It’s the start of another earnings season, and we’ve got some Stocktrades related companies that report earnings this past week that we’re going to cover in this weeks newsletter.
Of note, we’ve been getting a lot of questions on the state of TC Energy and its current spinoff.
We will be covering this in next weeks newsletter. Much like the TELUS/TELUS International situation, we need to take some time to digest what’s going on to provide some valuable insight to members.
Foundational Stock Earnings
Loblaw (TSE:L)
Loblaws continued with its consistency in the second quarter of 2023, beating on both top and bottom lines. Earnings of $1.76 came in above expectations for $1.71 and revenue of $14B came in ahead of expectations for $13.74B. T
he company rarely misses expectations and although it’s down 1.8% on the year, we’re not surprised with this due to the fact money is leaving defensive stocks and into more aggressive growth orientated stocks at this moment in time.
We aren’t out of the woods in terms of an economic slowdown or recession, and we feel Loblaws would be a quality stock to hold in such situations.
Same store sales growth continued to climb at a mid-single digit pace in both its food retail and drug retail segments, which as ultimately led to a mid-single digit increase in overall sales on the quarter relative to last year.
The company’s gross margins, which have been the main focal point for many investors (and politicians, but that’s an entirely different topic) over the last years as they keep tabs on rising prices and inflation, dipped by a mere 30 basis points (0.3%), and still sit at 31.1%.
The company has put its capital to use through the first six months of the year, reducing the total number of shares outstanding from 335.5M to 323.8M, and we would expect the grocer continues to buy back shares while its share price trades at attractive valuations.
Interest expenses are up 27%, however this isn’t all that surprising considering the nature of interest rates right now, and it’s no doubt impacting cash flow. The company attributes most of this increase in financing costs in multiple segments of the business.
The company is still generating a significant amount of free cash flow. In fact, the company still sports a free cash flow yield, which compares the company’s free cash flow per share to its stock price, of just under 8%.
This is a FCF yield we would consider attractive, as most of our screens start with companies that have free cash flow yields above 7%.
Overall, it was steady as it goes for Loblaw on the quarter, and we wouldn’t expect too many crazy surprises from the company despite the tough macro-environment. In fact, it’s likely to benefit the company more than hinder it.
Alphabet (GOOG)
Alphabet seems to have eliminated all doubt about its business model, both from an advertising and AI standpoint, at least through the first six months of the year.
The company reported its strongest cash flow generation in history this quarter, along with topping analyst expectations on all fronts. Revenue of $74.6B topped expectations by just shy of $2B, and earnings per share of $1.44 came in ten cents higher than expectations. The 19% growth in earnings over the last quarter snapped a year long slide of declining earnings for the company.
The company is putting up high, single-digit growth despite an extremely tough macro-environment for advertisers and the majority of its client base.
Although it is witnessing its Google and Youtube Ads revenue slow, the company has been able to cut costs to improve efficiency and ultimately continue to drive earnings growth. Google Search revenue came in at $42.62B, around $2B higher than the 2nd quarter of 2022, and Youtube Ads revenue came in at $7.6B, around $320M higher over the same time period.
The bright spot in terms of overall growth was its Google Cloud department, which posted revenues of just over $8B, representing nearly 30% growth from the 2nd quarter in 2022. In fact, its cloud department actually reported positive operating income, which is a first.
The company continued to trim down its workforce, which is highlighted by a $2B charge-off for severance payments. It continues its efforts to improve efficiency in a post-pandemic environment. The benefit of the company being clearly overstaffed during the pandemic is the fact it has been able to trim employees and drive outsized cash flow growth despite top line growth in its advertising segments slowing. In total, the company generated $21.77B in free cash flow on the quarter, representing 29% of the company’s total revenue.
Overall, all segments came in over and above expectations, and as a result the company has been on a consistent uptrend since it reported. If it can generate this type of cash flow in this environment, we’re very curious to see what Google can do when more companies return to its ad networks in a more robust economic climate.
Bull List Earnings
A&W Royalty Income Fund (TSE:AW.UN)
A&W Continues to put up strong growth in a challenging environment yet again. On the quarter, royalty sales increased by 4.8% compared to Q2 2022. Throughout the year’s first six months, royalty sales are up 6.4% compared to the first half of 2022. If we look to same-store sales growth, which would not account for new restaurants added to the pool, they were up 2.5% compared to Q2 2022 and 4.1% compared to the first six months of 2022.
Signs of inflation slowing down are evident, as the fund’s restaurants have been able to absorb most of the rising food costs into its menu, all while still growing sales.
In addition, administrative expenses are declining through the first six months of the year compared to the last. As a result, payout ratios have started to normalize, and the fund’s six-month payout ratio comes in at 99.4%. In the most recent quarter, it was even lower at 88.9%.
Remember, this fund’s objective is to earn revenue from the restaurants, pay its expenses, and then dish out the rest as a distribution. So, a 99% payout ratio is nothing to be alarmed about. The fund is designed to operate with ratios that high.
The total restaurant count sits at 1037, and the company added 22 restaurants to the royalty pool over the last year. Overall, it continues to be an outstanding royalty fund that is being weighed down by high policy rates and attractive fixed-income opportunities. Once rates start to normalize or come down, we feel there is some upside potential here to go along with a very nice yield.
