Another week, and another jam-packed earnings season. During this time, we provide in-depth commentary on all the companies we feature here at Stocktrades so that members can save time and make better decisions.
First, though, let’s briefly review our thoughts on the market volatility.
Current market volatility
Although the markets didn’t have the best week, with all major US indexes down more than 2% and the TSX falling nearly 3%, it’s essential to understand that the markets are still posting a relatively strong 2023 overall.
The NASDAQ is up 27%, the S&P 500 14%, and the TSX 2%. If your portfolio is Canadian-concentrated, likely, your portfolio is not keeping up with the US indexes.
For the most part, this is because the TSX Index is not only exposed to the cyclical nature of financial, oil, and material stocks but the fact that many of our blue-chip companies here are highly sensitive to interest rates.
One of the downfalls of the TSX
Technology stocks have had a large-scale rebound in 2023. And, because the TSX has very little technology exposure, it hasn’t necessarily reaped the benefits the S&P 500 has.
If we strip out technology-based returns on the S&P 500, returns shrink from 14% to just 8%, meaning nearly half of this year’s returns on the S&P 500 have come from just a single sector.
If you’ve been paying attention to our commentary as of late, you’ll notice one thing that is nearly front and center of every report, particularly those of struggling companies, and that is financing costs.
We’re seeing rising rates impact not only major companies like our telecoms and utilities but also many of the fastest-growing small caps in the country.
The takeaway
Overall, the longer your time horizon, the more you should welcome lower stock prices.
Once we stop thinking about where a stock will be 5 or 10 months after we buy it and instead focus on where a company could be in 5 or 10 years, investing becomes much easier.
With that said, let’s jump into earnings.
Foundational Stocks
Constellation Software (TSE:CSU)
Speaking of Canadian tech exposure, here is one of the best.
Constellation Software reported mixed second-quarter results. The company reported revenue of $2.741B, which topped expectations of $2.699B, but earnings per share of $13.67 missed expectations of $19.57.
Keep in mind analysts tend to miss the mark in terms of the company’s expected earnings by very wide margins. We place next to no emphasis on estimates regarding earnings for the company.
When we look at year-over-year (YoY) revenue growth, the company reported a 26% increase over the first quarter of 2022 and a 30% increase through the first six months of the year compared to the first six months of 2022.
Because Constellation is an acquisition-heavy company, many look to organic growth to see how the company is growing outside of its normal acquisition activities. In this case, organic revenue came in at 4% on a quarter-over-quarter basis and 3% on a YoY basis.
It has already deployed over $977M in acquisitions through the first six months of the year. Although this is down from the $1.27B through the first six months of 2022, this makes sense. During that period, valuations were much lower, and Constellation was likely finding more opportunities at lower prices.
The company reported free cash flow per share of $22.05 through the first six months of the year, representing a 40% increase from the first six months of 2022.
As mentioned a few times, the company doesn’t hold quarterly calls; it only issues annual letters. So, outside of the raw numbers, there isn’t much to go off of until the end of its fiscal year.
Granite REIT (TSE:GRT.UN)
Granite REIT reported a mixed quarter in which it reported revenue of $134.5M, topping expectations of $130.33M and reported Funds From Operations (FFO) per share of $1.21, missing expectations of $1.25 per share. Even with the missed FFO numbers, there was a lot to like about the quarter.
For starters, revenue through the first six months of the year is up 19.2%, and FFO is up 14.4% as the company continues to lower its payout ratios. It now has a payout ratio in terms of FFO of 65% and an adjusted FFO payout ratio of 71%. In the REIT world, adjusted FFO is the more reliable metric for dividend payout ratios, as it factors in property maintenance costs, among other things that FFO does not include. At 71%, Granite has some of the best-in-class payout ratios, which should allow the company to continue to drive strong dividend growth and maintain its Aristocrat status.
The company now sits on 143 investment properties, up from the 140 it had last year. However, properties under development have slowed considerably, down by 75%, likely due to the current environment and overall costs.
Granite sits with occupancy rates at 96.3%, and Magna International makes up 26% of total revenues. Although this is still high, it is down materially from years past. Although it highlights some concentration risk, it is not as material.
We view it as the premiere REIT in the country, especially in the industrial space. We will continue to add to our positions as valuations remain lower due to the current rate environment.
Bull List
Alaris Equity Partners (TSE:AD.UN)
Alaris reported average results to kick off Fiscal 2023. Revenue of $36.85M met estimates, and adjusted EBITDA of $31.64M beat by $1M. Adjusting for the Kimco Holdings redemption, revenue dropped by 7% year-over-year (YoY), mainly due to the issues with a top 10 partner that we’ve spoken about for the nine months or so now, LMS.
