Category: Equity Research

Energy Update January 2018: SLB & XOM

Oil view positive for 2018:
• Late cycle has historically favored the energy sector
• We are coming at a FCF inflection point: cost cutting has been done in a low oil price environment. Recent increase in oil price will be incrementally positive for energy companies
• Volume growth
• Valuation

Adding 50bps to XOM to get to a full 2% position
XOM is seen as a defensive holding compared to peers:
• Strong balance sheet
• Top FCF & dividend coverage ratio
• History of finding good balance of reinvesting in the business and returning capital to shareholders
• March 2018 Analyst Day will provide some updates on potential buyback, could be a catalyst for the stock

Schlumberger Update 2018
In a lower for longer oil price environment, service companies that are able to provide a differentiated offer and/or evolve their business model will be able to exceed last cycle’s peak earnings (reached in 2014). We believe SLB has been able to evolve its business and remains a quality company that has attractive growth driver for the coming years.
1. Schlumberger Production Management (SPM) project: key growth driver, recent projects could add $1B in sales in 2018
• High growth/high margin business with less competition
• Less cyclical with better ROIC
• Attractive offering for cash constrained E&P that are looking to partner with service providers to lower production decline rates and/or increase production. SLB gets a portion of incremental profits created by its service

2. Pick up in offshore activity would benefit SLB the most vs. peers
• SLB clients’ project planning at a 2 year high
• Erosion in international pricing is slowing
• International activity has bottomed in 3Q17

3. Shareholder return to improve
• Top line & margin recovery
• Dividend yield 3%, could be increased in 2018 (better cash flow from operations + stable capex)

Goldman Sachs Sale Recommendation

As discussed today, we are selling Goldman Sachs (GS). Goldman is reliant on trading results which have been lackluster over the past 6 years. Fundamentally, regulation has changed the brokerage business model, reducing opportunity for revenue and crimping margins. Weakness in hedge fund trading has hurt GS results relative to their peers. Given MiFID in Europe, we do not believe these headwinds will likely increase.  Attached is our presentation with an updated slide on valuation which is at or near a 4-year high.  goldman review 101917 RM

CVS 2018 Initial Guidance

Yesterday CVS provided its initial 2018 guidance, which came as a surprise as the management team had previously announced that its guidance would be provided along 4Q17 earnings call. We believe this move is to reassure the investment community on its business growing in line with their expectations (ex-acquisition). Clarity on growth is driving a relief rally in the stock this morning. Continue reading “CVS 2018 Initial Guidance”

Sensata Analyst Day Review – Increasing Price Target to $61

Yesterday Sensata had its Analyst Day and provided 2018 guidance above expectations (the stock reacted positively, up +8%). Additionally, ST’s management gave an upbeat view on the business next three years, and is forecasting a 2-3X acceleration in revenue growth, after three years of below expectations growth.
Following the event, I am updating my price target to $61/share, from $51 prior. This is to reflect the better business trends in the coming three years than previously thought and a re-rating of the stock. A 16-17x P/E is reasonnable, leaving ST’s multiple below peers as the company is still highly levered to the auto business (peaked in the US). I recommend we hold the position.
Below is a summary of the information provided during the event. Continue reading “Sensata Analyst Day Review – Increasing Price Target to $61”

Adding Black Knight, Inc. (BKI) to the Focus Equity portfolio

Black Knight, Inc. is a leading provider of mortgage processing and technology solutions to the US mortgage industry. Over 60% of all first lien loans are processed using BKI’s technology. BKI servicing revenue is very stable with long term contracts. Also, BKI sells software facilitating loan originations and sells data and analytics services to the mortgage industry. Continue reading “Adding Black Knight, Inc. (BKI) to the Focus Equity portfolio”

CVS / Aetna Merger Commentary

Last night CVS announced a definitive agreement to acquire Aetna (a Health Insurance Company), for $207/share, financed by 30% new equity and 70% new debt ($45B)/cash on hand. The transaction is expected to close mid-2018. This deal greatly increases CVS’s pro forma leverage to 4.6x (current 2.9x). In order to deleverage quickly, CVS will stop its share buyback program and maintain its dividend flat, until the leverage ratio goes down to low 3x, which I expect to happen within the 2 years post deal. The synergies seen by the management team are currently at $750M in the second year of the deal, which should create EPS accretion in the low to mid-single digit range. Continue reading “CVS / Aetna Merger Commentary”

Johnson & Johnson ($JNJ.US) 3Q17 earnings recap: beat and raise top and bottom lines

JNJ reported strong Q3 2017 results with a beat and raise on top and bottom lines. Sales came in nearly $360M above estimates and cash EPS of $1.90 was 13% ahead of street estimates. Solid performance was driven mostly by better than expected results in pharmaceuticals. Excluding the impact of acquisitions and divestitures and forex, worldwide sales were up 3.8%. Price Target remains unchanged.

Continue reading “Johnson & Johnson ($JNJ.US) 3Q17 earnings recap: beat and raise top and bottom lines”

SSGA Chart Pack – Looking at Equity Factors

SSGA SPDR ETFs Monthly Chart Pack – September 2017

Attached is the September chart pack from SSGA. Below is one slide that shows monthly performance of the various equity factors in the U.S. YTD.

SSGA Graph

While this is a relatively short time period, it is a good example of why it makes sense to own more than one factor ETF. During the year, momentum (growth) performance has picked up while quality and minimum volatility have lagged on a relative basis. However, in August, we saw a spike in market volatility due mostly to geopolitical concerns.

This was the first spike that we have seen in some time. Minimum volatility held its ground with positive absolute and relative performance during the month, and importantly, acted in the way we would expect (outperforming during periods of uncertainty).

For clients that may ask why they own multiple equity ETFs (growth, quality, low volatility) this is just one simple example of how different factors balance one another out while reducing the overall risk of the portfolio.