Category: Equity Earnings

J&J reported 1Q18 earnings: new product launches are driving their pharma segment growth

Thesis intact. Key takeaways:

JNJ reported 1Q18 earnings results that showed the strength and breadth of its portfolio, with good performance in Pharma (Stelara and Zytiga offsetting Remicade deceleration). However, the sales beat was driven by a greater positive FX impact than expected, rather than operational outperformance. The company-wide organic sales growth was 4.3%, a modest acceleration from +4.2% in 4Q17. JNJ’s raised its 2018 operational sales growth guidance by 50bps to 4%-5% and affirmed its EPS guidance of $8.00-$8.20. The management team intends to use the extra cash from the lower tax rate for additional R&D spending. On the call it was clarified however that the pursuit of better organic growth rate will not deter from looking for more M&A targets, as it remains core to its growth strategy. In the next 5 years, the company plans to implement various supply chain actions to reduce complexity and improve cost competitiveness, resulting in $0.06-$0.08B in annual pre-tax savings. These savings will help offset some pricing pressure or internal investments.

Continue reading “J&J reported 1Q18 earnings: new product launches are driving their pharma segment growth”

S&P 500 Valuations

S&P 500 market valuations (based on forward P/E) have fallen from 20 to 16.7 since the start of 2018.

The drop is due to an increase in earnings estimates and drop in market prices (about 2 points). If you look at the below chart which goes back to 2007, the stock market valuation has fallen significantly and is now within one standard deviation of the historical mean.

However, some caution is necessary. The above uses estimated future earnings.

If we look at trailing earnings, the picture is different, as valuations are more than one standard deviation outside of the historical average.

So, markets are closer to average valuation based on the idea that tax cuts and a relatively strong economy will deliver solid earnings growth. Though this expansion is aging, we see no signs of a recession.

Additionally, it appears some of the market froth has been removed. Some of the “less rationale” investments have shown even larger corrections than the broad market – Bitcoin, Tesla and some tech stocks.

This is the type of environment where we should benefit from positions in quality names.

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

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!

McCormick (MKC) 1Q 2018 earnings results were good, guidance raised on FX and tax impact

McCormick (MKC) delivered 1Q 2018 adjusted EPS of $1.00, a 32% increase y/y thanks to recent acquisitions and good product portfolio management. We are encouraged to see good progress on the margin front with continued stable top line growth. Management provided additional details on its cash use following the tax reform. Price target unchanged.

Continue reading “McCormick (MKC) 1Q 2018 earnings results were good, guidance raised on FX and tax impact”

JP Morgan Guide to Retirement 2018

From: Peter Malone
Sent: Tuesday, March 20, 2018 9:46 AM
To: CrestwoodAdvisors <crestwoodadvisors@crestwoodadvisors.com>
Subject: JP Morgan Guide to Retirement 2018

Good Morning,

Attached is the 2018 JP Morgan Guide to Retirement. As always, JPM provides so much useful content, and this piece is extremely relevant to all areas within the Crestwood team.

I have included just four graphics that stuck out to me but would recommend looking through the full presentation whenever you have the chance.

Continue reading “JP Morgan Guide to Retirement 2018”

Cigna to acquire Express Scripts

Cigna is acquiring ESRX for a 31% premium ($48.75 in cash and 0.2434 in stock). This deal validates the shift towards vertical integration in the healthcare space, as the different players try to resolve the continued pricing pressure and recent Amazon threat.

I believe standalone PBMs will disappear from the system, especially smaller PBMs that won’t be able to compete as well, although they only control 8% of the market currently.

According to the Insurance Information Institute, there are 858 health insurance companies in the US, which leaves room for the major players to keep gaining shares. Major mergers have been blocked by the Justice Department (Anthem/Cigna and Aetna/Humana), but by integrating PBMs with their insurance operations, majors insurance companies will squeeze out smaller players as they will be able to negotiate better terms for their clients.

My assumptions is that the integrated PBM business will over time no longer grow from outside health insurance contract wins, but support the growth of their own insurance business (with a better margin and revenue growth profile in the mid-single-digit range).

What sets CVS/Aetna apart is its retail pharmacy network and growth potential in the MinuteClinics. UNH is now trying to replicate this MinuteClinic model by acquiring small clinics/urgent care centers, and recently made a bid for Envision (an ambulatory outpatient surgery center such as ophthalmology – FYI I tested it in Boston a couple years ago, it wasn’t that bad and very convenient).

Health care Insurance companies market share (the left chart is a bit outdated, as it is from 2015):

PBM Market shares (a bit outdated, as this is from 2016, and Express Scripts lost the Anthem business, representing 20% of their revenue):

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!

Fortive announces spin-off/split-off deal with Altra Industrial

This morning Fortive announced merging its Automation & Specialty business with Altra Industrial. The initial transaction details are below.

