HILIX – Q3 2019 Commentary
Overview:
The Hartford International Value Fund performed in line with its benchmark during the quarter, but underperformed YTD. Slow global growth, geopolitical tensions, and monetary stimulus by central banks are key factors that have led to negative returns during the quarter.
Key Takeaways:
Current Price: $111 Price Target: $115
Position Size: 3.35% TTM Performance: +23%
Medtronic released their 2Q FY20 results this morning, with organic revenue growth of +4.1%, a +20bps adjusted operating margin expansion and +7.4% adjusted EPS growth. During the call, the management team gave an early view on 2020, raising growth at three of their largest divisions. More disappointing was the Diabetes segment guidance of low single-digit growth representing a 500bps cut to sales growth (now 1-3%) as competitive pressure intensifies in the US. On the positive side, they are expecting their new pacemaker to be approved in 2021. The TAVR segment performed extremely well this quarter with 20% global growth and mid-20% US growth (check this video to understand what this is: https://mendedhearts.org/video/tavr-procedure-video/ ). Medtronic’s competitor Edwards Lifesciences recently released earnings that showed similar high growth, which we find reassuring regarding this market’s potential. MDT’s CEO is set to retire and Geoffrey Martha will take on the helm of the company in April 2020. The new CEO is looking to be more aggressive in small M&A and allocating capital to higher growth segments. Overall this was a good quarter but we see limited near-term upside in the stock, waiting for new products in the pipeline to lift sales up further. Medtronic is such a well-diversified company that overall growth can be somewhat toned-down in a sector that has done well in the last years.
Updated FY20 guidance:
Organic revenue growth +/- 4% (unchanged)
Operating margin ex-FX +40bps
EPS increased to $5.57-$5.63 from $5.54-$5.60
MDT Thesis:
· Stands to benefit from secular trends (1) increased utilization from Obamacare (2) developed populations age
· Strong balance sheet and cash flows. Increased access to non-cash should allow MDT to meaningfully increase their dividend
· 6% normalized Real Cash yield provides solid total return profile over next 2-3 years
· Ownership interest aligned. Management incentivized to maximize shareholder returns – 14% 10yr average ROIC
[tag MDT]
$MDT.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
DBLTX – Q3 2019 Commentary
Overview:
The DoubleLine Total Return Bond Fund underperformed its benchmark during the quarter, as well as YTD. This underperformance was heavily driven by the shorter duration of the Fund compared to its benchmark, as we saw 2-year and 10-year rates decline 13bps and 34bps, respectively.
MWTIX – Q3 2019 Commentary
Overview:
The MetWest Total Return Bond Fund was approximately in line (slightly under) with its benchmark during the quarter, but has slightly outperformed during the year. The slight underperformance was heavily driven by the shorter duration positions during August, as well as the Treasury futures allocation. While falling rates and exceeding financial rates compared to yields created a lag for some of MWTIX’s holdings, other allocations in corporate credit brought positive returns.
TCPNX – Q3 2019 Commentary
Overview:
The Touchstone Impact Bond Fund slightly outperformed its benchmark during the quarter, yet underperformed YTD. This underperformance for the year has been heavily driven by the funds allocation to mortgages, including the funds’ underweight on agency single-family MBS, which underperformed agency multi-family MBS (fund is overweight here).
WATFX – Q3 2019 Commentary
Overview:
The Western Asset Core Bond Fund slightly outperformed its benchmark during the quarter, while outperforming at a greater scale YTD. This outperformance was heavily driven by the tactical duration positioning and yield curve positioning as rates moved lower and the yield curve began to flatten out during the quarter.
Current Price: $44 Target Price: $63
Position size: 3.7% TTM Performance: 1%
CSCO reported good Q1 results, but guided below expectations for next quarter. Revenue growth guided to -3% to -5% vs street +2.7% and adj. EPS guided to $0.75 to $0.77 vs street $0.79. The weakness was attributed to a weakening macro environment, not company-specific issues. Last quarter they said they saw early signs of macro weakness. They said the macro environment has continued to deteriorate and was broad-based across all end markets (except public sector) and geographies. While weakening business confidence and a resultant slowdown in enterprise spending would be a headwind for them, the secular drivers that Cisco stands to benefit from are very much intact. Long-term Cisco will benefit from a product refresh cycle that is ultimately driven by increasing data traffic. With rising data traffic, technologies are changing (5G, IoT, WiFi 6) and networks are becoming more complex – Cisco’s products help companies solve for that by helping them simplify, automate, and secure their infrastructure. Capital return program should limit downside – buying back shares and now >3% dividend yield that’s easily covered (helps provide a floor, especially w/ falling rates).
Thesis intact, key takeaways:
· Deteriorating macro conditions across every region and now expanding into the Commercial (SMB’s) and Enterprise verticals. Mgmt said commercial tends to be the most resilient and they saw broad based weakening with those customers across the globe. They pointed to weakening business confidence as a result of macro uncertainty due to trade wars, Brexit, Hong Kong, uncertainty in Latin America, upcoming US elections and potential impeachment.
· In terms of macro softening management talked specifically about smaller deal sizes and approval process across industries getting longer…a leading indicator of tightening corporate budgets.
· Infrastructure Platforms (largest segment, ~58% of revs) was down -1.4% YoY. Similar to last quarter, all the businesses were up except for routing from soft Service Provider (cable and telecomm companies) demand. Switching had growth in both campus and data center with the continued ramp of the Catalyst 9000 and strength of the Nexus 9000 (both sold w/ 3-5yr software agreements). Management commented that the campus refresh cycle continues to be strong.
