Category: Equity Earnings

Resmed (RMD) 2Q2020 earnings summary

Key Takeaways:

Current price: $160 Price target: $168 (NEW)
Position size: 3.3% 1-year performance: +74%

Resmed reported another quarter of impressive sales growth (+14% ex-FX). Gross margins expanded 50bps on a comparable basis, thanks to product mix (more masks) and production efficiencies. Their software-as-a-business (SaaS) business slowed down from 83% in 1Q20 to 37% in 2Q20 as prior year’s acquisitions are becoming organic (in the high single digits (HSD)). The company will spend more towards its MatrixCare SaaS business in the coming quarters in an effort to boosts sales (just as they did with Brightree). [more]
To explain their continued growth trajectory, the management team talked about their masks business and innovation as a way to fill a void in their category coverage instead of replacing older versions of the product. This helps the company gain market share globally in a market that is growing in the HSD rate. The company also partners with multiple players (with the Propeller Health platform) to build a relationship with COPD patients in stage 1 and 2 (when a machine is not yet needed), so that once they move into stage 3 and 4 of the disease development (COPD is a progressive disease), the patient is already familiar with Resmed’s offerings. RMD is enrolled in a trial with Novartis to determine of the Propeller app can help deliver better outcomes in treating COPD.
Resmed announced another small acquisition with Snapworx, which will support Brightree, thanks to its AI-driven private software to provide patient contact management and workflow optimization for their re-supply market.
The Coronavirus is expected to have mixed impact for them in China: more demand for ventilator but less for sleep treatments.
We increased our price target to account for sustainable high growth supported by innovation and bolt-on M&A.

Thesis on RMD:
• Leading position in the underpenetrated sleep apnea space
• Duopoly market
• New product cycle
• Returns of capital to increase: ~1% share buyback/year (back in FY18), dividend yield of 2%

$RMD.US

[category earnings]

[category equity research] [tag RMD]

SYK 4Q19 earnings summary

Current Price: $211 Price target: $240
Position size: 2.57% 1-year Performance: +33%

Key Takeaways:

Stryker released 4Q19 results with organic sales up +8%, operating margins +80bps and EPS +14%. This quarter highlighted once more the strength of SYK’s portfolio. The management team provided a conservative guidance for 2020 organic sales growth of +6.5%-7.5% (Coronavirus is not expected to have any impact as of today). While this is lower than the 2019 growth achieved, it is good to remember that the exact growth was provided in early 2019. If the market dynamics continue in 2020, getting closer to 8% is a possibility. Stryker has outgrown its medical device sector in the last 7 years by 200-250bps/year. That growth has also helped the company to expand its operating margin (30-50bps/year target). In 2019, margins expanded 40bps despite the dilutive effect of recent acquisitions and investment in ERP.

For any doubters SYK can continue on this path, here’s a reminder of the tailwinds going forward:
• Continued adoption of robotic surgery in knees and hips
• Camera launch in endoscopy
• Aspiration business in neurovascular business
• Past year acquisitions to be integrated into core (organic) sales growth
• New products in acute emergency care

Furthermore, SYK has structured its business differently from competitors: its decentralized sales force drives its team to know its markets very well (and helps identify possible targets to acquire that have similar innovative culture). SYK is becoming truly global, with significant runway in emerging markets and Europe (HSD growth that is forecasted to continue as it is gaining market share in Medsurg, knee and spine).

SYK Thesis:
• Consistent top and bottom line growth in the mid and upper single digits respectively
• Continued operating leverage of current infrastructure
• Strong balance sheet and cash flow used in the best interest of shareholders

$SYK.US
[category earnings] [tag SYK]

LMT 4Q19 earnings summary

Key takeaways:

Current Price: $ Price Target: $469 (NEW)

Position Size: 4.12% 1-year Performance: +50%

Lockheed released its 4Q19 earnings results this morning, with organic sales +10%, segment operating margins +70bps, and EPS +20.5%. During the quarter, the company made an additional $1B contribution to its pension plan. While not pre-announced, this payment is not surprising as the company has performed well and generated good cash flows recently. This additional contribution will most likely reduce future pension payments needed, a good thing for 2020 and 2021 cash flows. The Sikorsky business helped its segment margins, and the F-35 program continues to lift profits with an 18% incremental margin. LMT has achieved a record backlog level of $144B (from $75B in 2014), up 5% from last quarter. Book-to-bill ended 2019 at 1.2x, a good metric for predicting future demand. Net debt/EBITDA is low at 1.1x. With its solid balance sheet and plenty of cash available, LMT is considering retiring an additional $2B in debt in the next 2 years, as well as increasing its share repurchase. The management team added that they recognize that ½ of its shareholder base is invested in the stock for its dividend, so they are looking into increasing its dividend as well. M&A is less a priority as its organic growth is strong and valuations are high. While LMT’s valuation is pretty full right now, we think the dividend story and very sustainable FCF will keep LMT trading at a premium in the foreseeable future.