In our full report of Alaris (linked at the bottom of this commentary), we go more in-depth on the LMS situation.
The company’s Q2 press release stated that LMS “has progressed as they had expected and is poised to begin paying distributions in Q3 of 2023”.
This is good news; the timing seems ahead of where they previously guided. The company also mentioned that all other partners are performing according to expectations.
In the quarter, the company deployed US$13M, notably down from the $36.5M in Q1. However, through the first six months, it aligns with expectations.
Run Rate Cash flow was guided downwards from $0.63 to $0.58 per share. The distribution is still well covered, making up less than 70% of operating cash flows.
There is no doubt patience will be required. The economy is still skittish, and as we’ve seen in the markets the past couple of weeks, recent bullish sentiment was perhaps a little overdone. The risk of a recession still looks large and small caps like Alaris, and their underlying business partners are more exposed to economic sensitivity than large caps.
That said, outside of LMS, their partners have been performing quite well, and the underlying metrics remain positive.
You can view our full report on Alaris Equity Partners here
Brookfield Asset Management (TSE:BAM)
Brookfield Asset Management reported mixed earnings. In the second quarter, distributable earnings of $0.32 met expectations, and revenue of $985M missed expectations for $1.096B.
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 5.8% year-over-year to $0.34 per share, and fee-bearing capital delivered double-digit growth, reaching $440B (+12% YoY) and up $8M quarter-over-quarter (QoQ).
In Q1, the company raised $17B in capital (up from $13B last quarter), and it has now raised $37B year-to-date and $74B over the last twelve months as its flagship funds are in fundraising mode.
It is near closing for its fifth infrastructure fund ($27B today), and its third infrastructure fund raised $4.3B to date and is on track to exceed its initial funding target.
The company also made headlines when it announced that it was targeting $150B in capital raises this 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 with $2.9B in cash.
You can view our full report on Brookfield Asset Management here
Boyd Group Services (TSE:BYD)
Boyd reported its third consecutive quarter of strength, and the company is clearly in an operational turnaround after the pandemic. Revenue of $1.01B topped expectations of $968M, and earnings per share of $1.69 topped estimates of $1.34. The company’s EBITDA of $127.98M came in at 12.7% of sales, 100 basis points (1%) higher than last year, highlighting improved efficiencies and the taming of supply/inflation issues.
In terms of year-over-year growth, the company has grown sales by 22.9%, and earnings have nearly doubled. Organically, the company has grown sales by just under 19% through the first six months of the year, highlighting the fact that it knows how to identify smaller shops to acquire and how to drive strong growth from those shops.
As an acquisition-heavy company, financing costs will undoubtedly hit earnings. Overall financing costs through the first six months of the year compared to last year have increased 39%, and they now make up nearly 20% of the addbacks to the company’s EBITDA.
However, the company is still in a very strong position financially, as financing costs currently make up only 1.5% of the company’s overall sales throughout the first six months of the year. Investors can take comfort that despite its acquisition-heavy business, rates could go much higher, and Boyd would still generate strong cash flow.
The company’s long-term outlook, in which it expects to double the size of its business by 2025 (based on 2019 sales, which was the year it stated the guidance), is still in place.
You can read our full report on Boyd Group Services here
Park Lawn Corporation (TSE:PLC)
Park Lawn reported second-quarter earnings that generally hit the mark. Revenue of $114.4M was in line, and earnings of $0.2979 topped expectations of $0.2938 by a negligible amount.
The company reported 12.3.% year-over-year revenue growth and a 150 basis point (1.5%) increase to its quarterly EBITDA margins. The top-line growth and growth in EBITDA is not an issue for the company. The problems mainly stem from the bottom line, which is being impacted severely by financing costs. Remember, EBITDA stands for earnings before interest, taxes, depreciation, and amortization. So, it will not be reflective of the company’s current struggles when it comes to rising rates.
When we look at adjusted net earnings per share, which would factor in financing costs, we saw a decline of 37%. Lowering mortality rates was the headwind in 2022 for this company coming out of the pandemic, and right now, financing costs are the headwind in 2023.
As a result, earnings are likely to continue facing pressure. As such, Park Lawn will likely remain at lower valuations over the short term. The positives in all of this are that the company maintains a solid balance sheet, with interest coverage ratios at 5.5x and a quick ratio of 1.5x, indicating it has 150% of its liabilities due in the next year in cash.
When rates are lowered, net income and earnings per share should rebound.
