Key Takeaways:
· 4Q19 results were better than expected
· 2020 guidance reflects conservatism due to current oil prices: greater focus on cost reductions and less so on oil production growth
· Dividend increase of 30% reflects management’s conviction in their premium strategy. Even if oil prices dip below $40/barrel, EOG can cover its dividend without issuing equity
Key Takeaways:
1. Revenue recognition restatement is not a major issue and does not impact cash flows.
2. Robust leasing activity. In 2019, they had their highest level of tower leasing activity in more than a decade. However, they did see a slowdown in activity in Q4, which they feel is temporary and a result of uncertainty around the outcome of the pending merger between T-Mobile and Sprint. They expect a return to significant activity in the second half of 2020.
3. Excluding the impact of the restatement, 2020 guidance was maintained.
Thesis intact, highlights on the quarter:
· They beat on site rental revenues (almost 90% of revs) and missed on Services revenue, which was impacted by the restatement.
· 4Q19 site rental revenue was $1,301m, above consensus of $1,263mn.
· The restatement came after consultation with the SEC’s Office of the Chief Accountant. This was spurred by a subpoena over a separate issue (capitalization and expense policies related to tenant installations and upgrades), which seems to have been put to rest. Based on the consultation, CCI came to a separate conclusion related to their revenue recognition practices – that a portion of the transaction price from its installation services should be recognized over the course of the lease. They restated historical financials to reflect this, however, CCI will recognize the same absolute dollar amount of both revenue and gross margin over the course of its customer contracts – it’s just a timing issue.
· The 2020 outlook now implies adj. EBITDA growth of 6% YoY, and AFFO growth of 9% YoY to a midpoint of ~$2.6B or $6.12/share.
· LT tower activity should remain robust. Continued growth in mobile data demand is driving their customers to make significant investments in their existing 4G networks. And they expect their customers to spend the next decade investing in deployment of 5G.
· Could see churn picking up from the TMUS/S merger in 2020. However, management views a T-Mobile/Sprint merger as a long-term positive as Sprint has valuable spectrum holdings which it has not been able to fully deploy due to capital constraints, and the combined entity appears likely to accelerate deployment of 5G as part of its integration. Management believes that investment from the combined T-Mobile/Sprint, will likely more than offset the impacts of T-Mobile decommissioning duplicative sites.
Valuation:
· Strong AFFO growth will drive the valuation.
· Trades at a discount to SBAC and AMT.
· High incremental margins means AFFO growth should outpace site rental revenue growth.
· Low maintenance capex (~2% of revenue) supports high AFFO margins.
· 2020 AFFO ($6.12/share) yield of ~4%. This is an attractive yield given the secular growth potential.
The Thesis on Crown Castle:
1. CCI is well positioned to capitalize on secular mobile data demand growth and small cell/urban opportunity.
2. Strong competitive position. Leading US tower company.
3. Toll booth business – offensive (secular growth) & defensive (4% dividend & contracted cash flows) characteristics.
4. Revenues derived from long term contracts with price escalators and good visibility.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$CCI.US
[tag CCI]
[category earnings]
Key Takeaways:
· Solid 4Q results: they beat on revenues and EPS.
· Weak guidance because of Coronavirus impact: they are now projecting Q1 revenue down 3% to 7%, the street had been expecting 5% growth. And they expect 1Q room nights booked to be down 5% to 10% and gross bookings down8%-13%. This implies room nights in March down 25-35%, so results are meaningfully deteriorating with the recent cases of the virus in Italy. If the virus spreads more broadly across Europe, the impact to their results will get much worse. APAC is 20% of room nights, with no single country more than mid-single-digits. ADRs are lower in APAC, so share of gross bookings is less than that.
· Underlying operations performing well: before the virus outbreak, January was trending above expectations. They are progressing on growing their alternative accommodations business and their connected trip strategy.
Current Price: $1,694 Price Target: $2,400
Position Size: 2.5% TTM Performance: -1%
Highlights:
· Solid gross bookings: Room nights grew 12%, ADRs were down 4%, putting constant currency gross booking growth at ~7%.
o Q4 room nights were 191 million, up 12% YoY. Exceeded high end of guidance range.
o Full year 2019 room nights were 845 million, up 11% YoY.
· Alternative accommodations: $3.1B in revenue – now at 21% of overall revenue for the full year. Grew 14% at a “healthy profit margin.” Now has 6.3 million listings.
· Payment product – requires additional investment but will help them control and opportunistically change room prices which they believe will improve their room night share. Payment platform will also aid their connected trip strategy.