Terms of the deal:

Partly structured as a Reverse Morris Trust and as Direct Purchases of Assets & Equity interest:

· FTV will contribute a portion of FTV A&S businesses to the newly created subsidiary

· FTV will distribute the equity interests in Spinco to FTV shareholders in either split-off or spin-off

· Spinco will merge with a subsidiary of Altra, and as a result will become a subsidiary of Altra, and Spinco shareholders will receive 35M shares of Altra common stock

· Upon closing, FTV will own 54% of the combined company, and Altra 46%

Fortive A&S brands Kollmorgen, Thomson, Portscap and Jacobs to be divested to new Spinco ($907M in sales, $220M in EBITDA)

Fortive shareholders to receive ~$3B ($1.4B in cash proceeds and debt reduction, $1.6B in newly issued Altra common stock)

Transaction expected to close by the end of the year

Continue reading “Fortive announces spin-off/split-off deal with Altra Industrial”

TJX Q4 Earnings Update

TJX reported a great Q4 amid a difficult retail environment. Sales were up 8% on 4% SSS and 4% square footage growth. Notably, traffic was the primary driver of SSS at all of their concepts. Comp store sales exclude e-commerce, which is still small but “grew significantly.” Total global store count now stands at 4,070. They clearly have the model in brick and mortar that is working. They opened 250 stores in 2017 as other retailers continue to shrink their store count. They plan to grow stores 6% this year with most of the growth coming from their home concepts. They increased their dividend by 25% to $1.56, putting them close to a 2% yield.

  • Marmaxx, their largest division, had 3% SSS on positive traffic and negative ticket.
  • Overall merchandise margins are strong though there was some contraction at HomeGoods.
  • Same store inventories were up in-line with sales.
  • Wage increases negatively impacted EPS growth by about 1%.
  • 2018 FCF was $2B and they returned $2.4B to shareholders.
  • They plan to repatriate $1B in cash in 2019

Current Price: $84 Position Size: 2%

Price Target: $84 TTM: 5.4%

Guidance:

 

  • 2019 sales of $37.7B, +5%. Assumes SSS of 1-2% and 6% store growth.
  • 2019 EPS: $4.04, +5%, assumes an increase in merchandise margins.
  • Wage increases will negatively impact EPS by 2% and will continue to have a negative impact beyond 2019.
  • Fx should be about a 1% benefit.
  • For SSS by division they expect:
    • Marmaxx +1-2%
    • HomeGoods +2-3%
    • Canada +2-3%
    • International 1-2%

Inventory Availability:

 

  • There have been investor concerns that inventory is getting more rationalized at retailers resulting in fewer closeouts and less available inventory in the off-price channel.
  • Management addressed this on the call saying that, “availability has never been an issue for TJX in over our 41-year history. Throughout 2017 overall availability of inventory from top vendors was as good as it has ever been.”
  • They are one of the most efficient and discrete channels for vendors to clear inventory, whereas clearing inventory online is not as discrete and can be brand damaging.
  • Their sourcing scale is part of their competitive advantage and they source from 20k vendors in 100 countries.
  • Additionally, on the call management pointed to online vendors as a new source of inventory.

Future growth will rely increasingly on the Home category and International:

 

  • Given this, management is looking towards the home category as their next leg of growth. They are accelerating store openings and are bring the Canadian HomeSense concept to the US.
  • One the call they introduced a long-term store target for HomeSense in the U.S. of 400 stores, from the 4 stores today.
  • They also expect to add 483 HomeSense stores in Canada, bringing the total there to 600.
  • In Europe, they are the only major off-price retailer.

Valuation:

 

  • Their balance sheet is strong with no net debt.
  • Store openings will bolster top line growth.
  • They have been steadily FCF positive with LT FCF margins averaging about 6-7% and high ROIC.
  • Assuming a normalized FCF margin, they trading at about a 5% forward yield.

EOG reported good 4Q17 results, but 2018 capex higher than expected on lower production guidance

EOG reported 4Q17 oil production of -1% vs. high end of guidance and in-line with consensus, while adjusted EBITDA 9% above consensus. The stock consolidated today after disappointing production and capex guidance for 2018. However we think the thesis is intact, as Premium wells now represent the majority of completed wells, FCF outlook is positive even at $50/bbl, and dividend growth has been resumed. Price target under review. Continue reading “EOG reported good 4Q17 results, but 2018 capex higher than expected on lower production guidance”

Cisco Q218 Earnings Update

Cisco reported a strong quarter beating on top and bottom line. Revenue is finally growing again. As they shift from a hardware focused company to a software focused company, one side of the business has been cannibalizing the other dragging down growth. But the higher growth, higher margin, recurring revenue software business, now 33% of revenue, bodes well for future profitability. They increased the dividend by 14% (>3% yield) and increased the buyback authorization from $6B to $31B. They expect to utilize this over the next 18-24 months, which means buying back 15% of their market cap. They had a one-time $11B tax hit in the quarter as they plan to repatriate $67B cash.

