Category: Equity Earnings

Aramark 1Q18 Earnings Update

Aramark reported their 1Q18 results beating on top and bottom line and raising guidance. Increased outlook was based primarily on taxes, currency and acquisitions. No change to outlook of legacy business. They saw broad based growth across all lines of business and all geographies. Seeing a strong pipeline of new business opportunities. They did have some margin compression, driving operating income down 3%, which was more than offset by the lower tax rate, driving the EPS beat. Costs associated with the onboarding of new customers, weaker uniform margins and technology investments (kiosk and mobile ordering) contributed to the operating profit decline. They expect margins to improve in the back half of the year as onboarding costs abate and as labor productivity initiatives are implemented. They booked a $184m gain on re-measurement of deferred tax liability on the lower tax rate.

Thesis intact, key takeaways:

Strong organic growth was a key positive in the quarter:

 

  • Organic revenue growth was a nice improvement from their Q4 results where they missed organic growth targets.
  • Revenues were up 6% on 5% organic growth and 1% currency.
  • Organic growth driven by volumes, price increases (to offset labor and food inflation), and improving retention rates.
  • International had particular strength in Europe and emerging markets.

Inflation and margin compression are concerns:

 

  • They are expecting 3% inflation in their business, but feel they are well positioned to recover rising costs.
  • Though wage inflation is fairly broad based they did say it varies across regions in the US.
  • They have labor productivity initiates (centralized hiring and demand driven scheduling) aimed at offsetting wage increases.
  • They also have some shielding to inflation because of about 1/3 of contracts have a pass-through mechanism (cost plus, escalators) and another 1/3 with renegotiation rights.
  • There is some concern around potential competitive pricing actions given a tax windfall, as low margin businesses, where competition is high, are more likely to have tax benefits competed away though pricing.
  • This dynamic could be offset by their historically higher tax rate than peers – management said it may be more of a level playing field for them going forward.

Recent acquisition integration:

Avendra and AmeriPride both closed within the last couple months.

  • Expect the acquisitions to be earnings dilutive in 2018, but FCF accretive.
  • Interest expense increased to $350m.
  • Leverage ratio is up, but they extended their debt maturities and now have so significant maturities for 7 years. Will use FCF and tax benefit to de-lever.

Outlook raised:

 

  • Increased outlook based primarily on taxes and currency. No change to outlook of legacy business.
  • They expect 3% organic revenue growth and a 1-2% currency benefit.
  • 2018 EPS guidance of $2.15-$2.30. This was raised from the EPS guidance they gave last quarter of $2.10 to $2.20.
  • Capex at 3.5% of sales – this is line with historical level.
  • FCF outlook of at least $400m maintained despite raise in EPS outlook- not yet updated to reflect the benefits of tax reform and the acquisitions, so this number is likely to go up. Street numbers were closer to $500m.
  • Expected tax rate of 26% is a 700bps improvement.
  • Will use tax savings to decrease leverage ratio which climbed up with acquisitions. Aiming to get below 4.5x by year end.

The Thesis on Aramark:

 

  • ARMK is an industry leader in the food, facilities, and uniform outsourcing market. The market is large and growing supported by favorable outsourcing trends.
  • Aramark has an opportunity to continue expanding margins driven by productivity initiatives and operating leverage.
  • The stock currently trades at a trough multiple vs. the market and at a discount to peers which I expect to mean revert thanks to low double digit EPS growth for the next few years driven by margin improvement, deleveraging, and improving top line.
  • ARMK is well positioned to weather economic cycles due to a diversified customer base and greater than half of their revenues coming from non-cyclical industries.
  • As deleveraging continues shareholder returns should increase via dividend growth and buybacks.

 

Visa 1Q18 Earnings Update

Visa reported a good quarter with revenues of $4.86B and EPS of $1.08, both better than expected (including a benefit from tax reform). Their key business drivers of payments volume, cross-border volume, and processed transactions were supported by a strong global macro environment, including a solid holiday season in the US and growing digital payment penetration. They posted purchase volume growth of 9.7%, with strong performance across all regions. Visa total payment volume was just over $2 trillion (up 12.4% yoy, 9.7% in constant currency). Client incentives have been rising and came in at $1.3B (21.4% of revenue). They gave a solid outlook on the global macro trends they are seeing, especially in Europe.

