On 5/8/18, Crestwood unveiled its ESG integration initiative. For individual stocks, ESG ratings will help inform our evaluation of management. To derive ESG rankings, we have combined the services of RepRisk (news-based) with Sustainalytics (disclosure-based). We believe this process will help reduce risk, improve performance and help differentiate Crestwood’s investments. Please see below presentation:
Thanks to the Research Team for all their work!
John
Thesis Intact. Key Takeaways:
Overall results were good, with sales up 11% ex-FX, but EPS missed slightly due to one-time restructuring charges. Resmed is guiding to growing its SG&A costs at half the rate of its revenue. The recent growth in the rest of the world was driven by recent funding policy changes in France and Japan favoring connected care solutions, where Resmed has an advantage over other competitors that would struggle with the investments required to develop a good connected care solution. The new funding rules favor their AirSense devices pushing suppliers to upgrade their fleets (this trend should persist for the medium term). On the other hand, we see its US results as a slight negative, as RMD has recently lost some market share to Philips who had a double-digit growth this past quarter vs. RMD +8%. The next quarter will determine if this is an ongoing trend to be worried about or if the company’s innovation ability is intact.
Valuation: no change at this time
Thesis on RMD:
$RMD.US
[tag RMD]
Julie S. Praline
Director, Equity Analyst
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Thesis Intact. Key takeaways:
UNP met consensus numbers thanks to a combination of moderate volume growth and price increases, and kept costs under control. Operating Ratio (OR) was 64.6%, but productivity gains of $35M were well below management’s expectations. The shortfall was related to the network issues the company experienced during the quarter, mostly in the Southern region.
The management team is scratching its 2019 OR target of 60% (with consensus already above that numbers ~61%, so sell-side numbers shouldn’t come down too much) and its $300-350M in productivity gains guidance. The reasons are:
· Productivity initiatives affected by problems in implementing an automated train stopping and collision avoidance system (Positive Train Control), affecting the flow of operations. PTC implementation was initially targeted to end in 2018, but now pushed towards 2020. The company has reactivated 650 locomotives (250 since February) and still has 250 still in storage. To improve its service, the company is also offering signing bonuses to attract new labor and has recalled all employees on furlough
· Price inflation less than expected (something the street had been questioning the company for a while)
It long-term OR target of 55% is remains untouched at this time. The company still benefits from high barriers to entry, supporting pricing power and margins. For 2018, management remains positive on the top line possibilities, guiding to positive full year volumes and core price gains. They are also evaluating its capital structure, and could see some debt funded buyback to be announced at its Analyst Day on May 30th. We see this quarter as a one-time blip in the company’s strong operational history. We remain positive on the name.
Continue reading “UNP 1Q18 earnings: remaining positive on the company’s story”
Thesis Intact. Key Takeaways:
Yesterday MMM reported its 1Q18 results, with sales and EPS in-line, but margin missing (30bps expansion vs. 100bps expected). While EPS met consensus expectations thanks to a lower tax rate, and healthy reported sales growth of 7.7% (+2.8% organic – and all five segments in positive territory), management reduced its top end of organic sales growth guidance for 2018 to 3-4% (from 3-5%), and the top end of EPS guidance by $0.15. A guidance cut this early in the year drove the stock down on the news. In particular, its Industrials segment (1/3 of sales) fell short of expectations, with a sales deceleration to +2.2% from 5.7% last year. The auto aftermarket (auto body shops) was weak – although not new news as it was previously called out in March. But recall that IHS forecasts a return to positive global auto production for the rest of the year, which should support its auto OEM business (+3% in 1Q). Oral care saw weak demand (flat y/y), and electronics experienced a deceleration in growth.
On the positive, 3M’s pricing increase (+70bps) showed the company’s strength and sustained margins expansion, but this needs to be monitored as raw material inflation continues through 2018 and pressures margins. The management team raised its buyback target to $3-$5B from $2-$4B before. MMM remains a best-in-class industrial company, as proven by its improving ROE and consistent FCF margin (even during the last recession – see charts below).
· Valuation: we have updated our model and do not change our price target at this point.
Continue reading “MMM 1Q18 earnings – better than the stock reaction implies”
Good morning,
I wanted to send an update on Colgate ahead of earnings … Please see below.
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.
Current Price: $84 Position Size: 2%
Price Target: $84 TTM: 5.4%
Guidance:
Inventory Availability:
Future growth will rely increasingly on the Home category and International:
Valuation:
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:
Cisco’s margins are expanding as their revenue model evolves:
Intent-based networking will be a growth driver:
Valuation:
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:
Thesis intact, highlights from the quarter:
Results across all segments were solid with the best results in the Communications, Media & Technology segment of +18%:
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:
Investment Thesis:
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:
Inflation and margin compression are concerns:
Recent acquisition integration:
Avendra and AmeriPride both closed within the last couple months.
Outlook raised:
The Thesis on Aramark:
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:
Digital shift is growth driver but will weigh on margins:
Valuation:
Visa Thesis:
