Category: earnings

Current Price: $459 Price Target: $540 (Increasing from $480)

Position Size: 2% TTM Performance: +14%

SHW reported a weak 1Q, missing estimates on lower volumes across all three segments. They saw a slow start to the architectural painting season in N. America and continued challenging conditions in “many end markets outside N. America.” Despite this, the stock is up on positive outlook in N.A. w/ an expected rebound in volumes in 2H and better gross margin performance. Despite miss, management reiterated full year EPS guidance (+13.5% YoY). Very positive commentary on expectations for N. America paint stores (drives majority of their profit) on an expected improvement in housing turnover. In addition, price increases and declining raw material pressure may lead to positive revisions on improved margin expectations.

Key Takeaways:

· SHW is set to benefit from higher product prices, good volume growth, falling raw material costs and an improvement in housing.

· Gross margins improved sequentially, flat YoY, despite the volume shortfall and higher raw material costs. This is encouraging given mgmt. expectation that YoY raw material inflation will be highest in Q1. They expend continued GM expansion and expect volumes to improve over the balance of the year, particularly in the back half.

· They saw broad based softness in Asia and Europe.

· The Americas Group: 55% of sales, +3.6%

o Despite a strong backlog and project pipeline reported by their professional customers, volume growth was slower than expected.

o Weakness this quarter is not a cause for concern. This is the seasonally smallest quarter for their paint stores business, and can be volatile year-to-year. Better indicator of demand is painting contractor’s feedback on project backlog. They are universally optimistic, report seasonably high project backlogs and a very healthy pipeline of new projects.

o They would be a big beneficiary of an improvement in the housing market.

o Opened 15 new stores

· Consumer Brands Group: 16% of sales, down less than 1%

o FX headwinds(-1.6%)

o Most of the softness in demand in the quarter was in markets outside North America, most notably Asia-Pacific.

o Operating margin in the first quarter expanded sequentially and YoY

o “we are very well positioned across all North American retail channels heading into the important spring selling season.”

· Performance Coatings Group: 29% of sales, modest sales growth

o Operating margin improvement despite raw material pressure.

· Guidance Reaffirmed

o Sales guidance for Q2 +2-5%; full year +4-7%

o Reaffirmed full year 2019 adjusted diluted net income per share guidance to be in the range of $20.40 to $21.40 vs $18.53 in 2018. Midpoint slightly below street.

Valuation:

• Expected free cash flow of $2B in 2019, trading at over a 4.7% FCF yield.
• Increased our quarterly dividend by 31%. Dividend yield 1%.
• Given growth prospects, steady FCF margins and high ROIC the stock is undervalued. They deserve a premium multiple based on large exposure to the N. American paint contractor market and no exposure to the cyclical sensitive auto OEM end market.
• Balance sheet leverage from the Valspar acquisition continues to improve; they expect to get to under 3x by the end of the year.
• Buybacks should accelerate in 2019 as Sherwin returns to its historical capital allocation.

Thesis:

• SHW is the largest supplier of architectural coatings in the US. Sherwin-Williams has the leading market share among professional painters, who value brand, quality, and store proximity far more than their consumer (do-it-yourself) counterparts.
• Their acquisition of Valspar creates a more diversified product portfolio, greater geographic reach, and is expected to be accretive to margins and EPS. The combined company is a premier global paint and coatings provider.
• SHW is a high-quality materials company leveraged to the U.S. housing market. Current macro and business factors are supportive of demand:
  • High/growing U.S. home equity values. Home equity supportive of renovations.
  • Improving household formation rates off trough levels (aging millennials).
  • Baby boomers increasingly preferring to hire professionals vs. DIY.
  • Solid job gains and low mortgage rates support homeownership.
  • Residential repainting makes up two thirds of paint volume. Homeowners view repainting as a low-cost, high-return way of increasing the value of their home, especially before putting it on the market.

