Analysis: - Aptus Capital Advisors



Name: UnitedHealth GroupTicker: UNHMarket Reaction: +4.4%Earnings: Q1 2020-254028829000Analysis:UNH had a strong quarter, with management maintaining 2020 EPS guidance (one of the few) of $16.25 - $16.55. With revenues more or less in line with expectations, the big beat in the quarter came on medical loss ratio (“MLR”) of 81.0% (100+ bp better than expected) as increased COVID-19 related claims were more than offset by a sharp decline in higher cost surgical claims. Management called out only "minimal impact" from COVID-19 on 1Q20 results, as the domestic reaction to COVID-19 only ramped up in mid/late-March. Offsetting this is a decline in the commercial book of business, as unemployment continues to increase, a brief slowdown across the Optum businesses, and an increased MLR in 2H20 as claims from the backlog of deferred elective procedures come in (2H20 MLR expected to be 350+ bp above 1H20, with the biggest impact in 4Q). While the duration and impact from COVID-19 remaining a variable for the foreseeable future, we continue to view shares of UNH trading at less than 15x 2021 EPS as attractive given the company's sustainable growth and diversified business mix.D + G: 1.42% + 9.50% = 10.92%Net Premiums Growth + Margin Expansion + Repurchases = EPS Growth Rate8.0% + 1.0% + 0.5% = 9.5%Name: Fidelity National Information Services, Inc. Ticker: FISMarket Reaction: -2.9%left197294500left27121200Earnings: Q1 2020Analysis:The company pre-leased their Q1 2020 earnings in mid-April – mildly disappointing. Specifically, FIS announced that adj. EPS would be $1.26-$1.28 (vs. street estimates of $1.29) and organic revenue growth would be 1-2% (vs. street expectations of 3%). More importantly, the implied exit rates are lower than expected as consolidated revenue likely exited the quarter (last week of March) down 12%, weighed down by a softer Merchant Solutions segment (-35% of revenue). Although results are certainly weaker than expected, we still believe FIS is the best house in the neighborhood and feel incrementally worse about the group as those exposed to merchant acquiring (SQ, FISV) and spending trends in general (V, MA, PYPL) are likely worse off than we previously thought. The one wildcard we haven't heard from yet is FISV but we have a hard time believing the legacy FDC merchant business held up as well as legacy WP and could be a lot worse. As expected, along with peers, FIS withdrew their FY 2020 guidance. D + G: 1.01% + 11.50% = 12.51%Organic Growth + Inorganic Growth + Margin Expansion + Debt Repayment + Repurchases = Growth Rate6.5% + 0.0% + 2.5% + 2.0% + 0.5% = 11.5%Name: Visa, Inc. Ticker: VPrice Reaction: -0.1%left30213700Earnings: Q1 2020Analysis: Visa reported slightly better than expected Q2 2020 earnings including improvement in April to date spending trends – positive for investors. Additionally, we were encouraged by recent wins (incl. Truist) as well as management's commentary on incentives (expect to still be in original range 22.5-23.5% of gross revenues) and the continuation of share repurchases (still $9B+ in fiscal 2020). Importantly, cross border volumes in April are better than feared at down ~40% y/y in the second half of April. Although V gave one more week of data than MA, even during the same week (ended Apr 21) V rebounded to -40% vs MA -49%. In addition, we believe V is benefiting from pricing actions last year (revenues 600 bps above volume in F2Q20), which is partially offsetting volume weakness in the near-term.Growth could be a little challenged in 2020 as cross-border revenue (~25% of total revenue) could be down ~20% as travel may be down >50% near term (analysts assume that travel is ~2/3 of cross-border revenue). The rest of the business is mostly driven by volume and transactions, which may be flattish in C2020.Little worried about current valuation, as earnings estimates continue to come in. Valuation around all-time highs - over the past 10 years Visa has traded >30X NTM P/E only ~2% of the time; current valuation is ~32X NTM P/E, though skewed, given the environment and the market being a forward looking mechanism. We like the stock a lot as a long-term compounder, behind strong secular growth, with somewhat limited cyclical pressures. In addition, the clean balance sheet and inflation hedge provides additional late-cycle investment benefitsD + G: 0.62% + 11.50% = 12.12%Sales Growth + Margin Improvement + Plaid Acquisition + Share Repurchases = EPS Growth Rate10.0% + 0.0% + 0.5% + 1.0% = 11.50%Name: Roper Technologies, Inc. Ticker: ROPPrice Reaction: +7.4%317522987000Earnings: Q1 2020Analysis:Roper‘s strong start to 2020 served as a reminder of the durability of the model and strength of management that has led