Research Blog – INTERNAL USE ONLY

Selling MMM, Adding to SHW #researchtrades

We are recommending the following changed to our Focused Equity portfolio:

Selling MMM, putting proceeds to bring SHW to 3% weight, and remaining proceed to IVV.

Sell MMM thesis:

We reviewed the original buy thesis following last week’s earnings release.

1. The original thesis is broken:

a. “diversified industrial revenue stream”: resilient segments did not offset larger decline in more cyclical segments

b. “margin expansion from scale and international expansion”: most segments saw a margin contraction as a result of delayed reaction by the company to end markets softness

c. “ROIC strength”: decline forecasted

d. “good capital allocator”: debt has funded a lot of the EPS growth, while cash flow from operations set to decline

2. Even after a big pull-back the stock is not cheap (both on P/E and DCF)

3. At this stage of the cycle, being patient with this name is risky (we see more slow down possible in revenue + restructuring story might not be enough)

Buying to SHW 3%:

  1. They can take price to offset raw material inflation. Not owning SHW when oil price was going up would have been a mistake.
  2. Tailwinds in key housing end market. Factors driving residential paint market:

a) Housing turnover should improve as mortgage rates are back below average rate of outstanding mortgages. This reduces the mortgage rate lock-in effect that weighed on the housing market last year.

b) Aging housing stock – by 2020 54% of the housing stock will be >40 years old.

c) Aging in place – Baby boomers, over the last couple years, have accounted for about 50% of the remodeling spend

d) Housing starts should increase. Rate of new home construction has been unsustainably low given continued strength in household formation. Historically housing starts run at ~1.3x HH formation to make up for housing units that are taken out of stock (natural disaster or demolition). Over the past 4 yrs. housing starts have run in-line with household formations.

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

Alphabet Q1 Results – Stock down on revenue miss

Alphabet is down pre-market – they reported earnings, missing on the top line and beating on EPS. This is a quick summary – I will follow up with more details. Management attributed the revenue miss primarily to Fx and also the timing of some ad product changes. Revenue was $36.3B vs. consensus of $37.3B, up 19% constant currency (17% reported) – that’s a deceleration from 23% in 4Q18. Excluding the impact of the EU fine EPS was $10.81, better than consensus of $10.53.

$GOOGL.US

[tag GOOGL]

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

Colgate 1Q19 earnings results

Key Takeaways:

Current price: $71 Price target: $77 (NEW)

Position size: 1.8% 1 year performance: +7%

Colgate surprised to the upside with organic sales growth of 3% (the highest in the past 9 quarters), driven by improvement in North America, while China remained weak. The management team expects China to improve in 2H. Colgate is still losing market share globally but on the positive side, their Total brand gained back some shares in the US after its relaunch in February. EBIT margins contracted 180bps (raw material costs inflation was partially offset by cost savings and pricing; but negatively impacted by a rise in advertising). Advertising spend will remain ~11% of sales in 2019, an increase vs. last year, but necessary to relaunch its brands. We are increasing our price target after updating our model. Continue reading “Colgate 1Q19 earnings results”

Lazard International Strategic – Q1 2019 Commentary

LISIX – Q1 2019 Commentary

The Lazard International Strategic Equity Fund outperformed the MSCIA EAFE Index in the first quarter by 150 bps driven by stock selection across most sectors. While political issues such as Brexit and trade can cause some market uncertainty, the team believes that market growth can be maintained given a more lax outlook in global monetary policy.

Market Overview:

– International equities rebounded strongly in the first quarter after weak end to 2018

o This was buoyed mostly by confirmation of the dramatic reversal in tone from the Fed

– Some signs of progress in US/China trade talks were also helpful

o Accompanied by early signs of stability in China after a variety of government stimulus

– With a combination of easing economic fears, and potential peak in rates, gains were broad based as both cyclical areas such as materials and more stable operations

– Technology sector saw jumps in both the cyclical semiconductor space and in long duration growth stocks

o Financials lagged, however, dogged by poor results, Scandinavian money laundering scandal and falling rate expectations

Performance Overview:

– Lazard International Strategic Equity portfolio outperformed the MSCI EAFE Index in the quarter

o Driven by stock selection across a number of sectors, mostly stemming from encouraging earnings reports

