Research Blog – INTERNAL USE ONLY

WATFX – Q3 2021 Commentary

Western Asset Core Bond Fund Commentary – Q3 2021

Thesis

WATFX (currently yielding 1.69%) is an actively managed fund that finds overlooked areas of the market that can go against consensus views and add value. Through internal macro, credit, and fundamental research WATFX identifies undervalued securities and takes on more credit exposure to generate alpha over time. Through a diversified approach to interest rate duration, yield curve, sector allocation, and security selection, the fund dampens exposure to volatility.

 

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Overview

In the third quarter of 2021, WATFX outperformed the benchmark (Barclays U.S. AGG) by 11bps largely due to the fund’s longer duration and yield-curve positioning. Overall exposure to spread products have been a tailwind, while Treasury-based products acted as a headwind during the quarter.

 

Q3 2021 Summary

  • WATFX returned 0.16%, while the U.S. AGG returned 0.05%
  • Quarter-end effective duration for WATFX was 7.10 and 6.71 for the U.S. AGG
  • Extended duration, primarily in the intermediate part of the yield curve
  • Continued to trim TIPS exposure and began trimming agency MBS exposure
  • Reducing exposure to investment-grade and “plain vanilla” high-yield securities
  • Increasing exposure to high-yield sectors, residential and commercial structured products, bank loans, and EM debt

 

 

 

 

Outlook

  • We continue to hold this fund and believe in our thesis due to the fund’s diverse approach and strong top down-bottom up fundamental value investing over the long-term
  • Expecting continued strengthening in global GDP and higher inflation
  • Fed tightening could take longer than anticipated due to enormous economic slack, labor market scarring, and headwinds around debt and demographics
  • Expect central banks to remain extremely accommodative in the near future, and focusing on diversification will be paramount to strong performance

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[Category Mutual Fund Commentary]

 

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

 

MWTIX – Q3 2021 Commentary

MetWest Total Return Bond Fund Commentary – Q3 2021

Thesis

MWTIX (currently yielding 1.07%) is an actively managed fund that provides a sector-based strategy while still maintaining fundamental research driven through issue selection. When compared to the benchmark (Barclays U.S. AGG), the holdings have similar duration and exposure, yet selection is focused around areas where other managers are not looking. Through sector rotation and active weighting, we expect MWTIX to generate alpha over time.

 

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Overview

In the third quarter of 2021, MWTIX slightly outperformed the benchmark (Barclays U.S. AGG) by 7bps. Performance was largely driven by relatively beneficial positioning in corporate credit with a focus on higher yielding opportunities. An underweight to corporate credit, specifically Industrials, and an overweight to Financials contributed to overall performance. Securitized sectors were mostly flat, though non-agency MBS did provide a small tailwind to performance. Exposure to lower coupon securities and the fund’s duration positioning were the only headwinds for the quarter.

 

Q3 2021 Summary

  • MWTIX returned 0.13%, while the U.S. AGG returned 0.05%
  • Quarter-end effective duration for MWTIX was 6.29 and 6.71 for the U.S. AGG
  • The team has taken action to de-risk the portfolio by moving up the quality spectrum, reducing tight commodity-exposed names/sectors, swapping into shorter-dated issues, and enhancing liquidity

 

 

 

 

Outlook

  • We continue to hold this fund and believe in our thesis due to the fund’s defensive approach and minimal exposure to more vulnerable issuers and industries
  • Focus remains on sectors that offer stability during volatile markets and wider spreads
    • EM debt – possible opportunity based on cheaper entry points
    • Securitized – preference for MBS TBAs due to better yield
    • Legacy non-agency MBS – attractive from a collateral perspective
    • CMBS – opportunities in AA- and A-rated starting to present itself (similar to CLOs)
  • MWTIX has positioned itself defensively by maintaining a duration shorter than the index
  • Risks going forward: continued volatility, higher inflation, slowing growth, elevated leverage, change in course of COVID à spread decompression, tight valuations, increased volatility

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[Category Mutual Fund Commentary]

 

 

 

 

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

 

DBLTX – Q3 2021 Commentary

DoubleLine Total Return Bond Fund Commentary – Q3 2021

Thesis

DBLTX (currently yielding 3.19%) utilizes a top down-bottom up process that focuses on MBS and Agency bonds. When compared to the benchmark (Barclays U.S. AGG), the holdings have lower duration and exposure to corporate bonds, reducing their sensitivity to interest rate movements and credit spreads. We expect attractive risk-adjusted return characteristics over the long term from DBLTX, especially during periods when corporate bonds’ spread increase and the yield curve steepens.

