We continue this week with more highlighted companies here at Stocktrades reporting earnings. Although we’re mostly wrapped up, we still have a few outlier companies reporting, along with one of the most important segments on the Canadian markets, Canadian banks, reporting in late May. As always, we have a full newsletter dedicated to the banks, which will be coming in early June.
Remember, we only highlight a few core reports in this email. Our website has more than 40+ updated reports this quarter, and it’s important you make frequent visits to the website for not only these reports but every other feature we offer.
In addition, we have a removal from the Dividend Bull List. Before we start, let’s dig into my weekly moves.Moves made in my portfolio
I added to four positions on the week.
Three of them were relatively routine adds. I added to Equitable Bank (TSE:EQB), Intact Financial (TSE:IFC), and Blackrock (BLK) on the week, with Equitable and Intact being purchased with dividends received and Blackrock being from my weekly contribution to my portfolio.
I made a larger add to my Boyd Group Services (TSE:BYD) position with some of the cash position available in my account in order to take advantage of what I would consider a pricing weakness.
Boyd reported relatively soft earnings last week. It seems wild to say this, as we are 2+ years out of pandemic-like conditions, but pandemic headwinds are still impacting this company. The issue now? Used automobile prices are falling, and as a result, Boyd is realizing lower demand for automobile repairs after collisions.
Automobile insurance is, at its core, relatively simple. If you get into a collision that costs $8000 to repair, and your vehicle is worth less than that or possibly even slightly more than that, the insurance company will simply write off your vehicle and issue you a cheque for its value.
During the pandemic, used automobile prices skyrocketed, and insurance companies typically use these price points to judge whether or not a vehicle is worth being repaired. When prices are high, insurers will be more reluctant to write vehicles off, and repair demand will increase. For 2+ years, Boyd was witnessing so much demand that it simply couldn’t keep up. This was the primary driver of this.
Now that prices are settling, the company is seeing more auto insurers write vehicles off rather than repairing them, and as such, demand is slowing.
Boyd will eventually be able to adjust to this lowered demand, and I don’t really have much concern for them over the long term. The company is now trading at 12.8x free cash flows, which is more than 25% below its historical valuations, and I felt this would be a solid opportunity to fill out my position.
Sitting at 2.7% of my portfolio, I’ve nearly reached my target allocation when it comes to Boyd (3%). So although I will continue to add in small chunks, I’m unlikely to make any more significant adds like I did this week to the company unless prices become more attractive.
Pembina Pipe (TSE:PPL) removed from the Dividend Bull List
When we added Pembina to the Bull List in 2023, our primary thesis was value. We believed that operationally, the company was best in class in terms of pipelines in Canada yet the market wasn’t reflecting this.
Fast forward a year later and the company has total returns just shy of 30%, while other major pipelines like Enbridge and TC Energy returned 8.8% and 11.4%, respectively.
Our removal this week is primarily based on the fact that the value gap has closed. Pembina’s impressive run over the last year has valuations sitting above historical averages and at this point, our thesis has been fully confirmed. As such, we’re removing the company from the list.
As always, we don’t want to give the impression a removal from our list means investors should sell the company.
Pembina is a strong income stock, a mid 5% yielder that many retirees and income investors own to generate income from their portfolios.
Our removal is solely based on the value element not being there for the stock anymore.
Earnings
Home Depot (HD)
Home Depot reported a mixed first quarter of 2024. Revenue of $36.4B missed expectations by about $200M, and earnings per share of $3.63 topped estimates of $3.60.
Considering the current macro environment and the financial difficulties of many Canadian and U.S. consumers, the company’s operations have held up admiringly well. This quarter paints yet another picture of large-scale renovation projects being delayed until there is some relief on the interest rate front, and consumers are opting for smaller projects during this time.
Sales are down 2.3% and earnings by 7% year-over-year. However, this was largely expected due to the abovementioned conditions and a delayed start to spring, which fuels many outdoor projects.
When we look to same-store sales, they declined by 2.8%, and if we isolate the United States, they declined by 3.2%.
Total customer transactions are down 1%, average ticket price is down 1.3%, and sales per square foot of store space are down 3.4%.
We’ve mentioned in other retail operations that the average ticket price is an important key performance indicator among these companies. It gives a better indication of consumer trends because it highlights not only the foot traffic coming through the store but also how much they’re spending when they’re there.
The decline in average ticket price reaffirms our thoughts that consumers are scaling back larger projects, such as those that may require financing to complete, like large kitchen renovations, for smaller ones.
The company confirmed its 2024 guidance, which expects to grow earnings and revenue by 1%. However, the positive growth rate is primarily attributed to the fact that there will be a 53rd week in 2024 for the company, which it expects will add $2.3B in revenue and about $0.30 in earnings per share. When we isolate those out, its expected to be another flat year of growth for Home Depot.
It expects to add 12 more stores on the year and net interest expenses will come in at around $1.8B. When we look to interest expenses in 2022, which was when policy rates started increasing, they sat at $1.3B. So, we can see how even a large-scale company with a well-managed debt profile like Home Depot is being impacted by financing costs.
