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Microsoft reported solid 3Q results beating on the top and bottom line and delivering strong guidance. Overall revenue grew 16% aided by the weaker dollar which added 3pts to the top line. They saw strong growth across all 3 segments with cloud continuing to be the key the driver of growth. Commercial Cloud (Office 365 commercial, Azure, Dynamics 365) revenues were $6B, up 58% (an acceleration from last quarter) and accounting for over 22% of revenue in the quarter. Despite the higher mix of lower gross margin cloud, their operating margin improved 200bps as the top line beat resulted in better leverage of opex and better than expected EPS. While cloud margins are a drag now, they will help drive better FCF margins as the business scales. Within Commercial Cloud, Azure grew 93% – estimates are for this business to be about $8B in revenue this year and for commercial cloud to be $22-23B or about 20% of total revenue. They are the number two cloud player behind AWS. The “More Personal Computing” segment which includes Windows, Xbox, Surface, and all other hardware showed meaningful improvement. That segment, which has been in decline, grew 13% to nearly $10 billion on solid results from the Surface and gaming. This segment performance is in line with their comments last quarter of a stronger than anticipated commercial PC market and that the consumer PC market was “stabilizing.” Overall they are seeing positive demand across their business and are positioned to benefit from a strong IT spending environment with digital transformation, migration to the cloud (especially hybrid where they have an edge) and companies positioning their infrastructure for IoT. Free cash flow in the quarter was over $9B and they returned $6.3 billion to shareholders pretty evenly split between dividends and share repurchases.

Valuation:

· The stock is reasonably priced trading at close to a 5% FCF yield for a company with double digit top line growth, high ROIC and a high and improving FCF margin (~30%).

· They easily cover their 1.75% dividend, which they have been consistently growing.

· Strong balance sheet with about $132B in gross cash, and about $55B in net cash.

Investment Thesis:

· Industry Leader: Global monopoly in software that has a fast growing and underappreciated cloud business.

· Product cycle tailwinds: Windows 10 and transition to Cloud (subscription revenues).

· Huge improvements in operational efficiency in recent quarters providing a significant boost to margins which should continue to amplify bottom line growth.

· Return of Capital: High FCF generation and returning significant capital to shareholders via dividends and share repurchases.

$MSFT.US

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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

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Thesis intact. Key takeaways:

Fortive released its 1Q18 earnings results last night. Overall organic growth was +2.6%, and with the help of FX and acquisitions, reported sales increased 13.4%. Although core growth showed a slow start to the year, we remain confident that the company can achieve its guidance of mid-single-digit organic growth for the year. One of the reason being timing, as its Transportation Technologies business saw some orders linked to the EMV transition (gas station payment system) pushed to 2Q, causing overall flat organic growth in its Industrial Technologies segment. All six growth platforms had positive pricing, lifting operating margin, but this was partly offset by recent acquisitions. EPS grew 30% y/y. Regarding potential M&A activity, FTV commented on the possibility of adding a new platform of growth (they have 6 currently), but don’t feel the pressure to do so. The deal pipeline remains solid but sellers are currently expecting elevated prices. We remain positive on the stock.

Continue reading “FTV 1Q18 earnings recap”

Thesis intact. Key takeaways:

On a comparative basis, Stryker delivered solid 1Q results with 8% organic sales and 13% EPS growth. Total sales were up 8.2% on a constant currency basis, acquisitions added 1.2%, volumes and mix were a positive 8.6% while price was a negative 1.6%. Their US knee business continued to grow ahead of the market with 7.3% organic growth, gaining market share. The first quarter also saw 8,200 total knees done using the Mako robot, up from 7,150 in 4Q17, and placing a total of 28 Mako robots of which over 50% were into competitive accounts – JNJ had commented on the competitive environment pressuring their sales in that space – today’s results confirm that the market is still growing and SYK won market shares.

On the negative news front, Spine sales were weak again (flat y/y), as continued market softness in the US was impacted by double-digit price declines across the portfolio on top of last year’s high single-digit price decline (excluding innovative products such as the tritanium cage). Competitors in Spine saw negative organic growth: -7% for JNJ and -3.8% for Zimmer.

Following strong 1Q results, management raised organic revenue guidance range by 50bps from 6.0-6.5% to 6.5-7.0% growth for the year, and EPS to $7.18-7.25 (+11-12% y/y growth) from $7.07-$7.17, which includes $0.04 of dilution from recently acquired Entellus.

We continue to believe Stryker can continue to deliver above-average sales and EPS growth due to its business mix, innovative profile and M&A integration ability. We remain positive on this name, even after a strong stock move for the past 12 months.

Continue reading “SYK 1Q18 earnings”

Visa reported very strong 2Q18 results and raised guidance. Adjusted EPS was $1.11 (high end of street estimate was $1.06). Broad based global economic growth spurred an acceleration in payment volume growth, fueled by debit spending globally. International was particularly strong with an acceleration in cross-border volume (outbound from Europe, inbound to the US) driven by the weaker dollar. Payment volumes were up 10% and processed transactions were up +12%. EPS guidance raised from mid-20% growth to high 20’s growth. The integration of Visa Europe continues on pace with expectations. Revenue growth is now expected to be low-double-digits, up from the previous guidance of high-single-digits. Cards outstanding grew 4% (to 3.3B), with 2% growth in credit cards and 5% growth in debit cards. Debit cards continue to outpace, partly driven by Millennials who favor debit over credit. As expected, the trend of rising incentives continues as competition is intense for share of customers’ wallets and for business with issuers. Visa is continuing to develop new avenues for growth as the payments industry changes. Contactless payment penetration continues to rise globally. They are positioning themselves to grow in the evolving P2P and B2B markets. For example, in March they acquired Fraedom to help expand their B2B business. This expands their addressable market from the $45 trillion retail payment market to the $120 trillion B2B market and the $60 trillion P2P market. Visa is also in the early stages of standardizing their digital checkout. They recently announced an agreement with Amex and MasterCard to offer a common user interface for digital payments. The platform will create a single button checkout across sites and devices, eliminating the friction of online checkout across various sites.

Continue reading “Visa 2Q18 Earnings Results”

Thesis intact. Key takeaways:

Pepsi reported good organic revenue growth (+2.3%) with emerging markets strength (+HSD sales growth) lifting the company’s growth this quarter. On the negative side, North America Beverages continues to face tough competition, but results improved sequentially – in the eyes of the CEO, this is a short term problem and they “know exactly how to fix it”. The gross and operating margins were weaker, with input costs inflation impacting the company (a theme we have heard from others as well). Some responsible pricing will help offset cost inflation this year. Management is guiding to a continued gross margin compression through 2018, which has typically been offset by SG&A productivity. However this year the company will increase spending to fend off competition (Coke but also smaller players). Cola is the only category Pepsi has been outspent recently, which they intend to fix to keep their market shares. The lower tax rate will instead be used to maintain earnings growth. Pepsi is maintaining its 2018 guidance.

There has been pressure for Pepsi to break its business into 2 companies: beverages and food. PEP’s CEO reiterated the importance of having both businesses together, as it is used as a bargaining tool with their customers (retailers): beverages has a high velocity in store, which is attractive to retailers (drives traffic). When warranted, beverages are sold in pair with salty snacks (salt makes you thirsty J). They also view their bottling business as a utility company that has low margins but creates lots of cash.

Pepsi remains a key holding in our consumer staples sector.

Continue reading “Pepsi 1Q18 earnings results”