In this weeks newsletter we’ll be kicking off our earnings commentary on highlighted stocks here at Stocktrades, along with some pretty major news about a Dividend Bull List Stock.
I didn’t make any moves in my portfolio this week as I am out of the office until this Wednesday and didn’t really have time to go over my portfolio enough to make any moves. However, I’ll be returning to weekly contributions and buys this week.
Lets kick the newsletter off with another huge announcement from a small-cap income company on our Dividend Bull List.
A&W Royalty (TSE:AW.UN) and Food Services Merger
A few days ago, news came out that A&W Royalty was entering into an agreement with A&W Food Services to merge the two companies together and form one simpler corporation.
Right now, the company operates under two different segments. The Royalty Income Fund, which is the stock on our Bull List, and A&W Food Services, which is the restaurant operation side of the business.
The Royalty Income Fund takes a portion of revenue generated by Food Services and distributes that income to shareholders, without having exposure to the input costs or expenses of the restaurants themselves.
However, the company looks to be ending that structure. Instead, it will create one company with a simpler corporate structure, one that will be fully exposed to the entire business.
This will be very similar to a company like Restaurant Brands International (TSE:QSR). Shareholders of the new corporation will now have exposure to the entire business, including the operating profits (and costs) of the restaurants themselves.
Is this a good thing or a bad thing?
As of right now, it’s difficult to say. I’ll have to take some time to look into how profitable the individual franchises are, and I would imagine A&W will release a lot of that information as well when the deal goes through.
I believe the franchises themselves are highly successful businesses with rock-solid margins and strong profitability. However, I’ll make that conclusion for certain when I can get some eyes on the actual numbers.
The one thing this merger certainly does is changes the overall risk profile. The company has always been low-risk in nature due to the top-line royalty structure of the company. No matter how much the underlying restaurants struggled, as long as revenue kept growing, A&W Royalty would grow. In a way, this made in so the company actually benefitted from higher inflation.
Now, the company will be fully exposed to the underlying operations of the restaurants. Although this does bring with it much more upside potential price wise, it does bring added operational risks.
For many, this change will be welcomed, but for the risk-averse, they may not like the change.
What about the gap in share price?
Shareholders will either receive new shares in the corporation or $37 in cash when the deal closes in October, if it is approved. As of right now, the company is trading at just under $35 a share.
There is a small amount of arbitrage here, around 6%, if the deal goes through. However, I believe the situation does pose some heightened risk to the downside that makes the 6% potential upside not worth it.
I do believe if the acquisition were to be rejected by shareholders or the deal were to fall through for any reason, we’d likely see the company fall to sub $30 again.
In this case, you have to weigh your options if you’re looking to buy. Is the $2.10 premium from today’s price worth the potential (albeit small chance) of a $5-6 dip in share price.
I’m going to be holding my shares until the $37 price point is reached
There is no rush for me to sell my A&W shares at this point. I do believe the deal will go through, and for that reason I will simply hold until I am given the cash payout or the shares in the new corporation. From there, I’ll make the decision as to what I’d like to do and whether we will be adding the new corporation to the Bull List.
Due to the merger, we’re removing A&W from the Bull List
There is a chance that the company will be re-added once we get the detailed financials of the new corporation.
But until then, it makes sense to remove the company from the Bull List, as the only reason to buy at this point would be the arbitrage (gap between its current price and the merger price of $37) and we don’t really feel that is an attractive enough opportunity to keep in on the list at this time.
Earnings
Waste Connections (TSE:WCN)
Waste Connections reemphasized its status as a key Foundational Stock with beats on the top and bottom lines. Earnings of $1.24 per share beat estimates by $0.06, and revenue of $2.25B topped expectations for $2.02B.
The company delivered strong year-over-year (YoY) double-digit growth in earnings (+21.5%), revenue (+11.2%), and operating cash flows (+10.1%).
Strong results came from solid volume growth across its markets, with a notable increase in commercial and industrial volumes. Waste Connections also benefited from effective pricing strategies and initiatives.
Remember we have mentioned consistently that Waste Connections benefits from the pricing power of being able to offset lower volumes with higher prices? We are now seeing volume being worked back to normalized levels, and it should now be able to benefit from higher pricing even further.
In terms of M&A, management noted that they are active in acquiring smaller companies and efficiently integrating them into operations. It is positioned for a ‘record year’ in private company acquisitions as it has added over $500M in annualized revenue and has an additional $150M in deals expected to close by year-end.
