Category: earnings

Key Takeaways:

Current Price: $59.2 Price Target: $82

Position Size: 1.73% 1-year Performance: -8%

Schlumberger 3Q18 earnings results were slightly above recently lowered expectations. The growth in North America slowed down from last quarter, constrained by pipeline capacity and workers availability (to be resolved by the end of 2019). The sector is however recovering globally. Ongoing improvements of the oil producers investments level helps lift SLB sales, which increased 8% y/y. Operating margin expanded 15bps y/y, and adjusted EPS grew 10% y/y. FCF yield remains attractive at 4.7%. The management team warned of lower profits in 4Q18 vs. 3Q18, as US fracking activity continues to drop.

Segments review:

Drilling sales +15%: Saudi Arabia and Russia drilling activity helped. margin down 24bps y/y

Production: some slow down following strong growth recently: +13% sales growth y/y but flat sequentially, margins flat y/y

Reservoir Characterization: sales -6% but operating margin expanded 470bps thanks to better product mix

Cameron: continued pressure on their Deepwater business, sales flat y/y, and margin deleverage of 356bps

Geographic review:

North America sales +23% y/y

International sales +1% y/y

SLB Thesis:

1. After 5 years of significant underperformance, The Energy Sector is historically cheap and SLB is

historically cheap relative to the sector – despite being one of the highest quality Energy companies

in the world

2. As the leading Global Oil Services company, SLB is well positioned to benefit from (1) Secular

growth in U.S. shale production and (2) Cyclical rebound in global oil production/oil prices

3. SLB is a high quality company within a highly cyclical industry – SLB has generated 16% annual

Returns on Invested Capital over the past 10 years and throws off a lot of free cash flow

4. SLB’s stock is highly levered to increasing oil prices and will not wait for the turn to make its

move. We are also getting closer to a bottom in EPS estimates and SLB protects better than most

energy stocks on the downside due to its high quality nature – strong balance sheet, ROIC, cash

flows

$SLB.US

[tag SLB]

Julie S. Praline

Director, Equity Analyst

Crestwood Advisors

Pepsi reported 4.9% of organic revenue growth well ahead of consensus +3.2% outlook, bringing the year-to-date growth to 3.4%. Core EPS (ex FX) grew 9% y/y, while reported EPS grew 18%. Both gross and operating margins contracted this quarter, impacted by higher transportation and commodity (aluminum) costs and additional advertising and marketing expenses. This is a continued trend started earlier this year. A lower tax rate lifted net income by ~$0.07/share vs expectations. North America Beverages improved sequentially, with volume +1% and price +1.5%, the first positive volume growth since 4Q16.

The company raised its 2018 revenue guidance, expecting organic sales to be at least 3% (from ~2.3% before). But reported EPS guidance was lowered by 5 cents due to worse negative FX impact. The CFO replied to a question during the call regarding cannabis, shutting down rumors of entering the cannabis business with cannabis infused drinks. Sadly, this was Indra Nooyi’s last call as CEO, as she is retiring, and a new CEO will lead the company starting tomorrow.

No change to our position size (2.11%) or price target ($123) at this time.

Continue reading “Pepsi (PEP) 3Q18 earnings results”

MKC reported an EPS results a penny above consensus, despite a boost from lower taxes of $0.08, which explains the stock’s negative reaction to results this morning. The long term story is intact, highlighted by its overall organic growth rate this quarter of 4%, thanks to +3.5% from volume/mix and +0.5% from price (reported revenue up +13.5% the recent RB Foods brands acquisition that added 9.6%) and healthy gross margins (+280bps). EBIT margins declined 200bps y/y and missed expectations by 80bps due to additional marketing/promotional spending. Overall adjusted operating margin increased 80bps y/y thanks to RB Foods brands accretive addition and core business shift to more value-added products. The Consumer segment showed results below expectations, while its Flavors segment was strong.

Overall McCormick has been a strong contributor, outperforming the consumer staples index by 33% in the last year. We are raising price target to $131 from $117.

