BEXIX Commentary – Q4 2019
Thesis
BEXIX is driven through bottom-up fundamental research that provides diversification within our full EM allocation. The fund looks for growth companies across all market caps that have a sustainable competitive advantage. We like BEXIX because the team takes advantage of companies that focus on consumer business and technological advancements, helping the fund produce returns above the benchmark (MSCI Emerging Markets Index).
LISIX Commentary – Q4 2019
Thesis
LISIX is a bottom-up, growth-based fund that completes the core satellite strategy within global equity. The fund is unique in that it focuses on individual stocks rather than markets and looks for reasonably priced companies with strong growth potential. We like LISIX because of the managers’ expertise in various market caps, geographies, and sectors which helps keep the fund diversified while providing strong upside and downside capture over time.
HILIX Commentary – Q4 2019
Thesis
Serving as a satellite holding, HILIX is a value style fund that takes advantage names that have underperformed recently and are cheaply priced. The team generates alpha by finding companies with strong fundamentals that are overlooked during times of low consensus expectations. We like that HILIX takes advantage of extremes and gains exposure to less efficient market caps by having more holdings and moderate active bets.
JPIN Commentary – Q4 2019
Thesis
JPIN’s focus on risk weighting enabled us to replace a market cap weighted index while still gaining exposure to international developed equity markets without deviating too far from the benchmark. Utilizing a multi-factor approach of value, quality, and momentum, JPIN has generated alpha through strong stock selection over time. Additionally, the fund helps diversify risk by weighting across 40 regional/sector buckets based on rolling risk statistics, which ultimately increases our exposure to active share and our risk-adjusted returns.
On 2/13, Fairfax Financial posted solid earnings for Q4 2019 of $23.58 well ahead of street estimates of $15.89.
Key takeaways:
1. President retires – Fairfax’ President, Paul Rivett, has retired. Chairman and CEO, Prem Wasta, has resumed control of operations.
2. Solid insurance results – Company grew book value at 14.8%, indicated a favorable new business environment with organic growth of 13% and posted a healthy combined ratio of 96.9%.
3. Improved investment results – Investments added $1.7b during 2019
TCPNX Commentary – Q4 2019
Thesis
TCPNX is a smaller fund that does not have as many assets under management compared to our other core mangers, enabling them to make more nimble and tactical decisions. By making small allocations to undervalued “riskier” asset classes (high-yield and non-dollar denominated debt), TCPNX diversifies our fixed income portfolio and generates superior returns to the benchmark (Barclays U.S. AGG). We like that the fund utilizes a bottom-up investment process through proprietary framework analysis, fundamental security review, and portfolio risk management.
WATFX Commentary – Q4 2019
Thesis
WATFX is an actively managed fund that finds overlooked areas of the market that can go against consensus views and add value. Through internal macro, credit, and fundamental research WATFX identifies undervalued securities and takes on more credit exposure to generate alpha over time. Through a diversified approach to interest rate duration, yield curve, sector allocation, and security selection, the fund dampens exposure to volatility.
MWTIX Commentary – Q4 2019
Thesis
MWTIX is an actively managed fund that provides a sector-based strategy while still maintaining fundamental research driven through issue selection. When compared to the benchmark (Barclays U.S. AGG), the holdings have similar duration and exposure, yet selection is focused around areas where other managers are not looking. Through sector rotation and active weighting, we expect MWTIX to generate alpha over time.
DBLTX Commentary – Q4 2019
Thesis
DBLTX utilizes a top down-bottom up process that focuses on MBS and Agency bonds. When compared to the benchmark (Barclays U.S. AGG), the holdings have lower duration and exposure to corporate bonds, reducing their sensitivity to interest rate movements and credit spreads. We expect attractive risk-adjusted return characteristics over the long term from DBLTX, especially during periods when corporate bonds’ spread increase.
Key Takeaways:
· Quarterly sales came below expectations but margins expanded
· Management team qualified those items impacting sales as “one-time” events, however we see one of them as simple poor execution from the team
· Coronavirus impact is not included in future guidance at this point
Current Price: $112.5 Price Target: $121
Position Size: 3.19% TTM Performance: +22%
Medtronic released their 3Q FY20 results yesterday, with organic revenue growth of +2.6%, a +90bps adjusted operating margin expansion and +11.6% adjusted EPS growth. While the organic sales growth was below expectations (+3.5% consensus), the operating leverage was substantial considering the top line miss. The management team highlighted a couple of one-time items impacting the top line: delays in client purchasing activities ahead of new products launch and the US & Canada ERP system upgrade affected products availability (problem resolved). In the US, their TAVR business grew below market as their sales team is taking longer to reach full productivity (new hiring in process to cover the 700 US centers performing TAVR surgery). We do not see this as a “one-time” item but rather poor execution from the company. In Diabetes, the US still faces challenges due to competition and patients waiting to upgrade their existing pump to the next-gen platform.
The company is unwilling to quantify the impact of COVID-19 on 4Q, but noted a lower volume of procedures in China as patients avoid hospital visits and ~12,000 physicians & nurses were sent to the Hubei region to deal with the crisis. The impact of the coronavirus will be released on May 21 during the next call.
During the call, Medtronic’s CFO implied a 4% growth rate in FY21, below the current expectation of 4.9%, although they remain confident sales will reaccelerate into FY21 and FY22 from the disappointing 3Q.
Overall this quarter showed the difficulty for a company this size to keep all the balls in the air at the same time… this quarter some fell on the ground…
Updated FY20 guidance:
Organic revenue growth +/- 4% (unchanged)
Operating margin ex-FX +40bps
EPS increased to $5.63-$5.65 but does not include the coronavirus impact
MDT Thesis:
· Stands to benefit from secular trends (1) increased utilization from Obamacare (2) developed populations age
· Strong balance sheet and cash flows. Increased access to non-cash should allow MDT to meaningfully increase their dividend
· 6% normalized Real Cash yield provides solid total return profile over next 2-3 years
· Ownership interest aligned. Management incentivized to maximize shareholder returns – 14% 10yr average ROIC
Category: Equity Earnings
Tag: MDT
$MDT.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