Finally, it is worth noting that Waste Connections raised its Fiscal 2024 outlook on the back of strong results. The new outlook is as follows:
- Revenue: $8.85B (up by $100M from previous guidance)
- Adjusted EBITDA: $2.90B (up from $2.86B previously)
- Net Income: $1.087B (no change)
- Capex: $1.15B (no change)
- Adjusted Free Cash Flow: $1.2B (no change)
It’s steady as it goes for one of the most consistent Foundational Stocks on our list, and in our opinion is about as set and forget as it gets when it comes to core holdings.
Alphabet (GOOG)
Alphabet reported Q2 results that beat on both the top and bottom lines. Earnings of $1.89 (+31.4%) per share beat by $0.04, and revenue of $80.54B (+8%) topped expectations for $78.59B.
The company continues to generate strong cash flow, posting $28.85B of operational cash flow, up 22.71% year over year (YoY).
A significant contributor to the positive results was the continued growth in Google Cloud, which earned $10.35B in the quarter, representing 12.1% of Alphabet’s total revenue. While Advertising revenue did increase by 5.44% to $60.23B, the growth rate is slowing. Competition from other platforms continues to impact the company in this area, and combined with the overall tech selloff on the week, this is likely why we saw a bit of weakness in Alphabet’s price.
Alphabet also returned $4.5 billion to shareholders through dividends and share repurchases.
Once again, the company talked about its focus on leveraging AI advancements to enhance its product offerings. It is making significant investments in generative AI technologies, which have boosted Google Cloud’s revenue. This is no doubt the major growth driver of the company.
While impacts were not explicitly stated, their ability to attract customers like Cohere, Jasper, and Typeface was credited to their advancements in AI. In fact, more than 70% of generative AI unicorns are now Google Cloud customers. Also worth noting, it has consolidated its AI research efforts under Google DeepMind.
All in all, it was a pretty solid quarter. While AI is still a buzzword, we are starting to see how Google’s investment in AI tech is leading to new customers through Google Cloud.
This will be something to watch moving forward, as its investments in AI and cloud infrastructure have negatively impacted margins.
So, eventually, investors will want to see real monetary gains as a result of these investments. That said, we are still in the early days here, and early signs are encouraging.
Lockheed Martin (LMT)
It was a strong first quarter for Lockheed Martin (LMT), which beat on the top and bottom lines. Revenue of $18.12B (+9%) beat by $1.11B, and earnings of $7.11 (+5.65%) per share beat by $0.66.
The company generated positive year-over-year performance in all segments, including Aeronautics (+6%), Missiles and Fire Control (+13%), Rotary and Mission Systems (+17%), and Space (+1%).
The company also reported a backlog of $158 billion, highlighting significant new orders and sustained demand for key programs such as the F-35 and advanced missile systems.
It generated $1.5 billion in free cash flow and returned $1.6 billion to shareholders through dividends and share repurchases.
Lockheed Martin’s 2024 outlook was also updated based on their strong performance. The company now expects increased full-year sales, segment operating profit, and earnings per share. Specific targets include:
- Net Sales: Raised the lower end of the range and narrowed guidance to between $68.0 and $68.5 billion (from $67.3-$68.7B).
- Segment Operating Profit: Expects between $7.45 and $7.55 billion (up from $7.3-$7.4B).
- Earnings per Share: Between $27.00 and $27.20 (up from $26.60-$26.90).
Overall, Lockheed just continues to perform as it should. Nothing flashy, just consistent operational performance, which propelled the company to new 52-week and all-time highs on the day of earnings.
Visa (V)
Visa posted mixed Q3 results. Earnings of $2.42 (+12%) per share were in line with estimates, and revenue of $8.9B (+10%) came in just below expectations for $8.92B.
That said, volumes across business lines did show strong growth, with Payments (+7%), Cross-Border (+14%), and processed transactions (+10%) all growing year over year (YoY).
On the earnings call, management indicated that consumer spending trends remain positive despite a tough macroeconomic environment. U.S. payment volume grew 6% YoY, while international payments volume increased 11%. Visa also emphasized the continued growth in new digital payment methods, such as tap-to-pay and digital wallets, further driving consumer spending.
Furthermore, it extended agreements with major partners like Wells Fargo and Banco de Credito de Peru. It launched new co-branded cards with companies such as Adani One, ICICI Bank in India, and Qatar Airways in CEMEA.
The company continues to return cash to shareholders through dividends and buybacks. In the quarter, Visa repurchased 17.2 million shares at an average price of $276.75 per share, totaling $4.8 billion.
Despite mixed results against estimates, the company reiterated 2024 outlook, which calls for revenue growth in the low single-digits and EPS growth in the low teens. Nothing flashy in these earnings, just consistent operational performance.