 

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Overview

In the third quarter of 2021, DBLTX outperformed the benchmark (Barclays U.S. AGG) by 32bps, largely due to an overweight to credit. Exposure to non-Agency residential MBS and non-Agency CMBS also contributed to returns for the quarter. In general, every sector in the Fund acted as a tailwind to performance.

 

Q3 2021 Summary

  • DBLTX returned 0.37%, while the U.S. AGG returned 0.05%
  • Quarter-end effective duration for DBLTX was 4.05 and 6.71 for the U.S. AGG
  • The top two performers were non-Agency residential MBS and non-Agency CMBS
    • Agency MBS only slightly contributed to overall returns

 

 

 

 

 

Outlook

  • We continue to hold this fund due to the approach and strong diversification factor within our core bond holdings
  • DBLTX is a good position to hold due to its low duration which outperforms during periods of rising rates – Treasury yields were at all-time lows in 2020, but have flip-flopped in 2021
  • Historically, DBLTX has displayed stronger returns and lower volatility than the index
  • DBLTX has had consistent strategy, allocation focus, and sector distribution

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[Category Mutual Fund Commentary]

 

 

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

 

CSCO Q1 2022 Results

Current Price: $53                           Price Target: $62

Position size: 2.8%                          TTM Performance: +30%

 

Key Takeaways:

  • Broad based demand growth but seeing headwinds from supply chain delays and chip shortages – supply constraints will last at least through the first half of next year and are impacting their ability to convert historically high demand into revenue. This is expected to impact the timing of revenue…causing next Q revenue to be lower than expected, but full year revenue guidance maintained.
  • Taking price increases – a series of prices increases will offset impact to margins but at a lag. The increases won’t be felt for a couple quarters. Some ordering strength was likely driven by customers trying to get ahead of price increases.
  • Secular drivers ramping – they are benefiting from digital transformation w/ the ramping of associated key technology transitions (Wifi 6, 5G, 400 gig, edge) that are catalysts to companies modernizing their aging network infrastructure. They’ve been investing behind these big market transitions for a long-time, they’re finally coming to life and will be long-term growth drivers for their business.
  • CEO Chuck Robbins said…”The bad news is: we’ve had obviously challenges getting things shipped to our customers. The good news is:  our backlog is at an all-time high for our company; it’s never been higher.”

 

 

Additional Highlights:  

  • Revenue was $13 billion, up 8% YoY, in line with their guidance range.
  • Strongest product order growth in a decade – up 31% YoY on broad based strength across most segments, end markets and geographies.
  • Supply chain issues – “snarled logistics” (ocean, air & trucking) and delayed component availability (e.g. seeing key suppliers like Fabrinet significantly adding to capacity but it takes time)…but they are starting to see signs of stabilization. For instance, memory costs are beginning to decline which suggests the market is starting to come into balance.
  • They’re taking prices to offset higher costs – when all of this eases, it should be a tailwind to margins.
  • Additional quotes from the call…
    • On supply chain issues: “While our revenue growth was solid, it was impacted by the supply constraints which are affecting our technology peers and nearly every other industry. Our product orders were extremely strong and balanced across our markets, but we are constrained in what we can build and ship to our customers”
    • “We have been taking multiple steps to mitigate the supply shortages, and deliver products to our customers, including working closely with our key suppliers and contract manufacturers, paying significantly higher logistics costs to get the components where they are most needed, working on modifying our designs to utilize alternative suppliers where possible, and constantly optimizing our build and delivery plans.”
    • On inflation and price increases: “We are doing this at a breath and scale that is significantly greater than most in our industry. Of course, all these steps, while necessary to maximize our production and delivery to customers, add to our cost structure. When combined with cost increases we are seeing from many of our suppliers, these factors are putting pressure on our gross margins. While we’ve thoughtfully raised prices to offset this impact, the benefits are not immediate and will be recognized over the coming quarters.”

