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Key takeaways:

Current price: $115 Price target: $123

Position size: 2.30% 1-year performance: +1.5%

Pepsi reported +4.6% of organic revenue growth, helped by pricing +4% (although FX was -4%). What mattered today was the company’s 2019 guidance announcement. The company plans to return $8B to shareholders in 2019 through share repurchases and dividends. PEP expects organic top line to grow 4% (above consensus of +3.4%), and EPS of $5.50, which would be a 3% decline y/y as the company expects to reinvest for growth (more marketing spending) and incur some restructuring costs. It is pretty common to see an EPS “reset” lower as a new CEO takes the helm of a company. Thus there is no surprise there with a 3% decline in EPS this year. There is nothing completely different with newly appointed CEO Ramon Laguarta strategic vision. He has a desire to streamline Pepsi’s manufacturing and supply-chain footprint for better performance, becoming “leaner, more agile and less bureaucratic”. As costs rise, Pepsi is renewing its efforts to drive productivity gains and is targeting $1B in savings/year until 2023. Long term, Pepsi is hopeful to return to an algorithm of +4-6% organic growth, core operating margin expansion of 20-30bps and a high-single-digit core EPS growth starting in 2020. Continue reading “Pepsi 4Q18 earnings call”

Current Price: $48 Target Price: $54

Position size: 4.4% TTM Performance: 16%

CSCO reported very strong 2Q results. Sales and EPS were better than expected and guidance was ahead of consensus. They delivered revenue growth across all geographies and businesses, strong margins, double-digit EPS growth, and continued solid cash generation. Cisco is benefiting as their customers face an increasingly complex IT environment as they move to the cloud, deal with growing connectivity of users and devices, and changing security needs. Cisco’s evolving portfolio of products helps customers navigate this complexity by helping them simplify, automate, and secure their infrastructure. As a result, despite concerns of weakening IT spending, CSCO is seeing robust demand. Demand is solid enough that they haven’t seen any impact to their business from changes in the global macro-economic environment. The CEO said, “I would tell you that it certainly is one of the more complex macro geopolitical environments that I think we’ve seen in quite a while with all the different moving parts. But to be honest, from the first day of the quarter to the last day of the quarter, we saw zero difference. We saw very steady demand throughout the quarter.” They are in the early innings of evolving network architectures, so there is a lot of runway to the growth they are seeing.

Thesis intact, key takeaways:

· Top line growth was ~7%. Q3 sales expected to be up 4-6%, street was expecting +3%.

· Impact of the 10% tariff was immaterial in the quarter. They were able to offset with pricing.

· Transition to recurring revenue model. The percentage of recurring revenue is now ~1/3 – they set a goal of 37% by 2020. They are on track to drive software revenue to 30% of total revenue by FY20. Subscription revenue was 65% of total software revenue, up from 57% last quarter. This transition will drive an upward trend in CSCO’s margins over the next several years.

· Their largest segment, Infrastructure Platforms (58% of revenue), was up +6% YoY on another quarter of campus switching strength, driven by solid demand for their Catalyst 9k products. Routing declined due to weakness in service provider end markets. They also saw a decline in data center servers.

· In terms of customer segments, enterprise was up 11%, commercial grew 7%, public sector was up 18%, and service provider was down 1%.

Valuation:

· They have close to 3% dividend yield which is easily covered by their FCF. Dividend increased 6% and added $15B to buyback authorization, bringing the total to $24B, or over 10% of their current market cap.

· They have $15B in net cash. In the quarter they returned $6.5B to shareholders – $1.5B in dividends and $5B in buybacks.

· Forward FCF yield is almost 7%, well above sector average 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

www.crestwoodadvisors.com

PLEASE NOTE!

We moved! Please note our new location above!

Share price: $78 Target price: $96

Position size: 2.5% 1 yr return: -11%

Hilton beat on revenue and EPS. 2019 EPS and EBITDA guidance better than expected despite lowered RevPAR guidance range from 2-4% to 1-3%. This new lowered RevPAR guidance was largely expected and is in line with other hotel operators. EBITDA was $544m, ahead of guidance and consensus. RevPAR for 4Q was +2% driven entirely by higher rates. Q1 guidance also ahead of expectations. While RevPAR guidance is weakening, Hilton is structurally different than it was last cycle – asset light means less operating leverage and less volatile earnings stream if RevPAR continues to weaken. Moreover, unit growth will aid EBITDA growth regardless of RevPAR trends. (RevPAR = revenue per available room. It’s their total room revenue divided by their total number of rooms).

