Category: Equity Earnings

Current Price: $1,916 Price Target: $2,400

Position Size: 2.5% TTM Performance: -4.7%

Key Takeaways:

· Gross bookings growth was $25B up 5% YoY and up 10% constant currency. Guidance was for 4-6% growth constant currency.

· They booked 213 million room nights in 2Q, a 12% increase (6-8% guided).

· ADR’s down 1.5% a little better than the -2% last quarter. Geographic mix and stronger dollar negatively impacting ADR’s. Countries with lower ADR’s growing faster and European travelers to the US trading down b/c of stronger dollar.

· Revenues were $3.85B, up 9% (14% constant currency), better than the $3.75B expected.

· Bookings guidance for Q3 (peak travel season) was lower than expected, but they have a long history of guiding conservatively (chart below). Guidance for Q3 is +3-5% gross bookings growth constant currency, suggesting a deceleration from this quarter (partly driven by tougher compares). Despite this, management noted a “solid start to the summer travel season”

· Increased ad spend this quarter (+8%) aided higher bookings growth. They’ve been trying to “optimize” ad spend for several quarters which has been resulting in weaker bookings growth…clearly this ad spend/rev growth algorithm will continue to be a focus going forward as the trade-off between growth and spend persists.

· On the call they said “short-term return on our brand spending is running below our expectations. As a result, we plan on refining our spending levels on brand marketing in the second half of the year.”

· Investing for growth: focus on “connected trip” and payment platform that supports non-hotel properties. Investments will reduce their full year EBITDA growth by a few percentage points. Connected trip vision encompasses all of their brands w/ a goal of broadening focus from accommodations to other aspects of travel spend. They’ve been talking about this for a while, but focus here seems to be ramping with more emphasis on leveraging assets like Opentable.

· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. This is growing faster than their overall business. They declined to give any details on the state of this business when asked.

· French digital services tax will have $32m full year impact.

Continue reading “BKNG 2Q Results”

Key Takeaways:

Current Price: $57 Price Target: $90

Position Size: 1.64% 1-year Performance: -17%

This morning CVS published its 2Q19 earnings results, with EPS above expectations (an 11% beat) thanks to higher revenue and gross margins. Revenue was up 3.7%: pharmacy same-store-sales were +4.7% (comparable scripts were up +7.2% thanks to better adherence to taking medication) and front end same-store-sales were +2.9% (although 80bps of that was a shift in Easter holiday date y/y). On the PBM side, claims were up 4% y/y, a growth in volume that helped boost margins 9.7% y/y. Net new business is still negative (-$7.6B, on the loss of Centene and lower new contracts) but this result was better than the previously negative $8.7B provided at the June investor day. Aetna is performing well, with synergies expectations now to be $400M in 2019 vs $300-350M previously announced: formulary optimization and transition of functions happening faster than initially thought (such as consolidation of the mail operations and pharmacy). The management team raised its FY19 guidance to $ $6.89-$7.00 from $6.75-$6.90. Its 2020 EPS is currently $7, which appears conservative at this point. We believe sentiment around this name will improve as regulatory concerns dissipate and we gain more clarity on PBM business wins during the year. Continue reading “CVS 2Q19 earnings summary”

Disney is down pre-market on below consensus Q3 results, missing on revenue and EPS. The miss was driven primarily by disappointing results at theme parks and at the acquired 21st century Fox business (21CF). Almost all of the operating income miss was the result of one-time issues that led to disappointing results at the acquired 21CF film studio and Star (India TV and streaming). They reiterated their expectation for 21CF to be accretive to EPS in FY21. Weak domestic theme park attendance was disappointing given the Star Wars Land launch at Disneyland in Anaheim. Management attributed weak attendance to admission price increases and higher hotel rates in advance of the Star Wars Land opening. Weak attendance at Disney World attributed to people deferring visits until the Star Wars Land attraction opens there later this month. Management seemed confident that these demand issues are temporary. With a slew of changes at Disney including 21CF acquisition, further acquisition of Hulu stake from Comcast, investment behind yet to be launched DTC (including forgone licensing revenue), Disney is in a spending mode ahead of an evolving business model. So it’s not surprising that results are choppy. No change in thesis, more details to come.

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

$DIS.US

[tag DIS]

Share price: $60 Target Price: $60

Position size: 2.3% TTM return: 9%

BKI reported a good quarter but lowered guidance. Revenues were +6%, slightly below consensus and adj. EPS was better at $0.49 vs $0.48 consensus. Adj. EBITDA of $148m was above consensus of $146.5m. They updated guidance to the low end of the previously given range – the decrease was due to an earlier than planned client loss from a single-client product they are discontinuing. In general, the results highlight ongoing strength in their core business as they continue to win new clients and successfully expand existing relationships through cross-selling and contract renewals.