to continued outperformance versus the S&P 500 during almost all time periods of recent memory, with the exception of 2016. Roper’s balance sheet is under-levered and its continued asset light, heavy FCF generative model should enable the company to capitalize from an M&A perspective later this year or in 2021. On that note, a core tenant of our buy thesis is Roper’s ability to deploy cash and drive CRI. We like the current environment for Roper given its conservative nature, asset-light structure, and cash flow generation. Its balance sheet is in great shape with $1B of cash (~2x net leverage), an untapped $2.5B revolver and recently amended covenants — which together provides the unique flexibility to act on a pipeline of high-quality opportunities. We believe economic turmoil will create acquisition opportunities that the company is poised to jump on. ROP’s model is holding up relatively well, but they are not immune to a global shutdownGoing forward, we appreciate the level of detail that management provided on their outlook considerations, particularly in the Application Software (AS) segment, where most of the businesses were not a part of the ROP portfolio during the last downturn. Specifically, management broke down the segment into perpetual licenses (10% of AS), Services (20% of AS) and recurring SaaS/maintenance (70% of AS) revenue. Of the three categories, perpetual licenses are expected to be the most volatile as this piece is dependent on adding new logos (i.e., customers) and typically carries the highest EBITDA margins (direct pass through to profit). Within services, there is a portion that is on premise that could also see volatility. However, the majority of AS is recurring SaaS/maintenance, where attrition rates are historically low (< 5%).From a margin standpoint, management embeds flattish y/y margins in both the AS and Measurement & Analytical Solutions segments. The bottom line is that we expect 2020 EPS to be down only 5% and FCF to be even more resilient (flattish), highlighting the durability of ROP's business model. This was the big driver for the stock on earnings day. D + G: 0.54% + 9.50% = 10.04%Organic Growth + Inorganic Growth + Margin Expansion = Growth Rate7.0% + 2.0% = 0.5% = 9.5%Name: Inc. Ticker: AMZNPrice Reaction: -7.1%Earnings: Q1 2020left7529000Analysis: Amazon reported Q1 revenue well above consensus forecasts, with the company exceeding the high-end of its revenue guidance for a second consecutive quarter. AWS revenue grew +33% y/y as the company added $265mn in revenue q/q, though much of the accelerated adoption of cloud services will likely fall into Q2 and beyond. Consolidated operating income came in just below consensus as margins contracted ~210bps y/y (vs. -80bps in Q4) due to COVID-related disruptions. Management guided to Q2 revenue of $75.0 - $81.0B vs. FactSet consensus of $77.9B. Guidance implies growth of +18% to +28% y/y and embeds a ~70bps FX headwind (vs. ~5bps FX tailwind in Q1). Management guided to Q2 operating income of ($1.5) - $1.5B vs. consensus of $3.8B. Management noted that this includes approximately $4B of costs related to COVID-19, primarily virus testing, offset partially by cost efficiencies and lower anticipated marketing.Overall, strong demand, higher costs, and some uncertainty about near-term trends - not much that surprised us in the Q1 report. Amazon is back in spending mode, justified we think by the need to manage employee welfare and significant demand. Meanwhile, Prime members shopped more and watched more despite inconveniences of longer delivery times; AWS/Advertising segments were essentially in-line. Ultimately, Amazon should be in a better position to take share in large retail categories. Amazon remains, in our view, uniquely positioned to achieve significant ongoing market share expansion amid strong ~15-20% annual growth in revenues and leveraging a large and growing base of several hundred million active consumer and enterprise customers. We view the company’s focus on customer experience through broad product selection, low prices and technology innovation as creating a meaningful competitive moat, which in turn should ultimately drive operating leverage and continued healthy free cash flow returns. With a trillion-dollar market opportunity and accelerating e-commerce tailwinds, we believe shares will continue to trade at a premium to other large-cap Internet companies. D + G: 0.00% + 20.00% = 20.00%Sales Growth + Margin Expansion + Share Repurchases = Growth Rate13.50% + 6.50 + 0.00% = 20.00% Name: Apple, Inc. Ticker: AAPLPrice Reaction: +0.3%Earnings: Q1 2020left879500Analysis: Apple reported solid numbers but then pulled guidance for the June quarter. We believe bulls had been hoping for a June