Continue reading “McCormick 3Q18 earnings results: long term story intact”

Current Price: $106 Price Target: $120 (updated price target)

Position Size: 2.3% TTM Performance: 48%

TJX reported a great quarter, beating on revenue and EPS ($1.17 vs consensus $1.05) and gave a very positive view on the retail environment. The beat was driven by significantly better than expected SSS (excludes c-commerce).

· SSS were an impressive +6% vs. consensus of +2% & +1-2% guidance. This was a big acceleration from +3% last quarter. Traffic was the biggest driver. They saw an acceleration across all divisions, with their core Marmaxx division (60% of revenue) delivering SSS growth of 7% (above even the highest estimates).

· Performance was solid across all divisions and geographic regions.

· They noted a “very strong start” to Q3. Not to apply Fed-like word parsing, but this was apparently the first time they used “very” in this outlook commentary in over 3 years.

· Canada SSS were +6%. They mentioned significant wage pressure in Canada.

· Europe is doing well and they are taking share. International (Europe & Australia) SSS were +4% an improvement from 1% last quarter and a big change from last quarter’s commentary of a “challenging retail environment” in Europe (where they have over 500 stores). They are taking share in European retail market – “we believe the gap in comp performance between us and many other major retailers has continued to widen.” In mainland Europe, they are in only 4 markets: Austria, Germany, Poland and the Netherlands. They also have stores in the UK, which is where they saw the biggest positive inflection in performance.

· Full year EPS and SSS guidance raised. Full year EPS guidance is $4.12 at the midpoint vs $4.07 previously (excluding benefit from a lower tax rate).

· SSS now expected to be +3-4% vs +1-2% previously (in their 40+ yr. history they’ve had only 1 year of negative SSS).

· They again made a point about their ability to attract a younger customer to validate the sustainability of their business model. “We are particularly pleased that we have been attracting a significant share of millennial and Gen Z shoppers among our new customers”…”the majority of new customers at Marmaxx, are these younger customers which indeed bodes very well for our future.” There were several minutes of discussion around this, so they must be getting a lot of questions from investors.

· Merchandise margin was down, but would have been up significantly excluding freight costs – i.e. they are not “buying” this better growth with deeper discounts. Inventory grew in line with sales, a positive indicator for future merchandise margins.

Continue reading “TJX 2Q19 Earnings Update”

Current Price: $46 Target Price: $54

Position size: 4.4% TTM Performance: 47%

Thesis intact, key takeaways:

· Cisco reported a really solid Q4 with better than expected sales and EPS and issued well above consensus FY19 sales growth guidance of +5-7%.

· They continue to make progress on their transformation from a hardware business to a software and services focused business. The percentage of recurring revenue is now at 32% – they set a goal of 37% by 2020.

· Campus switching strength – Infrastructure Platforms segment (58% of revenue; +7% YoY) driven solid demand for their Catalyst 9k products. Catalyst 9K was launched last year, best ramping product in the company’s history and only sold with a subscription. It’s a key part of their strategy of shifting to recurring revenue.

· Positive inflection in Service provider demand. Service provider orders (+6% YoY) grew for the first time in over 2 yrs driven by a large carrier footprint build-out in Asia as well as better trends in US cable. Management, however, continues to be cautious in forecasting this segment given the lumpy nature of the service provider business.

· Similar to last quarter, gross margins were a disappointment. Last quarter gross margin compression was driven almost entirely by higher memory costs. This quarter memory cost issues persist and also higher growth in Asia came at the expense of lower margins. Mix shift towards servers was also a drag. Margins should move higher over time driven by higher subscription software sales.

· Cisco is another company well positioned to benefit from the increasing adoption of hybrid cloud (along w/ MSFT): Their customers are undergoing a fundamental shift in their technology infrastructure. Historically, large enterprises have run applications in their private data centers. Now they still have applications running in private data centers, but also are consuming SaaS applications and services from public cloud providers. This is essentially what hybrid cloud is. A mix of on-premise and off-premise. Large companies with large expensive data centers, sensitive data, and lots of sunk technology costs are taking a slower, staged approach to moving to the cloud. With it their networks and how their traffic is flowing and how it is secured has fundamentally changed – data is destined for 50 locations instead of just a private data center. Networks are proliferating and the coming internet of things (IoT) and 5G will drive even more proliferation. So, companies are having to rethink their entire IT infrastructure and Cisco is at the center of this transition, which is leading to the success they are seeing.

