This week, we’ll continue with earnings commentary on the companies we highlight at Premium. Next week, we’ll introduce our November Value Call, where we have an entire newsletter dedicated to a single company we feel is cheap and a solid option to look at.
But first, we wanted to collect feedback on these newsletters overall.
The introduction of video content
For the last while, we’ve had some requests by members, particularly around these earnings emails, that they would prefer if the commentary is in video format with a written transcript of the video for those who choose to read it.
We would ultimately produce these videos during earnings time at the expense of the updates of the “Recent Earnings” portion in our reports. If they were a success, we could adopt video content for other things, such as model portfolio updates.
And as always, when enough members raise an idea, we like to get feedback on the implementation.
For Mat and I, doing earnings updates in a video-style format is no issue. And it would allow us to provide a bit more commentary and visuals, maybe.
The videos would be chaptered and easily navigated by members to find information about the companies they care about.
If you’d be interested in the introduction of video format along with our written content, simply respond to the survey we sent in the email version of this content.
Alternatively, you can email me as well and state your opinion.
Foundational Stock Earnings
Constellation Software (TSE:CSU)
Constellation Software posted a strong third quarter. In terms of analyst estimates, for some reason, analysts have a difficult time projecting earnings for Constellation, and comparing results to expectations is largely ineffective. Of note, all numbers below are in USD unless otherwise stated. The company reported revenue of $2.12B, which marks a 23% increase year-over-year. Out of this 23% growth, 8% is organic, which means that Constellation did not require an acquisition to achieve that growth. It came from previous acquisitions that have already been merged into the company. Acquisition-based and organic-based growth are key metrics with a company like Constellation. The company relies so much on acquisitions that it is important to keep an eye on growth from this standpoint (total growth), but it also needs those acquisitions to grow once they’re merged into the fold, which would be organic growth. Net income has grown by over 30% over the same timeframe, and the company deployed over $187M towards acquisitions on the quarter. The company has found incredible success in a post-pandemic environment, acquiring businesses. As a result, it has been able to provide exceptional returns to its shareholders. This company doesn’t dive too deep into earnings or details. Instead, management focuses on providing value to shareholders by strategically acquiring smaller, cash-flow-positive businesses and merging them into the fold. For a company that has done it as long as Constellation has, we’re ok with the muted commentary.
Franco Nevada (TSE:FNV)
First off, if you’d like to read the update on the Panama issue with Franco Nevada, just click here to head to our Foundational Stock page where we have more information. In this newsletter we’ll speak on earnings only.
FNV posted a mixed quarter. Of note, all figures are in USD. Earnings of $0.91 (+11%) per share beat by $0.02, and revenue of $309.5B (+2%) missed by $13.9M. While production of 161,000 GEOs (Gold Equivalent Ounces) topped expectations, the strong performance at Cobra Panama was offset by lower Antapaccay and Vale iron ore results. The company generated $71M in free cash flow, and it exited the quarter with $2.3B in liquidity. The company also reiterated that it would hit the lower end of targeted guidance, which is as follows:
- GEO Sales of 490,000 and 530,000 (flat YoY)
- Total GEO Sales of 640,000 and 700,000 (-8.2% at mid-range)
In the quarter, it acquired four additional royalty streams for total consideration of $124.5M. The company didn’t provide much in terms of commentary on Cobre Panama outside of stating what we already know. Overall, we are in wait-and-see mode.
Loblaw (TSE:L)
Loblaw reported strong Q3 results, topping on both the top and bottom lines. Revenues reached $18.265B, representing a 5.0% increase and narrowly topping expectations for $18.210B.
Contributing to this success were the Food Retail (Loblaw) and Drug Retail (Shoppers Drug Mart) segments, which experienced same-store sales increases of 4.5% and 4.6%, respectively. The Drug Retail segment, in particular, saw notable growth in front-store same-store sales (1.8%) and pharmacy same-store sales (7.4%).
Net earnings grew by 11.7% to $621M to go along with a 12.4% increase in earnings per share, coming in at $2.26, topping estimates by a penny.
E-commerce sales increased by 13.6%, a sign of more consumers choosing to utilize online ordering for their groceries. The company’s operating income grew to $1.065B, up by 7.5%, while Adjusted EBITDA rose by 4.3% to $1.926B million. Additionally, the Retail segment’s adjusted gross margins saw a slight decrease of 20 basis points to 30.6%.
During this period, Loblaw repurchased 2.9 million common shares for $341 million and invested $676 million in capital expenditures.
Let’s shift our focus to the headlines that grocers continue to make under continued political pressure. Loblaw pointed to a decrease in food margins and attributing it to their efforts in fighting inflation by investing to keep prices lower in their stores.
