We’re right in the thick of things when it comes to earnings season, and for the most part companies highlighted here at Premium are having good quarters.
There seems to be a tale of two telecoms at this point in time in Canada, with TELUS reporting strong results (which I’ll get to first in the earnings section) and BCE reporting sub-par results, resulting in some significant pressure on its share price.
BCE is not a company I cover here, as TELUS has been my preferred telecom. I’ve been adding to TELUS fairly aggressively over the last while as you probably know, with it being a Value Call, and the quarter was certainly a bright spot on my short to mid-term thesis on the company.
For BCE, the situation seems to have gone from bad to ugly. I won’t speak on it much in our Premium newsletter. Instead, I’ll drop a link to my recent YouTube video on the company here.
My portfolio moves this week
I made a couple routine additions to my portfolio this weak, the first being to Toromont Industries (TSE:TIH). The company had what I would call a soft but far from concerning quarterly report, and I’m happy to add on weakness. I’ll discuss more on Toromont during the earnings section below, plus link to the recent updated report of the company.
My second addition is to Amazon. I have always stated I view Alphabet and Amazon as the two most attractively priced Magnificent 7 stocks available today. Although I typically add these companies on a regular dollar-cost averaging routine, I will admit, I’ve been adding to these two in particular a little more often recently.
My YTD portfolio gains creeped above 26% last week, and it has been an exceptional year for me overall. With my portfolio being around 45% US stocks and 55% Canadian, this is around a 3% outperformance of a 55/45 S&P 500 TSX Index benchmark.
Keep in mind, however, that even though my portfolio is 55% Canadian, the vast majority of my Canadian holdings have the bulk of their operations located in the United States.
The main drivers for a lot of my portfolio returns this year have come from small cap stocks highlighted here at Premium. Alaris (TSE:AD.UN), Savaria (TSE:SIS), Aritzia (TSE:ATZ), Equitable Bank (TSE:EQB), and WELL Health (TSE:WELL).
Over the last few years, these have been some of the most hated stocks on the market. But, as a long-term investor, I took the opportunity to continue to accumulate at cheaper valuations and ultimately I am reaping the benefits at this point in time.
Earnings
TELUS (TSE:T)
TELUS reported a strong third quarter of 2024, something the company will need to continue to do to break out of its rut pricing-wise. Revenue of $5.09B was in line with expectations but earnings came in at $0.28, well ahead of estimates for $0.23.
Customer growth has slowed but is still industry-leading at 347,000 net additions. The telecoms are going to be facing pressure from a reduction in immigration intake here in Canada, so I expect we will see this number continuing to slow in the future.
The company’s ARPU, or Average Revenue Per User, continued to fall as well, with mobile ARPU coming in at $58.85, 3.4% lower than the third quarter of last year (see the chart below).
One thing to note is that these declining numbers are not unique to TELUS, but to all telecoms. It is one of the main headwinds they continue to face.
One key area of focus at this point is free cash flows. I would argue that it is the most important metric coming out of all major telecom earnings. For TELUS, free cash flow is growing materially, with the company reporting $753M in FCF on the quarter. I’ve attached a chart below on the company’s last 12 month free cash flow generation.
 |
This is a 25%~ increase from the third quarter of 2023, and if we look to the past 2 quarters, the company has generated $1.45B in FCF. This free cash flow generation adequately covers the dividend, which has been a focus point for many investors when it comes to the telecoms.
It is also one of the theses behind my heavy purchases of TELUS as of late. I do believe FCF generation from the company will improve materially, and as a result, we should see an increase in valuation from the market if it continues to put up strong results.
I don’t believe this will happen over the period of a couple quarters, but strong results for a year or so will definitely go a long way in terms of valuations and market sentiment for the company.
The company’s non-telecom segments, TELUS Health and TELUS Agriculture, posted strong results, with revenue up 4% and 20%, respectively. TELUS Digital (formerly TELUS International) continues to struggle, but it did offset some of the pressure with new client additions.
The company made its routine semi-annual dividend raise, and on the year, it has raised the dividend by a little more than 7%. If free cash flow continues to improve the way it has been, the company should be able to generate more than enough to cover the dividend.
Overall, it was a solid quarter for a company with a lot of pressure on it to cut back capital expenditures, improve free cash flow generation, and improve its balance sheet. I continue to hold a larger-than-normal position in the company, and I am going to be continuously re-evaluating as it reports earnings.
Toromont Industries (TSE:TIH)
Toromont reported a mixed third quarter. Revenue of $1.338B topped expectations for $1.28B, but earnings per share of $1.58 missed estimates for $1.68.
On a year-over-year basis, revenue is up by 14%. Its Equipment segment grew by 14% year-over-year, and its CIMCO segment, the one that primarily focuses on refrigeration, grew by 17% over the same period.