Key Takeaways:

· Despite slightly weaker than expected revenues in 2Q their strong new client pipeline in both mortgage servicing and origination software should accelerate revenue growth.

· Long term targets continue to be 6-8% revenue growth and mid-teens EPS growth. By segment, management continues to expect mid to high-single digit growth in Servicing, high-single to low-double digit growth in Origination, and low to mid-single digit growth in Data & Analytics.

· Data analytics segment (~15% of revenue) revenues were up 3% driven by growth in their property data and portfolio analytics businesses. This is a lower margin segment that has been seeing margin improvement, however this quarter margins contracted by 160bps. Adjusted EBITDA decreased 4% to $9m due to higher personnel costs as they grew their sales team

· Software Solutions segment (~85% of revenue) was up 7% driven by higher average revenue per loan and loan growth on their core servicing software solution.

o Segment EBITDA margins increased by 90bps.

o Within this segment servicing (~70% of revenue) grew 7%. This is steadier than their originations revenue. They continue to dominate first lien loans with leading share and are growing share in second lien loans. Once current commitments are implemented they will have ~70% share in first lien and ~30% share in second lien.

o Originations (~15% of total revs) made up of new loans and refi’s – revenues increased 8% driven by growth in their loan origination software business (Empower) which was up 18%. Counter cyclical aspect to this segment where falling rates bode well for mortgage origination volumes, primarily by increasing refinance activity.

· BKI has consistently performed well through tough times for their end clients, partly because they’re providing them with solutions that solve their problems like increasing efficiency and maintaining regulatory compliance.

Valuation:

· Trading at ~3.9% FCF yield –valuation is supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex (~9% of revenue now) which should taper as they grow.

· Leverage ratio now at 3x, because of Dun & Bradstreet.

· Capital allocation priorities include opportunistic share repurchases, debt pay down and potential acquisitions.

Thesis:

• Black Knight is an industry leader with leading market share of the mortgage servicing industry.
• Stable business with >90% recurring revenues, long-term contracts and high switching costs.
• BKI has high returns on capital and high cash flow margins.

$BKI.UA

[tag BKI}

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

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!

BKI beat on earnings but lowered guidance. Revenues were +6%, slightly below consensus and adj. EPS was better at $0.49 vs $0.48 consensus. They updated full year guidance to the low end of the previously given range. The decrease was due to an earlier than planned client loss from a product they are discontinuing. More details to come.

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

$BKI.UA

[tag BKI}

Apple reported better than expected revenue and earnings, with revenue of $53.8B vs $53.4B expected and EPS of $2.18 vs $2.10 expected. Revenue was up 1%, returning to growth, despite 300bps headwind in the quarter from currency. They also issued guidance above the street with a range of $61B-$64B for Q4 – the street was at $61B. They are making progress on diversifying away from the iPhone. This was the first quarter in many years where the iPhone represented less than 50% of revenue. They saw an impressive 48% growth with their “Other Products” business on robust wearables growth (e.g. Apple Watch). A return to revenue growth in China on a constant currency basis was a big relief given sharp declines in the last couple quarters. Services, however, were a slight disappointment at $11.5B vs consensus $11.8B – that represented 13% growth. Services is a key part of their long-term story and is higher margin. The next couple quarters will be important for the Services segment as they launch Apple TV+, Apple Arcade and Apple Card.

Key Takeaways:

· Performance in China was a key positive – they returned to growth on a constant currency basis. Last quarter they reported China revenue down 22%.

· iPhone revenues (-12% YoY) were a little light vs expectations after beating last quarter.

· Revenue excluding iPhone was up 17% from last year with growth across all categories.

· Mac sales were better than expected after weak performance last quarter. Mac and iPad sales grew 11% and 8% YoY, respectively, when broader notebook and PC market declined YoY in 2Q

· Services revenue decelerated from 16% growth last quarter to 13% growth. However, excluding a one-time item from last year and Fx headwind, currency neutral Services growth was 18%. Management reiterated their target of doubling FY16 Services revenue in FY20. Accounted for ~21% of sales and ~1/3 of gross profit.

· Paid subscriptions grew by 30M+ in F3Q19 to over 420M.