· Strong performance in Applications (+6% YoY) and Security (+22% YoY).
· Service revenue was up 4%, driven by software and solution support.
· Gross margins and op margins better than expected, in part benefitting from the positive impact of rising software mix.
· By end markets, Public sector order metrics remained strong (+6% YoY) while enterprise and commercial were each down 5%, and service provider was down 13%.
· By geography, Americas and EMEA were each down 3% and APJC was down 5%. Total emerging markets were down 13% with the BRICS plus Mexico down 26%. China is <3% of sales, revenue was down 31% in Q1 (was down 25% last quarter).
· Product mix continues to improve with more software/subscription. By year end, they target 50% of their revenue to be from software and services – a target which they reiterated they will hit. Subscription revenue was 71% of total software revenue, up 12pts YoY and 5 points sequentially. This transition will drive an upward trend in CSCO’s margins over the next several years.
Valuation:
· They have a >3% dividend yield which is easily covered by their FCF.
· Capital allocation strategy of returning a minimum of 50% of their FCF to shareholders annually through share repurchases and dividends. Their annual dividend is $6B.
· Forward FCF yield is ~7.5%, and is supported by an increasingly stable recurring revenue business model and rising FCF margins.
· The company trades on a hardware multiple, but the multiple should expand as they keep evolving to a software, recurring revenue model. Hardware trades on a lower multiple because it is lower margin, more cyclical and more capital intensive.
Thesis on Cisco:
· Industry leader in strong secular growth markets: video usage, virtualization and internet traffic.
· Cisco is the leader in enterprise switching and service provider routing and one of the few vendors that can offer end-to-end networking solutions.
· Significant net cash position and strong cash generation provide substantial resources for CSCO to develop and/or acquire new technology in high-growth markets and also return capital to shareholders.
· Cisco has taken significant steps to restructure the business which has helped reaccelerate growth and stabilize margins.
$CSCO.US
[tag CSCO]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
PLEASE NOTE!
We moved! Please note our new location above!
On 11/2/19, Berkshire Hathaway (BRK/A, BRK/B) reported Q3 earnings increase of 3.9% to $8.5b with strength in Insurance and Railroads. Sales increased 2.4% year over year. Berkshire’s collection of insurance companies and investments is unmatched and generates ~$8.8b in cash a quarter.
Current Price: $220 Price Target: $240 (raised from $225)
Position Size: 3.3% TTM Performance: 0.8%
Thesis Intact. Key takeaways from the quarter:
The Thesis on BRKB:
Thanks,
John
$BRK/B.US
[tag BRK/B]
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
Disney is up after revealing that, since launching Disney+ yesterday, they already have 10m subscribers. This is far better than people expected…and positive news after the glitches the site has been reportedly suffering. Management said the technical issues were due to demand far exceeding their highest estimates.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$DIS.US
[tag DIS]
Share price: $137 Target price: $165
Position size: 2% 1 yr. return: 20%
Disney reported strong Q4 results. Revenue was in-line and they beat on EPS $1.07 vs street $0.95. Reiterated the guidance of DTC for Disney+, Hulu and ESPN+ that was given at the April Investor Day. They also had positive commentary around early results of Disney+ in the Netherlands and have announced new partnerships w/ Amazon Fire, Samsung and LG for streaming Disney+.
Key takeaways:
· Better than expected op income driven mostly by Parks (includes consumer products) and Studio. Studio performance driven by Lion King, Toy Story 4, and Aladdin.
· Better consumer products op income was due to growth in merchandise licensing w/ Frozen and Toy Story merchandise. Better parks op income was driven by their strategy of managing yield (i.e. dynamic pricing) to drive greater profitability. Domestic park attendance was comparable to Q4 last year, and reflects the impact of Hurricane Dorian, which adversely impacted attendance growth by about 1%. Per capita guest spending was up 5% on higher admissions, merchandise and food and beverage spending. So far this quarter, domestic resort reservations were flat YoY. Mgmt says guests are deferring visits to Disney Land and Walt Disney World until the complete opening of Galaxy’s Edge at those respective locations. While int’l parks are being negatively impacted by Hong Kong protests, it was offset by growth in Paris and Shanghai parks.
· Expectations for Disney+, which launches next week, are increasing given new partnerships, better visibility into robust slate of exclusive content, earlier than expected launch in Western Europe and positive commentary around testing in the Netherlands.
· Launch next week is in US, Canada and Netherlands, then Australia and New Zealand the following week and Western Europe in March.
· The new Star Wars series, The Mandalorian, which will be available at launch and exclusive to Disney+ is being heavily hyped after early screening of the first episode. Link to Mandalorian trailer: https://www.youtube.com/watch?v=XmI7WKrAtqs
· Disney+ distribution partners include: Apple, Amazon, Roku, Samsung, Google, Microsoft, Sony, LG.
· Media networks – cable subs down 4% YoY, driven by cord-cutting and in line w/ peers. ESPN+ now has >3.5m subs – up almost 50% QoQ. Hulu now at 28.5m subs and mgmt. announced that FX network will now be exclusive to Hulu for streaming. Additionally, FX will produce new original series exclusively for Hulu, starting with 4 new series in 2020.
Investment Thesis:
$DIS.US
[tag DIS]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