guide above expectations driven by inventory restocking. However, management stated that inventory levels were within the normal range exiting March which reduces the chance that inventory rebuild acts as a tailwind in the June quarter. In terms of capital return, Apple repurchased $18.6B in the quarter, within its typical buyback range, and raised the dividend by 6.5%. The amount of new buyback authorization was just $50bn compared to $75B last year but we don't believe this signals any change to Apple's buyback intentions looking forward.Most importantly, we believe the product lineup and future opportunities remain solid, supported by continued revenue diversification that included a quarterly services record. We remain positive on the long-term eco-system and product development opportunities, coupled with a strong balance sheet and brand position. D + G: 1.03% + 13.00% = 14.03%3YR EPS Growth: 13.0%Name: Packaging Corporation of AmericaTicker: PKGPrice Reaction: +9.4%-63525717500Earnings: Q1 2020Analysis:1Q'20 EBITDA of $311M was well above Wall Street’s $273mn estimate, and adjusted EPS of $1.50 was well above guidance of $1.20, due primarily to better cost control. It appears that 1Q downtime was more limited than expected, in part due to the surprisingly strong demand environment. Despite this, PKG ran Packaging inventories down to record-low levels, and demand remained solid in April. Paper volumes and sales were not as bad as we feared, and EBITDA beat estimates at this segment, too. PKG already announced Paper capacity curtailments for 2Q to adjust to weaker demand. PKG declined to provided 2Q EPS guidance citing COVID-19 uncertainty, which we don't view as surprising, but did note continued good Packaging volumes in April. Overall, shares outperformed on the solid beat and constructive comments on April Packaging volumes and inventories.While solid containerboard volumes were expected (after industry data surprised to the upside), the real story here was the solid cost control. We wonder if PKG's $1.20 EPS guidance wasn't planning for some economic downtime in 1Q that wasn't needed due to the surprisingly strong demand. At any rate, cost control was impressive and PKG was able to leverage the strong volumes into solid margins. We see the previously announced capacity curtailment in Paper as prudent, given industry reports of very weak demand here. We do not think investors will be surprised by the lack of 2Q guidance given continued market uncertainty. PKG continues to have the best balance sheet in Paper/Forest Products and noted its priority in these uncertain times is to maintain financial strength.D + G: 3.11% + 5.00% = 8.11%3YR EPS Growth: 5.4%Not much revenue or EPS growth here – but boy, is it cheap…Name: BlackRock, Inc. Ticker: BLKPrice Reaction: +9.6%Earnings: Q1 202007683500Analysis:BLK showcased the strength of a diversified business model, which the firm's scale and diversified platform drove what will likely be very differentiated organic growth relative to peers. We believe BLK will have the best organic growth among peers during Q1 given its diversified franchise with strength in iShares, alternatives, multi-asset, money market and even positive active equity flows partially offsetting active fixed income and non-ETF index outflows. BLK remains well-positioned to manage through the current environment in terms of 1) continuing to drive positive organic growth with both risk-on and risk-off product sets, 2) re-engineering the expense base to both protect margins and maximize opportunities to accelerate share gains when the market backdrop improves, 3) potentially accelerating interest in Aladdin amid a need for technology solutions and risk-management, 4) increased adoption of ETFs (with ESG as a newer, accelerating leg to the story), and 5) strong capital flexibility and potential to accelerate repurchase if shares remain under pressure.BLK is trading at 15.9X 2021E EPS, essentially in line to the SPX, which we view as reasonably compelling given an outlook for accelerating share gains and margin expansion in 2021E.D + G: 2.70% + 10.00% = 12.70%Revenue Growth + Operating Leverage (Margin Expansion) + Share Repurchases =EPS Growth7.0% + 1.5% + 1.5% = 10.00%Name: JPMorgan Chase & Co. Ticker: JPMPrice Reaction: -3.9%right28638500Earnings: Q1 2020Analysis: The larger reserve build accounted for the EPS shortfall in Q1 but incorporates projected impacts from a ~25% decline in GDP and unemployment rate >10%. Outsized reserve build may continue for the next few quarters, but 2021E EPS should be cleaner. Projected 2020 NII weakness was mostly offset by lower expenses too. JPM should weather this recession better than most and likely emerges stronger as its PPNR offsets even