$SHW.US

[tag SHW]

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Key takeaways:

Current Price: $333 Price Target: $388

Position Size: 3.50% 1-year Performance: -12%

Lockheed’s 1Q19 earnings results were impressive with organic revenue growth of 23% (including an 8% boost from an extra work week). With bookings trend still positive (1.21X in the quarter), the revenue growth looks sustainable for the rest of the year (although not as high as 1Q). Margins expanded as well, and as new programs headwinds ease during the year, we should expect continued margin gains. This quarter, Lockheed delivered 26 F-35 jets (vs. 14 in 1Q18). During the call, management highlighted the increased international demand for the F-35, which will represent nearly half of the growth for this program in the future. LMT has facilities in place to ultimately produce over 180 aircrafts a year. The CFO noted some frustration with the US Air Force (discussions on driving down the price, as well as committing to 48 jets/year over the next 5 years vs. 60 jets initially projected). Overall 1Q19 earnings were much better than expected, explaining today’s positive stock reaction.

Continue reading “Lockheed Martin (LMT) 1Q19 earnings summary”

Key Takeaways:

Current Price: $178 Price Target: $177 (NEW)

Position Size: 1.94% 1-year Performance: +30%

UNP reported a revenue decline of -2% (but with an average price slight acceleration from last quarter to +2.75% – enough to offset some cost inflation), and an operating ratio that improved 100 bps y/y, despite weather related challenges (160bps impact including lost revenue and increased costs). Heavy snowfall and flooding resulted in track outages affecting train speed and network fluidity, but the implementation of the Unified Plan 2020 (focused on asset utilization) is having a positive impact on freight car velocity, terminal dwell time and train speed. UNP’s operations proved more resilient to weather disruptions than it did in the past (our fear heading into the quarter). The outlook for 2019 cost savings is positive, with a step-up in net cost savings in Q2-Q4. We are raising our price target to $177 to account for a better operating ratio than expected.

Continue reading “UNP earnings summary”

Key takeaways:

Current price: $126 Price target: $139 NEW ($123 OLD)

Position size: 2.30% 1-year performance: +15%

Pepsi reported +5.2% of organic revenue growth, helped by an “extraordinary” Super Bowl season. Core EPS increased 3% y/y ex-FX. Its snacks and soda segments had good sales growth, and the CFO noted an improvement in their competitiveness. However volume expansion did not last for its North America beverages segment (price increases drove the sales up), and overall growth will slow during the rest of the year. We should not expect operating margins to expand throughout the year either, as the company pursues investments to streamline its operations, combined with higher raw material costs. On the positive side, Pepsi reiterated its 2019 guidance. Overall this was a good quarter for the company. Continue reading “Pepsi 1Q19 earnings results”

Key takeaways:

Current Price: $190 Price Target: $233

Position Size: 1.82% 1-Year Performance: +14% (since inception 12/20/2018)

STZ reported its 4Q 2019 earnings results this morning. Beer shipment remains high at +8%, and total beer sales grew +9.3%. During the call, management highlighted the strength Corona and Modelo, in addition to their product innovation capabilities, as driving continued market share gains in North America. It was highlighted that 1Q20 will reflect some inventory destocking, so a slowdown in growth rate should be expected in 1Q20. Beer EBIT margin was above last year at 40.5% vs. 37.9%. Better price/mix and lower marketing spend helped expand margins.

In addition to today’s good results, last night they announced the sale of lower-tier wines (30 brands out of the 64 lower price owned by STZ) to E&J Gallo for $1.7B, allowing STZ to focus on premium, higher growth/higher margins brands. Those brands were $1.1b in sales in FY19 (38% of wine sales). This had been talked about by management but the deal is closing sooner than what we had anticipated. Overall we are pleased with the results and look forward to future announcement around the use of cash from the wine sale.

Continue reading “Constellation Brands (STZ) 4Q19 earnings summary”

Key Takeaways:

Current Price: $146 Price Target: $129 (under review)

Position size: 2.86% 1-Year Performance: +37%

McCormick released its 1Q19 results and reiterated their initial 2019 guidance. Organic growth is back on track (+4% organic) after the 4Q18 shortfall due to inventory issues. High volume in both Consumers and Flavor Solutions drove the sales growth this quarter. Retailers orders were supported by higher customer consumption, and increased sales to quick service restaurants helped the Flavor Solutions segment. Revenue growth is better than most food competitors, which continues to explain MKC’s premium valuation. Recent successful acquisitions (French’s mustard and RedHot sauce for example) as well as the introduction of new products are helping sustain good top line growth. Overall this quarter was pretty uneventful and continues to show why we own this stock: steady, reliable growth supported by good underlying demand for their products. Our price target is under review.

