Category: earnings

Key Takeaways:

MMM reported 2Q18 revenue that were better than expected, with EPS in line after removing the one-time gain from the sale of its Communications Markets business. Revenue grew +7.4% y/y (+5.6% organic ex-FX), gross margins expanded by 120bps y/y, and operating margin increased 100bps mostly from better volume and productivity actions. Sales growth was broad based, with all segments seeing organic growth. Some of the beat this quarter was due to US customers accelerating their purchases ahead of an ERP roll-out in the US in Industrials, Safety & Graphics and Electronics & Energy (this has been implemented in Europe in the last 18 months). The impact from this implementation is a +50-100bps of growth pulled forward to 2Q18. Adjusted EPS grew 27% y/y thanks to organic growth, productivity efforts and a lower tax rate.

MMM returned $2.4B to shareholders via dividends and share repurchases this quarter. The management team increased the lower end of its share repurchase guidance to $4-5B from $3-5B.

The stock initially sold off as the management team adjusted its top-end EPS guidance for the year due to the sale of a business, but recovered since as the underlying fundamentals remain strong. Overall MMM has some good momentum in its pricing power, offsetting raw-material inflation. The new tariffs have little effect so far on the company’s costs, only estimated at 1c/share. However the management team is monitoring the impact from any increase in tariffs and possible retaliations, and could change sourcing and/or pricing increases if necessary. We are not changing our price target or position size at this point.

Continue reading “MMM 2Q18 earnings”

Key Takeaways:

Schlumberger 2Q18 earnings results were generally in line with expectations, with revenue +6% quarter/quarter, and margin +75bps q/q. Technology and software, differentiating factors for SLB’s margins, were offset by startup costs and transitory operational delays. Cameron (offshore activity) is slow to rebound, but should contribute to growth in 2018-2019. Management had a positive outlook for its international business, seeing positive pricing trends, projecting it to strengthen in 4Q. Initial guidance is for double digit growth in its international business in 2019, while capex needs remain at $2B, lifting the company’s FCF. Its equipment will be fully deployed by the 4th quarter, setting the stage for greater pricing power in 2019. However, its North American geography is projected to get worse before it gets better. During the quarter, SLB repurchased 1.5M shares. On the negative side, 3Q18 guidance came below consensus, with EPS up 10-15% q/q. Overall we are pleased with the results, and believe patience is key with this stock to see improving free cash flow.

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

Direct: 617.226.0025

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: $106 Price Target: $120 (new target price; increased from $105)

Position size: 5% TTM Performance: 42%

Microsoft reported solid Q4 results beating on the top and bottom line and delivering above consensus guidance. Revenue growth accelerated slightly from 16% last quarter to +17%, with double digit revenue growth across all segments. Revenue was $30B for the quarter and for the year crossed $100B for the first time. Top line results were aided by the weaker dollar which added 2pts. Windows and the PC cycle still matter, but Cloud is the key driver of growth. They saw strong demand in both, driven by a robust IT spending environment. Though Microsoft has trailed AWS, Cloud adoption is moving into a phase where Microsoft should have an advantage. The results this quarter substantiate that. The key is hybrid cloud and multi-cloud. Early cloud adopters tended to be smaller companies and digital native companies – companies that didn’t have enormous legacy data centers with tons of money invested in equipment or with critical data that they wanted to keep in-house. As larger companies with legacy IT infrastructure increasingly shift to the cloud, they will take a hybrid approach, which just means they still keep some stuff on-premise. It is a bridge between the old and new. Microsoft has an advantage with Azure stack because it is a highly differentiated product and the leading technology for hybrid. They are also well positioned because they have entrenched enterprise relationships. The trend to multi-cloud refers to companies wanting to use multiple vendors so there is no vendor lock-in or loss of bargaining power. So, adopting AWS doesn’t mean you wouldn’t also use Azure. Microsoft is and will continue to be a beneficiary of this trend.

Commercial Cloud (Office 365 commercial, Azure, Dynamics 365) revenues were $6.9B, up 53% and accounting for 23% of revenue in the quarter (up slightly from 22% last quarter). For the full year, Commercial Cloud was $23.2 a little ahead of expectations and full year cloud run rate is now close to $28B. Importantly, cloud margins continue to improve (+600bps YoY) which will help drive better FCF margins as the business scales. Within Commercial Cloud, Azure grew 89%. The “More Personal Computing” segment which includes Windows, Xbox, Surface, and all other hardware continues to improve. That segment accelerated to 17% growth on solid results from Windows Commercial (+23%), Surface (+25%) and gaming (+39%). This segment performance is consistent with their previous comments of an improving commercial PC market and a “stabilizing” consumer PC market. Free cash flow in the quarter was over $7.4B down 15% YoY reflecting higher capex in support of their cloud business. Capex was $4B in the quarter vs $2.3B in 4Q17. They returned $5.3 billion to shareholders with $3.2B in dividends and $2.1B in share repurchases.

Valuation:

· They produced $32B in FCF for the year putting them at close to a 4% FCF yield – reasonable for a company with double digit top line growth, high ROIC and a high and improving FCF margins.

· They easily cover their 1.6% dividend, which they have been consistently growing.

· Strong balance sheet with about $134B in gross cash, and about $57.5B in net cash.

· Increasing price target to $120 based on ~30% FCF margins and mid-to-high single digit top line growth.

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

[tag MSFT]

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!

Key Takeaways:

UNP reported revenue growth of 8%, but an operating ratio of 63% above consensus of 62% (lower is better). Fuel prices had a negative impact on margin of -100 bps (fuel costs +48% y/y), as the company passes on the increased fuel expenses to clients with a lag. The services related costs increase offset the productivity gains this quarter. UNP noted some one-time challenges that impacted performance: a tunnel collapse being out of service from May 29 to June 20 (this added 4-5 days for some freight as trains had to be re-routed), and train-crew shortages (which is improving). While those costs should persist in 3Q, overall 2H should show some productivity gains. Another negative point highlighted during the call was the decline in Permian volumes Frac Sand, as local sand mines come online. Freight revenue experienced positive performance: +4% volume (accelerating from 2% in 1Q18), +2% core pricing, +3.5% fuel surcharge, and a -1% mix impact. Free cash flow was better than expected, but helped by lower capex than estimates. The management team is more positive in its business environment outlook, and lifted its volume growth guidance for 2018 to low-to-mid single digit growth (from low single digit).

Volume growth will be supported by:

o future plastic shipments (chemical plants coming on stream)

o truck drivers shortages pushing conversion to rail in intermodal

o e-commerce supporting shipment of parcels.

So far UNP is being lifted by positive trends lifting volumes and prices, but a couple of one-time items impacted its productivity, masking any improvement in its operating ratio. We will monitor the fuel cost increase to make sure it is being passed on to customers in the coming quarters. We are not lifting our price target at this time, as we need to see its operating ratio improve at this stage of the economic cycle.

Continue reading “UNP 2Q18 earnings recap: underlying business trend is good, one-time items hit its operating ratio”

Key Takeaways:

Pepsi released Q2 earnings that were better than expected (granted on recently lowered sell-side expectations). Organic growth was +2.6% (consensus +2.2%). North America beverages remains soft, but saw sequential improvements following additional advertising efforts + new products (Bubly and Gatorade Zero), and should see continued positive momentum in 2H18. Frito Lay’s good performance in price and volume helped lift the overall company’s gross margin (positive mix impact). The emerging markets had strong growth +6% even with the Brazil truck driver strike limiting distribution of goods. As I had mentioned leading up to this earnings season, the company (as well as other consumer staples) is experiencing higher commodity and freight costs. Since a good portion of this quarter’s growth came from one-time items (Thailand beverage refranchising for example), the quality of growth going forward needs to be monitored. The company reiterated its FY18:

ü organic revenue growth of at least +2.3%

ü EPS +9% y/y.

Continue reading “Pepsi 2Q18 earnings: some relief from good growth but margins going forward still need monitoring”

TJX beat on revenue and EPS with better than expected SSS. Performance was solid across divisions and concerns around inventory availability were dispelled. SSS were +3% vs guidance of +1-2% with strong performance across their apparel and home categories. Traffic was the primary driver across all 4 divisions. Marmaxx division (60% of revenue) SSS were +4% driven mostly by traffic and slightly by ticket. International SSS were +1% despite a “challenging retail environment” in Europe (where they have over 500 stores). Full year guidance is 1-2% SSS (in their 40+ yr. history they’ve had only 1 year of negative SSS). They also mentioned they “have been disproportionately attracting new millennial and Gen Z customers.” Merchandise margins compressed a little, but gross margins were flat. They are seeing some headwinds from wages and “significantly higher” freight costs, offset by positive Fx and a lower tax rate. The midpoint of full year guidance was raised despite these headwinds and with a lower expected tax benefit. Full year EPS should be about $4.07 plus a $0.72 benefit from a lower tax rate.

Continue reading “TJX 1Q19 Earnings Update”

Thesis intact, key takeaways:

Cisco reported Q3 earnings and beat on the top and bottom line and guided in line with street. While the quarter was strong, the growth of Services revenue (26% of revs) seemed to be a little lower than expected and gross margins were lower. They had 70 bps of gross margin compression driven almost entirely by higher memory costs. This is similar to previous quarters and is an industry wide phenomenon. They continue to make good 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. Enterprise saw accelerated growth at +11% YoY driven by strong growth with Catalyst 9k units –the 9k switches are only sold with a subscription and are a key part their strategy of shifting their core business to recurring revenue. They saw strength in both campus and data center switching. Additionally, Applications and Security were both strong – up +19% and 11% respectively. As expected, Service Provider revenue trends continue to be weak, pressuring router sales – though exposure to this end market is decreasing. They repurchased $6.2bn worth of shares in Q3 and still have $25B remaining in their buyback authorization which they aim to complete in 1.5-2yrs.

