We’re back into earnings season, which means in-depth commentary on all the stocks featured here at Premium.
It’s been a huge year here at Premium, with the Canadian Foundationals outperforming the index yet again, the US Foundationals in a tight race with the S&P 500, and many Bull List stocks putting up outstanding returns.
My portfolio crossed the 25%+ threshold in terms of returns for the year due to the strong October thus far. As I mentioned, it’s nice to soak in and enjoy these returns. Still, we do have to understand that we will eventually revert to the mean of 8%-10% annually.
How we get there is anyone’s guess, and how long the markets could continue to run like this is anyone’s guess as well.
Let’s get into my moves for the week.
My portfolio moves
It was a relatively simple week for me. I’ve used up all my capital from selling my A&W Royalty holdings and directed most of those proceeds to my position in WSP Global. So, the purchases this week were just some dividends and spare change I had inside my accounts.
I added to my Granite REIT (TSE:GRT.UN) position. This is nothing more than a dollar cost averaging buy I make every once in a while for the company. I believe it is still the best REIT in the country, and the aggressive expansion by many retailers when it comes to e-commerce will put heavy demand on industrial spaces for the foreseeable future. Granite should ultimately benefit from this.
The other addition would be to the former Value Call Boyd Group Services (TSE:BYD). My adds to the company at this point are to take advantage of what I feel is a stock trading at a cheap valuation. As I’ve mentioned, the stock hasn’t been this cheap in over ten years. With a long-term horizon, I’m happy to take advantage of lower prices due to temporary headwinds.
Screener updates
Last week, we rolled out our beta testing of our brand-new stock screener, and the response has been excellent.
One of the main comments I see thus far is that you no longer need to be an expert on individual stock metrics and company data to identify strong stocks quickly. Hearing this makes me pretty happy because that was the exact goal of this screener.
I’m still making a few refinements to the grading system, as I do believe we have a few sub-optimal stocks that are slipping through the cracks, primarily ones that have had an extensive amount of tailwinds due to the COVID-19 pandemic that have achieved results that are likely not sustainable over the long term.
I’m looking to penalize specific companies based on particular metrics inside the screener if they’re abnormal, unsustainable, or pose an extensive risk. This should provide a quick and easy solution to filtering them out of the top results. Thus far, I haven’t seen more than a couple of them in the top 50-100 results, but they exist.
Another addition is that you can now click a simple checkbox on the left side of the screener to filter through all of our stock lists here at Premium. You’ll be able to view all of the data on our highlighted stocks at the click of a button.
If you haven’t used the screener yet, try it whenever you have time. I do believe it is going to be a tool that will provide an extensive amount of benefits, and it doesn’t require a market guru to navigate.
Earnings
Blackrock (BLK)
Blackrock continues to benefit heavily from a resurgence in the activity of equity markets. The company topped expectations on both fronts, reporting revenue of $5.19B versus expectations of $4.9B, and earnings per share of $11.46 came in well ahead of the $10.31 expected.
As an asset manager focusing on the markets, the company makes significant revenue through fees. It is not surprising that when equity markets see a high amount of inflows, this company will be able to drive strong earnings because of increased fees.
The company had $221B in inflows on the quarter, and assets under management are up $2.4T on a year-over-year basis, now sitting at $11.5T. When we first added Blackrock to the Foundational Stocks list, AUM sat around $10T. This is some notable growth in just 2-3 years.
The company is continuing to see significant inflows into its ETFs. If I were to guess, the inflows would be from not only increased activity in the equity markets but also a ton of new investors that came into the markets during the pandemic shifting to a passive form of ETF investing over an active stock picking strategy.
If you look to the graph below, you will see that ETF revenue (black bar) has now eclipsed pandemic level revenue. Considering how crazy the interest in the markets was in 2021, this is notable.
Year to date, ETFs make up $248B of the company’s current $360B in inflows. This is certainly a trend that makes me bullish for Blackrock moving forward despite its large size.
Earnings per share have grown around 5% year-over-year, and the company continues to buy back shares, repurchasing over $375M worth on the quarter.
The valuation gap has closed at this point in time, and the company is trading at a premium to historical averages.
However, considering the activity in the equity markets, I have little doubt the company won’t grow into that valuation unless we hit a significant misstep in the economy.
Pepsi (PEP)
Pepsi reported a relatively inline quarter. Revenue came in at $23.3B, while earnings per share came in at $2.31. Both of these were within 50 basis points (0.5%) or so of estimations.
When we compare the results to the third quarter of last year, revenue is effectively flat and adjusted earnings are up by 5%. One main headwind the company faces at this point is extensive recalls in its Quaker Foods department in North America, plus the overall impact of global tensions on its sales overseas.
Overall, the business in North America was relatively flat, with Quaker Foods declining around 13% while the other segments of the business didn’t grow much at all.
If you look to the chart below, however, you’ll see that Quaker Foods is a very small portion of the business. It is the middle blue chunk of the stacked bar graph. This is exactly why the large recalls and big dips in revenue really aren’t impacting the company’s share price all that much.
The company’s operations in Europe made up for the bulk of the drop in Quaker Foods, with sales up 7%. Where the impact of Quaker was truly realized was in the earnings department, as it witnessed a 28% decline, primarily caused by the recalls.
Overall, the sluggish economy in North America is certainly impacting sales, as many consumers are cutting out discretionary snack-type purchases as pennies continue to be pinched. But those headwinds should be subsiding as policymakers continue to cut rates. The company’s beverage segment remains strong regardless of the economy, with earnings per share increasing by double digits on the year.
When we look to organic growth on a revenue basis from the company, although it is down from pandemic highs, it is still much higher than it was pre-pandemic, which is a good sign.
All eyes were on the company from a guidance point of view, which is likely why the company realized some growth in share price post-earnings.
Revenue is now expected to come in at a “low single-digit growth” pace. Previously, this guidance was set at 4%, which is what I would deem to be a “low-to-mid” single-digit pace. So, it is unclear of how much it will come below this number, but the wording from management leads me to believe they will not hit this 4% mark.
Where guidance was upbeat was on the earnings front. Despite the headwinds, the company still expects to generate 8% or more earnings per share growth. As a result, it expects to return more than $8B back to shareholders in 2024, with $7B~ of that coming from dividends and $1B in share buybacks.
The company is in what I would deem value territory at this point, and although it looks expensive on a trailing basis, there are a lot of one-time costs and impacts hitting earnings right now.
Despite these issues, it still trades below historical averages. With projected high single-digit growth on the horizon, I think it is attractive as a defensive play.
