This upcoming week is going to be an interesting one. We have most of the Canadian bank’s reporting, which should give us a pretty good indication of where Canada is headed economically for the next bit here. As always, stay tuned for our comprehensive overview of every single Big 6 bank and their earnings.
We’ve also got our eyes on a few stocks for inclusion on the Bull List, and once this earnings season ends we’ll no doubt come to a decision and make a new addition.
For now, lets continue through companies featured here, including how they did on the quarter and our thoughts moving forward.
My portfolio moves
It was a relatively quiet week, making a few small moves in my portfolio. I continued to add to my Park Lawn (TSE:PLC) position, but I’m nearly done on that front. It’s now grown to over 2% of my portfolio, an allocation size I’m typically more comfortable with when it comes to small caps.
The good news? I was able to accumulate quite a few shares in the sub $20 range, which I feel will be a bargain for Park Lawn when we look back a few years from now. I’ll still continue to add throughout the year, however I’ll likely scale back a bit from the weekly adds I’ve been making for 3+ months now.
Another purchase would just be adding to my Berkshire Hathaway (BRK.B) position. The stock is creeping up there in terms of becoming my largest equity holding, trailing only Blackrock (BLK) and Home Depot (HD).
Interestingly enough, I haven’t had to actually add too much to the position for it to get to where it’s at. With the stock being up nearly 60% off September 2022 lows, it’s kind of done it by itself.
As always, you can view my entire portfolio and transactions here. Feel free to utilize the Q&A to ask me anything you’d like.
And speaking of Berkshire, lets dive into earnings.
Berkshire Hathaway (BRK.B)
Many Americans believe Berkshire to the the bellwether of the American economy given the variety of businesses it owns. The company’s report was strong this quarter, but does highlight some cracks in the American economy when it comes to their utility and railroad segments.
The company reported record operating income of $37.35B, which represents 21% growth from Fiscal 2022. Virtually all of the growth came from the company’s insurance segment, as it had a $5.4B swing in insurance underwriting operating income and a $3.1B swing in insurance related investment income.
On the railroad side of the business it witnessed a 14% decline in operating income and its utility segment fell by 40%.
The company’s conglomerate of other businesses, which can range from fast food chains like Dairy Queen to Business Wire, a online press release platform, reported a low single-digit increase in operating income.
On the rail side of the business, the company attributed the slowdown to not only a softer economy but also a struggle to keep wages down. It stated that
“Wages increases were far beyond the country’s inflation goals.”
On the utility end, the business struggled primarily because of significant wildfires in California. The company says that it will not know its total losses from the forest fires for many years. However they stated when they do find them out, it may make them rethink utility investments in the west due to their exposure to fires.
Overall though, the insurance side of the business picked up the slack and then some for these two struggling businesses. Record volumes, record underwriting profits, and sky-high returns on their investment income.
We haven’t witnessed how the market will react to Berkshire’s earnings as it came out with the report yesterday. However, we’d expect a positive reaction on open tomorrow unless the broader markets start the week off in the red.
Berkshire will continue to be a routine add into my (Dan) portfolio for quite some time, as I feel there is still plenty of growth left.
Home Depot (HD)
Home Depot reported earnings that were relatively inline with expectations. Earnings per share of $2.82 came in 5 cents higher than expectations and revenue of $34.79B came virtually right in line with estimates.
Overall, 2023 was not a very strong year for the company. However, the market had mostly priced this in as the company has had fairly impressive results over the last year, up more than 28%. Home Depot is no doubt a cyclical stock, and right now with consumers tightening up and spending only on necessities, it isn’t surprising to see sales and earnings lagging.
The company reported total sales of $152.7B and earnings per share of $15.11. This is a 3% decrease in revenue compared to 2022 and a 9.5% decrease in earnings.
The company reported a decline in nearly all business segments, as Building Material sales fell 3.2%, Decor revenue fell 3.3%, and Hardlines revenue fell 0.2%. Overall customer transactions fell 2.3% but the company has been able to somewhat offset this with higher growth in terms of ticket prices per customer. Total store count came in a 2,333, which is 0.5% higher than Fiscal 2022.
Putting 2023 behind them, the company released their Fiscal 2024 guidance in which the company still expects the operating environment to be relatively difficult. For the most part the company expects revenue and earnings to come in flat.
However, because there will be 53 weeks in this Fiscal year and not 52, the company should be able to turn out a small 1% increase in earnings per share.
Overall, the long-term thesis with Home Depot is still very much in place. Yes, consumer spending is slow right now on the home improvement front, but it will not be slow forever, and once rates decline and discretionary spending increases, people will start to spend at Home Depot again.
We view this as an attractive opportunity to accumulate the company while it’s being undervalued due to economic headwinds.
Loblaw (TSE:L)
Regardless of your feelings towards grocers and pricing in this environment, one thing has been consistent – Loblaw’s ability to deliver strong results.
Q4 earnings of $2.00 (+13.6%) beat estimates by $0.10, and revenue of $14.35B (+3.7%) missed expectations for $14.53B. Adjusted EBITDA of $1.6B (+9.4%) also came in on the high side compared to expectations for $1.55 billion.
