Category: Equity Research

Today 3M’s CFO presented at the Morgan Stanley conference and provided some outlook comments for 2018 that were slightly more negative than the previous guidance:

· FX now neutral (vs. 10c positive impact previously announced)

· The rising raw material prices will impact earnings by 10 cents/share (vs. 5-10c prior guidance). To offset this, in 1Q 3M increased their prices by 70bps, and in 2Q by 110bps. This price increase remains robust so far, but we shouldn’t expect an uptick from there. This should just offset the costs inflation starting in 2H

· There are signs that the auto production units will be lower than expected

· Healthcare unit growth is now at the bottom of the 4-6% growth previously announced: US oral care has been slower than anticipated, and their drug delivery business is seeing negative growth following a strong 2017

· China: growth now closer to 10% rather than 10-15%: manufacturing and exports out of China have seen less robust growth recently

· Expected 2H18 organic growth of 2-4% (50-100bps of the growth was pulled forward in 2Q from 2H due to their ERP system deployment)

$MMM.US

[tag MMM]

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 published positive comments following their roadshow with Sensata’s CEO this week. A quick summary of what was discussed with investors is below:

· Starting to demonstrate leverage to electric vehicles: average content per vehicle now in line with gasoline vehicle (average is $30/vehicle), and even higher in hybrid vehicles (for example: $80/vehicle on Fiat 500e, $70 on Porsche Panamera, and $45 on Chevy Volt).

· China: this country presents the most upside for the next 3 years, and guidance includes a slowdown in production. The current average content per vehicle is $11, and is expected to rise 50% in the next 3 years.

· Large differences with the typical automotive supplier:

o more diversified end markets exposure (60% auto vs. 100% for other suppliers)

o low customer concentration risk

o cost structure: more variable/less fixed costs (which helped protect margins from experiencing huge swings in 2008)

o better cash flow generation

· Share buybacks more attractive since the re-domiciliation of headquarters to UK.

[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

Pepsi announced its plan to acquire SodaStream, an Israeli countertop carbonated water machine manufacturer. Pepsi will pay $144/share (an 11% premium to the last closing price). The deal is funded by cash on hand. Closing of the transaction is expected in January 2019. Sodastream’s revenues for 2017 were $543M, a 19.1% EBITDA margin, and has been FCF positive for 2 years.

This deal is a positive for Pepsi, following on its strategic plan to increase healthier drinks and snacks to its portfolio. 

No change to our thesis or price target.

[tag PEP]

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!

Key Takeaways:

· Resmed is winning shares in the US: devices +9%, masks +12% (better than last quarter, and removing our fear of share loss to competitor Philips)

· Rest of the world devices sales +6% slower than last quarter as fleet upgrade slows down (big boost last Q in France & Japan not repeated this Q). Rest of the world masks sales still impressive at +16% (upgrade in masks)

· Acquisition of HEALTHCAREfirst (software of home health/hospices) during the quarter will add growth to Brightree (sales +12% this Q). Terms of the deal not disclosed. We like Resmed push into Saas (software-as-a-service), as a way to increase recurring revenue and diversify from the cyclicality of devices/masks sales due to introduction of new models

· Margins in line with their guidance at 58.1%, but below consensus: lower prices were offset by better manufacturing & procurement efficiencies. We like the recent trend of gross margin stability, which combined with lower SG&A expenses as a % of sales (thanks to scale benefits and cost reductions), will help boosts RMD’s operating margins

· FY19 guidance introduced:

ü Gross margin consistent with 4Q18 of ~58%

ü SG&A 24-25% of sales – lower than FY18 and the lowest of its history

ü R&D 6-7% of sales (a good rate to maintain top line growth)

ü Tax rate 22-24%

While we still like Resmed’s company profile and growth trajectory, the shares appear fully valued today. Our updated price target is $109, assuming continued double digits growth in the next 4 years and FCF margin stability. Current position size: 2.56%, current price: $108.6.

Continue reading “Resmed (RMD) 4Q18 earnings recap”

This morning Fortive announced the acquisition of Accruent, owned by the private equity group Genstar Capital. Conference call at 8:30am.

Deal details:

· $2B in cash, financed by cash & debt

· expected to close in 3Q18, accretive to FCF and EPS in 2019

· fits Fortive’s strategy to add recurring revenue businesses, in the connected devices & IoT/data analytics

· 10% ROIC by year 6

· Synergies possible with Fluke and recently acquired Gordian

Company description:

· Accruent is a global software company that provides resources to companies to manage their facilities/real estate/physical assets in a cloud-based framework. This software tracks the full life cycle of real estate and facilities: capital planning, lease accounting, space management, field service management

· employs 1,100 employees and serves 10,000 global customers across a wide range of industries

· 20% of its revenues is international (serves 150 countries)

· total addressable market for Accruent’s software is $7B, #1 in this market

· revenue of $270M in 2018, 50% software-as-a-service, 70% recurring revenue base, high revenue retention and low cyclicality

· Adjusted EBITDA margins of 37%

· Long runway for additional M&A in that market

$FTV.US

[tag FTV]

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!