Thesis intact, highlights from the quarter:

Benefits from tax reform:

Their adj. EPS growth of 26% included a 900 basis point benefit from tax reform. Last quarter they gave initial FY18 guidance of “high single digits” revenue growth and “high end of mid-teens” EPS growth. They maintained their revenue guidance and raised their EPS guidance (mid to high 20% growth) primarily on the lower tax rate. Their tax rate will be down 600bps to 23%, which will add over $800m in earnings and $900m in FCF. As a result, they are increasing their buyback and dividend.　 In general, they said they plan on prioritizing long-term “sustainable” investments versus one-time actions.

Strong results continue across all regions:

 

  • Asia Pacific +7.5% – improved volumes from Australia and Taiwan.
  • Canada+11% – higher gas prices and increased spending in retail and telecom.
  • CEMEA +19.3% – driven by the Gulf countries of the Middle East.
  • Latin America +14% – particular strength in Argentina.
  • US +9.6%
    • US credit payment volume was $478bn (up 11.3% yoy) and US debit payment volume of $402bn (up 7.6% yoy). Volume growth driven by increases in consumer credit, holiday spending and accelerating e-commerce growth. Online grew 4X faster than offline.
    • Saw particular strength in movies, gaming, fitness, sporting goods, and recreational activities.
    • During the holiday season, e-commerce gained share, representing 30% of consumer U.S. holiday volume.
    • New co-branded offerings with Starbucks and Uber.

Digital shift is growth driver but will weigh on margins:

 

  • Electronic payments should be a big long term growth driver. Their operating margins have been steadily rising for years, now standing at about 60%, but this trajectory should flatten out as they invest behind digital initiatives like Visa Checkout and Token Service.

Valuation:

 

  • Valuation supported by buybacks and dividends. In Q1, they returned $2.2B to shareholders consisting of $1.7B in repurchases and $460m in dividends. They plan to return over $9B of the $10B in FCF they expect to produce in 2018.
  • Given high ROIC and secular growth opportunity, the stock is trading at a reasonable >4% FCF yield. Dividend yield is <1%.

Visa Thesis:

 

  • Visa is the number one credit and debit network worldwide – accounting for about half of all credit and roughly three fourths of all debit card transactions.
  • We are still in the earlier innings of the digitization of electronic payments. This is a secular tailwind supporting Visa’s growth as 1.) Electronic payments continue to replace cash 2.) Commerce moves online 3.) Consumer spending grows globally
  • Visa’s asset light “toll both” business model is characterized by recurring revenues, high incremental margins, low capital expenditures, and high free cash flow.
  • Visa’s recent acquisition of Visa Europe should be a nice tailwind over the next few years as the European market is in the earlier stages of electronic payment adoption and Visa is well positioned to gain market share and improve margins in the region.

 

Apple Q118 Earnings Update

Apple reported record revenue and earnings, but iPhone unit sales and Q2 guidance were both below expectations.　 Revenues were better than expected at $88.3B, up 13%. EPS was $3.89, up 16% and also better than expected. iPhone units were weaker than expected at 77.3m units down -1% (and below expectations for 80m units), but iPhone revenues were up 13% driven by a record iPhone ASP of $796, up $100 from the prior year driven by iPhone X. Wearables were up 70% and were the second biggest growth driver after the iPhone. They also saw record app store sales. Heading into the iPhone launches in the fall, many analysts were predicting an iPhone “super cycle.” Sentiment has shifted dramatically given recent expectations for weaker iPhone unit sales, causing the pullback since mid-January when shares hit an all-time high of $179.

Current Price: $160　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 Position size: 3.8%

Price Target: Under review　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 TTM Performance: 30%

Thesis is intact, key points:

  • 1Q18 was a week shorter than 1Q17. Looking at growth metrics on a per week basis the results look a bit better.
  • Average iPhone unit sales/week were up 6% in the quarter.
  • Total sales/week were up 21%.
  • Guidance was weak, but that was widely expected. There were numerous reports heading into the quarter suggesting iPhone unit sales have been below expectations.
  • International sales accounted for 65% of the quarter’s revenue and they saw double digit growth across all geographies.
  • Sales in China gained 11% to $18B.
  • Cash is $285B, $269 of which is outside the US. Net cash is $163B. They have a provisional tax payable of $38B for planned cash repatriation.

iPhones

 

  • iPhone revenue grew 13% to $61.56B; units declined 1%.
  • On the call Tim Cook said “iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November.”
  • With iPhone representing 62% of revenue, there are concerns that overall growth will slow. Unit growth is being impacted by a smartphone market that is maturing as penetration rises and the unbundling of phone and service contracts by carriers has led to a longer replacement cycle.
  • There are also concerns that replacement batteries sales for older models could further extend the replacement cycle.
  • While a lengthening replacement cycle may be a drag on unit sales, this will abate when the replacement cycle eventually stabilizes.

iPad

 

  • iPad revenue grew 6% to $5.9b.
  • Average sales/week were up 8%.
  • They released new models mid-year.
  • iPad now has 46% share of the US tablet market.