2020 guidance was raised:

Sales of $62.75B-$64.25B (increased +2.4% from prior guidance)

Mid-point segment margin 10.8%

EPS of $23.65-$23.95

CFO at or above $7.6B (previous expectations were for ~$7.2B)

As the company provides its guidance, it is interesting to know that over the last few years, the company beat its initial sales guidance by 4% and EPS by 10%.

We are updating our price target as we are rolling the model forward.

LMT Thesis:

· Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships

· Excellent management team focused on returning capital to shareholders

· Strong cash flow and financial position

[tag LMT] $LMT.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

www.crestwoodadvisors.com

JNJ 4Q19 earnings summary

Key Takeaways:

Current Price: $146 Price Target: $175 (NEW)

Position size: 2.54% 1-Year Performance: +16%

J&J reported 4Q19 organic sales growth of 2.6% and adjusted EPS decline of -3%. For the year, organic sales grew 2.8% and EPS +8.8%. By segment, Consumer grew 2.1% in the quarter thanks to good over-the-counter, beauty and wound care performance but the baby care saw a 9.3% decline (Baby center divestiture and competitive pressure). Pharma grew 4.4% as its oncology business saw good overall market and share growth. Immunology, infectious diseases and neuroscience also performed well. Sales decline for its cardiovascular and pulmonary Hypertension businesses due to biosimilar and generics competition.

Medical devices performance was flat due to a decline in its surgery business (sale of the ASP business), but ex the divestiture, the segment grew 2.7%, still somewhat underwhelming for a healthcare sub-sector that has performed in the mid-single digits in the past few years.

JNJ also provided 2020 revenue guidance of $85.4-$86.2bn (within consensus expectations of 5-6% growth), and EPS below ($8.95-$9.10 vs consensus $9.12). We think management is being conservative at this point.

On the litigation front, JNJ has a goal of settling in opioids cases, but continue to go to court with its talc cases. A recent ovarian cancer study showed no significant relationship between talc and ovarian cancer.

We are updating JNJ price target as we are rolling forward our model to 2020.

Thesis on JNJ reiterated:

  • High quality company with consistent 20% ROE, attractive FCF yield,
  • Investments in the pipeline and moderating patent expirations create a profile for accelerated revenue and earnings growth
  • Growth opportunity: Medical Devices and Consumer offer sustainable growth and potential for expansion internationally
  • Strong balance sheet that offers opportunities for M&A.

[tag JNJ]

$JNJ.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

www.crestwoodadvisors.com

Schwab Q4 2019 results

Last week, Schwab reported Q4 earnings of $.62, slightly missing estimates of $.64. Despite the headline miss, results were solid with healthy organic asset growth of $66.2b for Q4 representing full year growth of 7%. Total client assets rose to $4.04T, surpassing the $4 trillion mark for the first time. Asset growth should remain healthy heading into 2020 with the expected closing of two acquisitions – USAA Investment Management and TD Ameritrade.

Current Price: $ 48.45 Price Target: $53

Position Size: 2% Performance since initiation on 6/24/19: 24.8%

Q4 Highlights:

  • Core asset growth of 7% for 2019
    • Core net new asset growth of $66.2b for quarter and $211.7b YTD
    • Growth in Advisor services 10% YoY
  • Net interest margin
    • Deposits grew qoq from $208.6m to $211.1m as cash sorting (moving sweep assets into other higher yielding vehicles) pressures abated
    • Net Interest Margin (NIM) was 2.34% decreased only 9bips given lower rates.
  • Asset Management and trading
    • Schwab Index Mutual Funds $323.3b up 30% YoY
    • Schwab Index ETFs $163.8b up 42% YoY
    • Trading revenue fell to $86m down 58%, but is only 6% of revenue
  • Profitability – industry leader
    • ROE 19% and 45.2 pre-tax profit margin
    • Expenses up only 5%
  • Capital allocation
    • Repurchased 6.4m shares during quarter for $230m. $2.8b remains of authorized buyback. Buyback yield of 2.13%
    • Dividend yield of 1.4%
    • Shareholder yield of 3.5%

Schwab Thesis:

· Expect Schwab’s vertically integrated business model to drive AUM growth. Schwab has averaged 6% organic core net new asset growth as retail clients and advisors are attracted to Schwab’s low cost trading and custody services.

· Conservative, well-managed firm who is a leader in online trading and focused on leveraging platform.

· Schwab is on the cusp of generating excess capital which they plan to return to shareholders. Expect a 20%-30% payout ratio for dividends (1.7%) and management has approved a $4b share buyback which could amount to 4% to 5% of shares

($SCHW.US)

[category: Equity Earnings]

John R. Ingram CFA

Chief Investment Officer

Partner

Direct: 617.226.0021

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

STZ 3Q FY20 earnings summary

Key takeaways:

Current Price: $192 Price Target: $226
Position Size: 2.70% 1-Year Performance: +11.5%

Constellation Brands published their 3Q FY20 earnings this morning. Beer sales continue to shine (+8.3%) while margins expanded +200bps (a combination of pricing and lower COGS). The premium wine business is doing well, up 9%, although this number remains muted by the sales decline of the <$11/bottle wine brands that are in the process of being divested. Innovation and premiumization is the focus of the new CEO. As proof, the company is already taking orders from distributors for their upcoming launch of Corona Seltzer in the Spring. Their internal research showed that the Seltzer category is taking shares from beer (premium domestic & craft but not from imported beer), wine and spirit categories. They think the seltzer category can grow 2-3X from where it is today. Regarding the Canadian cannabis market, STZ remains bullish, with increased conversion of the illicit market to legal one (23% legal purchase in 2018 vs. 50% in 2019). Overall this was a good quarter, but we look forward to a “cleaner portfolio” once the lower priced wine & spirit brands are divested (with cash proceeds used to repay debt), as well as new innovations on the cannabis/drinks front.

