Even if you don’t pay attention to or invest in crypto, you may have heard about the devastating crash of LUNA. Trading in the $115 range in early May, there was a complete capitulation of the coin and it now trades at $0.0001034.
Many of our members have been asking what is going on there. Ultimately, even if you think this hasn’t impacted you because you only own major cryptocurrencies like Ethereum or Bitcoin, it has an impact on the entire market.
So, it’s a good thing to understand what exactly has happened, even though there are some complexities. Along with more earnings summaries published by us, we’ll take a deep dive. Let’s get started.
A&W Royalty Income Fund (TSE:AW.UN)
A&W continues to post excellent growth and remains a strong option in the current inflationary environment.
The company increased its royalty income by 13.5% and its same-store sales growth by 11.5% on a year-over-year basis. The company added 25 restaurants to the royalty pool, which was a strong contributor to the increase in sales. When we look at distributions, the company’s payout ratio vaulted to 145% on the quarter. But it’s important to understand this is simply a timing issue.
The company faced a large tax windfall during the quarter, nearly doubling its current income tax provision on a year-over-year basis. We will see this payout ratio trend downwards as we move forward as income taxes are likely not going to play as big of a factor in future quarters.
This has been an exceptionally reliable company since we placed it on the Bull List in late November, outperforming every major North American index. It is a fund I (Dan) own, and remains an underrated and under-followed company in Canada.
You can view our new PDF report on A&W here
Intact Financial (TSE:IFC)
During this financial drawdown in 2022, there has been one company in particular that has stood out, and that is Bull List stock Intact Financial.
The company has outperformed virtually all other major financial stocks in the country, including all of Canada’s 6 Big Banks and life insurers like Great-West Lifeco, and Manulife Financial.
The company increased net operating income by 13% and direct premiums written grew by 86%. Keep in mind, that the vast majority of this premium growth was through the acquisition of RSA, a company Intact bought midway through 2021. If we look at organic growth in terms of premiums written, it sat at 8%.
When we look at earnings per share on a year-over-year basis, they shrank by 28%. However, it is important to note that the company had a large, one-off investment gain in Q1 of 2021 which makes the decline look much worse than it is.
Intact Financial is a situation where yes, the company does trade at a premium valuation, but it is more than justified with its results.
You can view our new PDF report on Intact here
Boyd Group Services (TSE:BYD)
Boyd Group Services is a company that despite some large headwinds is still putting up strong results.
Boyd posted first-quarter results that topped estimates on all fronts. Of note, this company does report in USD as the bulk of its revenue is generated in the United States. The company reported revenue of USD 556.8M, EBITDA of USD 53.8M, and earnings of USD 0.10.
The reported revenue marks a 32% year-over-year increase and also same-store sales growth of 14.7%. There is no question that demand has returned for Boyd’s services. It cannot keep up with demand. However, supply chain and labour issues are starting to have a large impact on the company’s operations.
Gross margins decreased by 4.1%, coming in at 44.1%, and for a company that can normally grow adjusted EBITDA by double digits annually, it posted only 1.9% year-over-year growth in that department. However, on a quarter-over-quarter basis margins did improve as the company is continuing to negotiate rate increases with insurance companies to cover cost pressures.
This company will remain on the Bull List, as it is a long-term contrarian play that patient investors will likely appreciate. Once labour and supply chain issues are settled, we have little doubt the company won’t return to its pre-pandemic growth rates.
You can read our new PDF report on Boyd Group Services here
Lightspeed Commerce (TSE:LSPD)
In quite possibly the most anticipated earnings report this quarter, Lightspeed topped estimates on all fronts.
It was a strong quarter for Lightspeed yet again as the company topped revenue, earnings, and EBITDA estimates. Of note, over the last two years Lightspeed has not missed a single revenue estimate, and has only reported one quarter in which it came in shy of EBITDA targets. There is no questioning the fact the company is reliable when it comes to hitting targets.
When we look to total growth over the year (including acquisitions), the company grew total revenue by 147%, subscription revenue by 108%, and transaction-based revenue by 218%. The company also took a step towards profitability on an EBITDA basis, reporting EBITDA losses that made up 7.6% of revenue versus 9.6% last year.
Its subscription-based platform is still seeing near 50% organic growth, while gross transaction volume grew 39% on an organic basis.
In terms of guidance, the company increased revenue guidance for Fiscal 2023 and now expects revenue of $740-760M USD and adjusted EBITDA losses to come in at only 5% of revenue. This would mark yet another year in which the company reduces losses, and the company expects to reach break even on an adjusted EBITDA basis by Fiscal 2025.
Our new Lightspeed PDF report is in the final stages of being complete, and we will let you know when it is on your Premium dashboard.
Savaria (TSE:SIS)
Savaria posted first quarter 2022 results that generally missed the mark. Revenue of $183.54M was inline with expectations but earnings of $0.10 came in 33% below expectations, and EBITDA of $24.42M was 9.6% short of estimates.
On a year-over-year basis, the company is seeing some strong growth, with revenue growing 63.8%, earnings 56.5%, and adjusted EBITDA 41.2%.
However, it is important to note that most of this is generated from the Handicare acquisition. Margins dropped by a little more than 2% as material costs and supply chain issues continue to weigh on the company. However, we’re not overly concerned in this regard as this seems to be a market wide issue.
It completed a relatively small acquisition of Ultron Technologies for $2.5M. The company specializes in circuit and software development, along with manufacturing and global procurement.
When we strip out the Handicare acquisition, Savaria is not growing as fast, but is still posting relatively strong double digit growth across all segments. Out of its total 63% revenue increase, 12% came organically. If we look to its specific segment in terms of organic growth, Accessibility grew by 8.7%, Patient care by 22%, and Adapted Vehicles by 12.9%.