This should allow Home Depot to benefit from multiple tailwinds once rates eventually do come down. The question now is when will rate decreases occur, as hotter-than-expected CPI and PPI reports are no doubt stoking the “higher for longer” flames.
Overall, Home Depot remains one of the largest positions in my portfolio. I believe patient investors will be rewarded here due to the long-term tailwinds the U.S. and Canadian housing markets should provide.
Intact Financial (TSE:IFC)
Intact Financial produced yet again another solid quarter, topping expectations on all fronts. Revenue of $6.5B topped expectations of $5.7B, and earnings per share of $3.68 beat estimates by $0.14.
It is often better to look at net operating income per share (NOIPS), which focuses on Intact’s core business operations and isolates any specific earnings that are not from its insurance operations. NOIPS came in at $3.63, which topped analyst estimates of $3.40. The company grew NOIPS by 19% per share on a year-over-year basis as it continues to turn out strong results and solidify itself as one of the best insurers in the country.
Direct premiums written grew by 6%, book value per share grew by 9% to sit at $84.76, and return on equity came in at 14.7%.
The company’s combined ratio, which is a critical metric for an insurance company, came in at 91.2%. The combined ratio compares the premiums brought in by an insurance company relative to what has been paid out. The easiest way to look at this is that if an insurance company’s combined ratio is above 100%, it means they’re paying out more in claims than they’re bringing in in premiums.
Intact’s combined ratio is one of the best in the business, and it declined by 0.7% year over year primarily on the back of its UK operations finally normalizing. For quite some time now, its UK operations have had combined ratios over 100% because of high catastrophe losses. This has been a drag on the overall business, but it is now looking to be turning things around, as its combined ratio now sits at 94.6%.
Combined ratios in the United States and Canada sat at 88% and 90.7%, respectively.
It was a strong quarter for Intact, whom is likely to continue to drive strong results due to solid underwriting and higher overall gains on its investments as it continues to benefit from higher yields.
Click here to read our full report on Intact Financial
Exchange Income Corp (TSE:EIF)
Exchange Income Corp put up a solid quarter to kick off Fiscal 2024. Record revenue of $602M missed expectations of $611M, but earnings of $0.20 came in above estimations for $0.1925. We’re not overly concerned about the revenue miss. We are more focused on this company providing strong bottom-line numbers at this point.
Year-over-year revenue and adjusted EBITDA grew by 14%, free cash flows by 3.3%, and earnings per share declined by 26%. The decline in earnings per share can be attributed to a growth of 11% in terms of shares outstanding, along with some higher acquisition and financing costs.
We’re not overly concerned about this, as the company did warn investors of higher costs over the short term a few quarters ago.
On a segment-by-segment basis, Aerospace and Aviation grew revenue by 13%, and Manufacturing by 16%. The company is continuing to grow its top line in virtually every business segment. The only thing holding it back now are the added financing costs due to rising rates and larger than expected expenses.
The company issued outlook in which it still expects its business segments to continue growing in the coming quarters but reiterated that profitability may decline.
The company’s dividend payout ratio, when we adjust for maintenance capital expenditures, came in at 58%, which is relatively in line with previous years. When we look to the payout ratio in terms of earnings, it comes in at 84%, which is 9% higher than last year.
Overall, it was a relatively strong quarter from Exchange Income Corp and short-term pressures on profitability should allow investors to accumulate shares at what we feel are discounted prices.
The dividend is safe, and although it’s unlikely to grow a meaningful amount, considering how attractive its yield is at this point, we’re not overly concerned with its growth anyway.
You can read our full report on Exchange Income Corp here
Jamieson Wellness (TSE:JWEL)
Jamieson reported a strong rebound quarter. Revenue of $128M topped expectations of $123.9M, and earnings per share of $0.09 came in well ahead of estimates for $0.04.
The company has been weighed down recently by a strike at a Windsor Ontario distribution center. However, the situation seems to be resolved. Although it delayed some shipments into the second quarter, operations should be relatively unphased.
On a year-over-year basis, revenue fell by 6.4% and earnings are down by 57%. The impact on revenue was primarily due to the strike at its facility. On the earnings front, financing expenses continue to weigh on the company as a result of higher policy rates.
Its international expansion efforts continue to pay off, as its U.S. segment drove 37% sales growth, and its China segment grew by 126%. The main pressures on revenue resulted from a 14.7% decline in its Canadian segment which again, was a result of the strike at one of its facilities in Ontario.
Debt levels remain high, but the company should be able to continue to allocate cash flow in an effort to reduce debt levels moving forward. Some relief in terms of policy rates will certainly be a bonus, but this company’s balance sheet is strong enough it should be able to weather the storm even in the event rate declines are pushed into 2025.
It reiterated its outlook for 2024, in which it expects revenue to grow anywhere from 6.5%-12.5%, Adjusted EBITDA to come in the $138M-$144M range, and adjusted earnings per share to sit at $1.55-$1.65. If the company can hit this guidance, Jamieson is relatively undervalued here, in our opinion, trading at only 16x its expected 2024 earnings.