Investment Thesis:
• Adding STZ helps position our portfolio to be more defensive at this stage of the economic cycle
• STZ is down ~20% YTD, giving us a good entry point
• STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
• STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex

[tag STZ]

[category earnings]
$STZ.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

www.crestwoodadvisors.com

JP Morgan College Planning Guide

Good Morning All,

Attached is a piece that I received from JP Morgan concerning college education funding and the many long and short term planning elements that get intertwined with higher education.

There are a lot of impactful graphics focused on the magnitude of costs and ways to quantify the value of a college degree. JPM always does a great job with these types of reports so worth reading through.

Thank You,

Pete

Peter Malone, CFA

Portfolio Manager

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

JPM College Planning Guide.pdf

TJX 3Q20 Earnings Update

Current Price: $60 Price Target: Raising to $65 from $60

Position Size: 3.4% TTM Performance: 22%

TJX is up on a strong earnings report and raised guidance. They beat on revenue and EPS, with SSS up 4% vs guidance of 1-2% (which they lowered last quarter). Off-price continues to outpace the rest of retail. Management’s commentary on the call around their inventory positioning and general environment for Marmaxx was very, very positive. Full year SSS and EPS guidance increased.

Key takeaways:

· Revenue beat on same store sales of +4% vs expected +2.6%.

· Traffic was again the biggest driver of SSS. E-commerce sales are not included in SSS numbers.

· Marmaxx (their largest segment) – comp sales increased 4%, lapping a very strong 9% increase last year.

· International had the strongest SSS of +6% – they continue to take share despite the uncertainty of Brexit and a tough retail environment in Europe.

· GM were better than expected but offset by higher SG&A. Higher payroll costs and escalating freight expenses from rising home-furniture penetration are margin headwinds.

· Excellent inventory availability – specifically, mgmt talked about growing e-commerce channels being a source of inventory supply as online merchants struggle to appropriately gauge their own inventory levels – almost all the goods they’re selling on websites are imported goods with long lead times. They are trying to predict sales by category and item, but don’t have all the history that a brick and mortar retailer would have. This highlights part of TJX’s competitive advantage – their scale and centralized merchandising. The efficacy of this is reflected in high inventory turns, which allows them to be very liquid and very opportunistic w/ inventory buys. They buy in season and continuously flow merchandise to stores.

· Tariffs – Q4 guidance includes small negative impact from tariffs. Thus far, they have benefited from vendors buying in merchandise earlier due to tariffs, which has resulted in more availability for TJX. But given TJX’s high turns, they buy-in inventory on a much shorter-term basis, so they don’t have visibility yet into 2020 and the potential impact from tariffs. They do not directly source a significant amount of goods from China.

· M&A – They disclosed a $225million investment in 25% of Familia, a major (275 store) off-price apparel/home retailer in Russia that could double its store base in the next 3-5 years. They are Russia’s only major off-price retailer. TJX may take a larger stake in the future.

· 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.

Continue reading “TJX 3Q20 Earnings Update”

MDT (Medtronic) 2Q FY20 earnings summary

Key Takeaways:

Current Price: $111 Price Target: $115

Position Size: 3.35% TTM Performance: +23%

Medtronic released their 2Q FY20 results this morning, with organic revenue growth of +4.1%, a +20bps adjusted operating margin expansion and +7.4% adjusted EPS growth. During the call, the management team gave an early view on 2020, raising growth at three of their largest divisions. More disappointing was the Diabetes segment guidance of low single-digit growth representing a 500bps cut to sales growth (now 1-3%) as competitive pressure intensifies in the US. On the positive side, they are expecting their new pacemaker to be approved in 2021. The TAVR segment performed extremely well this quarter with 20% global growth and mid-20% US growth (check this video to understand what this is: https://mendedhearts.org/video/tavr-procedure-video/ ). Medtronic’s competitor Edwards Lifesciences recently released earnings that showed similar high growth, which we find reassuring regarding this market’s potential. MDT’s CEO is set to retire and Geoffrey Martha will take on the helm of the company in April 2020. The new CEO is looking to be more aggressive in small M&A and allocating capital to higher growth segments. Overall this was a good quarter but we see limited near-term upside in the stock, waiting for new products in the pipeline to lift sales up further. Medtronic is such a well-diversified company that overall growth can be somewhat toned-down in a sector that has done well in the last years.

Updated FY20 guidance:

Organic revenue growth +/- 4% (unchanged)

Operating margin ex-FX +40bps

EPS increased to $5.57-$5.63 from $5.54-$5.60

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

[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

www.crestwoodadvisors.com