· Connected trip strategy gaining traction:
o their strategy is to build a multi-product offering of accommodations, flight, attractions, ground transport and dining – all connected by a seamless payment network.
o Launching flight product more broadly. Should be available to ~50% of customers by the end of 2020. Launching air product should help with gaining share in the US market as air/hotel bookings tend to be more bundled in the US. Expedia dominates the US market, while Booking dominates Europe.
o They saw a lift in rentalcars.com (+12% YoY) as they leveraged integration of this with Booking.com.
o They intend to grow this strategy with owned properties, such as Opentable, and by partnering with 3rd parties.
· Cost cutting – Mgmt. commented on the call that they will focus in 2020 on looking for opportunities to reduce their cost structure. This is new and not something they’ve discussed before. This comes after EXPE has announced meaningful cuts, including major layoffs.
· Improving ad spend efficiencies. Saw solid top line growth while reducing reliance on performance marketing. Performance marketing expense only grew by 2%, driving 40bps of op leverage in the quarter. Brand marketing was down by 31%, adding 130bps of leverage. Going forward, they will no longer break out performance and brand marketing. They will report them combined.
Valuation:
· Repurchased >$8billion of stock in 2019.
· Strong balance sheet with no net debt.
· The stock is still undervalued – trading at >5.5% FCF yield on 2020.
Thesis:
1. Booking is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.
2. BKNG has several competitive advantages relative to Online Travel Agent (OTA) peers:
· Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings
· They operate largely on an agency basis which allows them to continue to grow their network and do so profitably
· Strong position in China/South East Asia via Ctrip and Agoda
3. Booking’s addressable market is growing driven by:
1.) Alternative accommodations
2.) Increased penetration (growth of mobile/internet)
3.) Global growth of travel spend > GDP.
4. Their asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.
$BKNG.US
[tag BKNG]
[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
MSFT said they will not meet their Q1 sales guidance related to PC suppliers in China. They said “although we see strong Windows demand in line with our expectations, the supply chain is returning to normal at a slower pace than anticipated.” The guidance cut is only for their More Personal Computing segment which includes Surface and Window OEM licensing – the rest of their guidance remains unchanged.
Microsoft update on Q3 FY20 guidance
REDMOND, Wash. — Feb. 26, 2020 — As Microsoft closely monitors the impact of the COVID-19 health emergency, our top priority remains the health and safety of our employees, customers, partners, and communities. Our global health response team is acting to help protect our employees in accordance with global health authorities’ guidance. Worldwide, Microsoft employees are working to support organizations addressing the challenges on the ground. Microsoft also continues to make donations to relief and containment efforts, including directly providing technology to help hospitals and medical workers.
On Jan. 29, as part of our second quarter of fiscal year 2020 earnings call, we issued quarterly revenue guidance for our More Personal Computing segment between $10.75 and $11.15 billion, which included a wider than usual range to reflect uncertainty related to the public health situation in China. Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.
As the conditions evolve, Microsoft will act to ensure the health and safety of our employees, customers, and partners during this difficult period. We will also continue to partner with local and global health authorities to provide additional assistance. We deeply appreciate the commitment of the people and organizations that have united to address this health emergency; our thoughts are with all those affected across the world.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$MSFT.US
[tag MSFT]
[category equity research]
CCI reported 4Q results, with in-line organic site rental revenues, but they reported an accounting change that impacted services revenues, EBITDA and AFFO. They received a subpoena from the SEC, which has resulted in CCI determining that their revenue recognition policy did not meet with GAAP. It seems to relate to installation services that should have been recognized over the life of the lease rather than up front. As a result, they are restating 5 years of financials and full year guidance for 2020 was reduced by 4%. More details after the call.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
Key Takeaways:
· BKNG beat on 4Q revenues and EPS.
· The stock is down because they issued weak guidance due to impact from the Coronavirus.
· Projecting Q1 revenue down 3% to 7%, the street had been expecting 5% growth.
· They expect 1Q room nights booked to be down 5% to 10%.
· Mgmt. said they saw “a significant and negative impact” and that it is not possible to predict where and to what degree outbreaks of coronavirus will disrupt travel.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
Key Takeaways:
1. Beat driven by higher than expected same store sales of +6% (vs street +3.2% and guidance of +2%-3%).
2. They had strong SSS results across all segments with particular strength in TJX International (Europe/Australia) demonstrating continued share gains. SSS int’l were +10% vs. cons 3.6%.