Retail gross margins were also strong, rising by 56 basis points (0.56%) year-over-year (YoY). Same-store sales (SSS) in the food segment rose 2%, missing estimates for 2.5% SSS growth. On average, traffic was up, and basket size was down, a likely reflection of higher prices. The company’s Shoppers brand continues to be a highlight, and the segment now accounts for 45% of EBITDA. On a full-year basis, Food retail and Drug retail SSS grew by 3.9% and 5.4%, respectively, while retail gross margins were relatively flat. As it was year-end, the company also released Fiscal 2024 outlook, which is as follows:
- Its Retail business to grow earnings faster than sales;
- Adjusted net earnings per common share growth in the high single-digits;
- “To continue investing in our store network and distribution centres” by investing a net amount of $1.8 billion in capital expenditures.
- Return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.
Outlook aligned with the company’s long-term framework, which calls for 8-10% annual earnings per share growth. In Fiscal 2023, Loblaw returned $1.7B to shareholders through share repurchases, and it looks like it’ll be another year of strong buybacks. Given the current environment, management points to strong tailwinds for its discount brands, such as No Frills, Maxi, and No Name in Fiscal 2024. The company is also accelerating new store openings.
In Fiscal 2024, it plans on opening 40 new stores and converting an additional 30 to discount. This is up from the 31 stores it opened or converted in Fiscal 2023. If one strips away all the political noise, Loblaw remains one of the best grocers in the country.
Exchange Income Corp (TSE:EIF)
Exchange Income ended the year on solid footing. Earnings of $0.70 missed estimates by $0.02, while revenue of $656M topped estimates by $10M.
Although still well within the comfort range, the company’s dividend payout ratios increased on a year-over-year (YoY) basis. The payout ratio in terms of earnings now sits at 80%, and the FCF after maintenance expenditures payout ratio sits at 57%. Last year, these two ratios were 73% and 55%, respectively.
Despite the bump, the company still has strong coverage ratios, and we’re not concerned in regards to dividend safety.
The company has done a good job securing a lot of its debt at low-interest rates. However, there is no question that financing costs are impacting the company. On a YoY basis, financing costs have increased by 29% (down from 38% last quarter).
In the quarter, the company posted record adjusted net earnings of $34M and record FCF of $50M (up 25% YoY). On a per-share basis, earnings dropped by 5% YoY, and FCF was up 11%. Earnings per share are being negatively impacted by higher financing and share dilution due to acquisitions.
Regarding Fiscal 2024 outlook, the company re-affirmed guidance calling for adjusted EBITDA of $600-635M, which represents 11% growth at the midrange. It is worth noting that guidance implies no improvement to the macro environment and does not include any potential acquisitions.
It only captures existing business and assumes the current rate environment remains stable. What does that mean? Any improvement in the macro conditions will likely lead to an uptick in guidance as they appeared to be conservative in their approach.
All in all, it was a positive quarter, and we believe there is a nice opportunity for more upside upon news of any new contract wins or acquisitions.
For those who seek yield, the company pays an attractive 5.38%~ dividend at this moment as well.
You can read our full report on Exchange Income Corporation here
Pembina Pipeline (TSE:PPL)
Pembina Pipeline reported strong fourth quarter results. Earnings of $1.21 (+210%) per share beat expectations for $0.76, while revenue of 2.466B (-8.5%) topped estimates of $2.51B. Adjusted cash flow per share of $1.36 also came in strong, up by 8.8% YoY and in line with estimates.
There were quite a few business updates this quarter. Some notable highlights include Peace Phase III trending below budget. The original budget called for a capital spend of ~$530M and was previously revised downward to $475M.
This quarter, management indicated that it now expects the project to cost $430M and will be completed in Q1. Notably, it’s not often that major projects come in under budget in such a way, a testament to Pembina’s strong management.
The company also reversed a charge on the Nipisi Pipeline as it was recently activated and signed a long-term contract. It now expects the pipeline to be fully contracted by the end of the year. Speaking of contracts, management also signed a long-term agreement with Dow Chemical to supply and transport up to 50K barrels per day of ethane.
Finally, the company announced that it would make a final decision on the Cedar LNG investment in mid Fiscal 2024 (slightly delayed from previous expectations for a decision to come in Q1).
As for the company’s financial position, Pembina reported a strong balance sheet as of end of Fiscal 2023, with the ratio of debt-to-adjusted EBITDA of 3.3x.
As such, the company met guidance that previously called for this ratio to be in the 3.3-3.6x range. Management also reiterated Fiscal 2024 guidance, which called for adjusted EBITDA of $3.725B to $4.025B.
All in all, Pembina continues to perform, and it is well-positioned to post outsized growth this year, especially once the big Alliance/Aux Sable acquisition closes.
That deal should be immediately accretive to cash flow, and given the expected synergies, it should provide solid growth across the board.
We feel the company is the strongest pipeline play in the country right now.
