As earnings season wraps up, we’ve got more commentary on our favourite companies in the country this week.
Next week, however, is an exciting one for many. That is because we will be doing our quarterly bank stock recap, dedicating an entire newsletter to analyzing Canada’s major financial institutions and giving our thoughts on the banks and the economy as well, as they’re closely correlated.
Keep in mind that although TD Bank and Royal Bank have reported earnings, we’ll refrain from speaking on them this week so that we can compile them all in a single newsletter.
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Foundational Stock Earnings
Home Depot
While weakness remained year over year, Home Depot delivered a beat on the top and bottom lines in the second quarter. Earnings of $4.65 (-7.9%) beat by $0.20, and revenue of $42.92B (-2.0% Y/Y) beat by $690M.
Global comparable sales and comparable sales in the U.S. dropped by 2%, which, while disappointing, is still much better than expectations for global sales drops of 4.1% YoY. It is also much lower than last quarter’s 4% drop.
The good news is that there was strength in the categories one would associate with “smaller projects,” but it continued to see pressure in “certain big-ticket, discretionary categories.”
Last quarter, the company revised guidance downwards, and the good news is that it remained intact this quarter. As a reference, here is company guidance for Fiscal 2023 as of Q2:
- Diluted earnings per share decline between 7% and 13% (decline by mid-single digits previously)
- Sales and comparable sales to decline between 2% and 5% compared to fiscal 2022 (flat previously)
- Operating margin rate to be between 14.3% and 14.0% (14.5% previously)
- Tax rate of approximately 24.5%
- Interest expense of approximately $1.8 billion
Along with Q3 results, Home Depot approved a $15B share buyback.
Going forward, the company is still navigating “a unique and uncertain environment,” and expects to achieve the previously announced $500M in annual cost savings by 2024.
Bull List earnings
Goeasy Ltd (TSE:GSY)
It was another strong quarter for Goeasy, which beat on the top and bottom lines. Adjusted EPS of $3.28 (+16%) beat by $0.11, and revenue of $302.2M (+20.37%) beat by approximately $2M. It is worth noting that the adjusted EPS was a quarterly record.
Despite fears of an economic slowdown, the company is witnessing strong loan originations. During the quarter, loan originations came to $667M, a 6% increase over the $628M it generated in Q2 of 2022.
This led to loan growth of $210M, topping goeasy’s estimates for between $175-200M. As of the end of the quarter, it had a loan portfolio of $3.2B, up 35% year-over-year (YoY).
Net charge-offs – a metric that will be heavily scrutinized moving forward as it is a highlight of loans it expects to go unpaid – came in at 9.1%, which was slightly higher QoQ (0.2%) and in line with Fiscal 2023 guidance of 8.5-10.5%.
Also worth noting, the company reiterated it can grow its loan portfolio by $250M annually based on internally generated cash flows. That means it does not require additional debt. That number increases to $400M annually if it uses existing credit facilities. In other words, it has ample avenues to fund growth.
Management also touted its business model and that it “experienced favorable competitive conditions and received a record number of applications for credit” despite a challenging macro-environment. As a result, it now expects to reach the high end of its Gross Consumer Loans portfolio (see table inside our report linked below).
It was another solid quarter for a company that continues to deliver.
If you remember, the government reduced the maximum allowable interest rate for lenders like Goeasy not too long ago.
Once this announcement was made, analysts slashed the company estimates. They lowered prices out of fear that it would materially impact the company.
The response?
“Despite the pending change in legislation, the company does not expect a significant impact to its business outlook and believes the change will benefit goeasy, and those with scale, in the long term. As such, the company remains confident it will continue to produce a record level of annual earnings going forward”
As we can see, analysts’ rush to downgrade the stock was premature. This is a good example whereby seeking clarity before making rash decisions is essential.
The updated guidance should put to rest all fears that the Feds proposed change will have a material impact on the company. The investment thesis remains intact.
You can read our full report on Goeasy Ltd here
Intact Financial (TSE:IFC)
Intact Financial posted mixed results in the first quarter. Net operating income per share of $2.30 missed by $0.08 and revenue of $5.016B was in line with estimates for $4.977B. NOI was down materially (-30%) year-over-year (YoY) as it booked $421M in catastrophe losses.
Direct premiums written grew 6% year-over-year (YoY). While post-business lines performed well, the lone outlier was Canadian Personal Property, which had an elevated combined ratio of 119.2% (+22.7%). This was due in large part to the aforementioned higher catastrophe losses.