Valuation:

· They have 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: $2,045 Price Target: $2,400

Position Size: 3% TTM Performance: 20%

Bookings reported a better top and bottom line but guidance disappointed. Total bookings for the quarter increased 21% to $25B (+12% constant currency). The source of the disappointing 2Q guidance is expectations of decelerating room night growth (+7-11% vs +13% in 1Q) caused by a reduction in performance advertising spend. Performance ad spending is primarily with Google and to a lesser extent with sites like TripAdvisor and Trivago. They are making a deliberate trade-off in reducing costlier (and fading ROI) performance ad spend, despite the impact to room night growth. The benefit is hitting margins and was the cause of the big EPS beat. This strategy is not new – rising advertising costs have been a theme across the industry and their response is consistent with what they have said the last couple quarters and is not a surprise. They are shifting ad dollars to brand advertising (like TV) in an attempt to get more direct traffic to their site as the ROI on performance advertising has gone down and as a result direct traffic is increasing as a % of the mix. After last quarter, many speculated that this may disrupt room night growth – which it has. The long-term thesis, however, is intact and they still have plenty of runway for growth.

Continue reading “Booking Holdings 1Q Earnings Update”

Aramark reported 2Q18 earnings, beating on the top and bottom line and raising the midpoint of EPS guidance. Revenue was up 6% constant currency with about 2% organic growth. The quarter included partial results from AmeriPride and a full quarter of Avendra. The key positive was the improvement in adjusted operating margins in conjunction with top line growth as the two together have been elusive. Importantly, the margin expansion was led by their core US food service business in contrast to their competitor Sodexo’s profit warning on inflation and increased competition. Sentiment was bad heading into the quarter as Aramark has had trouble hitting their organic growth and margin targets. In 2017, they disappointed with organic growth, but saw margin expansion. Then last quarter they saw meaningfully improved top line growth at the expense of 50bps in margin contraction. This was largely blamed on the onboarding of new contract wins. Management says they are on track to hit the FY18 7.2% margin target that they set in 2015, though with much of it back half weighted (implies a 7.9% adj. op. margin in 2H18 vs 6.5% in 1H18). Legacy growth was slightly below long-term target for 1Q, but they said they expect the legacy business to hit their “at least 3%” target for the full year. For 1H18 they are at 3.4%. Without adjustments, their operating profit would have been down almost 30%. Some of their adjustments and the capitalization of certain client related costs are a source of skepticism around the validity of their margins. This margin concern has been reinforced by profit issues at Sodexo and talk of rising delivery costs from their primary distributor, Sysco. Specifically, client contract incentives represent cash payments for renovations of client facilities – this hits the capex line and is in “other assets” on the balance sheet (net of accumulated amortization it’s close to $1B). Adj. operating income adds back that depreciation and, in doing so, added 80bps to the 2Q adj. operating margin. Longer term, their acquisitions will help with margins through increased purchasing scale with Avendra and better capacity utilization and route density with AmeriPride.

Continue reading “Aramark 2Q18 Earnings Update”

They beat on top and bottom line and reiterated full year guidance. Revenues were up 5%, slightly ahead of expectations. The street is at the high end of their guidance for the year. They continue to face some headwinds, but their pipeline of new business is solid which provides some reassurance on top line growth going forward. Drivers for the business primarily include new client wins, mortgage originations and total active loans. Their pipeline is strong with several new customer wins reported (e.g. added JPM to their originations solutions pipeline), but the pace of implementation has been a source of disappointment as the process for migrating new customers onto their platform, often from in-house or highly customized solutions, can be complex and slow. This was the cause of their guide down last quarter. Additionally, similar to last quarter, rising rates are negatively impacting mortgage originations, with industry volumes down 14%. That drop is driven by lower refinancing activity which now makes up 37% of originations – that’s the lowest proportion of total originations since 1995. In 2012 that proportion was 72%. This will continue as rising rates mean fewer people will be in a position to benefit from refinancing. This is a headwind in their Software Solutions segment (~85% of revenue), though originations make up only 10% of revenue and servicing is 75% and much steadier. Refi’s are a sub-segment of that 10% and, given pent-up demand in housing, purchases are going to start to outpace this. Overall, Software Solutions segment revenues were up 5% as servicing grew 7% and originations declined 4%. On the servicing side, they continue to dominate first lien loans with 62% share and are growing share in second lien loans. At the end of 2017 they had 13% share of second lien, they now stand at 17% share and expect to reach 30% once current commitments are implemented. Mortgage servicing costs continue to rise and should aid growth in this business as potential cost savings are an impetus for banks to adopt BKI’s software. Data analytics segment (~15% of revenue) revenues were up 3%. Growth going forward in this segment should be ~3-5%. M&A continues to be a focus, especially with the new CEO.

Continue reading “Black Knight 1Q18 Earnings”