As we move through earnings season, there have been a lot of impressive quarters put up by some Canadian companies despite a rough economic environment.
Regarding the economic environment, Canada reported its first increase in inflation in ten months last week. As of right now, there isn’t much to worry about. However, further increases in inflation could no doubt put pressure on the markets, mainly if it results in the Bank of Canada changing its tune and raising rates yet again.
The difficulty here is the bulk of the increase in April inflation has come from rent, mortgage costs, and gasoline. Raising interest rates would have no impact on the price of gasoline. It would only continue to fuel higher rents and mortgage costs as landlords continue to increase rent while mortgage rates continue to increase.
Overall, the best strategy to deploy is one that does not rely on the direction of policy rates to be successful. A well-constructed portfolio will certainly still be volatile in situations like this. However, buying strong companies and holding them long-term has been a strategy that has worked for over a century.
We are about to head into the summer months as well. May, June, July, and even some of August are notoriously slow in terms of market volume, as many choose to take a few months off and let their portfolios be. This tends to lead to lower overall volatility during the summer months. However, depending on how inflation goes and commentary from policymakers, it could still be an interesting summer.
Foundational Stock Earnings
Brookfield Renewables (TSE:BEP.UN)
Faced with a problematic macro-environment, Brookfield Renewables put up a decent first quarter. As a reminder, BEP reports in USD, so the numbers that follow are reflected as such. Fiscal Q1’23 funds from operations (FFO) of $0.43 per share beat by $0.02 while revenue of $1.058B missed expectations for $1.19B. The company grew FFO by 13% year-over-year, in line with the company’s targeted double-digit range.
The company’s current portfolio is 90% contracted, with a weighted average contract duration of more than 14 years. 70% of the company’s revenues are indexed to inflation, and it only has a 3% exposure to variable debt (97% fixed rates), which reassures investors of the company’s ability to navigate inflationary and high-rate pressures, providing it with reliable cash flows and certainty in an environment that is anything but.
All in all, it was a decent quarter for the company, and it remains well-positioned to be one of the top-performing global renewable companies. In our opinion, this is the perfect time to pick away and accumulate utilities while prices are lower.
Home Depot (H)
It was a rough start to the year for Home Depot. While earnings of $3.82 beat by $0.03, revenue of $37.3B (-4.1% Y/Y) missed by $1.05B. The miss on revenue was the largest in the past 20 years. Lumber deflation accounted for more than 2% of the year-over-year decrease.
As a result of “the negative impact to first quarter sales from lumber deflation and weather, further softening of demand relative to our expectations, and continued uncertainty regarding consumer demand, we are updating our guidance to reflect a range of potential outcomes.”
We have placed Home Depot’s guidance details on our US Foundational page, which you can find here.
We are starting to see the impacts of higher rates on households. Notably, the company also saw lower YoY spending on discretionary items, a sign that consumers are switching to savings mode or simply don’t have as much discretionary cash as they once did.
We knew Fiscal 2023 would be a challenging operating environment – management warned us. That said, the big miss to start the year is undoubtedly going to raise some red flags, and investors should expect volatility in the short term. Long term? We still believe that Home Depot is a best-in-class option for investors, and this could be a great time to accumulate.
Bull List Earnings
Stella Jones (TSE:SJ)
In terms of the first quarter of 2023, Stella topped estimates on all fronts and by wide margins. Earnings of $1.03 topped expectations of $0.78, revenue of $710M came in higher than the $706M expected, and EBITDA of $120M beat estimates of $97M.
The company has repurchased 7% of its total shares over the last year. Although it’s unlikely earnings at Stella Jones will keep up this pace of buybacks over the years, as it was likely aggressively buying back shares when they traded at a discount, it shows management’s ability to deploy capital, with many of the repurchased shares bought at a significant discount to today’s share price.
The company has reported that it is either on track or expected to exceed guidance regarding revenue, EBITDA margins, debt to EBITDA, and its overall exposure to residential lumber. We’ve attached an image of its guidance below:
It continues to do everything right and shows no signs of slowing down. Overall, we’ve upgraded our price target to the high $60 range for Stella.
You can view our discounted cash flow analysis of the company in our updated reported here.
Alaris Equity Partners (TSE:AD.UN)
Alaris reported average results to kick off Fiscal 2023. Revenue of 36.7M missed expectations of $37.6M, and the company continues to have issues with one of its clients.
The top end of the company’s partnership base is healthy. Its top four partners, which account for 47% of the company’s revenue base, all had double-digit annual revenue growth, with one of its larger clients Accscient, an IT service company, reporting 43% revenue growth on a year-over-year (YoY) basis.
