In what looked to be a pretty solid week to close out the markets, volatility reared its ugly head again as a tax-cut bill was approved in the United States that sent bond yields soaring.
The thinking here is simple. Tax cuts will ultimately mean lower revenue for the US Government, which will likely fuel deficit spending. As the market grows more uncertain about the levels of debt the United States is taking on, they tend to sell bonds, pushing yields up.
In the simplest explanation possible, as bond yields rise, the attractiveness of stocks declines.
As long-term investors, we can ignore the noise and simply accumulate strong companies over the long term. This allows us to make fewer emotional decisions based on current headlines and reap the long-term benefits.
A prime example? Back in 2011, US debt was downgraded, much like it was this week. Over that time period, the NASDAQ is up 575% and the S&P 500 338%.
This week’s newsletter will wrap up a lot of the earnings commentary on Premium-featured companies. However, there is one more release, often the most anticipated of the quarter here at Premium, and that is my in-depth review on Canadian bank earnings.
They finish filing late next week, so you’ll have that comprehensive write-up in your inbox next Sunday.
Let’s get into it.
A note for future newsletters. I provide a lot of charts alongside my commentary in these emails. So, make sure you enable images!
Portfolio moves
It was a relatively straightforward week for me after a flurry of moves last week. One thing you will notice is there was a sizable increase in my cash position, going from around 5% to 8%. This was due to a larger one-time deposit from some GICs that had matured at Equitable Bank. I have not sold anything to stock up cash, and I do plan to deploy this money over the next couple of months.
The only addition I made this week was to my Brookfield Corporation (TSE:BN) position. This is nothing more than a routine dollar cost-averaging purchase, but I also acknowledge the fact that I believe Brookfield is trading at a discount at today’s levels, so the addition was a little larger than usual but nothing outrageous.
As the earnings season comes to a close, I’ll be issuing a Value Call in a few weeks after I’ve had time to collect my thoughts.
Earnings
Home Depot (HD)
Home Depot continues to put up some fairly strong numbers in the context of the current economic environment. Results aren’t exactly strong from a “growth” perspective, but my main thesis here is that if the company can continue to tread water during a relatively harsh economic backdrop, it should provide tailwinds moving forward as rates fall and economic activity picks up in the United States.
Overall sales increased by 2.8%, while comparable sales were effectively flat. What this is telling you is that the bulk of Home Depot’s overall revenue growth at this point is new stores, as comparable sales strip out new stores. The company did add 13 new stores on the quarter.
Overall earnings per share declined by 5%, primarily due to some decreases in overall margins. This makes sense, as the company is currently dealing with a bit of pricing pressure in terms of tariffs and inflation. The company has mentioned it will not broadly increase its prices due to tariffs, and plans to utilize its strong relationships with its vendors to try and work something out instead of passing those costs off to the consumer.
This could continue to impact margins over the short term, but will ultimately be a benefit over the long term in terms of customer relations with the company.
Transactions increased by 2.1%, but average ticket (the amount someone spends when they come to the store) remained flat. Which, shouldn’t be all that surprising considering the current economic environment. People are putting off large-scale purchases and instead are making smaller, more routine renovation/maintenance purchases.
The company reiterated the strongest portion of my thesis in regards to Home Depot:
The US home market is aging, in a big way. Over 55% of US homes are 40+ years old, and an increase in overall home equity among US homeowners should increase home improvements/renovations.
However, there needs to be some relief in the interest rate environment and overall economic activity. When the consumer decides to spend again, it should be a large tailwind for Home Depot.
The company mentioned that larger remodeling projects are continuing to be deferred by consumers because of higher interest rates. It expects there could be upwards of $50B in home improvement spending being deferred because of the rate environment. If this is the case, Home Depot is in an outstanding position to benefit from this when the time comes.
Overall, it was a soft quarter, but one that was largely expected. The company’s 2025 guidance was reaffirmed, in which it expects 1% comparable sales growth, flat margins, and a 2% decline in overall earnings. This is a cyclical play that I believe is currently in the bottom of a cyclical downtrend. I plan to continue to accumulate shares.
Boyd Group Services (TSE:BYD)
Boyd reported another soft but expected quarter. The company is currently going through some industry-wide headwinds that are impacting results. However, the company is weathering the storm better than the vast majority of companies in the sector. As a result, the market was generally pretty positive post-earnings.
