The markets closed green again this week as investors seem to be regaining confidence. If we look back to even the last three months, the markets are now in the green. It’s a step in the right direction.
However, we must keep emotions in check as this could easily be a bear market rally. A bear market rally isn’t uncommon in situations like this. But for long-term investors, this is irrelevant. If the markets recover, we’ll finally get to see green in our portfolios after a near-year-long bear market.
However, if this does prove to be a bear market rally and the markets dip yet again, it just means we’ll be able to buy some of our favourite companies for cheaper yet again.
In this e-mail, we’ll continue to review a plethora of earnings from companies highlighted at Premium. However, we also want to move one of our companies from “Bullish” to “Neutral” status as a runup in price has caused it to become fully valued in our opinion.
We’ve moved Telus International to “Neutral” status
For those new to Premium, we primarily shift to Neutral status on Bull List companies due to a change in the thesis.
For Telus International, the company is up over 40% from its June lows, and we now believe it to be fairly valued.
If we head to our report of TIXT (which you can view here), you’ll see this part in our valuation section:
If we take Telus International’s historical margins of 6%, apply a 3% terminal growth rate, a 7% required rate of return, its Fiscal 2022 estimates of 22% revenue growth and then 15% after that for the next 3 years, we come to a fair value of around $38.
Where it gets interesting is if the company can keep up with 20% growth on an annual basis. This is where we come to the point where Telus International is still discounted. If we utilize Fiscal 2022 estimates and then forecast 20% growth instead of 15% for the next 3 years, we come to a fair value of around $44 a share, signaling a near 20% margin of safety at the time of writing.
So, because the company is now trading north of $40 per share, we feel our overall thesis on TIXT has changed from being an undervalued profitable tech company to one that is fairly valued on the lower end of its growth rates.
Remember, just because we shift our status on a company doesn’t mean we suggest selling it. I (Dan) still hold a position in TIXT, and I plan to hold it for the long term.
However, profit taking and reducing position sizing is something we’d never really fault someone for doing.
If there is a dip in TIXT’s price, an acquisition, or it posts earnings that suggest growth rates could hit the higher end of our assumptions, the company would be returned to a Bullish status.
Earnings reports
Of note, plenty of companies have reported earnings that are not highlighted in this e-mail, primarily because we are still working on their reports.
This was possibly the most Premium highlighted companies we’ve ever had reporting at once. So, we have a bit of a backlog in terms of reports. Make sure to check in frequently on the website as we continue to make updates, and next Sunday we should have the majority of them done.
Park Lawn Corporation (TSE:PLC)
Of note, I put Park Lawn Corporation first on the list because I (Dan) added to my position on the price weakness after earnings.
Park Lawn posted somewhat disappointing results for the first time in a while. But as we’ll get to in a bit, these results could have been expected. Of note, the numbers below are in USD.
The company reported revenue of $75.92M and diluted earnings per share of $0.19, both of which were well below estimates. Park Lawn faces the issue that year-over-year comparables will be difficult because of the pandemic. We must remember that Q1 and Q2 of 2021, in terms of death rates, were exceptionally high due to the pandemic. The overall death rate due to COVID-19 has fallen by nearly 50% on a year-over-year basis. Park Lawn’s operations will be impacted as a company that deals exclusively with death.
However, on a year-over-year basis, the company is still growing at a double-digit pace. Revenue is up 11.4% through the first six months of the year compared to last year. Although margins are down around 300 basis points (3%), we view this to be transitory considering the overall impact of inflation across the globe.
You can read our full report of Park Lawn Corp here
Savaria (TSE:SIS)
Savaria posted second-quarter results that missed the mark on all fronts. Revenue of $192M came in $6M short of expectations, EBITDA of $31.4M came in $1.5M short, and adjusted earnings per share of $0.14 came in 3 cents short of expectations.
However, it was a relatively strong quarter for the company as things seem to be turning around. Despite pressures on the company’s shipping costs, materials, fuel, and labour, margins have improved on both a quarter-over-quarter and year-over-year basis.
The company is also posting strong organic growth. During the quarter, it posted double-digit organic growth in both the Patient Care and Adapted Vehicle segments. Its largest segment, Accessibility, grew by 6.8% organically.
You can read our full report of Savaria here
Acuity Ads (TSE:AT)
Acuity Ads posted earnings that missed on both the top and bottom line. Revenue of $28.3M missed estimates by $2.3M~ and EBITDA came in at $1.5M, about half of what was expected. However, the company opened the day 20% in the green after earnings. Why? Primarily Illumin growth.
Illumin revenue on a year-over-year basis saw 96.1% growth, making up 36% of the company’s total revenue. The platform’s self-serve segment revenue increased by 94% sequentially, and its self-serve clients grew by 24%.
With the central thesis behind Acuity being the production and growth of its Illumin platform, this was a strong quarter in our eyes.
You can read our full report on Acuity Ads here
Boyd Group Services (TSE:BYD)
If you’ve read up on Boyd in previous quarters in our e-mails, we’ve been highly persistent in keeping this company on the Bull List throughout its significant struggles. Struggles that, in our opinion, are entirely out of the company’s control.
And, it seems like our patience has finally paid off, as the company posted a blowout quarter and has now erased virtually all of its 2022 losses and is outperforming the TSX Index.
Earnings of $0.63 crushed estimates for $0.29, and revenue of $612.8M also handily topped expectations for $569.4M.
The reported revenue marks a 37% year-over-year increase and same-store sales growth of 22.3%. There is no question that demand has returned for Boyd’s services.
However, supply chain and labour issues continue to impact the company’s operations. Gross margins decreased YoY again from 46.1% of sales to 45.3% in the second quarter of Fiscal 2022.
It did, however, return to double-digit EBITDA growth (+11.7%). QoQ margins also improved as the company continued negotiating rate increases with insurance companies to cover cost pressures. While it has “made good progress with many clients, (it has) not achieved the level of pricing that will return our labor margins to historical levels.”
You can read our full report on Boyd here.
Equitable Bank (TSE:EQB)
Uncharacteristically, Equitable Bank missed estimates this past quarter. Earnings of $1.75 missed by 20%, and revenue of $166.66M missed expectations for $172.46M.
However, it was a busy quarter, and the big miss on earnings resulted from some revisions to fair value on some of its investments. This also led to a lower return on equity of 12.1%. Important to note that this did not change the strong performance of the core business and the company re-iterated Fiscal 2022 guidance.
EQ Bank has proven to manage challenging macro environments and is doing so again. To close, it also provided a few more updates worth noting:
- It is entering the Province of Quebec
- Introducing a new payment card (Mastercard)
- On track to close the Concentra Bank acquisition (received clearance from Competition Bureau)
- Announced a 7% raise to the dividend
You can read our full report on Equitable Bank here.
Parkland Fuels (TSE:PKI)
We spoke on Parkland Fuels last week. Parkland reported earnings that topped estimates on all fronts. Revenue of $9.71B, adjusted EPS of $1.07 and EBITDA of $450M topped estimates of $7.35B, $1.07, and $439M, respectively.
Our full report is now available here.
Lightspeed Commerce (TSE:LSPD)
Much like Parkland, we spoke on Lightspeed last week. It topped estimates on the top and bottom line yet again. The company is notorious for meeting or exceeding analyst expectations, especially on a top-line basis, as it has not missed since its IPO.
Our full report is now available here.
OpenText (TSE:OTEX)
Open Text delivered a Q4 that was relatively in line with estimates. Of note, it is a little confusing with this company as it is already in Q4 of Fiscal 2022, ahead of most companies due to the timing of their Fiscal results.
While revenue of $902.45M missed slightly (-0.18%), earnings of $0.80 per share beat by $0.03. The company continues to be a cash flow machine, generating $214M in FCF as it exited the quarter with ~$1.7B in cash and cash equivalents. Strong cash flow generation means it will be more able to make tuck-in acquisitions as it won’t have to rely on debt. In a rising rate environment, this is important.
According to the company, customers are accelerating their adoption of the cloud. For the first time in history, the cloud segment accounted for the highest percentage of revenue. It also happens to be the fastest growing segment (+9.8% YoY) which bodes well for the future.
Management re-iterated their desire to focus on strong cash flow generation and is well positioned to make further tuck-in acquisitions without the need to take on high debt loads. Notably, 75% of the company’s current debt load is fixed-rate, and according to management, “interest rate increases have a minimal effect on our business.”
You can read our full report on OpenText here
Alaris Equity Partners (TSE:AD.UN)
It was a strong quarter for Alaris, which beat on both the top and bottom lines.
Revenue of $56.5M beat by 250K, and EBITDA of $55.31M topped expectations by ~$3.54M. On a per unit basis, revenue and diluted EPS jumped by 60.3% and 28.6% over Q2 of Fiscal 2021. It was a record Q2, and the company reiterated run-rate cash flow guidance.
Once again, the company materially reduced its outstanding senior debt by an additional $77M as it waits for the markets to stabilize. While it remains on the lookout for deals, it pointed to a “large quantity of deals but not the quality that (they) demand.”
While it made a few smaller investments, no notable deals occurred this past quarter. That said, it did make a $26M investment into an existing partner (Asscient) post-quarter. Overall, it was yet another solid quarter for this undervalued asset manager. The dividend remains well covered by cash flows (payout ratio dropped to 39% from 55%), and the added flexibility will bode well for further capital deployment moving forward. It exited the quarter with $113M in available credit capacity.