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Key takeaways:

· Their weakest areas of demand were leisure travelers in the US and Asia Pacific.

· Group business is solid – 2019 group bookings up in the mid-single-digits and corporate negotiated rates up just over 2%; slightly ahead of last year’s growth. More than 70% is already on the books.

· On 2% RevPAR growth in 4Q, they grew EBITDA 12%.

· Net unit growth – In 2018 they opened more than one hotel per day – the best year of openings in their history. They added over 450 hotels (+57K rooms) or approximately 7% growth YoY. They ended 2018 with 5,700 properties and 913K rooms (~5% global room share) across 113 countries.

· Strong pipeline for 2019 – record year for construction starts and signings. They are expecting to grow rooms 6-7% in 2019. 80% of that is under construction. >50% of pipeline is outside of the US.

· Launched new luxury brand, LX. The first hotel opening under this banner is in Dubai and is a conversion from a contract Marriott lost last year.

· Loyalty members hit 85m and account for 60% of system-wide occupancy. Goal is to have 100m members by the end of the year.

· China RevPAR was weaker than expected at +5% – it had been trending up double digits. They echoed other companies in saying that the macro environment in China is weakening. Despite that, management had a very positive tone about the future of their operations in China.

· Conversions (an existing hotel changes their banner to Hilton) increased from 20% of pipeline to 25%. This can be a little counter-cyclical. It peaked as a % of their pipeline in the recession in low 40% range. They are starting to see a ramp in conversions in China.

· Returned $1.9B to shareholders in 2018.

· The stock is undervalued, trading at over an 8% FCF yield on 2019.

Investment Thesis:

∙ Hotel operator and franchiser with geographic and chain scale diversity of 14 brands, 5,400 hotels and 880k rooms across 106 countries (Hilton, Hampton Inn & Hilton Garden Inn ≈ 2/3 of portfolio).

∙ Network effect moat of leading hotel brand and global scale lead to room revenue premiums and lower distribution costs.

∙ Shift from hotel ownership to franchising results in resilient, asset-light, fee-based model.

∙ Record pipeline generating substantial returns on minimal capital will lead to increasing ROIC and a higher multiple.

∙ Unit growth and fee based model reduce cyclicality – Lower operating leverage vs ownership reduces earnings volatility and unit growth offsets potential room rate weakness.

∙ Generating significant cash which is returned to shareholders through dividends and buybacks.

$HLT.US

[tag HLT]

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

Key Takeaways:

Current Price: $76 Price Target: $87 (under review)

Position Size: 2.19% 1-year performance: +7%

Fortive released 4Q18 results with sales up 7.4% organically (+11.4% reported), and adjusted EPS up 30% from last year (helped by lower interest expenses and lower tax rate). While China was highlighted as strong in 4Q18, the company did warn that there was some early buying that pulled forward some sales (70-100bps of growth) as companies were buying ahead of possible tariffs. Management thinks North America will remain solid in 2019, while Western Europe and China could experience some slowing down. Those assumptions are driving the 3% core top line growth guidance for 2019, and the high end of 5% assumes there is no slow down. Operating margins increased 40bps (excluding the recent acquisitions dilutive effect), helped by 80bps price increases. During the call, the company highlighted accelerating their portfolio transformation towards less cyclical markets and more secular growth drivers, also increasing in the recurring revenue base. This is part of our buy thesis on the name and reassuring to hear the transformation is going in the right direction. Continue reading “Fortive 4Q18 earnings summary”

Key Takeaways:

Current Price: $42.5 Price Target: $51

Position Size: 1.65% 1-year Performance: +7%

Sanofi reported 4Q18 sales results containing no surprises, with sales up 3.9% and EPS +4.7%. Flu vaccines was a growth driver this past quarter, while the diabetes franchise remained weak. The divestiture of Zentiva, its European generic business as well as growth of Dupixent will boost margins going forward. The Dupixent sales increased thanks to advertising and the recent US launch in asthma (the drug is approved for severe form of eczema and asthma). Sanofi new R&D chief is pruning the portfolio to focus on better prospects, accelerating research on 17 programs while discontinuing 25 others. The firm is putting cancer treatment on its priority list, and removing diabetes from it, which had been a major growth driver for the company in the past (with drug Lantus). In addition, the company is refocusing its segments in order to “unlock organizational efficiencies”… we have heard that from other companies in the past, and we remain unconvinced about the value of such reorganizational efforts. But on the positive side, Sanofi’s dividend yield is now an attractive 4.2%, which offers good support to the stock. Continue reading “Sanofi 4Q18 earnings summary”