Key positives from the quarter:

 

  • Revenue was up 3% to $11.9B, EPS was up 10% and FCF was also up 10%.
    • Americas +6%, EMEA +6%, Asia 0%, Emerging Markets +1%
  • Guidance better than expected – revenue +3-5%; EPS $0.65
  • Commercial order growth jumped to 14% from 12% in FQ1 and 4% in FQ4’17. Driven by rapid Catalyst 9k adoption.
  • Gross margins improved 60bps because of the mix shift toward services revenue.
  • Tax rate guidance of 20%
  • Service provider continues to be weak with orders down 5%
  • Strong innovation pipeline

Cisco’s margins are expanding as their revenue model evolves:

 

  • The hardware business isn’t growing, software is growing 12-15% and services are growing mid-single digits.
  • Services and software carry higher margins than hardware and are less capital intensive.
  • By 2020 they expect at least 50% of revenue from software.
  • About 33% is recurring revenue currently.

Intent-based networking will be a growth driver:

 

  • One of the biggest IT shifts since the invention of the router – transforms how networks function.
  • “Intent-based networking systems monitor, identify, and react in real time to changing network conditions.” Helping firms grapple with the growing digitization of their business.
  • Only Cisco delivers an end-to-end, intent-based networking strategy.
  • Major product is “Catalyst 9K”
      • Fastest ramping product in the history of the company.
      • Was the driver of the 14% commercial order growth.
      • Will enhance gross margins.

Valuation:

 

  • FCF steadily outpaces net income, so the company is cheaper than it looks on a P/E multiple.
  • They have over a 3% dividend yield which is easily covered by their FCF.
  • FCF yield of over 6% is well above sector average and is supported by an increasingly stable recurring revenue business model.
  • The company trades closer to a 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.

 

Cognizant 4Q17 Earnings Update

Cognizant reported very strong results for 4Q17, beating on top and bottom line, issuing solid guidance and significantly increasing their dividend. The dividend, which was just initiated in 2Q17, was increased by 33% (increase driven by tax reform). Revenues were up 10.6% and EPS was up 18.4%, excluding a one-time repatriation tax expense of $617m. Full year FCF was $2.1B, up almost 57% YoY. They returned all of their FCF to shareholders through share repurchases ($1.9B) and dividends ($265m).

Current Price: $76 　　　　　　　　　　　　　　　　　　　　　　　　　　　　 Price Target: $76

Position Size: 2.3% 　　　　　　　　　　　　　　　　　　　　　　　　　　　　 TTM Performance: +43%

Cognizant is well positioned for the accelerating shift to digital:

 

  • In recent years, the news has been dominated by the rise of digital natives like Facebook, Amazon, Netflix and Google
  • Going forward, they say previously dominant companies rise as the “new generation of digital heavyweights.”
  • While a digital transformation is remaking and disrupting business models, Cognizant is helping legacy players adapt.
  • Digital related revs grew 30% in 2017, accounted for 27% of revenue and is higher margin.

Thesis intact, highlights from the quarter:

 

  • 4Q17 Revenue of $3.83B up 10.6%.
  • Consulting & Technology Services revenue up 10.2%.
  • Outsourcing Services revenue up 11%.
  • About 40% of their revenue from fixed price contracts – continuing to shift mix of business towards this.
  • Employee metrics reflect improving resource alignment
    • Annualized attrition was 17.9%; (460) bps lower than 3Q17
    • Utilization: Offshore (excluding trainees) increased to 83%; On-site was 92%
  • They acquired Netcentric and Zone in 4Q17 to expand their digital marketing capabilities.

Results across all segments were solid with the best results in the Communications, Media & Technology segment of +18%:

 

    • Financial Services saw strength with insurance and mid-tie banking clients which offset continued weakness with larger banking clients (notably, they are starting to see recovery).

 

    • Healthcare saw strong demand from payer clients (e.g. insurers). Shift from fee-for-service to value based care is driving demand as it requires data-driven insights and increased digital collaboration.

 

    • Products & Resources saw growth in manufacturing and logistics clients, offsetting weakness in retail

 

  • Communications, Media & Technology had sold growth across all sectors.

For the full year, they saw solid results across all regions except the UK which was down 2%.

First Quarter & Full Year 2018 Outlook

The Company is providing the following guidance:

 

  • Q1 2018 revenue $3.88B to $3.92B, street was at $3.88B.
  • Q1 2018 EPS at least $1.04, street was at $1.01.
  • Full year 2018 revenue $16B to $16.3B, bracketing street estimate of $16.2B.
  • Full year 2018 EPS at least $4.53, street was at $4.35.
  • Tax rate 24%
  • $0.80 dividend, raised 33%, trading at a 1% yield.
  • Expecting continued share repurchases.

Investment Thesis:

 

  • With a FCF yield of 5%, 1% dividend yield, secular growth tailwinds, strong balance sheet and ROIC running in the mid-20’s, the stock is still cheap.
  • They are well positioned to benefit from the “SMACK” megatrend (Social, Mobile, Analytics, Cloud, and Key disruptors) which is driving corporations to rethink the way they do business.
  • Digital readiness and cloud computing are reshaping client demand for IT services. Cognizant is well positioned to benefit from this shift and trades at an attractive valuation.