– In the industrials sectors, lock maker Assa Abloy and pilot training company CAE all showed good progress

o Chinese commerce giant Alibaba reported reassuring numbers, as did both Chinese insurer Ping An and its bank subsidiary

o Media stock Vivendi saw strong sales and rising bid speculation for its music business

– On the negative side, Spanish utility Red Electra was hurt by political uncertainty and a surprising satellite acquisition

– Japanese real estate company Daiwa House succumbed to sector weakness

– In the Philippines, conglomerate GT Capital is still seeing pressure on sales and margins at its Toyota auto business

Market Outlook:

– On the macro side, China is showing some signs of stabilization from its credit and sentiment slowdown, though Europe slowed further

– U.S. economic data was mixed with the labor market strong but forward looking indicators slowing

o Rising rates and cooling global growth started to bite

– Company reports have focused on weakening economy and cost pressures in many markets

– China has announced a variety of small stimulus measures, but the major change of tone came from the Fed, who went from increasing rates to possible decreasing

o The extent of this change was surprising given the amount of debt that has continued to pile up on public and private balance sheets

– Political issues such as Brexit and the trade war remain concerns but the market appears prepared to shrug off slowing growth again as monetary policy headwinds fade

– Overall, the team remains confident that by focusing on stock selection of sustainably high growth the long term track record can maintain

Performance Review:

[Mutual Fund Commentary}

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Baron Emerging Markets – Q1 2019 Commentary

BEXIX – Q1 2019 Commentary

The Baron Emerging Markets Equity Fund outperformed its benchmark during the quarter as EM equities bounced back to start the year. Many of the most impaired names recovered and Baron had incremental gains in all but two equity sectors. Baron believes that China will continue to surprise on the upside in 2019 helping drive broad EM performance.

Continue reading “Baron Emerging Markets – Q1 2019 Commentary”

Visa 2Q – Beat and slight FY EPS raise

Current Price: $160 Price Target: Raising to $185 from $160

Position Size: 3.8% TTM Performance: 32%

Visa continued to perform well in the second quarter with better than expected revenue and EPS. Net revenues were up 9% (constant currency), dampened by higher client incentives. EPS was $1.31 vs consensus $1.24. They reaffirmed full-year 2019 net revenue growth of "low double-digits" on nominal basis and slightly increased adjusted EPS growth to "high-end of mid-teens," from "mid-teens.” Slight weakness in the quarter was that volume growth decelerated from 11% to 8%. Mgmt said volume growth was impacted by fewer processing days in the quarter and timing of Easter. Processed transactions continued to see double-digit growth. Last quarter they expressed concerns around weakening non-US macro trends and cross border transactions, but this quarter they struck a more positive tone, indicating that cross border had stabilized. Cross border accounts for ~27% of gross revenue and is higher yield. In the first few weeks of Q3, payment vols have accelerated, especially in the US.

Continue reading “Visa 2Q – Beat and slight FY EPS raise”

SYK 1Q19 earnings summary

Key Takeaways:

Current Price: $185 Price target: $201 NEW ($198 OLD)

Position size: 3.62% 1-year Performance: +12%

Stryker released results with organic sales up +7.3%. This quarter operating margin improved 10bps (including a 50bps negative impact from acquisition). Its Mako robot will see some competition in the near future as peer Zimmer is launching its own knee replacement robot (Rosa), but so far the order book remains strong for SYK, with 55% of the placements in accounts taken from competitors. A total of 35 robots were placed globally (27 in the US). Regarding the recent K2M acquisition, the combined sales organization is now in place, which will allow a revenue ramp up as the year progresses. We are raising our price target slightly to account for a continued good growth in the business.

Segments revenue growth:

· Orthopedics organic revenue growth of 5% was driven by 6.4% international growth and 6.6% growth in Knees which benefited from strong Mako TKA demand and strength in cementless

· MedSurg organic revenue growth of 8.9%, led by 17.5% U.S. Instruments growth and 7.5% Endoscopy growth (NOVADAQ and Sports Medicine). The Medical division grew 9.2% organically in the US, reflecting solid performance in the bed, stretcher, and Sage businesses

· Neurotech & Spine organic growth of 7.8%

2019 Guidance update:

Organic sales increased on the low end from 6.5-7.5% to 6.8%-7.5%

30-50bps EBIT margin improvement reiterated

Adjusted EPS raised on the low end from $8.00-$8.20 to $8.05-$8.20

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

[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