQ). The second tab will show the historical returns and current yields of each REIT sector.
Specialized REITs have been a fast growing part of the REIT index and include the two top performing REIT sectors: Datacenters and Towers.
AFFO: Adjusted Funds From Operations – measure of financial performance of REITs
Key takeaways:
· Sales growth higher than expected in Q1 due to pantry loading – Q2 sales to be slightly negative
· Acquisition of Rockstar Energy Beverages closed, and entered exclusive distribution agreement of Bang Energy drinks – progressing on its efforts to capitalize on the rising demand for functional/energy drinks (high growth/high margins category)
· 2020 guidance withdrawn given COVID-19 uncertainties
· Dividends and share repurchases remain
Current price: $136 Price target: $153
Position size: 2.48% 1-year performance: +6%
Pepsi released their 1Q2020 earnings results this morning: +7.9% organic sales was above consensus of 3% (thanks to pantry loading) and EPS of $1.07 was roughly in line with consensus of $1.03. Profits were slightly better as well. Guidance for the year was withdrawn due to the virus impact being hard to measure. However the management team is expecting a low single digits decline in sales in 2Q: slower EM channels and weakness in immediate consumption channels (convenience stores/bars). The management team continues to expect large-format/e-commerce channels to benefit from recent trends, with a gradual improvement in convenience stores as people return to work. Regarding costs, labor, logistics and service costs are higher to meet consumer needs. To reduce the impact of these costs, the company is reducing discretionary and non-essential marketing expenses. As for liquidity, PEP has ample flexibility and plans to return cash to shareholder through dividends and continue share repurchases. Regarding its energy drinks strategy, PEP plans to accelerate Rockstar’s market share gains, improve Bang’s distribution and unlock potential at Mountain Dew that was previously limited by the Rockstar agreement.
Segment details:
Thesis on Pepsi:
Tag: PEP
category: earnings
$PEP.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
Last week, Schwab hosted their Spring Update to discuss reported Q4 earnings of $.62. Despite interest rate headwinds, asset growth was solid with healthy core asset growth of $73b (+7%). Deposits grew sharply +$58.7b up 21% as investors sold stocks and increased cash. Deposit levels grew mostly towards the end of the quarter and will support earnings moving forward. Valuation remains attractive.
ISI-REIT-Valuation-2.pdf
Real-Estate-Sector-Weights.xlsx