It was an eventful week on the markets. After a Republican party-driven rally post-election, Jerome Powell put some water on the fire by stating that the Federal Reserve is in no hurry to cut rates considering the strength of the economy.
Unfortunately, this continues to put pressure on the Canadian dollar, as our economy is in a position that desperately needs rate cuts. The farther we deviate from the Federal Reserve in terms of policy rates, the lower the demand for the Canadian dollar.
When you can earn 1%+ more on a US treasury bill, capital will ultimately flow out of Canadian government bonds and into US treasuries.
Many pundits have stated the CAD will continue to go lower, and I do tend to agree. This is exactly why I’m continuing to buy USD, even at historically weak prices. However, I’m also purchasing smaller amounts of USD to try and even out the ebbs and flows of the Canadian dollar.
For someone who is looking to convert large sums, I can see how this would be particularly stressful, as currency fluctuations can have a sizeable impact on overall returns, and they’re next to impossible to predict with any sort of accuracy.
The movements of policymakers in terms of interest rates, policies put in place by government officials, general economic activity, and so much more come into play. With both a Canadian and US election occurring within a year, there is even more uncertainty on where the Canadian dollar will go.
As for my overall strategy, I will continue to purchase USD on a weekly basis in smaller increments. If the dollar goes lower, I benefit, and if the dollar goes stronger, most of my USD purchases have been averaged out over a period of years, reducing the overall currency impact.
Let’s dig into the core of the newsletter this week, which includes a Bull List removal, a sale of that position in my portfolio, and some earnings reports.
Automotive Properties REIT (TSE:APR.UN) has been removed from the Bull List
I will combine this Bull List removal commentary with my portfolio moves this week, as it was the most notable move.
I have removed Automotive Properties from the Bull List and sold the position inside of my RRSP.
Automotive Properties is what I would have called a “growth” type REIT leading up to the headwinds the automobile industry now faces. The company often had some of the highest growth rates in the sector, coupled with a well-covered, high-yielding distribution.
It is not like the company isn’t operating well or producing weak results. They’re just lower growth rates than my original thesis for Automotive Properties. As a result, when a thesis changes, I move on.
I had given Automotive Properties the benefit of the doubt over the last year in terms of slower growth rates simply because it was industry-wide. However, the company reported earnings recently and with low single-digit growth in terms of net operating income and adjusted funds from operations, I felt the money was likely better allocated elsewhere.
The company still provides an attractive distribution, one that is well covered (around 85% of adjusted funds from operations). So, from a pure income perspective, I can see how one would still find this company attractive.
However, as an investor primarily focused on total return, it doesn’t fit the overall structure of my portfolio.
I will be holding the proceeds in cash at this point and will let members know what I decide to purchase.
Earnings
One important thing I’d like to highlight on the earnings front: We highlight key companies inside of this newsletter, but it would be overwhelming to put my commentary on all of them inside of the newsletter.
Your Stocktrades Premium dashboard will be the number one resource for commentary on all companies highlighted here at Premium.
For example, I have 3 companies inside of this newsletter, but over 14 company reports have been updated on our website.
Make sure you’re routinely logging in to keep tabs on my research!
Home Depot (HD)
Home Depot continues to report strong results amid a pretty harsh economic backdrop. Revenue of $40.2B came in higher than the $39B estimates, and earnings per share were $3.78, topping expectations of $3.60.
Revenue increased by 6.6%; however, when we look to same-store sales (chart below), which excludes new store openings over that same time period, they dipped by 1.3% company-wide. When we look to the US, the company’s largest market, it dipped by 1.2%.
Operating margins continued to be impacted as well, coming in at 13.8% versus 14.5% last year. As a result, the company reported a low single-digit decline in year-over-year EPS.
The company updated its Fiscal 2024 guidance, in which it expects comparable sales to decline by 2.5%, operating margins to come in at 13.5%, and earnings per share to fall by 2%. Fiscal 2024 includes an extra week of reporting for the company as well, so that added week of sales is boosting these numbers a bit.
They expect the added week to contribute around $2.3B in sales and $0.30 to earnings. So on an apples-to-apples basis, we’re looking at larger declines than the guidance issued.
Investors shouldn’t really be surprised by the results all that much. Home Depot is going to be heavily cyclical based on the health of the consumer and even though rates are declining, they’re not down far enough where consumers are willing to front the money for home renovation.
Especially when you consider the fact that many renovations are financed. These issues aren’t unique to Home Depot but industry-wide. It is performing pretty much in lockstep with a group like Lowes over the last year and there is nothing Home Depot is doing wrong from an operational standpoint.