Bank of America (BAC) reported core Q2 EPS of $.67 above market expectations of $.65 due to solid expense control, better card income and capital market results. BAC continues to be levered to rising rates, improve the balance sheet and return capital to shareholders. BAC increased the dividend by 25% and plans to return $26b to shareholders via buybacks and dividends for a shareholder yield over 8%.

Current Price: $30.8 Price Target: $37 (Increased from $30 – 15x 2018E)

Position Size: 3.5% Trailing 12-month Performance: 25.5%

Q1 Highlights:

• Solid results, despite weak revenue growth
  • Good control of noninterest expense -5% yoy
  • Strong digital footprint
    • Increased digital bank users to 35.7m from 30.8m a year ago
    • 76% of deposits are conducted digitally
  • Focused on returning capital to shareholders
• Continued improvement in the balance sheet
  • Common equity tier 1 ratio 11.3% up from 7.8% in 2009 and above Fed’s target of 9.5% for BAC
  • ROE of 10.8% with a return on tangible book of 15.2%
  • Net charge offs 0.43%
• Net Interest income was increased 5% YoY
  • Loan growth of 5% and deposit growth of 3%
  • 100 bps increase in yield curve will increase net interest income by $3.2b over the next year, driven by sensitivity to short-term rates
  • Strong growth in online banking with attractive offering for consumers – up 19% yoy.
• Continued strong expense controls
  • Total headcount fell 1%
  • Efficiency ratio improve 100 bps to 59%
• BAC is still attractively valued at 1.1x Book value and 14.2x P/E
  • New target represents 1.5 times book value
  • Expect the stock to grind higher given our view of accelerating EPS over the next 12-18 months driven by:
    • BAC’s focus on balance sheet quality
    • Declining expenses
    • Positive leverage to rising rates
• BAC is focused on returning capital to shareholders increasing the dividend 25% and a shareholder yield over 8%

BAC Thesis:

· BAC has transformed its business to a higher quality mix

· Recent results demonstrate an accelerating EPS growth and returns over the next 2 years

· BAC has become a return of capital story

($BAC.US)

John R. Ingram CFA

Managing Director

Asset Allocation and Research

Direct: 617.226.0021

Fax: 617.523.8118

Crestwood Advisors

50 Federal Street, Suite 810

Boston, MA 02110

www.crestwoodadvisors.com

CVS is seeing some pressure today as the FTC chairman said Aetna and CVS shouldn’t get a free pass because this is a vertical integration. Just a reminder that UnitedHealth is already a vertical integration at play, and has never been highlighted as being anti-competitive.

There are also comments coming from a proposed regulation entitled “removal of safe harbor protection for rebates to plans or PBMs involving prescription pharmaceuticals and creation of new safe harbor protection” (wow that was long to type!). Details are not currently available. This is yet another push from the Trump administration to reform the healthcare system. Drugmakers are seeing pressure too and trying to avoid damages to their business models: Pfizer and Novartis recently announced holding off raising prices for the rest of 2018, in response to Trump’s attacks.

As a reminder, a key function of the PBM is to leverage scale and competition to reduce drug costs for clients. PBM keep up to 10% of the “saving”, although CVS mentioned being closer to 5%. Per Goldman Sachs, the rebates business represents a mid-single digit % of its EBITDA. Below is Goldman’s calculation:

[tag CVS}

$CVS.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

PLEASE NOTE!

We moved! Please note our new location above!

Wells Fargo (WFC) reported core Q2 EPS of $1.11 versus street expectations of $1.12. Results were a bit messy and included several one-timers. Wells continues to make progress on improving relations with employees and customers as they look to put the various scandals behind them. Wells is becoming a return of capital story with over $25b in excess capital. Wells plans to increase dividends and double their already sizable share repurchase program – increasing shareholder yield to over 11%.

Current Price: $56.7 Price Target: $60 (increased from $56 15x 2018 earnings)

Position Size: 3.6% Trailing 12-month: 6.1%

Highlights:

• Update on settlements, lawsuits and balance sheet restrictions
  • Expects the Federal Reserve to lift balance sheet restriction during first half of 2019
  • Accrued charges in Q2 2018 to refund customers for pricing of foreign exchange transactions and fee calculations for wealth management area
  • On 4/20/18 Wells reported a $1b settlement with OCC and CFPD relating to forced car insurance and mortgage fees.
  • Wells still needs to settle with DOJ over residential mortgage policies dating back to the financial crises. Estimates place the settlement at $2b, but Wells has already set aside reserves of $3.2b
  • Additional lawsuits exist for overdraft fees, foreign exchange, mortgage fees, improper account closing and other smaller suits. Wells is not out of the woods, yet.
  • Replaced former Chairman, John Stumpf with CEO, Tim Sloan, and CFO Elizabeth Duke, a former Fed member, as independent chairman.
  • Named 6 new independent directors
  • Plans to spend 2% of earning to philanthropy (up from 1.3%)
  • Recent moves to improve standing of employees
    • Increased base minimum hourly wage to $15.00 an increase of 11%
    • Increased 401k and profit sharing programs
    • Increased stock incentive compensation
  • Recent improvements to help customers
    • Overdraft rewind, zero-balance alerts, debit card on/off capability, and P2P payments
• Wells is a return of capital story
  • Common Equity Tier 1 Ratio of 12.0% with a target of 10% – $25b in excess capital
  • ROE 10.6% (Return on tangible equity 12.6%)
  • Returned $4.0b to shareholders through dividends and share repurchases.
  • Increased dividend 10% from $.39 to $.43.
  • Increased share repurchases from $4b to over $8b which is shareholder yield of over 11%.
• Excellent banking business
  • Strong balance sheet – Net charge offs and Nonperforming loans near historic lows.
  • Balance sheet restrictions has allowed trimming of lower quality loans – autos loans and pick-a-pay mortgage loans
  • Return on tangible equity 12.6%
  • Generates $5b per quarter in earnings
  • $1.27 trillion deposits with average cost of 40 bps
• Noninterest revenue down -8% yoy – area affected most by changes to companies practices
  • Weak Mortgage banking with drop in margins for origination
  • Consumer fees (deposit service, card fees and other) were down in effort to please customers
  • Noninterest expenses were up 3% YoY mainly on higher salaries and benefits
  • Efficiency ratio improved to 64.9
• Net interest income improved 1% yoy
  • Average total loans down 1% yoy
  • Consumer loans down $6.6b with largest reduction in auto loans
  • Rate paid on deposits has risen from 0.17% 1Q17 to .40% 2Q18
• Valuation is fair on depressed earnings WFC now trades at 14.5x P/E. WFC is targeting $4.0b in cost savings over the next two years – an aggressive target.

WFC Thesis:

• Best franchise in banking due to disciplined loan writing and quality mortgage underwriting
• Large deposit base that provides low cost funding
• Strong capital ratios put WFC in a good position to be opportunistic, invest for the long-term and return capital to shareholders
• Fair valuation and potential for earnings rebound in 2018

($WFC.US)

John R. Ingram CFA

Managing Director

Asset Allocation and Research

Direct: 617.226.0021

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Key Takeaways:

Last week McCormick released its 2Q18 earnings, with a sales and gross margin beat (+340bps y/y à leading to a 330bps operating margin expansion) and EPS +24% y/y. Revenue ex-FX grew 16% (+13% from the addition of Frank’s and French’s brands), driven by +2.5% volume/mix and 0.5% price. China had the strongest Consumer segment growth with +5.7% volume growth. In its Flavor segment, Americas was the leading geography with +5.3% volume growth. The addition of new brands helped expand the company’s overall margins. MKC reduced its cash conversion cycle by 9 days, a sign of good cash flow management skills, supporting faster debt pay down.

Continue reading “McCormick 2Q18 recap”

We had been waiting for Fortive’s next deal following the divestiture of its Automation & Specialty business to Altra for $3B. It was announced last night with the acquisition of JNJ’s medical sterilization unit for $2.7B. The deal is expected to close by early 2019. The EBITDA from the new business will offset the loss from the divested Automation business. The deal will be financed by cash on hand, new debt and/or equity.

What is the JNJ’s Advanced Sterilization Products business?

· Provides innovative sterilization and disinfection solutions and low temp hydrogen peroxide sterilization technology:

o Terminal sterilization: Manufactures capital equipment as well as accompanying proprietary sterilant cassettes, biological indicators and software that sterilize critical devices including laparoscopic and robotic instruments and stainless steel instruments. Installed base of >21k units with 8-10 year life.

o High-level disinfection: Manufactures cleaners, reprocessors and biocides for semi-critical devices such as endoscopes. Installed base of >9k units with 6-8 year life cycle.

o Services: Provides maintenance and repair of sterilization solutions ensuring critical uptime for hospitals.

· Global market leader with 80% recurring revenue base (in line with FTV growth strategy), a large installed customer base and good brands

· Provides entry into the medical sterilization and disinfection market:

o Strong growth sector

o International growth

· Expected to achieve 10% ROIC in 4 years

This unit hasn’t grown in the several years, in a market that grows mid-single digit. Being part of a large corporation such as JNJ, the unit might not have been a critical business the company was focused on. With $775M in sales last year, it is in line with FTV’s business unit size in the $1B range. EBITDA margin is 25%, which should be accretive to FTV right away.

We see this deal as positive for FTV, expanding its exposure in the non-cyclical medtech sector.

$FTV.US

[tag FTV]

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!