  • Growing mix of recurring revenue should expand their multiple –Software mix is close to 1/3 of revenue w/ >80% of software sold as subscription. That means over 1/4 of total sales is from software subscriptions sales. Additionally, ~22% of rev is services with much of that from maintenance/support which tend to be recurring. Between the two, annual recurring revenue is ~42% . They have a growing “as-a-service” portfolio driving the mix shift happening w/in their business which should be supportive of their multiple and their margins. They continue to offer more products this way including Cisco Plus their new network-as-a-service offering. Their focus on subscriptions, allows them to deliver innovation faster to customers, while providing more predictability and visibility to their business over the long-term.
  • Continued momentum w/ web-scale cloud providers –commentary continues to be very positive. This is an important area of growth for them. They had record performance with over 200% order growth – seeing early traction of their 400-gig solutions, a huge testament to the investments they’ve made. This is an end market where they lost share to Arista in the past, but their positioning is improving w/ new products launched last year. Their Silicon One platform which they’ve broadened from a routing focused solution to one which addresses the webscale switching market, offering the highest performance, programmable routing and switching silicon on the market.
    • “the performance of the Silicon One architecture is pretty incredible, and in a world where sustainability is a massive issue for everyone. When you look at the performance to power consumption ratio, it leads the world. And so, when you look at the speed and the number of ports and the performance that we’re able to deliver at the lower power consumption, it is super meaningful. And so, not only is a great technology, but it comes at a significantly lower power consumption and I think those are couple of the big reasons.”
  • Valuation: trading at a almost a 7% FCF yield on fiscal 2022, which ends in July. This is well below S&P average of ~4%, for a strong balance sheet, high FCF generative business (~30% FCF margins) w/ a growing mix of software and recurring revenue. Fundamentals continue to be supported by business transformation/digitization trends (which are accelerating) at a reasonable valuation while much else in tech has seen substantial multiple expansion. Additionally, their valuation is supported by a 2.8% dividend yield which they easily cover. They grew their dividend for the 10th consecutive year and are committed to returning 50% of FCF annually to shareholder through dividends and buybacks. They have ~$14B in net cash on their balance sheet, or >6% of their market cap.

 

 

 

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

 

 

$CSCO.US

[category earnings ]

[tag CSCO]

TJX Q3 Results

Current Price:   $73                        Price Target: $83

Position Size:    3.7%                      TTM Performance: 30%

 

Key takeaways:

  • Very positive call; seeing robust demand – Better than expected SSS drove revenue and EPS beat. Sales up 20% and profits up 23% vs the same period pre-pandemic. “Open-only” SSS were +14%. These open-only comp store sales compare FY22 sales (this fiscal yr.) to FY20 sales (calendar 2019). Strong trends are continuing into the current quarter with QTD SSS trending up mid-teens.
  • They have an inventory advantage in the current retail environment – unlike other retailers, they have plenty of product that they are continuously flowing to their stores (immense buying, planning, logistics teams, strong vendor relationships and flexible/high inv. turn model all aid this) and positioned to take advantage of inventory opportunities (i.e. packaway) that may arise from the disruption in the supply chain.
  • Positive margin commentary – Freight and wage pressure is being more than offset by operating leverage on higher sales and higher merchandise margin (driven by multiple factors including taking price in select categories). When freight pressures abate, margins will expand.
  • Home category continues to be “off the charts” and launched HomeGoods e-commerce site in September
  • Seeing extremely plentiful inventory buying opportunities – “we can’t emphasize this enough, availability of quality branded merchandise is excellent, and we’re confident that we have plenty of inventory in our stores and online for the holiday season.”

 

Additional Highlights:

 