· Apple recently announced a $1B acquisition of Intel’s smartphone modem business to further their long-term strategy of owning and controlling the primary technologies behind key products. This could reduce reliance on 3rd party vendors and help Apple differentiate and expedite the development of future products. Qualcomm, who Apple had been in a long legal battle with, dominates the baseband processor market – they design the chips that allow smartphones to connect with data networks. Qualcomm was Apple’s supplier, then b/c of the legal battle they moved to Intel, now they’ll be using Qualcomm again for 5G chips, but this acquisition signals more in-house design long-term. Apple already designs in-house the processor chips (their A12 Bionic chip) that are the “brains” of their phones, iPads etc.

Valuation:

· Trading at about a 1.4% dividend yield, and >6% FCF yield.

· They have about $102B in net cash on the balance sheet. That’s over 11% of their market cap.

· The stock is undervalued and substantial buyback from management’s goal of net cash neutral will support valuation.

· In addition to the >$100B in net cash they already have, they produce about $60B in FCF annually. That’s more than all the other FAANGs combined.

· In Q3 they returned $21B to shareholders through $17B in share repurchases and $3.6B in dividends.

The Thesis for Apple:

• One of the world’s strongest consumer brands and best innovators whose product demand

has proven recession resistant.

• Halo effect -> multiplication of revenue streams: AAPL products act as revenue drivers

throughout portfolio – iPhone, iPod, MacBooks, iPad > iTunes, Apps, Software, Accessories,

• Strong Balance and cash flow generation.
• Increasing returns to shareholders via dividends and buybacks.

$AAPL.US

[tag AAPL]

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Key Takeaways:

Current Price: $47 Price Target: $61

Position Size: 1.88% 1-year Performance: -10%

Sensata released disappointing 2Q19 results, with organic sales of -1.6%, below management’s guidance of -1% to +2%. ST lowered its 2019 sales guidance by 3% due to lower end market growth assumptions in auto, HVOR and industrial. In 2Q19, the China auto industry was down 20% and European auto down 10%, much lower than anticipated. Despite weak top line, operating margins remained flat as the company actively managed its expenses and benefited from capital deployment initiatives. Additional actions are being put in place to align its cost structure to the lower market demand, as well as other restructuring actions (2 years payback on the restructuring already started).

Sensata reduced its market assumptions again:

· global auto market: -5%; vs -3% to -4% before

· China auto: -11% to 12-%; vs. -5% to -6% before

· European auto down 4-5%; vs. -4% before

o The auto slowdown is being offset by continued content growth such as electric vehicles battery subsystems

· Industrial -6%; vs. -1% before

· global HVOR market: -4%, vs. -2% before

On the positive side, Sensata continues to outperform the sectors it plays in, and is advancing its initiatives in the electrification theme (partnership with Lithium Balance). Even though the traditional Chinese auto market slowed down quite a bit, ST has been able to increase content per vehicle, allowing them to be somewhat flat in growth this quarter. They see China as the fastest EV market grower, helping sustain ST’s content growth in the future. Despite a weak quarter, the long-term content growth thesis remains intact, and the incremental $500mn buyback program announced today offers some support to the stock.

The Thesis on Sensata

• Sensata has a clear revenue growth strategy (content growth + bolt-on M&A)
• ST is diversifying its end markets exposure away from the cyclical auto sector over time through acquisitions, also expanding its addressable market size
• ST is a consolidator in a fragmented industry and still has room to acquire businesses
• Margins should expand as the integration of the prior two deals is under way, regardless of top line growth, and efficiencies in manufacturing are continuously pursued as they are gaining scale
• ST is deleveraging its balance sheet post acquisitions, leaving room for future M&A or a return to share buybacks, and improving EPS growth

[tag ST]

$ST.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

Key Takeaways:

Current Price: $77 Price Target: $91

Position Size: 2.08% 1-year performance: +0.7%

Fortive released its 2Q19 earnings, showing a mixed quarter with softer organic growth (+2% vs. 3-4% guidance) due to a worsening of its short-cycle business, much more so than when it was last discussed by management during 2Q (something that HON also mentioned being cautious about last month). Because of this, FTV is cutting its full year guidance: EPS is now expected to be $3.45-3.60 from $3.55-3.65 (~2% cut) due to lower top line growth (from 3-5% previously now 2.5-3.5%) and macro uncertainty. On the bright side, its EMV business (fuel retailing) is picking up momentum, and recent acquisitions should start contributing to organic growth in 4Q. Continue reading “Fortive (FTV) 2Q19 earnings summary”