This was evident in their internal food inflation number being lower than the national food Consumer Price Index (CPI). The company did however, express concerns about the level of commitment from some suppliers in sustaining falling food inflation, noting that without lower supplier costs, it becomes challenging to reduce shelf prices.
All in all, nothing new in that respect and operationally, it was another solid quarter.
Home Depot (HD)
Home Depot reported earnings that beat expectations on both the top and bottom lines.
Revenue of $37.71B topped expectations by $1M~, and earnings per share of $3.81 came in around 6 cents higher than expected. Overall, the company is stuck in a down year, but it is something we expected and noted in our overview at the start of the year. Comparable sales have dipped by 3.1%. However, expectations were for them to drop by 3.6%. The company is seeing relatively stable ticket value, just a lower overall volume of consumers as people start delaying renovation projects in light of higher borrowing costs.
The company issued tempered guidance to close out the year. It only has one quarter to go in 2023, so this guidance is likely to come in close to actual results. It expects sales to dip by 3-4%, with operating margins in the 14.2% range, which is close to pre-pandemic numbers. However, Home Depot has shown it can consistently grow operating margins over the past 20 years. Investors just have to understand it does go through these cyclical dips. Also, earnings are expected to close out the year 9-11% lower than Fiscal 2022.
Along with guidance, the company made some bold statements in its conference call, stating that:
“The worst of the inflationary environment is behind us,” and “retail prices are settling in the market.”
The long-term thesis for Home Depot is still well intact. With the American real estate situation allowing homeowners to lock in ultra-low pandemic-related interest rates for the life of the mortgage, homeowners will be motivated to renovate over selling their homes and incurring much higher mortgage costs. Although the situation isn’t the same here in Canada, or for the most part anywhere else in the world, most of Home Depot’s locations are in the United States.
Brookfield Asset Management (TSE:BAM)
In the third quarter, distributable earnings of $0.35 (+8%) topped estimates by $0.03, and revenue of $893M missed expectations for $1.089B. That said, we aren’t going to put too much stock in estimates right now since we are still in the early stages of analysts covering the company.
Fee-related earnings (FRE) increased by 8% year-over-year to $0.35 per share, and fee-bearing capital jumped by 8%, reaching $440B (flat QoQ).
In Q3, the company raised $26B in capital (up from $17B last year), and it has now raised $61B year-to-date as its flagship funds are in fundraising mode. Despite the reduced credit availability in the market, management still reaffirmed its Fiscal 2023 fundraising target of $100B. If this happens, it will be because fundraising efforts are about to accelerate as we close the year.
Looking forward to Fiscal 2024, management made the following positive comments:
“Heading into 2024, this strong fundraising sets us up for strong earnings in 2024. We also expect our margins to expand and these 2 items combined sets us up very nicely to deliver an excellent year from an earnings and dividend growth perspective.”
Given these positive comments, BAM will likely hit its long-term targets of raising between $70-$100B per year.
The company’s ability to raise capital in a challenging environment is a testament to its strong management team and brand name. Also worth noting, BAM exited the quarter debt-free and $3.0B in cash.
You can read our fully updated report of Brookfield Asset Management here
Pembina Pipeline (TSE:PPL)
Pembina Pipeline reported strong third-quarter results. The company’s reported earnings of $346 million and the record quarterly adjusted EBITDA of $1,021 million exceeded the estimated adjusted EBITDA of $919.96 million.
Adjusted cash flow from operations came in at $1.20 per share, in line with estimates and a 12% improvement year-over-year. This strong performance was attributed to growing volumes, rising utilization across various systems, and a substantial contribution from the marketing business. Worth noting, it marked a return to form as it recovered from earlier challenges such as wildfires and pipeline outages.
Earnings did drop materially YoY. However, this was primarily due to a significant gain recognized in the previous year from a change in ownership of most of Pembina’s field-based gas processing assets, which became part of Pembina Gas Infrastructure (PGI). This one-time gain in the prior year made the comparison appear starkly lower in 2023.
Additionally, the company raised its 2023 adjusted EBITDA guidance range to $3.75 billion to $3.85 billion, up from the previous range of $3.55 billion to $3.75 billion.
Finally, Pembina reported a strong balance sheet as of September 30, 2023, with the ratio of debt-to-adjusted EBITDA being 3.4 times. The improvement in the leverage ratio from 3.6 times in Q3 of last year indicates a strengthening in Pembina Pipeline’s financial leverage.
This improvement is a positive sign, reflecting the company’s effective management of its debt concerning its earnings. This is especially important in light of the current environment of rising rates.
All in all, Pembina continues to perform quite well despite the headwinds impacting the entire industry.
You can read our fully updated report on Pembina Pipeline here