Mac

 

  • Mac sales fell 5% to $6.9B, units declined 5%.
  • Average sales/week were up 2%.
  • 60% of worldwide Mac sales are to first-time buyers or switchers.
  • Strong emerging markets performance with Mac sales up 13%.

Apple Watch

 

  • Fourth consecutive quarter at over 50% growth.
  • Total wearables were up 60%.
  • The wearables business is now approaching a Fortune 300 company.

Services

 

  • Services revenue was up 18% to $8.5 billion with record revenue on the App Store.
  • They now have 1.3 billion active devices which is fueling this growth.
  • ApplePay purchase volume tripled and is now accepted at more than half of all retail locations in the US.
  • HomePod launch should help drive Apple Music revenue.
  • Augmented Reality enabled apps (ARKit) gaining traction – they point to this as an important area going forward. “AR is going to revolutionize many of the experiences we have with mobile devices.”

By Geography:

 

  • Americas: +10%
  • Europe: +14%
  • Greater China: +11%
  • Japan: +26%
  • Rest of Asia: +17%

2Q Outlook below expectations:

 

  • Revenue between $60 billion and $62 billion (estimates were at $65B)
  • Gross margin between 38% and 38.5% (estimates were 39%)
  • Operating expenses between $7.6 billion and $7.7 billion other income/(expense) of $300 million
  • Analysts are expecting 2Q iPhone units of 59.4 million

Valuation:

 

  • Trading at over a 6% FCF yield the stock is inexpensive, especially for a company growing top line, with high FCF margins and high ROIC.
  • The current price implies little to no growth and declining FCF margins.
  • They regularly return close to 100% of FCF to shareholders.
  • Gross cash is $285B, net cash is $163B, ~$32/share. They plan to reduce net cash to zero and will update their capital allocation plans next quarter. Given that they are suggesting reducing their cash by $163B there could be a transformative acquisition on the horizon.

 

GOOGL Q417 Earnings Update

Alphabet reported strong revenue growth for Q4, but earnings were weighed down by lower mobile advertising margins and rising marketing expenses. Additionally, FCF margins were down as they invest heavily behind new areas of growth. Revenues for the quarter were $32.3B up 24%, which was far better than expected. Excluding a $10B tax expense on repatriation, they reported EPS of $9.70/share which was below expectations. Revenues were driven by strong growth in advertising.

Thesis intact, key takeaways:

The concern is that are making less money per click:

  • Paid clicks were up 43%, but cost per click was down 14% and traffic acquisition costs (TAC) were up 33%. That put TAC at 24% of revenue, up 200bps. So, basically for their primary business, pricing is down and input costs are up, which is not a trend anyone likes to see.
  • The mix shift towards lower margin mobile ads is what’s negatively impacting earnings.
  • The primary cost of advertising revenue is traffic acquisition costs (TAC) and mobile search and programmatic are their highest growth areas and they have the highest TAC.
  • The street is reacting very negatively to these metrics, but it’s not a surprise that mobile ads are the growth driver or that they are lower margin.

 

  • Management has previously indicated that they expect TAC to increase as a % of revenue and that they are more focused on profit dollar growth than margins.
  • Advertising growth is still very high, but as the mix increases, the lower economics of mobile become more visible.
  • An added concern is that Amazon is starting to compete in mobile advertising.
  • Rising content acquisition costs with YouTube and increased marketing spend to promote hardware also ate into margins.

While Alphabet is principally an advertising company, management is working hard to reduce their reliance on this business:

 

  • They are investing heavily behind their biggest bets for the future (artificial intelligence, YouTube, hardware and cloud) which is weighing on FCF margins.
  • On the call the CEO said they are “laying the foundation for the next decade as we pivot to an AI first company.”
  • They differentiate themselves with their AI competency and have spent billions trying to inject AI into all aspects of their business.
  • Their cloud business is progressing though they are still a distant 3rd in cloud market share behind MSFT and AMZN.
  • Cloud　is now a $1 billion/quarter ahead of where most analysts were estimating. AWS reported $5B in revenue for Q4.
  • Their CEO says their cloud business could eclipse their advertising business long-term.