Quotes from the call…

  • Gaining share:
    • “Our flexible model has been a tremendous advantage in this environment. We’ve been able to expand and contract categories and merchandise in our stores, so that customers have full racks and shelves to shop when they visit”…”most of the inventory we need for the holiday season has already been delivered to us or is scheduled to arrive in stores and online in time for the holidays.”
    • “one of the things that’s happened in COVID is TJX, I believe, when you look at all the branded vendors in the market, we are probably more important today than we’ve ever been. We’re probably more important to the market place than we were pre-COVID. When you look at the amount of volume that we’re doing.”
  • Inflation:
    • “we are convinced that our relentless focus on value is a tremendous advantage. In an inflationary environment we believe even more consumers will be seeking out value. We are confident that our value position will be a very attractive option for consumers looking to stretch their dollars without sacrificing on quality and brands.”
    • “ We believe our top line initiatives can lead to outsized sales which is our best opportunity to offset some of the persistent cost pressures we face.”
  • On inventory opportunity in current environment:
    • “as we come out of holiday we could see a tremendous amount of packaways based on the supply chain challenges the whole markets going to run into. And if they end up with some late deliveries that don’t make it in for Christmas, which is very possible… if they didn’t plan their cadence correctly, then I think that is going to spill off a great opportunity for us to have increased packaways for next year — for next fall that we would be buying this January-February and I’m anticipating that could be a huge benefit to us.”
  • On their business model & current environment: “we’re close out-driven…we, in-season, hand-to-mouth, by a bulk of what we do. We buy very opportunistically that way…[] Retail is pretty strong out there obviously… []…and for a lot of the public company brands that are wholesalers, it allows them — they want to keep chasing that business with their more regular price accounts –  it allows them to get bullish knowing that we’re always there on the backside for the excess inventory…..We always like it when everyone’s business is good in this environment. As we go to next year, I think you’re going to see a lot of wholesalers, now stepping out to be a little more bullish on their upfront orders for those retailers knowing that they have TJX later for the cleanup, so to speak. So, I think that whole piece, which is probably one of the biggest pieces of our business is looking forward to a tremendous opportunity as we move forward because of that dynamic.”
  • Sales are tracking ahead of pre-pandemic levels…
    • Overall sales were $12.5B, over $2 billion more than the same quarter pre-pandemic.
    • Open-only comp sales vs pre-pandemic (fiscal 2020 but calendar 2019)
      • Overall: +14%
      • Marmaxx U.S. +11% – Home category similar to HomeGoods segment; apparel up mid-single digits (footwear & apparel are ~50%)
      • HomeGoods U.S. +34%
      • Canada +8%
      • International +10%
  • Higher merchandise margins continue to mitigate covid costs, higher wages and higher freight– Despite 160 basis points of incremental freight expense, higher merch margin led to a 30bps pre-tax margin increase vs fiscal ’20. They paid an appreciation bonus to store associates which should recede but expect freight to likely persist for the remainder of the year. HomeGoods margin is disproportionately impacted by freight increases due to its product mix.
  • Long-term thesis intact – Relative to other brick-and-mortar focused retailers, TJX  continues to have a superior and very differentiated model. They acquire their inventory from an enormous (and growing) network of vendors, acting like a clearing mechanism for the retail industry…essentially opportunistically buying leftover/extra product that constantly flows from retailers, branded apparel companies etc. Growth of e-commerce has led to better inventory opportunities/ selection, not worse. They leverage their massive store footprint and centralized buying to merchandise their stores and e-commerce sites w/ current on-trend product. No one else does this at the scale they do. Their immense buying, planning and allocation, logistics teams are helping them navigate the current environment. They have very quick inventory turns and can be nimble and re-active w/ their inventory buys and are an important partner to their sources of inventory…and becoming even more important. It’s a powerful model that continues to take share and, while they have a growing e-commerce business too, their store model has been very resistant to e-commerce encroachment. Moreover, they have a thriving Home business, a growing e-commerce presence, an expanding international store footprint and a track record of steadily positive SSS. Prior to last year, in their 44 year history they only had 1 year of negative SSS (this is unheard of!). So, with steadily positive SSS, a slowly growing store footprint and an emerging e-commerce business, TJX steadily grows their topline w/ consistent margins that are about double that of department stores.
  • Valuation: Balance sheet continues to improve, they’ve returned to their capital allocation program w/ dividend and buybacks and the valuation is reasonable at ~3.5% FCF yield on next yr.

 

 

 

 

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

 

 

$TJX.US

[tag TJX]

[category earnings]

 

Home Depot Q3 Earnings

Current Price: $393                     Target Price: $410

Position size: 2.3%                        Performance since inception: +45%

 

Key Takeaways:

  • Better than expected results as comparable store sales were +6.1% as elevated home improvement demand persists. They had positive comps every week despite unprecedented compares from last year.
  • Talk of “peak growth” not concerning  – despite slowing SSS, multiple secular tailwinds persist.
  • Pro sales growth now outpacing DIY as consumers resume large projects and return to pre-pandemic activities. 
  • Still not giving guidance: “we do not believe we can accurately predict how the external environment and cost pressures will evolve and how they will ultimately impact consumer spending.”

 

Additional Highlights:

  • Quotes…
    • On duration of supply chain constraints: “I would say this goes well into, if not through 2022 and we’ll keep doing what we’re doing with the innovation we’ve talked about and leveraging our scale as well as our new assets. I mean, when you think of our inventory growth, part of that is stocking these new facilities. So, not only have we improved our in-store stocking levels and been able to meet the accelerating demand through the quarter, but we’re also stocking all those new facilities that I talked about. So, we’re clearly getting disproportionate flow and that’s where our merchants and supply chain teams will continue to push.” This speaks to their scale and supply chain advantage in getting product on their shelves.
    • Demand trends: “we continue to see customers taking on larger home improvement projects as evidenced by the continued strength with our Pro customer which once again outpace the DIY customer”…”customers continue to tell us that they have projects on their list; Pros tell us that their backlogs are significant.”
    • Housing market: “when you look at the constrained availability of new housing, that clearly is having a positive impact on home values. And when customers home values are in a positive side of the ledger, they feel good about investing in their homes. I think that is, for sure, an element that is helping the overall home improvement dynamic. That housing availability shortage isn’t going to get solved anytime soon at the rate that we’re building homes, even though it’s an accelerated rate from where it’s been. That backlog is going to be there for quite some time.”
    • Consumer spending trends: “as the year started everybody believed during 2021 that we would see a significant shift away from goods back to services as the economic environment opened up, as we got our arms around the pandemic. Clearly, we have not seen that. I’d say that from the standpoint that yes you’ve seen things like travel and restaurants open up, but the customers continue to spend in the home improvement space. And, to date, we have not seen that dramatic shift back that everybody predicted”…”we think that the underlying factors for the home improvement industry are strong.”
  • Solid current trends:
    • Sales were $37B or +9.8% YoY on 6.1% SSS.
    • SSS of 3.1% in August, 4.5% in September and 9.9% in October. Q4 SSS are running ahead of total Q3 SSS.
    • E-commerce (mid-teens % of sales) grew 8% YoY as they lapped almost 90% growth last year.
    • 55% of online orders being fulfilled through stores, supportive of their omnichannel advantage
    • Big-ticket comp transactions or those over $1,000 were up approximately 18%, indicative of strong consumer environment
  • Managing well in difficult retail environment – While the retail industry is broadly seeing industry-wide supply chain disruptions, inflation and a tight labor market., they’ve not had issues hiring associates, in-stock levels are solid and they can pass through pricing – and inflation is a tailwind to SSS which drives some operating leverage.
  • Secular tailwinds persist…more homes need to be built. This should be a LT secular driver for HD.
    • Undersupply of homes continues to support pricing and years of underbuilding has shifted the age of the existing US housing stock – both of which support home improvement spending.  
    • According to a recent study by the National Association of Realtors, due to years of underbuilding, the US is short 6.8 million homes.
    • Building would need to accelerate to a pace that is well above the current trend…. To more than 2 million housing units per year vs a ~1.6m annual rate for starts.
    • From the NAR report released in June…“Following decades of underbuilding and underinvestment, the state of America’s housing stock, which is among the most critical pieces of our national infrastructure, is dire, with a chronic shortage of affordable and available homes to house the nation’s population. The housing stock around the nation has been widely neglected, with a severe lack of new construction and prolonged underinvestment leading to an acute shortage of available housing, an ever-worsening affordability crisis and an existing housing stock that is aging and increasingly in need of repair.”
  • Talk of “peak growth” not concerning…
    • Growth rate slowing doesn’t mean the business is shrinking or that the multiple will contract. While the rate of growth (after massive demand increase during Covid) will clearly slow, their business will continue to grow over time. Their long-term drivers are the durable housing trends, taking share in a fragmented home improvement market w/ DIY & Pro, grow their more nascent MRO business (particularly after HD Supply acquisition) and leverage their best of breed omni-channel model.
  • Best of breed omni-channel model drives productivity 
    • By adding specialized warehouse capacity and enhancing digital capabilities (online and in the store), HD is uniquely positioned to leverage their existing retail footprint (not really growing stores) and drive steadily high ROIC that is ~45% (which is incredible).
    • They dominate the category, are the low cost provider, have a relentless focus on productivity and can continue to flow an increasing amount of goods through their big box stores w/ omni-channel. This is a highly efficient model as 55% of online sales are picked up in-store which HD can fulfill from the store or nearby warehouses.
  • One Supply Chain rollout continues – investments support HD as the fastest, most efficient, low-cost provider. They continue to add new bulk distribution centers (used replenish stores with lumber and building materials), flatbed distribution centers (which are often tied to the bulk distribution centers), MDOs (market delivery operations are used to flow through big and bulky products, particularly appliances) and are now at 7 direct fulfillment centers for e-comm fulfilment – they’ll ultimately have ~20 direct fulfillment centers which will allow them to cover 90% of the country in same or next-day delivery.

·        Capital allocation: they’ve resumed share repurchases and remain committed to growing their dividend over time.

·        Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and a reasonable valuation, trading at just <4% forward 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

 

 

$HD.US

[tag HD]

[category earnings]

 

 

Disney Q4 earnings

Current Price: $160     Price Target: $215

Position size: 2%          TTM Performance: +18%   

 

 

 Key Takeaways:

  • Lower than expected Disney+ subscribers, impacted by covid related content headwinds –  subs were slightly lower than expected (but in-line w/ lowered guidance). The pandemic has impacted the cadence of new content which drives subs, but production is ramping w/ a lot of new content slated for the 2H 2022. In general, Disney+ has been ramping far ahead of initial expectations but with no change to breakeven guidance for their DTC platform, as they increase investment on content.
  • Higher spending on Parks and content impacting near term profits
  • Capital return still paused

 

Additional highlights:

  • Long-term subscriber targets maintained, but quarterly new subs were lower than expected…
    • They now have 179M subs (consensus was 187m) across Disney+, Hulu and EPSN+. That is second only to Netflix, which has a little over 200M….Disney’s achieved that in 2 years.
    • Disney+ now has 118M subs, Hulu is ~44M and ESPN has ~17M. 
    • In the past fiscal year they’ve grown the total number of subscriptions across their entire DTC portfolio by 48% and Disney+ subs by 60%.
    • “we remain focused on managing our DTC business for the long-term, not quarter-to-quarter, and we’re confident we are on the right trajectory to achieve the guidance that we provided at last year’s Investor’s Day reaching between 230 million and 260 million paid Disney+ subscribers globally by the end of fiscal year 2024 and with Disney+ achieving profitability that same year.”
  • Higher content spend and global rollout will continue to support sub growth…
    • Doubling the amount of original content with marquee brands Disney, Marvel, Pixar, Star Wars and National Geographic coming to Disney+ in FY’22 with the majority arriving July through September.
    • On Thanksgiving Day, premiering the first of Peter Jackson’s highly anticipated, six episode Beatles documentary Get Back.
    • https://www.thebeatles.com/news/%E2%80%9C-beatles-get-back%E2%80%9D-disney-original-documentary-series-directed-peter-jackson-debut-exclusively
    • They continue to build out ESPN+ with exclusive sports content. “with every new sports rights deal, we have considered both linear and DTC in fact all seven of the major deals we made in the last year and a half included a streaming component.” This includes: “Man in the Arena: Tom Brady”, Monday Night Football With Peyton and Eli, a historic 10-year NFL rights agreement, which begins in 2023 and a 7 year rights deal w/ the NHL. ESPN+ is the sole home for more than 1,000 out of market NHL games.
    • “the single most effective way to grow our streaming platforms worldwide is with great content and we are singularly focused on making new high quality entertainment including local and regional content that we believe will resonate with audiences.”
    • Disney+ now in over 60 countries and more than 20 languages. Next year they’ll add 50 plus additional countries including in Central Eastern Europe, the Middle East and South Africa. Their goal is to more than double the number of countries to over 160 by fiscal year ’23.
  • Online sports betting: indicated on the call that they’re interested in pursuing this in a meaningful way and are looking at partnering w/ 3rd parties in this space. There has already been talk of an agreement w/ Draftkings….Disney already owns ~4.5% of DraftKings stock (from their 2019 Fox acquisition).
  • Metaverse: yes, even Disney is talking about this. This idea of the next stage of the internet, or the embodied internet is a growing topic…given Disney’s owned content and focus on experiences, they view themselves as well positioned for “storytelling without boundaries and our own Disney Metaverse.”
  • ARPU should steadily rise over time – overall ARPU this quarter was $4.12 (ex-Hotstar, it was $6.24). Their ARPU is weighed down by lower Disney+ fees outside the US, but they will gradually raise prices over time and they have ways (other than sub fees) to make money off of their content w/ advertising, parks and consumer products (especially w/ content like Pixar, marvel, star wars).
  • Flexibility is a key component of their distribution strategy. They have 3 approaches for distributing films. 1) Release in theaters with a simultaneous offering via Disney+ Premier Access, 2) release straight to Disney+, and 3) traditional exclusive theatrical releases. Hybrid releases mitigated the impact of theater closures, but theaters are re-opening and they intend to continue to use this model.  
  • Improving demand w/ parks and cruises
    • Park re-openings…everything is open. They are opportunistically raising prices. Parks are generally operating at or near current capacity limits w/ robust guest spending trends and strong reservations. Margins are still below pre-Covid, but given some changes in both the revenue and the cost side, once capacity constraints are lifted, they think they will exceed previous margin levels. For example, mobile food ordering, virtual queues, dynamic pricing. Per capita revenue is up 30% vs 2019. One-third of guests at WDW are buying the Genie+ upgrade at $15/guest/day – that is a very, very material increase in per caps and margins. Return of international guests at domestic resorts will be a tailwind.
    • Cruises: all 4 ships are sailing, seeing “tremendous demand” and they’re adding a new ship in 2022.
  • Valuation – at a similar multiple to NFLX on 2023 subscriber revenue, Disney’s DTC business accounts for over 50% of their valuation, with the rest of their business (~80% of revenue) accounting for the rest, including all linear TV (e.g. ABC & ESPN), movies, advertising, parks, cruises and consumer products.  

 

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

 

 

$DIS.US

[category earnings ]

[tag DIS]

 

Black Knight 3Q21 Earnings

Current Price: $75           Price Target: $96

Position Size: 1.8%          TTM Performance: -25%

 Key Takeaways: 

    • Beat estimates: similar to last quarter, they beat estimates on strong new customer adds and cross-selling progress aided by their recent acquisition, Optimal  Blue. 
    • Increased their long-term growth targets: this is very positive and the stock reacted to that today. “Based on the ongoing successful transformation of our business, we are updating our long-term revenue growth expectations to 7% to 9%, an increase from our prior view of 6% to 8% that was in place since our IPO six years ago.”
    • Data & Analytics segment continues to be key growth driver (+10% YoY): seeing continued improvement with cross-selling Data & Analytics (~16% of revenue), which could be a solid future growth driver for them and aided in their higher LT growth targets.
    • Headwind from foreclosure moratorium set to reverse in 2022.

 Additional Highlights:

    • Seeing robust organic growth, ahead of LT targets: Revenues increased 21%; organic revenue growth of 11%.
    • Increased guidance: Now expect FY revenue growth of 18-19% (prior 17-18%) on organic revenue growth of 9.5-10% (prior 8-9%)
    • Limited impact from higher rates/end of refinancing boom:
      • Interest rates drive mortgage volumes but BKI revs are more tied to loans outstanding than the cyclicality of volumes.
      • Revenues tied to origination volumes are a relatively modest percentage of total revenue (sub-10%… or  ~18%  of  origination  revenues  and  26%  of  data  & analytics).
      • The rest of their revenue is recurring (>90%) with 5-7  year contracts and price escalators (adds ~1.5% to top line annually).
    • Focus on innovation and integrated offerings: their strategy is to continue to deliver innovation and selectively pursue acquisitions to further strengthen their end-to-end offerings across the mortgage life cycle. Example of new innovation: earlier this year they launched their underwriter assist solution, which uses AI enhanced automation to review loan package documents more efficiently, reducing the overall cost by reducing manual review time and supporting effective decision-making by underwriters.

Data analytics segment (~16% of revenue) revenues were up 10%. Driven by growth in their property data and portfolio analytics businesses.

    • Organic revenue growth of ~7%; 160bps of margin expansion.
    • Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals.
    • Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US. 

Software Solutions segment (~84% of revenue) up 23% YoY

    • Organic growth of ~10%; 60bps of margin expansion.
    • Servicing (mid-60’s % of revenue) was up 9%
      • Cross-selling aiding growth – i.e. MSP (their core servicing software) clients adopting their Loss Mitigation Solution and Servicing Digital Solution (a web and mobile solution that provides end customers with customized information about their mortgages as well as self-service capabilities).
      • Foreclosure moratorium headwind coming to an end: the federal moratorium has expired, they will see revenue benefit in 2022 as foreclosures make their way through the legal process. The moratorium was a $37m headwind (~3%) in 2020 and ~$48m headwind (3%) in 2021.
    • Originations (~20% of total revs) – made up of new loans, refi’s and HE– revenues up 66% (organic rev +14%)
      • Growth driven by Optimal Blue acquisition and new clients.
      • Originations are down >20% YTD, but only a 4pt headwind to this segment revs.
      • Strategy is to create a comprehensive end-to-end solution to digitize the origination process and increase efficiency through automation and AI to reduce the costs to originate a loan.

Valuation:

    • “bought back $100 million of shares in recognition of strong cash flow and our stock trading at levels that we believe is meaningfully below its intrinsic value.”
    •  Trading at >4% FCF yield on 2022 –valuation has gotten less expensive more recently and is supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex which should taper as they grow.
    • They should see high-single-digit top line growth and margin expansion in both segments – LT mgmt. goal of 50-100bps total per year – that, combined w/ modest share buybacks, should drive low-double-digit FCF/share growth.
    • Net leverage ratio at 3.4x
    • Capital allocation priorities include debt pay down, opportunistic share repurchases and acquisitions.

Thesis:

    • Black Knight is an industry leader with leading market share of the mortgage servicing industry. 
    • Digitization of real estate transactions is still in early stages
    • Stable business with >90% recurring revenues, long-term contracts and high switching costs.
    • BKI has high returns on capital and high cash flow margins.

 

.UA

[tag BKI}

[category earnings]

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

 

$BKI.US

[category earnings]

[tag BKI]

 

 

BKNG 3Q Results

Current Price: $2,437      Target price: $2850 (raised from $2,400)

Position Size: 1.8%          TTM Performance: +35%

 

 

Key Takeaways:

  • Booking trends well ahead of expectations ($23.7B vs $21.6B) as they saw meaningful sequential improvement
  • Beneficiary of strong leisure and European recovery aided by higher rates

·       Weak environment strengthens their position w/ suppliers (i.e. hotels) as they are a key source of demand

  • They look to reinitiate return of capital to shareholders in 1H22.

 

Additional Highlights:

  • Beneficiary of strong leisure and Europe recovery, led by higher rates:

·         Bookings recovered to 94% of 2019 levels (vs 88% of 2019 last quarter). Bookings declined less than the decline in room nights, due to the increase in average day rates.

·         Recovery driven by rate – average daily rates up 10% vs 2019 (part of that is geographic mix – excluding that, ADRs were up ~4%). This is similar to what we heard from Hilton – rate is strong, particularly w/ leisure, which is Bookings focus.

·         Room nights recovering but still lagging 2019 – Compared with 2019, Q3 room nights were down 18% (an improvement from down 22% in July and down 26% in Q2). Improvement since July was primarily driven by stronger room night trends in Europe. They’ve seen a further improvement in room night trends in October, including early signs of a pickup in room night trends in Asia.

·         Opening of US borders on Nov 8 should be a demand catalyst

    • Mobile bookings, particularly through their apps, represented 2/3 of total room nights. Direct bookings aids their ad spending efficiency which is key as this is a major expense for them.

·         recently rising COVID case counts in many countries including several important European countries adds to the uncertainty around how November and December trends will progress

  • Quotes from the call:
    • Guidance: “Given the ongoing uncertainty around COVID, it’s difficult to predict how room nights in November-December will compare with a 10% reduction we saw in October. Looking forward to November-December the rising case counts across many important Western European countries and across much of Eastern Europe as well as a start of the winter season in the Northern Hemisphere, which in 2020 contributed to an increase in COVID cases creates unpredictability.”
    • Pent-up demand: “we absolutely know there is huge pent-up demand because anytime, any government let’s go restriction, we see immediate demand.. So for example, the announcement, that November is opening for people to come to the US, immediately we saw demand in the UK, when they changed restrictions… immediate demand.”
  • Connected trip, payments & alternative accommodations are long-term growth drivers – The long-term vision for them continues to be the “connected trip.” The idea is to be a platform for not just hotel, but a portal for all aspects of travel including flights, activities, restaurants etc. A key part of this is building up the “supply” (e.g. tour operators). The current environment could be a catalyst for supply as weaker travel trends spur suppliers to look to Booking as a necessary source of demand. They continue to invest behind this despite the current environment including their payment platform (1/3 of bookings) which enables alternative forms of payment like WeChat, it enables payment to companies like tour operators through their platform, and offers buy-now-pay-later offered via partnerships with 3rd parties. This is a multi-year endeavor to transition from their accommodation only focus in the past.  As these grow over time it will drive a mix shift that will add revenue and grow profit dollars, but at a lower margin than traditional accommodations. An offsetting factor to this could be increased direct book (especially via their app), lower customer acquisition costs and lower performance marketing. Alternative accommodations are 30% of the mix and are skewed towards Europe, but they are focused on growing their US business particularly w/ building inventory w/ multi-property managers.
  • Will see an impact to profitability as travel recovers that is just a timing factor– with continued recovery in 2021, there will be more bookings made in 2021 that will check-in 2022 than there were bookings made in 2020 that checked-in 2021. This timing factor will have a negative impact on revenue as a percentage of gross bookings and drive some deleverage in their marketing expenses b/c they incur the majority of marketing expenses at the time of booking.

·       Stock is not expensive and expectations are reasonable. Trading at ~4.8% yield on 2022. Consensus is now for revenue to recover to 2019 baseline in 2022.

 

 

 

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

 

$BKNG.US

[category earnings ]

[tag BKNG]

 

Zoetis (ZTS) 3Q21 earnings summary

Key Takeaways:

 Share price: $213                    Target Price: $227 NEW ($213 prior) 

Position size: 2.30%                TTM return: +21%

 

Zoetis once again beat expectations and generated sales and earnings growth of 10% in the quarter. The International segment came in higher at +14% while the US were +7%. Livestock declined 2% due to generic competition and a tough y/y comparison, but was in positive territory internationally (favorable export conditions for meat producers). Companion Animal continued its solid trajectory with +19% sales growth led by Simparica Trio uptake and key dermatology products reaching $300M in sales, a historical high. Pain medication (Librela/Solensia) is above expectations in its first full quarter launch in Europe. The company continues to innovate to differentiate itself from generics & competitors. For example, it launched a chewable version of Apoquel (to treat dog allergy/itching). Looking forward to 2022, we expect pet health to continue its growth trajectory, as pet ownership has seen such a boost during Covid and increased pet owners awareness of their companion’s health in general, thanks to WFH. The mix was favorable to margins, with gross margins going back to historical high.

Valuation remains at a premium but is justified by innovation, market share gains (growing above industry levels) and consistent execution.

Guidance raised for 2021 again:

  • Revenue growth of +14-14.5% from +12.5% to 13.5% previously to reflect good 3Q
  • Adjusted net income range increased to $2.2B-$2.25B with operational growth of 16.5-18% from 13% to 15% previously

Zoetis investment thesis:

·         Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented

·         ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs

·         ZTS is growing above the industry rate and has proven resilient throughout economic cycle

·         Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013

·         Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability

 

$ZTS.US

[category earnings] [tag ZTS]

 

 

 

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