Of note, Boyd reports in USD, and all numbers below are USD.
Overall revenue declined by 1% year-over-year to sit at $778.3M. When we look to same-store sales, which are the sales numbers (chart below) that exclude recent acquisitions to give an idea of organic growth, they declined by 2.8% year-over-year.
The interesting element here, and relating to what I mentioned above, is most industry-wide same-store sales numbers are being reported in the 9%-10% decline range. The company’s branding and reach are certainly showing here, which should bode well when headwinds subside.
Overall margins expanded, with gross margins increasing by 1.4% to sit at 46.2%. This is an underrated element that many investors will likely gloss over. However, margin expansion during rough economic periods can alleviate a lot of the difficulties the company will face, as it can lessen the blow in terms of profitability from lower sales with margin expansion. It will be a number I am paying particular attention to moving forward.
The main issue for Boyd over the last while has been lower repairable claims. Skyrocketing automobile prices during the pandemic forced more insurers to make repairable claims versus complete write-offs, and as such, Boyd benefitted. Now, we’re seeing used automobiles fall in price, and damaged vehicles are being written off by insurers versus being fixed. This is resulting in industry-wide repairable claims being down 9%-10%.
When we look to Boyd’s same-store sales declines of 2.8%, we can take some big positives from this. This ultimately means they are gaining market share. When used car prices normalize (or even rise due to tariff situations), the company should be in a better position to benefit from increasing same-store sales.
The company has added 58 locations and has 8 new openings planned in the first half of the year, followed by 16 in the latter half. The company has stuck to its overall targets of adding 80-100 locations a year, despite some pretty rough economic circumstances. As you can see by the chart below, the US side of the business (orange and blue) continues to grow at a strong pace.
As mentioned, management views auto tariffs as neutral to slightly positive, as rising new car prices drive up used car values and repair rates.
The company launched its cost savings platform, dubbed “Project 360”, in which it expects to save the company over $30M per year and continue to expand margins. The company expects this project to have compounding benefits, as it should save the company over $100M per year by 2029.
Overall, Boyd is playing the long game here. I know this can be frustrating for shareholders, but it is ultimately more beneficial. While the top line remains pressured by macroeconomic and insurance-related factors, its discipline and margin strategy are gaining traction. Gross margin expansion when same-store sales are declining is quite rare, but they’re doing it.
You can view my full report on Boyd Group Services here
Brookfield Corporation (TSE:BN)
Brookfield continues to post outstanding results and is further cementing the case that it is one of the best asset managers in North America.
The company reported distributable earnings of $0.82 per share, which is up 30% year-over-year. As you can tell by the chart below, the company’s distributable earnings have finally surpassed pandemic level numbers, and keep trending upwards.
Overall revenue did end up declining year-over-year, but this is not uncommon with a company like Brookfield. Lower realized gains on assets, for example, can drive revenue lower, but not really be all that concerning over the long-term.
Its asset management segment continues to shine, with fee-bearing capital (the good kind, recurring, consistent revenue) increasing by 20%.
The company had $25B in inflows on the quarter, and when we consider they only expected $80B-$90B throughout the year, they’re off to a strong start.
When we look to the other segments, including infrastructure (BIP.UN), renewables (BEP.UN), private equity, and real estate, distributable earnings came in at $426M. Although this is only 1.7% growth year-over-year, we do have to understand that the economic backdrop isn’t necessarily all the best for the company, and the fact that they can continue to drive any growth when investment is kind of drying up shows their dominant position as an asset manager.
The company has repurchased over $850M in shares on the year, which is the largest amount ever repurchased in a single quarter by the company. As you can tell by the chart below, the company’s buybacks have accelerated rapidly over the last few years, indicating management believes the company is undervalued.
The company’s aggressive buybacks were likely due to a significant drop in share price relating to the trade war uncertainties we witnessed in the first quarter. It will be interesting to see if they continue to allocate that large of capital back to buybacks throughout the year.
The company’s CEO emphasized that despite short-term market noise, Brookfield’s focus remains on allocating capital for long-term compounding. Annualized returns of 18% over 30 years speak to how well this has worked for them in the past, and it is clear that management believes there is currently a disconnect between the fair value of the company and the current market price. This should be a strong opportunity for investors to accumulate shares at discounted prices.