Summary of results:

 Advertising – 84% of revenue, up 21% – mobile is ~47% of sales.

Other Revenue – 11% of revenue, up 38% – includes play store, cloud and hardware.

    • Hardware sales more than doubled in 2017 with strong holiday sales of home speakers and Pixel smartphones. This business carries a lower margin.
  • Other Bets (1% of revenue, up 49%):

 

  • This segment consistently runs at a loss, but losses were not as bad this quarter.
  • Revenues primarily generated by Nest, Fiber and Verily.
  • They paused fiber expansion in Q316, so capex from this segment was about $900m lower.
  • Nest had a strong holiday.
  • Waymo surpassed 4 million miles of real world driving and is the only company to have a fleet of driverless cars on public roads without anyone in the driver’s seat.

Strong across all regions:

 US revenues +21%

Other Americas +31%

EMEA +24%

APAC +30%

Valuation:

 FCF for the quarter was $6B and $24B for the year. This is a decline from 2017, and represents a 22% FCF margin, below their typical range of 24-25%.

  • Trading at a 3% FCF yield. This valuation relies on Alphabet continuing robust top line growth and maintaining their FCF margin.
  • $102B in cash, $140/share or 12.5% of their market cap.

Thesis on Alphabet:

 

  • Online advertising’s share of overall Ad budgets will continue to grow as:
    • People spend more time on the internet/mobile internet vs tv, radio, newspapers etc
    • Higher ROI (+ easier to measure) per marketing dollar spent online vs other ad mediums
  • They are the global leader in search.
  • Well positioned to benefit from increased smartphone penetration.
  • Flexible business model provides operating leverage with high returns (ROIC 50%) and huge free cash flow generation.

 

Microsoft Q218 Earnings Report – Cloud performance driving strong results

Microsoft reported Q218 revenues and earnings better than expected, excluding a one-time $13.8 billion charge on cash repatriation. Total revenues were up 12%, gross margin increased 12% and operating income was up 10%. Weaker US dollar benefited revenue by less than 1%. FCF was $5.3B, up 23%, of which $5.2B was returned to shareholders though dividends and buybacks. Strong cloud trends continue with commercial cloud revenue up 56%, reaching $5.3B (18% of revenue) and Azure revenue growth accelerating to +98% YoY. Commercial cloud drove about 60% of the revenue increase for the quarter. GM and operating margin outlook were increased as cloud margins improve. This is important to driving future earnings growth as cloud is lower margin and becomes a bigger piece of the pie.　 Geographically, U.S. and Western Europe performed best driven by commercial cloud sales. Overall they are seeing positive IT spending signals, a strengthening commercial PC market and growing demand for hybrid cloud.

Current Price: $94　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 Price Target: Under review

Position size: 4.4%　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 TTM Performance: 49%

Thesis intact, highlights from the quarter:

 

  • Productivity and Business Processes Segment (includes cloud-based applications like Office 365, Microsoft Dynamics and LinkedIn)
    • $9B in Q2 revenue (31% of total revenue), up 25%. LinkedIn growth accelerated.
    • LinkedIn added 4pts to top line growth and 4pts of gross margin growth.

 

  • Intelligent Cloud Segment (public, private, and hybrid cloud services, including Azure)
    • $7.8B in Q2 revenues (27% of total revenue), up 15%.
    • Gross margin increased 7bps to 55%.
    • Azure revenue growth accelerated to +98% YoY and is now at about a $6.8B annual run rate.
    • Azure margins materially improved.

 

    • More Personal Computing Segment (Windows OEM licensing, search advertising and devices like the Surface and Xbox)
      • $12.2B in Q2 revenue (42% of total revenue), up 2%; excluding phone, revenue grew 4%.
      • Stronger than anticipated commercial PC market; consumer PC market “stabilizing.”
      • Xbox was top selling gaming device over holiday.
      • Xbox moving from a hardware console platform to a subscription software platform with recurring revenues and higher incremental margins.
      • Gaming revenue grew 8% and is at a $9B run rate.
  • Commercial Cloud

 

    • This measure includes cloud revenues primarily from the first two segments – Office 365, Azure, Dynamics 365 and other cloud.
    • Annualized run rate is annualized revenue from the last month.
    • Current run rate is $21.2B, vs $20.4B in Q118 and $18.9B at FY17.

Outlook:

 

  • Expecting Q3 revenue of $25.6B.
  • Improved their full year guidance on gross margins and operating margins.
  • At current rates, Fx will add 2pts to Q3 rev.
  • Expecting a tax rate next year of 21%.
  • They didn’t specify what they would do with the repatriated cash.