We can look to the chart below of average ticket price (the amount of money Home Depot customers spend when they go there, on average) to see it has effectively flatlined during the high rate environment. People are looking at essential projects only right now.
The company is performing quite well considering the current economic environment. Housing starts are down, few consumers are planning any sort of major renovation projects right now, and overall, consumers are still pinching pennies.
Despite being in what I would think is the bottom of a cyclical downtrend, the company’s stock price is hovering around all-time highs.
All in all, it was a solid quarter from the company, and I expect tailwinds over the next few years on the back of a recovering economy. As a result, it remains one of my larger positions.
Intact Financial (TSE:IFC)
After a long string of positive quarters, Intact reported a so-so quarter in Q3. Revenue of $5.5B missed estimates for $5.6B, and although earnings per share of $1.01 came in well ahead of expectations, they’re down quite a bit on a year-over-year basis because of catastrophe losses.
The company reported 6% premium growth on the quarter (see chart below), much of which was driven by personal lines of insurance.
The main issue, and what I will be focusing on in this earnings writeup, was the catastrophe losses. The company reported earnings per share of $1.01. However, there was an impact to earnings of $5.03 because of these catastrophe losses. In total dollar terms, they exceeded $1.2B.
The bulk of these losses (around $1.15B) were in the Canadian segment, primarily related to the wildfires in Jasper, a hailstorm in Calgary, and severe rains and flooding in Southern Ontario. Although these impacts are no doubt devastating, the company is well capitalized and more than able to absorb these shocks.
Because of the large catastrophe losses, the company’s overall combined ratio came in at 103.9% on the quarter. As I’ve mentioned before, you want a combined ratio that is as low as possible percentage-wise, as it compares the money being brought in by an insurance company relative to the premiums it pays out. For example, in Intact’s case on the quarter, it brought in $100 in premiums but paid out $103.90 in claims.
On a year-to-date basis, the company’s combined ratio sat at 94.2%, which is down by 1.4% when we look to the first 9 months of 2023. The market didn’t really react all that much to this large-scale catastrophe loss reporting, likely because they expected it and also because it is probably a one-off situation of an unusual amount of events during one quarter.
Fundamentally, this company still remains strong, and I view it as one of the best insurers in North America. Book value per share increased by 17% year-over-year to now sit at $90.60, and the company’s debt-to-total capital ratio is creeping toward its target of sub-20%. The lower the debt to capital, the better. It suggests that the company is utilizing cash flows to finance business activities over debt.
The company issued its outlook expecting double-digit premium growth in its personal auto and property lines and mid-single-digit growth in its commercial and specialty segments.
Overall, it was a rough quarter from a loss perspective, but one that was somewhat expected. This still remains a long-term position and a core holding in my portfolio.
You can read our full report on Intact here
WSP Global (TSE:WSP)
After a strong second quarter, WSP reported a relatively inline quarter for Q3. Although revenue of $2.99B was in line with expectations and earnings of $2.24 topped estimates by a few pennies, the company has typically reported stronger results than this. Due to that, it had a bit of a dip post-earnings but nothing material.
Revenue is up 10.7%, and net earnings are up 13.3% on a year-over-year basis. The company is posting some of the strongest organic growth rates in over a decade and is firing on all cylinders.
The company’s backlog grew by 4.8% year-over-year, coming in at $14.8B (see chart below), an all-time high for WSP. This backlog works out to be nearly an entire year’s worth of revenue.
The company’s North America segment is where it is performing best, reporting an 11% increase in organic revenue growth, a 4.2% increase to its backlog, and the highest EBITDA margins out of any of its segments at 21.1%. When we look to its European arm, it reported mid-single-digit revenue growth, 6.6% backlog growth, and 16.5% margins.
Its Asia-Pacific segment is where it continues to struggle. Organic growth came in at only 1%, and the company’s backlog fell by about 5.4%.
One of the key reasons for this is the slower digital transformations in these countries. North America and Europe are rapidly expanding in data centers and other tech-based solutions on the back of growing AI demand. The market potential in this segment is significant; it is just taking some time to come to fruition.
It is important to keep in mind that this geographical region for the business makes up a relatively small portion of revenue, with North America and Europe making up the vast majority (over 83%). However, I do see the APAC segment as a strong long-term growth vertical for WSP.
Overall, it was a solid quarter for WSP Global. This company continues to confirm my thesis of being a long-term Growth at a Reasonable Price play on the back of rapidly expanding infrastructure in North America and globally.
Its mix of private and public sector revenues, which you can see in the chart below, make it a company that will benefit off of extended government spending moving forward, plus a recovery in the economy.