The company’s combined ratio (you want to see it under 100%) increased to 92.2% as catastrophe losses were “twice as high as expected” and operating return on equity (ROE) dropped to 12.8% from 15.4%.
While these are still healthy returns, we see how one quarter with elevated losses can impact the company. This is the risk associated with property & casualty insurers (P&C) – they are more prone to one-time events that can affect YoY results.
The good news is that the company is performing quite well outside of those one-time losses, and as a result its share price hasn’t budged much. Premiums continue to grow at a strong pace, and the company’s Personal Auto segment was a bright spot. Premiums increased by 6%, and there was a general sense that the segment would continue to improve over the course of the year. The Personal Auto segment exited the quarter with a healthy combined ratio of 91.2%, and the company expects to remain under its 95% target over the next 12 months.
It was an “ok” quarter for the company. Plenty of short-term headwinds caused material impacts on financials. As mentioned, this will happen to P&C insurers. Over time, these issues balance out, and keeping the big picture in mind is important.
You can read our full report on Intact Financial here
Jamieson Wellness (TSE:JWEL)
Jamieson reported second-quarter results that generally missed the mark. Earnings per share of $0.32 came in below expectations of $0.34, and revenue of $167.5M missed expectations of $169M.
The company also adjusted its outlook down in nearly every category, which caused a selloff post earnings. Here are the following adjustments to the company’s guidance:
Overall Revenue: Growth of 22%-26% versus previous guidance of 22%-28%
Canadian Revenue Growth: 2%-4% versus previous guidance of 3%-6%
International Revenue Growth: 0%-10% versus previous guidance of 5%-20%
Adjusted EBITDA Growth: 13%-16% versus previous guidance of 13%-18%
Earnings Per Share Growth: $1.56-$1.63 versus previous guidance of $1.62-$1.72
The reduction in earnings guidance is a combination of a decline in expected revenue and financing costs hitting the company’s bottom line. The company’s interest expenses have grown nearly five-fold over the last year. This isn’t all from rising rates. In fact, most of it was from debt accumulation via the Nutrawise acquisition.
The company raised the dividend by 11.8%, which surprised investors as many expected the company to prioritize debt levels over double-digit dividend growth.
When we look at year-over-year growth, revenue is up 51.5%, but most of that is acquisition-driven. When we look at organic growth, it sits around 3.6%. The company’s key driver in growth is its China segment, which grew 63% on the back of its new distribution model and overall demand.
Remember, this company has a stronghold on the supplement market in Canada, which is why growth sits in the low single-digit range in the country. But with its Nutrawise acquisition and China exposure, these will be the main growth verticals for the company moving forward.
Overall, it was a tough quarter from the company due to financing costs and a weaker consumer.
However, we’re noticing this across many companies, and it’s simply a macro environment companies will have to navigate themselves through.
You can read our full report on Jamieson Wellness here
Exchange Income Corporation (TSE:EIF)
Exchange Income Corp delivered a decent quarter. Q2 earnings of $0.93 per share missed by $0.02, and revenue of $627.22M beat estimates for $608.5M.
Adjusted EBITDA of $147M also topped estimates by ~$3M. The bottom line miss was the first time it missed on earnings for 2 and a half years. It wasn’t a large miss, but it effectively ends their streak of outperforming earnings estimates. That said, their revenue streak remains intact.
The revenue posted was a company record, representing a 19% increase year-over-year (YoY). Free cash flow also grew by 24% YoY, reaching a second-quarter record of $59M.
The company’s dividend payout ratio is around 57% of cash flows after maintenance expenditures are accounted for.
In the quarter, the company closed on some notable acquisitions, including BVGlazing and Hansen Industries – which were “immediately accretive to (their) business model.”
Along with the acquisitions, the company was awarded two fixed-wing medevac contracts in BC and Manitoba and an aerospace deal in the UK. The two medevac contracts are notable in size and will require capital of ~$275M. Both are for 10-year terms and with the possibility of extension. These are long-term contracts, as full-scale flying is not expected to begin until 2025.
The company has a combined backlog of nearly $ 1 billion, and its “pipeline of opportunities continues to be as strong as it has ever been.” As expected, it appears higher interest rates are driving down private market valuations, and EIF is well-positioned to take advantage.
According to management, inquiries for new projects are all “all-time highs” but “the time to convert these inquiries to confirmed orders is longer than normal because of the higher interest rate for developers.” The key, however, is that “demand is there.”
You can read our full report on Exchange Income Corporation here