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.
  • Strong balance sheet ($142Bn gross cash) allows company to be opportunistic in current environment.
  • Return of Capital: High FCF generation and returning significant capital to shareholders via dividends and share repurchases.
  • Valuation is reasonable at a 4.6% FCF yield and a 1.7% dividend yield.

 

Booking Holdings Q4 Earnings Update

Priceline, which recently changed its name to Bookings Holdings, had a better than expected 4th quarter driven by strong room night growth. Revenue growth should continue to be robust driven by room night growth and offset slightly by declining ADR’s. They have a high-single-digit percent of the overall travel market with plenty of runway for growth as they continue to benefit from the secular tailwind of growing online travel penetration. Rising advertising costs continues to be a theme across the industry, but they are making progress on optimizing their marketing spend. Additionally, they look to add new growth channels though alternative accommodations (homes & apartments) and through booking travel experiences. The name change was to align with the leading brand Bookings.com which represents 89% of gross profit. Their portfolio also includes KAYAK, Agoda, Rentalcars.com and OpenTable.

Current Price: $2,061　　　　　　　　　　　　　　　　　　　　　 Price Target: $2,400

Position Size: 2.2%　　　　　　　　　　　　　　　　　　　　　　　　　　 TTM Performance: 20%

Thesis intact, highlights for the quarter:

  • Revenues were $2.8B, +17% constant currency vs consensus $2.7B.
  • Constant currency gross travel bookings were +14% for the quarter and 19% for the year.
  • Room nights grew 17% to 152 million room nights for the quarter.
  • For the year, room nights were up 21%, representing 116m incremental room nights.
  • Average daily rates (ADRs), were down about 1% and are expected to continue to be slightly negative.
  • Adjusted EBITDA was $1.1B, up 23% and above the top end of their $910m guidance.
  • Adj. earnings were $16.86, which excludes $1.3B of provisional net income tax expense related to tax reform – comprised of $1.6B in repatriation tax, partly offset by a $217m income tax benefit from revaluing their deferred tax liabilities.
  • 2017 FCF was $4.4 billion, up 18%, growing slightly faster than revenue.
  • International provided $11.1B of their $12.4B in gross profit.
  • They continue to invest in growing their supply base and marketing and are experimenting with offering in-destination experiences like museum tours.

They are working on optimizing their marketing spend:

 

  • Marketing spend is essentially their customer acquisition cost, it’s a major portion of their operating expense and has been rising quicker than revenue.
  • This is a sector wide phenomenon. Cost of performance advertising has been going up and the return on that advertising spend has been going down. Competitors are spending increasing amounts, causing BKNG to spend more to maintain brand recognition and grow traffic to their sites.
  • Trying to improve ROI on their ad spend by increasing their share of direct traffic. They say this initiative is still in the early stages.
  • This means shifting some ad dollars to brand advertising (like TV) vs 　performance marketing spend, which is mainly through search engines (primarily Google), meta-search and travel research services.
  • They’re also working to improve how they measure the effectiveness of their advertising.

They are responding to Airbnb by growing alternative booking options:

 

  • They are expanding their alternative booking options and offering them in search results alongside traditional hotels in an effort to compete with Airbnb and Expedia’s HomeAway.
  • They now have an inventory of 1.2 million homes, apartments etc., up 53% YoY.
  • This could be a meaningful part of their business longer term.

Valuation:

 

  • They continue to generate solid FCF and growing FCF margins.
  • Returning capital to shareholders via buybacks. They returned $1.8B in 2017 and $6B over the last 3 years. They recently increased their authorization by $8B, bringing the total authorization to $10B.
  • The stock is still undervalued, trading at close to a 4.5% FCF yield.
  • Stable margins going forward and mid-single digit growth, leads to a DCF valuation of about $2,400.

Thesis:

1. Priceline 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. PCLN 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. Priceline’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. PCLN’s 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.

 

SSGA – Uncommon Sense

Good Afternoon,

Attached is the most recent “Uncommon Sense” piece put together by Michael Arone at SSGA. The theme is the recent increase in volatility, and he discusses the following three points:

1.) Investors have relied on the “Fed Put” during the market run-up, and he believes this remains in play with the new Fed Chair, Powell

2.) We are still in a Goldilocks market environment, with modest “not too hot, not too cold” growth

3.) Fundamentals continue to be the driver of growth in the stock market, and the numbers continue to be solid

As always, we want to temper client expectations and reactions in the short term but it is notable that, since the market correction earlier this month, global equity markets have already begun to rebound while volatility has fallen.