Alaris, at this current moment, is getting hit hard by the lack of payments in terms of distributions made by one of its top 10 partners, LMS. LMS is a steel manufacturer currently undergoing some difficulties due to built-up inventories. Distributions from LMS to Alaris have fallen by 96% YoY. This has been an issue for more than just this quarter. Investors likely wanted some solutions or insight by now.
LMS made up about 5% of the company’s collectible distributions. So, although Alaris’s diversity is shining here, with this event only impacting 1/20th of its revenue base, it’s still a notable hit to revenue. It should be short-term in nature. Of note, LMS distributions have not been forgiven but deferred. The company expects to start collecting the deferred distributions and new distributions from the company at the start of 2024. Outside of the LMS issues, it was business as usual for Alaris, and the quicker it could resolve the situation, the better.
The distribution is still well covered, making up less than 70% of operating cash flows, and with a yield north of 8% is attractive.
You can view our updated report of Alaris here
Intact Financial (TSE:IFC)
Intact Financial posted mixed results in the first quarter. Revenue of $4.809B came in shy of expectations for $4.91B, and earnings per share of $3.05 beat by $0.10.
Direct premiums written grew 4% year-over-year (YoY), and overall, we are starting to see earnings dip due to the company not making as much on investment income. This is something we highlighted in the valuation portion of the report and is one of the main reasons we believe the company is trading at such a large discount to historical averages.
The company’s combined ratio improved, dropping from 91.5% last quarter to 87.4% this quarter. However, it is still struggling with its European operations, as the combined ratio reached over 107% in the quarter. Remember, we don’t want to see anything over 100%. The lower, the better. However, this should be short-term in nature, so for now, we will just keep an eye on it.
The company’s return on equity has improved by 50 basis points on a YoY basis, reaching 15.4% in the quarter. The company reiterated its 12-month outlook in which it expects high product demand. It targets high single-digit growth in premiums written in almost all of its segments. It will continue to work out some inflationary and competitive issues in its UK segment.
Overall, it remains an outstanding GARP play, and we feel it is the best insurer in the country.
You can read our full report on Intact Financial here.
Topicus (TSEV:TOI)
It was a solid quarter for Topicus. Net income increased to €0.17 per share, up by €0.03 year-over-year. While the 21% increase is nice, much like CSU, net income fluctuates wildly quarter-over-quarter (QoQ) due to the nature of the business. For this reason, we don’t put too much stock in it. While operational cash flow (OCF) fell (-1%), free cash flow (FCF) increased by 64.6% to €101.1 million.
This huge jump in FCF was expected and starkly contrasted with the three consecutive quarters in which the company posted negative FCF growth. Once again, however, the company explains why Q1 is the key quarter:
“Many of the businesses invoice customers for annual software maintenance fees in Q1 each year resulting in a disproportionate amount of cash being received in the first quarter as compared to the remaining three quarters.”
In the quarter, it completed acquisitions with a total consideration of €20.4 million. This makes it back-to-back quarters in which they came in below the €40M we had become accustomed to.
Overall, it was another solid quarter, but as discussed, it’ll be important to judge this company on a YoY basis and less on a quarterly basis, given the nature of its business. Likewise, while there is no immediate reason for concern since the timing of acquisitions varies significantly, it is something to monitor over the next few quarters.
You can view our full report of Topicus here
Telus International (TSE:TIXT)
Telus International posted mixed first-quarter 2023 results. The company reported revenue of $686M versus expectations of $633M, and adjusted earnings per share of $0.28 came in shy of the $0.31 expected.
The company reported 9% growth in adjusted EBITDA, 8% growth in earnings per share, and 16% revenue growth on a constant currency basis. When we factor in currency fluctuations, that growth dips to 15%.
The company’s primary focus has been utilizing free cash flows to pay down the debt it took to acquire WillowTree. The company closed the quarter with a debt-to-adjusted EBITDA leverage ratio of 2.8x. When it first acquired WillowTree, it was 2.9x. From another perspective, before the WillowTree acquisition, it sat at just 1.1x. So, the company has a ways to go but is progressing.
Margins are compressing for the company, with net profit margins coming in at only 2%, while at this time last year, they sat at nearly 6%. Acquisition-related costs, higher debt levels, and overall inflationary pressures are certainly putting some pressure on the company. However, when we adjust out the WillowTree acquisition-related costs to get a clearer picture of growth, the company has grown net income by 10% on a year-over-year basis, even with weaker margins. We view the margin pressures to be short-term in nature.
The company reiterated its outlook on all fronts, expecting revenue in the $3B range, earnings in the $1.20-$1.25 range, and adjusted EBITDA in the $710M range. The high debt levels the company took on to acquire WillowTree are undoubtedly impacting the company’s bottom line. However, growth in EBITDA and the top line continues to be exceptional. As a result, we feel it is only a matter of time before the bottom line catches up.