· Recently announced Duo Security acquisition is an example of how they are helping customers navigate a hybrid cloud world. Duo has SaaS-delivered authentication and access solutions that will expand Cisco’s cloud security capabilities to help enable any user on any device securely connect to any application on any network.

· “Other products” (~2% of revenue; -18% YoY) continues to be a slight drag on growth. They plan to divest a portion of this – Service Provider Video.

· Returned $23.6B to shareholders over the full year, representing 184% of FCF (>FCF b/c of repatriation). That was made up of $17.7B of share repurchases and $6B dividend.

Valuation:

· They have close to 3% dividend yield which is easily covered by their FCF.

· FCF yield of over 6.5% is well above sector average and is supported by an increasingly stable recurring revenue business model and rising FCF margins.

· The company trades on 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.

· 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!

Current Price: $39.50 Price Target: $43

Position Size: 2% TTM Performance: <1%

· Aramark reported 3Q18 earnings, beating on the top and bottom line, maintaining full year EPS guidance of $2.20-$2.30.

· Revenue was up 9% constant currency with about 4% organic growth. That organic growth was a nice acceleration from 2% last quarter.

· Raised organic revenue growth guidance from 3% to 3.5%.

· This report was a big relief (sending the stock up over 8%) because they are finally delivering solid organic growth and look to hit the adj. margin targets they’ve been promising. This was especially important because heading into the quarter guidance was heavily back-half weighted. They should hit their full yr margin target of 7.2% that was set in their analyst day in 2015. Given first half results, investors were skeptical of their ability to achieve this.

· A couple of announcements on the innovation front:

o On the food service side, they announced a strategic partnership with a local company, Oath Pizza (started on Nantucket).

o On the uniform side, they announced this quarter the launch of a new “athleisure” premium performance uniform line called FlexFit.

· Retention rate remains strong in mid-90’s.

· Adj. operating margins expanded 60bps on productivity improvements and lower overhead. Top line growth combined with margin expansion led to op. income up an impressive 20% on a constant currency basis. The adjustments however are a little questionable and a good reason to look at this stock on a cash flow basis. Essentially, they capitalize some important revenue generating expenses that they are trying to get you to altogether exclude by adding back their depreciation to arrive at adj op income.

· They are closing the margin gap with industry leader, Compass Group and have now strung together two consecutive quarters of improvement in adjusted operating margins in conjunction with top line growth. The two together had been elusive for a while. In 2017, they disappointed with organic growth, but saw margin expansion. Then in Q1 they saw meaningfully improved top line growth at the expense of 50bps in margin contraction.

· Longer term, their acquisitions will help with margins through increased purchasing scale with Avendra and better capacity utilization and route density with AmeriPride.

· Inflation: they saw an uptick in labor inflation but feel comfortable with their ability to deal with this based on pricing power as well as investment to improve productivity. E.g. investing in consumer-facing technologies, self-help kiosks

Continue reading “Aramark 3Q18 Earnings Update”

Current Price: $1,896 Price Target: $2,400

Position Size: 3% TTM Performance: 18%

· Revenue (+20%) and EPS (+36%) were better than expected, but guidance was a disappointment. Gross bookings were basically in line with consensus at $23.9B, up 15% (11% constant currency).

· They saw EBITDA margin expansion this quarter, but guided to weaker than expected margins next quarter.

· Though they do have a track record of guiding conservatively (see below), their expected deceleration in gross bookings to 5% to 8% constant currency growth is meaningful.

· In general, these results are very similar to last quarter as they continue to prioritize profit over growth. Part of the disappointment is that weak room growth is happening while the global travel market is extremely healthy. Though, this disruption to room night growth is somewhat self-inflicted.

· Room night growth slowing due to reduced ad spend:

o Current quarter was good, but they guided to a slowdown in Q3. Room growth for Q2 was +12% ahead of the high end of their +7-11% guidance. Guidance for next quarter is 6-9% (consensus +13%). They blamed the deceleration on the World Cup and weather (heatwave) in Europe.

o Ad spend has been part of their engine of growth and their ability to spend at scale has enabled their success. They have been trying to dial this back for several quarters.