Below are a few charts from the piece worth sharing:

Uncertainty Caused by new Fed Chair – the Fed “Put” (ability of the Fed to reduce Fed funds rate when markets sell off)

Stock market pullbacks following new Fed Chair are not uncommon

Stock market pullbacks (in general) are relatively common but we had not seen a correction in over two years

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!

Uncommon Sense – February 2018.pdf

DBLTX – Q4 2017 Commentary

DBLTX – Q4 2017 Commentary

The DoubleLine Total Return Bond Fund lagged the Barclays Agg during the fourth quarter but outperformed for the year in 2017. Gundlach and team continue to favor securitized assets and believe U.S. economic growth should continue through the next year.

I have attached the DoubleLine broad fixed income sector commentary as a reference. This includes a lot of good information across all of fixed income.

Market Overview:

– It was another strong quarter for risk assets to close out the year

o Synchronized expansion in global economic activity across both emerging and developed markets continued to provide widespread gains across a variety of asset classes

– Reduced level of volatility across U.S. markets was driven largely by continued QE, quantitative easing, accommodative fiscal policy, strong consumer sentiment

– 10 Year UST yields moved slightly lower for the year and the Fed hiked three times

o When the 10 year UST yield began testing the lower end of the range in Q3, Gundlach turned openly bearish on the 10 year given expectations of rising rates

o 10 year hit 2.04 in September and ended the year up almost 40 bps ahead at 2.40%

– Big news during the fourth quarter was the approval of the new tax plan in the U.S.

o Corporate tax rate reduction had positive impact on equity markets

o Time will tell what the long term economic impact will be

– Fed raised rates in December for the third time of 2017

o First time since financial crisis that the Fed followed through on its promise of expected rate hikes

Performance Overview:

– In the fourth quarter, DBLTX underperformed the Agg by 39 bps

– While all sectors contributed positively to performance, the sell-off in the UST curve impacted valuations across fixed income

– Prices were down across Agency RMBS with longer duration derivative positions

o Inverse floating rate and inverse interest-only securities were worst performers

– Pass-throughs were the best performing in this sector as these investments generated positive total return due to interest income

o Non-agency RMBS contributed positively to performance due to strong interest income

– Subprime securities outperformed as prices increased during the quarter

– Amongst other securitized credit sectors, returns were positive due to interest income

– While prices were down on ABS and CMBS, CLOs

Market Outlook:

– Growth expectations and economic data remains strong in the U.S.

o Unemployment rate held steady at 4.1% which is a 17 year low

– Along with the ongoing downtrend in unemployment, consumer confidence remains strong

o The Conference Board’s Consumer Confidence Index rose to 122.1

– This level is higher than pre-global financial crisis and is indicative of strong consumer sentiment

– The ISM Non-Manufacturing Index dropped to 55.9 from 57.4

o Index level above 50 signals expansion across the respective sectors

– All of this points to an economy that still has room to grow

– On a macro level, Gundlach believes that equities are likely to pull back over the next year and he is skeptical about credit

o Does not believe there is reason to expect a recession and likes commodities as a general asset class

Performance Review:

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

50 Federal Street, Suite 810

Boston, MA 02110

www.crestwoodadvisors.com

PLEASE NOTE!

On February 26 Crestwood will move to our new located at:

One Liberty Square

Suite 500

Boston, MA 02109

DoubleLine Commentary Q4 2017.pdf

Medtronic reported solid 3Q FY18 earnings but delay in robotics program weigh on the stock today

Medtronic reported strong 3Q FY18 sales and earnings results this morning. FY18 guidance and FY19 commentary were reiterated. Competition is still a threat to MDT’s growth, but we expect some tuck-in M&A to help, following the cash repatriation from the tax reform. Price target increased to $93.

Continue reading “Medtronic reported solid 3Q FY18 earnings but delay in robotics program weigh on the stock today”

Pepsi 4Q17 earnings: results in line, 2018 guidance is conservative

Pepsi reported 4Q17 earnings in line with estimates of organic sales +2.3% and EPS growth of +8%. Management provided its initial 2018 guidance which is a bit light vs. expectations, but certainly achievable for Pepsi. We will look for a positive margin progression in the coming quarters as new products come to the market. Currently the stock is supported by an increased dividend and new repurchase program. Price target unchanged at this time. Continue reading “Pepsi 4Q17 earnings: results in line, 2018 guidance is conservative”