You can read our new PDF report on Savaria here
What happened to Crypto?
Now that we are past earnings season, we wanted to circle back and talk about the crypto crash that took place a couple of weeks ago. As many of you know by now, crypto took a nose dive and today most of the gains from the past year have been wiped out.
If we use Bitcoin and Ethereum as the proxies for the entire crypto market, you’ll see that they are now trading in line with where they were a year ago. Sound familiar? It is a similar trajectory that many of the high flying tech stocks have also taken.
So what happened that caused the downtrend to accelerate?
The main catalyst was the fall of Terra’s native coin (LUNA) and TerraUSD (UST). For those who do not know, Terra is a public blockchain, much like the Ethereum blockchain. For most investors, these two coins can be confusing. Which, is why we’re writing this piece today to try and explain.
To understand LUNA & UST, we must first understand the concepts behind “stablecoins”. Stablecoins are cryptocurrencies that are pegged (tied) to another financial asset like fiat currency (USD) or gold.
They are important to the crypto ecosystem as they are typically less volatile and are widely used as more effective mediums of exchange. Those pegged to the USD are particularly useful and enable one to move in and out of crypto relatively quickly, without having to fully transfer your crypto holdings into fiat currency and then back again to crypto. Stablecoins are a far more efficient and effective way of doing this.
There are two types of stablecoins. Those that achieve price stability by maintaining a reserve of assets such as U.S. treasuries or US dollars, and those which are algorithmic. That is to say, they rely on a formula to control the buying/selling and don’t rely on a reserve asset.
Tether (USDT) is an example of an asset-backed stablecoin whose reserves consist of ~85% USD with the remaining invested in short term deposits, commercial paper, corporate bonds, and secured loans.
Circling back to LUNA, it is an algorithmic coin and was subject to more scrutiny even before the crash
While bulls will point to the innovativeness of algorithmic coins, others called them Ponzi schemes. However, their decentralized nature (not relying on central banks’ assets) led them to have many backers in the space.
Regardless where one sat on the debate, the complete annihilation of LUNA is what effectively caused the entire crypto market to crash. This event was not one to be celebrated, as regardless on your position on the stablecoin debate, it had a negative impact on the entire crypto market. Justified or not, the markets got spooked.
So what happened to LUNA exactly?
We won’t go into the intricacies or technicalities but will try to explain this at a high level the best we can.
First off, Terra founder Do Kwon announced that they were buying Bitcoin for their UST reserves. This sparked optimism in the BTC market, but also skepticism since BTC was still highly volatile and most stablecoins avoid using other crypto as a reserves due to this volatility. Leading up to the crash, reserves hit about $3.5B worth of Bitcoin.
LUNA & UST have been accurately described as two sides of the same coin in that LUNA is used to stabilize UST which is pegged to the US Dollar.
There are two important definitions you need to understand before we continue. Burning is the process in which cryptocurrencies are removed from circulation, which ultimately reduces the amount of crypto in use. In simple terms, think of this like a company buying back its shares to reduce the total shares outstanding. Secondly, minting is the process of generating new coins, adding more into circulation. Think of this like a company issuing a share offering, adding more total shares outstanding.
When UST rises above $1 USD, then LUNA gets burnt and when UST is below $1, LUNA gets minted. Pretty simple concept. However, the Anchor Protocol, which is a lending platform in the Terra ecosystem introduced a 20% yield to stake UST. Why? To encourage adoption.
Now we’ve added another cryptocurrency definition to the mix. “Staking”. Staking cryptocurrencies is a process that involves committing your crypto assets to support a blockchain network and confirm transactions. It is a great way (but obviously not risk free) for cryptocurrency investors to generate passive income.
We have a LUNA/UST algorithm that insures balance, we have BTC reserves, and finally we have the largest lender on the platform offering a 20% yield. What happened next is best left to those with far more technical knowledge.
It has been referred to as a conspiracy theory, a personal vendetta and an outright attack on the Terra ecosystem. Here is a Twitter thread that summarizes succinctly the actions taken to cause the destabilization:
Click here to read the thread
In effect, these big market moves led to the de-pegging of UST from USD.
To bring its UST back to par with USD, the LUNA Foundation had to sell its Bitcoin reserves to buy up UST and this led to LUNA flooding the market. That led to the value of both coins spiraling downwards.
What followed included de-listing from exchanges, a LUNA coin that today is worthless and a UST price of $0.05 when it should be trading at $1 USD. Not to mention the fact that the entire Terra blockchain has been halted.
What happens next is anyone’s guess
The fall of Terra is effectively what caused all the chaos in the crypto markets over the past few weeks. No coin was spared as investors were rightfully spooked.
However, if one zooms out, this does not really impact the value of Bitcoin, Ethereum, Solana, or any other cryptocurrencies that have their own use cases. Sure, Bitcoin was under pressure as a large buyer was forced to liquidate its assets, but this was not a BTC issue itself.
While it does put the spotlight on algorithmic stablecoins, it hasn’t impacted traditional financial asset-backed stablecoins. Despite some short blips, USDC and USD are both fully pegged to the USD, trading at $1 each as of writing.
There is a chance that after this writeup you’re still a bit confused on the entire process and how this all went wrong. That’s understandable. If you’re interested in what went on, take some time to read through the e-mail a few times, and maybe do some research on stablecoins, and staking.
This is also a strong reminder that if you are invested in cryptocurrency, your allocations should be limited to your appropriate risk tolerance, and the bulk of your investment should be in stable, blue-chip cryptocurrencies like Bitcoin and Ethereum.