. Continue reading “McCormick 1Q19 earnings results: back on track”

Current Price: $1,737 Price Target: $2,400

Position Size: 2.6% TTM Performance: -6%

Key Takeaways:

· Slight miss on revenue, beat on EPS. While revenue was below consensus, it was ahead of the high-end of their guidance.

· Weak guidance: disappointing Q1 guidance driven by a weakening European market (the vast majority of their revenue) and higher ad spend.

· They have a track record of conservative guidance – they almost always come in ahead of the high end of their bookings guidance on a constant currency basis.

· Europe softening – they witnessed a slow start to the year, primarily in their core European markets, which they believe is largely due to overall macroeconomic factors. Average daily rates were a little weaker than expected and they guided to a meaningful deceleration in room night growth.

· FX headwind is expected to be significant this year. Current rates assumed in guidance reduces gross booking growth, revenue growth and non-GAAP EPS growth by 250 bps for the full year and 500 bps for the first half.

· Investing for growth: this will compress Q1 margins by ~350bps and reduce their full year EBITDA growth by a few percentage points. This reflects increased spend on brand advertising, customer acquisition and incentive programs and spending to support their new payment platform. They are investing in a payment platform that supports non-hotel properties, and will facilitate growth in transport and local attractions business.

· 171 million worldwide room nights booked in Q4, up 13% YoY and ahead of the high-end of guidance.

· Gross bookings of $19.6B were a little lower than expected (+13% constant currency) a slight deceleration from +14% last quarter.

· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. For the first time they disclosed revenue for this business – it now makes up 20% of revenue. They also said 40% of Booking’s active customers booked an alternative accommodation property at some point during the past 12 months.

· Growth vs. margins: They have been trying to “optimize” ad spend for several quarters by spending less on performance advertising (e.g. Google AdWords) and more on brand advertising (e.g. TV commercials). The idea is that brand advertising drives direct traffic to their site, resulting in a higher ROI. This ad spend/rev growth algorithm will continue to be a focus going forward as clearly the trade-off between growth and spend persist.

· Direct channel mix increased again (“well over 50%” of booked room nights). Probably not a coincidence that they now say over 50% of their bookings come from mobile devices, as mobile traffic is more likely to be direct (via app).

Continue reading “Booking Holdings 4Q Earnings Update”

Current Price: $50 Price Target: $60 (updated for the stock split)

Position Size: 3.6% TTM Performance: 29%

TJX reported Q4 EPS that was in-line with the street and much better than expected SSS (+6% vs consensus +3.5% (guidance was 2-3%). Guidance was a little below expectations due to higher wage and freight costs and currency headwinds. For Q1 wage and freight will be a 7% drag on earnings, for the full year these are expected to be a 4% drag. It’s been a very mixed quarter of results for retailers so far. WMT, COST, TGT and now TJX have all stood out with strong results while others reported a poor holiday season, particularly department stores. TJX, along with other off-price retailers, captured market share in the US. TJX’s sales have doubled over the last 10 years despite a changing retail environment.

Key takeaways:

· TJS Q4 SSS were an impressive +6%. Traffic was again the biggest driver (SSS numbers do not include e-commerce).

· Performance was solid across all divisions and geographic regions.

· Core Marmaxx division (60% of revenue) delivered SSS growth of 7%.

· For the full year, HomeGoods was their fastest growing division with 10% square footage growth and 4% SSS.

· The margin pressure they are expecting from freight and wage increases is a continuation of trends they saw last year.

· Q4 gross margins were flat and inventories grew less than sales. For fiscal 2019 merchandise margin was essentially flat despite a significant increase in freight costs. Ex-freight, merchandise margins improved significantly.

· Optimistic comp guidance: Fiscal 2020 EPS outlook is based on SSS growth of 2%-3% (3%-4% at Marmaxx). This is notably positive because for at least the last 6 years, they have started the year with comp guidance of 1-2% and have ratcheted up that guidance as the year progresses.

· Announced they are launching e-commerce for Marshall’s later this year.

· Tariffs: when asked on the call about the impact of tariffs on product availability, mgmt. said longer term it’s probably going to be a benefit for them because any chaotic change in the way vendors manage or allocate product will ultimately benefit them.