3. Guidance light, but seems conservative.
4. They have seen no impact from Coronavirus and say it’s too soon to predict any impact. They do not directly source a significant amount of goods from China.
Current Price: $64 Price Target: Raising to $70 from $65
Position Size: 3.7% TTM Performance: 20%
Highlights:
· TJX reported a strong quarter beating on sales and EPS. 4Q EPS of $0.81 vs. cons. of $0.77 and guidance of $0.74-$0.76
· Earnings guidance light, but seems conservative. Both Q1 and FY2021 guidance was slightly below the street, but mgmt. tends to guide conservatively.
· FY2021 guided to EPS of $2.77 to $2.83 per share vs street $2.86 w/ SSS guidance of with comps of 2%-3% vs. consensus of 3%.
· 1Q guided to EPS of $0.59-$0.60 vs cons. of $0.61, with comps of 2%-3% versus cons. of. 3.1%,
· They tend to guide conservatively, with EPS and revenue beating consensus 18 of the last 21 quarters
· Traffic was again the biggest driver of SSS. The fact they continue to grow traffic while many peers are seeing the opposite, validates that their concept is resonating w/ consumers and is a promising indicator for future SSS. E-commerce sales are not included in SSS numbers.
· Marmaxx (their largest segment) – comp sales increased 6%, lapping a very strong 7% increase last year.
· International again had the strongest SSS of +10% – they continue to take share despite a tough retail environment in Europe.
· GM were better than expected on “significantly” higher merchandise margins but somewhat offset by higher SG&A.
· They now have over 4,500 stores, including more than 1,200 outside of the United States.
· They continue to see excellent inventory availability
· Chart below demonstrates TJX’s resistance to e-commerce and economic cycles. Despite the ramp in e-commerce share of retail over the last several years, of the companies listed below TJX is nearly half of aggregate incremental spend. The companies listed below represent more than 2/3 of the ~$275B in US apparel retail sales. Additionally, in the ’08 to ’09 period they were one of few retailers that continued to grow and post positive SSS.
[m
ore]
Valuation:
· Balance sheet is strong. They have no net debt.
· Store openings will bolster top line growth.
· They have been steadily FCF positive, even through the financial crisis they posted 3% FCF margins. LT FCF margins are ~7%.
· Valuation is reasonable at >4% forward yield.
The Thesis on TJX:
· Market leader: opportunity to benefit from a lasting paradigm shift in consumer frugality. Treasure hunters – TJX has strong brands that attract cost conscious consumers– evident through consistently strong customer traffic.
· Strong bargaining power with suppliers due to size.
· Quality: Solid and consistent execution and top line growth driving strong margins through cost cutting/inventory control.
· Shareholder returns: Strong returns, balance sheet and cash flows being used for share buyback program, dividend, and store expansion.
$TJX.US
[tag TJX]
[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
Disney just announced that Bob Iger is stepping down as CEO, effective immediately. Bob Chapek has been named the new CEO – he has been at Disney for 27 years and most recently served as Chairman of Disney Parks, Experiences and Products. Iger has been CEO for over 15 years and was expected to remain CEO until the end of 2021. While the timing was a surprise, Iger will stay on and assume the role of Executive Chairman and “will direct the Company’s creative endeavors,” while leading the Board through the end of his contract on Dec. 31, 2021. Mr. Chapek will report to Iger, and the Board of Directors. He will be appointed to the Board at a later date. In terms of timing, Iger said the purpose of handing over the CEO role now was to turn over day-to-day management in order to free him up to focus all his time on the creative side. Chapek is 60 years old and is signing a contract for just three years.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$DIS.US
[category equity research]
[tag DIS]
TIREX Commentary – Q4 2019
Thesis
TIREX utilizes fundamental research to find properties in high barrier markets, with higher occupancy and rent growth. By focusing on quality companies and avoiding unnecessary risks, the fund obtains a strong track record that has outperformed the benchmark and REIT ETF over time. We continue to hold TIREX because of the team’s growth focus with asset concentrations in supply constrained markets. Lastly, TIREX was the lowest cost active manager screened, at 51bps.
HLMEX Commentary – Q4 2019
Thesis
HLMEX utilizes fundamental research to find companies with strong quality and growth metrics that can be compared across the global landscape. By focusing on investments with competitive advantages, long-term growth potential, quality management, and corporate strength, HLMEX offers diversity to our EM allocation while generating alpha over the long run. We continue to hold the fund because of the team’s conviction in high quality companies and managed risk through diversification and evaluation.