The company’s gross margins declined to 24.5% on the quarter, which is a 410 basis point (4.1%) reduction on a year-over-year basis. This drove the vast majority of the decline in overall operating income.
The company’s gross margins are often cyclical based on the amount of support revenue it generates, as this is typically the higher-margin, more profitable segment of its equipment sales. Lower product support revenues relative to its total revenues often lead to a weaker margin profile.
As mentioned, operating income declined by 12% as the company realized lower margins on the quarter along with higher spending in terms of future growth initiatives.
Bookings increased by 4% on the quarter, primarily driven by the Equipment group. See the chart below.
|
The company states it lost some bookings in its CIMCO group to a major competitor. This isn’t all that surprising, as it has less of a moat in the CIMCO segment. Overall, the Equipment segment saw bookings increase by 12%, while CIMCO grew only 1%.
Of note is that the company is realizing stronger booking activities, particularly in the CIMCO segment, in the United States versus Canada. This makes sense, as the Canadian economy is struggling much more than the United States.
The company’s overall backlog came in at $1.1B, which is down slightly from the $1.2B reported in September 2023.
Overall, it was a relatively strong quarter considering the economic backdrop the company is operating in. The long-term thesis of an economic rebound and a discounted valuation remains well intact. I will continue to add shares on a routine basis moving forward.
You can read my full report on Toromont here
Boyd Group Services (TSE:BYD)
Boyd continues to report soft quarters amidst economic weakness and falling used automobile prices. Revenue of $1.041B CAD came in slightly ahead of analyst expectations.
Earnings per share of $0.21 CAD came in well below expectations of $0.61. Boyd is well known for missing earnings expectations by a wide margin, so I’m not overly concerned with the large miss.
When we look to the industry overall, repairable claims fell by 12.6% on the quarter. Boyd, on the other hand, reported same-store sales declines of only 3.5% (I’ve attached a chart below).
|
Acquisitions helped boost the top line by around 2% year-over-year. However, economic headwinds are hitting the company relatively hard.
As used automobile prices continue to fall, more and more insurance companies are choosing to write off vehicles rather than get them repaired. As a result, demand for repair is falling.
In addition, lower claim volumes and deferred repairs due to weaker economic conditions are impacting sales and hitting margins.
The company has consistently stated that its outlook will stay intact, with plans to double the size of its business by 2025. This guidance was made at the end of 2019. The company stated for the first time that there may be slight delays in its growth objectives due to the weakness in overall demand.
The company has added over 41 locations this year, which is historically a low number. It stated it has scaled back acquisition activity this year to focus on the core business, an attempt to stabilize margins and keep its core business model running as efficiently as possible.
Overall, the message is still the same from me here. The company is facing some temporary headwinds that are impacting 2024 results materially. If we look to the chart above, we can see that the company’s earnings are expected to rebound in a big way next year and the year after. I’m continuing to average into this company on a regular basis with a long-term view in mind.
You can read my full report on Boyd Group Services here
Well Health (TSE:WELL)
Well Health reported an outstanding third quarter. Revenue of $251.7M missed expectations of $260M, and earnings per share of $0.05 came right in line with estimates.
You may be wondering why I called the quarter outstanding, especially considering headline numbers aligned with expectations. I say that primarily due to the company’s strong free cash flow generation on the quarter, improved outlook, and outsized growth.
Profitability has been a key issue with Well Health over the last while. Although the company has never really struggled to grow revenues, the market focused more on free cash flow generation. Growing a business is one thing, but making it profitable is another.
Free cash flow came in at $16.1M on the quarter, which is a staggering 85% bump on a quarter-over-quarter basis.
Year over year, growth came in at 69%. The company’s updated guidance now expects free cash flow generation to come in at around $55M. At current valuations, this would place the company at 22X expected free cash flows, which, in my opinion, is a discount relative to its overall levels of growth.
The company is achieving double-digit returns on invested capital across all its primary Canadian segments, including 11% in diagnostics and 24% in primary care.
On the US side of things, strategic acquisitions made during the pandemic are now starting to bear fruit. Wisp revenue has grown by 35% year-over-year, and the company reported a material increase in EBITDA over the same timeframe. Circle Medical, in which it owns a minority stake, grew by 61%.
US growth is key for Well Health, as the US healthcare market has proven to be more profitable than Canada.
The company was also overly criticized for issuing shares during the pandemic to fuel acquisitions. It has scaled this back substantially, opting to utilize free cash flow generation now that it is profitable. It diluted shares by 10% in 2022. This number is expected to come in lower than 3.4% for 2024.
|
The company bumped its guidance, now expecting revenue to come in at $985M-$995M, EBITDA to come in at the higher end of its guidance at $125M-$130M, and, as mentioned, free cash flow to come in at $55M.
The company is starting to gain some momentum from a profitability standpoint. In my opinion, it is only a matter of time before the market starts to reward it with a higher valuation multiple.