· They want people to go directly to them to book in the same way they go directly to Amazon to buy something. This means less performance ad spend and more general brand advertising like TV. They are seeing an increase in direct booking as a result.

· On the call they said “I think we are in a fairly good position in terms of our optimization right now in terms of the balance between growth and profitability but there are always areas where we’re experimenting constantly in these channels”

· If they succeed in making the shift to higher ROI brand ad spend and continue to increase direct traffic as a % of the mix that should help margins long-term. But if this experiment doesn’t start paying off, I expect they re-adjust ad spending. Whether or not they need to back track on this calculated bet, the long-term thesis is still intact.

· They continue to work on a local experience product through both organic investment and acquisitions.

Continue reading “Booking Holdings 2Q Earnings Update”

The stock is up today after releasing good earnings with EPS of $1.69 vs consensus $1.61, and thanks to disclosing more information around their PBM business. Their 3Q18 EPS guidance is below consensus, but the focus is on the Aetna transaction closing in the coming 2-3 months. The Aetna deal is expected to close in Q3 or early Q4, pointing to higher confidence the deal will go through. A “substantial” number of states have approved the deal. MinuteClinic is introducing video visits through the CVS Pharmacy app 24 hours/day, leveraging Teledoc’s technology platform.

Continue reading “CVS 2Q18 earnings results”

Current Price: $77 Price Target: $101

Position Size: 3% TTM Performance: 20%

Cognizant reported 2Q18 revenue up 9% but below the street and at the low end of guidance. This included a $31m rev benefit from the adoption of new accounting rules. Excluding the accounting change, rev was up ~5%. Lower than expected revenue is on weakness in their largest end market, financial services. Higher gross margin, lower OpEx, and a lower tax rate led to EPS that was ahead of consensus, $1.19 vs $1.10. They maintained fully year revenue guidance, but street is well ahead of the midpoint of full year guidance. FY EPS guidance raised and is slightly ahead of consensus. Q3 rev and EPS guidance was below the street.

· Their high exposure to legacy IT, exposure to financials, and a growing war for talent, is leading to concerns that achieving both revenue growth and margin expansion may be difficult for them.

· “The story among large money-centric banking clients remains mixed.” Financials are their largest end market and they continue to see weak spending at banks on legacy IT work. On a positive note, they are seeing some digital work at banks that is offsetting some of this decline – they gave examples of projects related to blockchain implementation, cloud migration and AI related work. “We are optimistic about this shift because banks have realized that they have no choice but to rewrite their futures with digital.”

· Weak guidance for Q3 and high employee attrition (hit 22% this quarter) are also a concern.

· Despite this, Cognizant will continue to benefit from an overall strong IT spending environment and some of their slower growth end markets should improve. Spending from banks should improve as rates rise and healthcare will continue to improve with the transition to value based care. Legacy represents the vast majority of IT spend and it is still early innings of the digital transformation that is occurring across industries. Continue reading “Cognizant 2Q18 Earnings Results – Weaker Revenues at Better Margins”

Current Price: $205 Price Target: $230

Position Size: 3.6% TTM Performance: 28%

Apple beat on top and bottom line and issued guidance ahead of consensus. They missed by a very small margin on iPhone units (41m units), but this is not a key quarter for phones given new product launches in Sept. Revenues were up 17% an acceleration from last quarter and their 7th straight quarter of accelerating growth. EPS was up 40%. Growth was impressive across products with the exception of Mac and iPad. iPhone revenues were +20% almost entirely driven by price increases. Services grew 31% to $9.5B representing 18% of rev in the quarter. “Other” revenue was up 37% driven by Wearables (Apple Watch, AirPods and Beats) which were up 60%, exceeding $10B for TTM. Mac and iPad revenues were both down 5%. Together they account for about 18% of TTM revenue.