severe credit stressPM is arguably the best positioned universal bank with leading market share across business lines (examples: serves ~63M U.S. households,~9.3% retail deposit market share, #1 U.S. credit card issuer, does business with >80% of Fortune500 companies, No.1 in global IB fees, No.1 in markets revenue globally, #2 custodian globally, No.1private bank in North America). Financial performance is also best-in-class (2019 performance: ~$119B in revenue, ~$36B in net income, ~19% ROTCE). Aggressive franchise investments have yielded impressive growth and market share gains across global IB fees (market share +40 bps Y-Y in 2019),FICC (+50 bps), equities (+30 bps), and credit card sales (+45 bps). Key drivers of future revenue/market share growth include investments in U.S. wealth management (~$50T market), branches (early results from new market expansions tracking ahead of expectations), new consumer products/lending products (examples: digital mortgage offering, point-of-sale lending), trading electronification, and real-time payments. JPM is well positioned to capitalize on the digital disruption across the financial services industry, in our view (JPM’s total technology spend is ~$12B. D + G: 3.61% + 7.00% = 10.61%5YR TBV Growth CAGR: 6.5% EPS Growth (5YRS) Expected: 7.0%Name: Waste Management Ticker: WMPrice Reaction: -381022288500Earnings: Q1 2020Analysis: While COVID-19 has impacted some of the best organic growth trends WM has posted in years, management has taken proactive steps to reduce expenses & flex capex which should help preserve a strong FCF profile. Volumes will likely be weak through 2020, but we believe WM is poised to exit the downturn in a position of strength that could be enhanced by its pending acquisition of Advanced Disposal. Given an underappreciation of broad-based strength in the(perceived low-growth) waste industry, we believe Waste Management has effectively harnessed the cycle and is poised to see a return to growth in the core business as businesses reopen.D + G: 2.05% + 6.50% = 8.55%Volume Growth + Inorganic Growth + Margin Expansion + Share Repurchases = Growth Rate1.5% + 0.5% + 2.5% + 2.0% = 6.50%Name: Broadridge Financial SolutionsTicker: BRPrice Reaction: +2.1%Earnings: Q1 2020-10918212058300Analysis: F3Q20 was generally a strong quarter for Broadridge, with total recurring revenue coming in ahead of Wall Street estimate on the back of strong GTO segment results. Looking ahead, givenCOVID-19-related headwinds Broadridge is updating its full-year revenue guidance to the low end of the previous range and lowering its non-GAAP EPS outlook by $0.19 at the midpoint. Broadridge's preliminary FY21 outlook is for low single-digit recurring revenue growth reflecting a relatively resilient business model in the face of a recession.D + G: 1.81% + 8.50% = 10.81%Splitting management’s guidance here: 9.00%Name: Dollar GeneralTicker: DGPrice Reaction: -1.60%-6858022034500Earnings: Q1 2020Analysis: We continue to view DG as one of the top "all weather" investment opportunities in hardline retail, given the company's high consumable products mix (~79% of sales), multiyear store growth opportunity and strong financial position. Specifically, there are only a few retailers that are driving y/y increases in customer traffic, and even fewer that can likely maintain those traffic gains in a higher unemployment environment. Admittedly, DG is up ~19% YTD versus the S&P 500 down 6% and is now trading at the high end of its historic valuation range (23x NTM estimate versus its 3-year median of 18x). That said, the multi-year store growth opportunity, host of margin accretive initiatives that are still in the early innings (potential upside to estimates), and the proven ability to drive market share gains in any economic environment justifies a higher-than normal valuation in our opinion.While 1Q20 sales and earnings clearly benefited from COVID-19 related buying, we were particularly pleased to see DG deliver positive traffic and ticket growth (some other essential retailers have seen traffic weakness) as well as ~50 bp of gross margin expansion (despite a higher consumable mix and lower apparel business). In addition, on the call, management noted an acceleration of some of its operational initiatives, which we believe will further strengthen DG’s competitive positioningBeginning in March, Dollar General saw an acceleration in traffic and ticket trends, with same-store sales accelerating 34.5% in March (mix shift towards consumables) versus +5.5% in February. Sales have moderated some in April and May, with comparable sales growth of 21.5% in April and ~22% in May. Overall, this was a knockout quarter for Dollar General. D + G: 0.78% + 12.00% = 12.78%Sales Growth (SSS