You can read our updated report on A&W here
TMX Group (TSE:X)
The environment seems to be improving for TMX Group as it beat on the top and bottom lines. Earnings of $0.38 beat by $0.03, while revenue of $306.2M beat by ~$13M. This represented flat earnings growth while revenue grew 7% year-over-year (YoY).
Trayport’s (European data platform) Q2 revenue came in at $47.9M (£28.28M vs. £27.8M in Q2 ’22), and subscribers grew by a healthy 6.2%.
While market sentiment has improved, it remains a challenging environment for capital markets. TMX Group releases monthly trading statistics that continue to reiterate the difficulties experienced.
Looking at year-to-date (YTD) numbers (as of June ’23), we are still looking at weaker overall YoY volume (-22.4%), value (-17.6%), and transactions (-24.3%). Once again, the most significant dip is on the TSXV, which saw an approximately 40% dip in the number of transactions and a 35% dip in the total value of the transactions.
Furthermore, equity financing volume continues to trend lower, with the TSX raising 54% less YTD on the back of 24.6% fewer financings. Similarly, the TSXV saw total financings raised drop by 33.6%, despite a 1.3% uptick in the total number of financings. What does this mean?
It means it is not only a difficult market for the performance of publicly-listed stocks, but it is also proving difficult for companies to raise money, and companies are likely putting off IPOs as a result. Speaking of which, IPO financings raised on the TSX and TSXV dropped by 79.2% and 93.3%, respectively.
Overall, it was a solid quarter by TMX, which has rebounded quite nicely from year lows. This isn’t surprising, as the markets themselves have been relatively bullish over the past couple of weeks.
Finally, it is worth noting that the 5-for-1 share split announced in February took place this past quarter. This is why you’ll see vastly different price targets, EPS numbers, etc. While the company’s reports reflect the change, do make sure you consider this if you are doing your own analysis.
You can read our full report on TMX Group here
Allied Properties (TSE:AP.UN)
Allied reported second-quarter earnings, which were okay but nothing exciting. This is expected as the company is operating in a tough environment. All things considered, however, it is still among the best-performing Office REITs.
In the quarter, NAV per unit dropped slightly quarter-over-quarter (QoQ) from $50.90 per share to $50.80 amidst macroeconomic uncertainty. In the quarter, the average net rent per occupied square foot grew by 7.6% to $23.51, and the leased area ratio came in at 87.6%, down by 3.3% year-over-year.
Diluted Funds From Operations (FFO) per share dipped by 3.3%, while Adjusted FFO dropped by 1.3% year-over-year. Likewise, FFO (76.5%) and AFFO (83.9%) payout ratios both increased (+4.4% & +3.4%) as a result of higher year-over-year (YoY) interest costs. While FFO was slightly below company forecasts, AFFO topped expectations. The main reason for the higher interest costs is higher rates to go along with the 14.3% net debt it added due to the portfolio of assets it acquired from Choice Properties REIT.
Unfortunately, the company also lowered Fiscal 2023 guidance. It now expects Net Operating Income, FFO per unit, and Adjusted FFO per unit to see flat to low single-digit growth. This is down from the low to mid-single-digit growth it guided to earlier this year.
The big news in the quarter is that the company has sold its UDC Portfolio and is expected close on August 16, 2023. Along with Q2 results, it also detailed how the $1.35B in proceeds will be used:
- ~$740M to repay all amounts drawn on its unsecured credit facility
- ~$200M to repay a secured promissory note
- $49M to repay its remaining first mortgages on wholly owned properties next year
- The rest will be to fund its development and upgrade activity over the remainder of 2023 and into 2024.
You can view our full report on Allied Properties here
Aritzia (TSE:ATZ)
Aritzia reported a solid first quarter 2024, topping estimates on all fronts. Revenue of $462M came in ahead of estimates for $459M, and earnings per share of $0.10 beat by a penny.
So why did the company fall nearly 30% on the report? Because of its newly issued guidance, in which the company revised estimates downwards in a significant way.
The company claims that a sharp deceleration in traffic trends caused it to revise its guidance downwards in anticipation of a harsher macroeconomic environment. Revenue is now expected to come in at $2.25B to $2.35B, which marks a 2%-7% increase compared to last year. Initially, the company had expected to grow revenue in the 10-14% range.
The company had forecasted a 200 basis point (2%) decrease this year in terms of gross profit margins. With the new guidance, it now expects gross margins to decline by 300 basis points (3%). Additional sales and administrative costs are also expected to weigh on earnings, with the amount of SG&A relative to revenues increasing by 300 basis points as well.
Outside of guidance, inventory continues to grow, and it will be something we have to keep an eye on moving forward. A buildup of inventory that cannot be sold can often lead to markdowns and higher storage costs, impacting margins even further.
On the bright side, during the conference call, the company reaffirmed the fact that although margins will be impacted this year, they expect them to rebound by 500 basis points (5%) next year and that their Fiscal 2027 target of $3.5B-$3.8B in revenue is still intact.
The company also stated that it may become more aggressive with buying back shares depending on how the stock price reacts to the recent report over the next few months.
It was a strong quarter for Aritzia in which guidance overshadowed the overall results. However, we’re still optimistic that these are simply short-term macro-related issues.