[MORE]

Thesis intact. Key takeaways:

• Buybacks – they have repurchased almost $220 billion of their stock (including $20B this quarter) since they announced in March 2012 that they would start to buy back shares (and pay a dividend). Since that time, shares outstanding have dropped by about 25%.
• Price increases are sticking – iPhone X was the most popular phone in the quarter again which drove the ASP up 20% to $724. Market share leader Samsung recently reported smartphone revenue down 22% driven largely by lower ASPs, citing “intense price competition.”
• Demand is strong – substantiated not just by their ability to take price, but 3.5m units of lower channel inventory means demand was stronger than what was reported.
• Gaining share – Not surprising given the last point, iPhones grew faster than the market, taking share in many geographies including the US and Greater China. Units in the US were up double digits.
• Services performance is playing into bull thesis – Apple’s ability to monetize their >1.3B installed base through higher margin services is widely viewed as the bull thesis on the stock and next leg of growth as the smartphone market matures. (Higher margin less investment) They are on track to meet services revenue target ($50B in 2020) sooner than planned. They hit 300m paid subscribers (+60%) though they don’t break this out at all. This nice thing about this leg of growth is that it’s highly margin accretive and requires less investment in the sense that they sort of crowdsource some R&D by harnessing the power of an army of outside app developers and then share in the value they create.
• Exclusive content is a focus – This quarter they announced a partnership with Oprah for original content.
• Active installed base on iPhone grew double-digits. With units only up slightly this underscore the lengthening replacement cycle which started with the decline in subsidized phone plans.
• China – Revenues were up 19% in the quarter, slightly trailing US growth. Represents 18-19% of total sales. Top 3 selling phones in the quarter were iPhones and iPhone X was the number one phone. They opened their 50th retail store in China during the quarter.
• While Services are widely considered as the next growth opportunity, Apple also has the opportunity to grow in Enterprise. This is not really talked about much yet, but I think several things hint at their Enterprise aspirations. Tim Cook gave multiple examples on the call of how enterprises are now using iPads and iPhones (they even gave a shout out to Aramark as an example). Earlier this year they announced a new initiative that will make is easier for developers to make apps available on Macs. So apps will work across devices. With most businesses now being BYOD, having a desktop that functions seamlessly with the mobile devices that employees are already using makes sense. MSFT did this with Windows 10. It was the first version of Windows that was the same across devices. But the prevalence of Windows on desktops didn’t drive purchasing decisions on mobile. Apple may have an opportunity in the reverse. On the call Luca Maestri said “more and more companies are giving their teams a choice when it comes to the devices they use at work, including Salesforce…the majority of their 35,000 employees are using Macs.” And Cook said, “We’re working with key partners in the enterprise to change the way work gets done with iOS and Mac.” Global PC shipments last year were 262m units and Apple only has about 7% unit share. https://www.itproportal.com/features/the-rise-of-apple-in-the-enterprise/

• Trade:
  • Tim Cook’s view on tariffs generally: “They show up as a tax on the consumer and wind up resulting in lower economic growth and sometimes can bring about significant risk of unintended consequences.”
  • View on current tariffs: Of the three tariffs implemented so far, none of their products are directly affected. For the proposed 4th tariff of $200B that’s in comment period, they are evaluating and will give their feedback to Washington. It’s a “tedious process” and they’re not commenting publicly on that yet.
• “Cord cutting is going to accelerate and accelerate faster than widely thought.” (AAPL and GOOGL are both potential beneficiaries of this).

Valuation:

• Strong balance sheet and FCF generation continue. $129B in net cash. YTD FCF is about $48B, full yr should be about $64B.
• The stock is undervalued and the substantial buyback will support valuation. Trading at close to a 1.5% dividend yield, a 7% FCF yield and a <15x P/E.
• Returned almost $25 billion to investors during the quarter, including $20B in share repurchases. They have $90B left in their authorization.

The Thesis for Apple:

• One of the world’s strongest consumer brands and best innovators whose product demand

has proven recession resistant.

• Halo effect -> multiplication of revenue streams: AAPL products act as revenue drivers

throughout portfolio – iPhone, iPod, MacBooks, iPad > iTunes, Apps, Software, Accessories,

• Mac gaining share in PC market and iPhone robust global demand driven by China/EM.
• Strong Balance and cash flow generation.
• Increasing returns to shareholders via dividends and buybacks.

$AAPL.US

[tag AAPL]

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!