As organizations consolidate IT roles, there is a growing concern of skills shortages associated with DevOps. Development Operations is a set of practices that ties together software development and IT operations to streamline system or software build as well as test and delivery lifecycles. DevOps already is widely used across organizations—44% say they have fully adopted the practices across 100% of the IT organization while another 50% have implemented DevOps at the team levels that benefit most.
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Following the CEO change in September, we continue to receive questions from investors around expectations for FY20 guidance, and the potential for a significant margin reset within F2Q. In our view, tempering near-term earnings expectations would provide newly appointed CEO Mike Salvino additional runway to assess the underlying health of DXC and/or investments required to stabilize revenue near-term. As a reminder, DXC lowered FY20 revenue and EPS guidance within 1Q noting (1) delays closing several large deals, (2) an accelerated transition to cloud weighing on legacy, (3) stranded costs attributed to the Luxoft transaction, (4) investments to scale the digital practice, and (5) incremental FX headwinds of $150-200mm. With valuation at a significant discount to historical averages (on an absolute and relative basis), we believe shares are pricing in FY20 results well below the current guide.
In this week’s Sunday Spotlight, we highlight investor sentiment and feedback on each name in our coverage (see page 2). Overall, while the market back-drop continues to weigh on our names, investor sentiment remains constructive on the long-term thesis on most of our Fin-Tech coverage, and slightly less optimistic on IT Services. Similar to what we saw this time last year, many of our names have contracted over the last several weeks and are now trading in-line or below their 1-year median P/E spreads to market, however most are still slightly above the 3-year median spreads to market given the substantial outperformance seen over the past three years in Fin-Tech and Services.
This (11/8/19) was a rollercoaster of a day, with SSP opening -5%, but ending the day +7% (vs. S&P, flat). There were many different sets of numbers to go through after a really long week; and retrans continues to be a bit of a pain point. However, the fact that core is trending +4% and political is already coming in ahead of expectations put retrans concerns to the wayside. To characterize this print: Q3 beat, the Q4 guide was a touch light, but our 2019 and 2020 estimates remain relatively unchanged.
In comping Aramco to IOCs, we are most interested in ex-commodity elements that influence cash available to Aramco shareholders, including costs, realizations, production mix, taxes, and royalties (has the term “Royalty Payment” ever been used more literally in an oil & gas prospectus?). Putting it all together, Aramco will clearly be a defensive stock within the oil cycle, not only due to fiscal elements that narrow the range of CF but also due to a relatively simple and transparent business structure compared to other IOCs. As we see oil price tailwinds from slowing US production and IMO 2020 related demand, we favor a more offensive skew and do not see existing IOCs as a source of funds for Aramco but note that the defensive characteristics are likely to appeal to many energy investors.
Adj. EPS of $4.54, above WR/Cons of $4.28/$4.36, was primarily driven by strong results in Health Services vs. our model. Health Services OI of $1.4B was 4% above WR’s $1.35B which we est. includes ~6-7% core-ESRX growth – see our bridge in page 2. Integrated Medical MLR came in at 80.5% vs. WR/Cons of 80.4%/80.8% w/ favorable PYD of $8M in qtr - $0.02 to EPS and ~10bps to MLR – mid-point of FY MLR guidance unchanged but the range narrowed. FY19 EPS guidance was raised by ~15c at the mid-point to $16.80-$17.00. Our revised 2019 EPS is $16.93 and numbers for 2020 and beyond are unchanged – see pg. 2.
Post CNC’s 3Q19 earnings release and call we are revising our ests to reflect actual results and updated mgmt. commentary. Our ’19 estimate remains unchanged at $4.39 after 3Q results came ~in-line w/ our expectations across key metrics. For 2020 CNC expects its revenue and adjusted EPS “to be consistent with forecast included in the Form S-4 filed in conjunction” which are at $79.4B / $4.79 respectively. While the $79.4B revenue guide was ~in-line w/ WR / Consensus pre-3Q expectations of $79.3B / 80.1B, CNC’s $4.79 EPS guide came in slightly below WR / Cons ests then of $4.85 / $4.92. Our ’20 EPS est moderates slightly from $4.85 to $4.80, ~consistent w/ the co.’s early guide, with ’21 modestly lower as well from $5.53 to $5.45. Our estimates do not include any benefit from two new TX STAR+ regions or recent LA loss.
On 11/7 ABC reported 4Q19 adjusted EPS of $1.61, slightly above estimates. EBIT was slightly below our estimates but was offset by tax rate favorability. ABC established FY20 EPS guidance of $7.30-$7.60 (+5% y/y) vs. prior WR/Consensus of $7.55/$7.58. While there wasn’t much upside in Q4, guidance was generally in line with expectations and embeds a consistent growth rate for pharma EBIT.
We believe that a thawing of trade tensions has been the biggest driver of the recent positive inflection in the global outlook, which has led to rising longer-term yields, a bounce in copper prices, and U.S. dollar weakness. These trends should persist in the weeks ahead. While we’re near-term bullish, looking out to 2020, whether or not a U.S.-China trade deal drives a sustained rebound in business confidence remains the most critical question.