· Continue to take share in Europe: In Europe comp sales grew 3% despite the challenging retail landscape. They have over 500 stores in Europe- in mainland Europe, they are in only 4 markets: Austria, Germany, Poland and the Netherlands. They also have stores in the UK

Continue reading “TJX 4Q19 Earnings Update”

Key Takeaways:

Current Price: $96.7 Price Target: $136

Position Size: 1.94% 1-year Performance: -12%

EOG reported 4Q18 EPS and EBITDA below consensus: while the US oil production beat expectations, EOG had higher unit costs and lower natural gas production. Capex was higher as well due to more efficient drilling that led to more wells being completed. Importantly, in 2H18 EOG showed improvement in its Permian performance (big driver to its growth), alleviating some concerns around this region that lingered in 1H18. The company’s premium drilling strategy started in 2015 is paying off: ROCE was 15% in 2018, way above its 10% target.

It appears that capex will be more front-end loaded in 2019, but the management team reaffirmed being committed to its capital budget (reassuring!). 2019 guidance for oil production was below consensus but that includes the international asset sales. Adjusting for the sale, the miss is only ~2%. The management team seemed confident to meet its 2019 goals thanks to good operating momentum and efficiency gains. Continue reading “EOG 4Q18 earnings results”

Key Takeaways:

Current Price: $64.88 Price Target: $90

Position Size: 2.11% 1-year Performance: -1%

While CVS reported 4Q18 earnings that beat market expectations, its continued struggle within its long-term care business and lower than expected 2019 guidance is pressuring the stock today. The bright spot was the continued growth in filled prescriptions (+7.4% pharma same-store-sales), proving that the online threat is not impacting store sales. Retail/Long-Term Care (LTC) operating margin was down 130bps in the quarter on greater investments in the business and the LTC weakness. [more]

PBM claims were up +5.7%, and although purchasing economics improved, pricing pressure continued. The client retention rate remains high at 98% but excludes the Centene upcoming loss. The MinuteClinic sales grew +9.8% y/y, a good testament of the value of this service within the stores.

This was the company’s first quarter including Aetna. CVS created a new health-care-benefits segment equivalent to the former Aetna health-care segment, which includes insured and self-insured medical, pharmacy, dental and behavioral health products and services.

There are a few negative points to highlight:

· The 2015 Omnicare acquisition (long-term care business) was the biggest deal CVS did until the Aetna merger. Years later CVS hasn’t been able to fix this business, triggering some questioning regarding CVS’s ability to integrate successfully another unit. Instead of being the growth driver its was advertised to be in 2015, Omnicare is facing industry challenges such as nursing homes bankruptcy, declining occupancy rates and payment pressures. “The LTC business has continued to experience industrywide challenges that have impacted our ability to grow the business at the rate that was originally estimated when the Company acquired Omnicare, Inc. in 2015,” CVS said. Almost half of what the company paid for Omnicare has been written down so far. Right now the bull thesis on the stock lies on the ability for CVS to integrate Aetna successfully, and the Omnicare failure is definitely creating some doubts in investors’ minds. We think the management team needs to bring more clarity to their strategy going forward and gain back investors’ confidence.

· CVS sees 2019 as (yet another) year of transition:

o Aetna integration. While we should see $300-350M of expected synergies, the savings will be fully reinvested, offsetting any incremental margin expansion from the acquisition

o Retail/LTC segment will be down 10% in 2019:

§ Half of the weakness is coming from the LTC business struggles & lapping of the tax reform investment

§ Half of the weakness is coming from continued reimbursement pressure and a declining generics benefit

· The corporate tax rate drop from 35% to 21% did not all fall to the bottom line as CVS reinvested some in higher wages and benefits.

To be fair, we found their action plan for 2019 attractive (more details to come in June), such as:

· New product lines in health & beauty

· Expanding higher margins service offerings

· A new PBM “guaranteed net cost” model offers greater simplicity to healthcare partners, which CVS expects to see more widely adopted in 2020 (not much traction seen in 2019). Rebates are 100% passed on to the client

· A new cost reduction effort for the combined companies (this is in addition to the $750M synergy target)

· Applying new technologies to improve health (collaboration with Apple)

· Programs to prevent hospital readmissions: by cutting them in half for example, CVS would reduce expenses by $300M.

Overall we still think CVS has the right long-term strategy by becoming vertically integrated, however the recent acknowledgement of the failure to turn around Omnicare is putting a dent in the trust we have with CVS. We expect the next investor day in June to be very relevant in gaining back some lost confidence.

Thesis on CVS

• Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.
• Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.
• shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)

$CVS.US

[tag CVS]

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