Growth) + New Stores + Margin Contraction + Share Repurchases = Growth Rate8.0% + 2.0% - 1.5% + 3.5% = 12.00%LT Analysts’ Growth Rate: 11.20%Name: Copart, Inc. Ticker: CPRTPrice Reaction: -0.30%Earnings: May 20, 2020left4762500Analysis: Profits fell as Copart continued to invest through the pandemic. Analysts are expecting revenue trends to worsen as post-outbreak volume flows through the system, but forward-looking metrics should inspire optimism. Driving activity is recovering while accident rates, total loss rates, ASPs, and inventory metrics are better than feared. Fundamentally, we remain bullish as Copart builds global demand for an increasing supply of totaled cars. We continue to be willing to pay a valuation premium for a market leader in a duopoly with durable growth drivers.7778751016000D + G: 0.00% + 11.50% = 11.50%ASP + Gross & OpEx Margin Improvement + US Market Share Growth + International Expansion + Buybacks2.00% + 3.50% + 1.00% + 3.00% + 2.00% = 11.50% Name: Home DepotTicker: HDPrice Reaction: -2.70%-19812023368000Earnings: Q1 2020Analysis:We believe that HD's 1Q20 EPS report demonstrates the agility of the company, which is particularly notable given its size. HD was able to pivot to the sharp change in the environment during the quarter by leveraging its omni-channel capabilities and offering contactless curbside pickup. Its heavy focus on digital is clearly now a strong competitive advantage with digital sales up ~80% in 1Q20. Furthermore, the company was able to manage expenses (spending$120M less than plan ex COVID-19 related payroll costs) while continuing to invest aggressively in One Home Depot strategic initiatives as well as in its employees. We believe that management has given some assurance to investors as it does not foresee negative comps this year while implying that expense growth should decelerate. Finally, the company's balance sheet is solid, with no outstanding borrowings on its $6 billion commercial paper program or its $6.5 billion revolver, and $5 billion of debt raised at ~3% in late March. Bigger picture, we believe HD is well positioned to outperform in what will likely be a tough environment over the next several quarters and has a large share gain opportunity longer-term as independents fall by the waysideD + G: 2.45% + 8.00% = 10.45%SSS Growth + Margin Expansion + Share Buybacks = Growth Rate4.5% + 1.5% + 2.0% = 8.00%Name: American Tower CorporationTicker: AMTPrice Reaction: -2.60%Earnings: Q1 2020left4508500Analysis:American Tower reported 1Q20 results that were in-line to above Wall Street estimates across most key financial metrics. Notably, the company beat on both domestic organic tenant billings (5.6% vs. 5.0% estimates) and international organic tenant billings growth (5.1% vs. 4.5% estimates). However, the company lowered its 2020 guidance for revenue, Adjusted EBITDA and AFFO, which was entirely driven by FX headwinds. The company maintained its guidance for 2020 domestic organic tenant billings growth (of 5%) and decreased its guidance for 2020 international organic tenant billings growth (~5% vs. ~5% to 6% previously). Our key takeaway from this report is that the primary negative impact from the COVID-19 pandemic on AMT's financials (so far) appears to be FX headwinds, rather than a lower organic growth outlookD + G: 1.60% + 11.00% = 12.60%Organic Growth + Economies of Scale + Inorganic Growth = Growth Rate7.00% + 3.00% + 1.00% = 11.00%DisclosuresThis commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment and tax professional before implementing any investment strategy.Investing involves risk. Principal loss is possible. Investing in ETFs is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of the shares may trade at a discount to its net asset value(“NAV), an active secondary market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a fund’s ability to sell its shares. Shares of any ETF are bought and sold at Market Price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Market returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Diversification is not a guarantee of performance, and may not protect against loss of investment principal. The Impact Series is a model portfolio solution developed by Aptus Capital Advisors, LLC. Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517‐7198 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or to advise on the use or suitability of The Impact Series, or any of the underlying securities in isolation. Information specific to the underlying securities making up the portfolios can be found in the Funds’ prospectuses. Please carefully read the prospectus before making an investment decision. ACA-20-113. ................
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