As I had expected, the Bank of Canada cut interest rates by 50 basis points last week. The market was torn about whether rates would decrease by 25 basis points or 50. Still, I believe the recent inflation print gave the bank all it needed to drop policy rates by 0.5%.
However, a caveat regarding the inflation report is that energy prices drove a significant portion of the overall decline in inflation. This makes future inflation reports extremely hard to predict, as energy prices have been known to be wildly volatile, especially considering the global conflicts we face today.
I’m sure the Bank of Canada knows this and found that the underlying data outside energy prices was solid enough to justify a larger cut. Interestingly enough, CIBC analysts had put the chance of a 75 basis point cut on the table a few days before the announcement. However, I don’t think there was a chance that a large cut could come in, especially considering that we don’t want to get too far apart regarding policy rates from the Federal Reserve.
The Canadian dollar has taken quite a beating over the last while here, mainly due to the Bank of Canada needing to cut more aggressively than the Fed.
This makes sense, as generally, money will flow to countries paying higher rates of interest. This would result in lower demand for the Canadian dollar relative to the US dollar, which puts pressure on our currency.
Overall, as long-term investors, we’re not particularly interested in macro-economics. Instead, we want to focus on buying and holding solid corporations long-term.
This is why you never really see this newsletter diving deep into the state of the economy or other macroeconomic data. It’s not that I completely ignore it. I just don’t feel it should be obsessed over.
I’m not the only one who believes you shouldn’t spend much time digesting economic data, either. One of the most famous investors of all time, Peter Lynch, is well known for his quote on investors focusing on the economy:
“If you spend 14 minutes a year on economics, you’ve wasted 12 minutes.”
Let’s dig into my portfolio moves for the week and then get into some Premium highlighted companies reporting earnings.
My portfolio moves
I added to my Alphabet (GOOG) position. Although this is a standard dollar cost averaging move I make every couple of months with Alphabet (and all my other holdings), I still believe that Alphabet remains one of the more attractively priced Magnificent 7 stocks.
The company is currently facing uncertainty regarding the anti-trust lawsuit and the fact that it might be forced to split off some of its business and lose some of its contracts with platforms like Apple. However, I believe that if they have to split the business, it may end up unlocking more value for shareholders. The company has numerous fast-growing segments, including Youtube and Cloud, that would be more than viable as publicly traded entities themselves.
My second addition is to Brookfield Renewables (TSE:BEP.UN). There isn’t much to think about here. It is simply a dollar cost-averaging move. I have Brookfield in a rotation in terms of additions to my position, resulting in me adding to it once every couple of months.
Thus far, my portfolio is up around 2% in October and 23.5% on the year, outpacing the S&P 500 by a fraction. Considering my portfolio includes many Canadian equities, I’m thrilled with the results thus far. As always, though, it is nice to soak in short-term returns, but the mentality should be for the long term.
Earnings
Waste Connections (TSE:WCN)
If you’ll remember, a few years ago we removed Canadian National Railway from the Foundational List and replaced it with Waste Connections. My theory here was the fact that CN Rail would be cyclical to the economy, while Waste Connections should be able to offset any sort of economic weakness with pricing increases due to its economic moat.
Thus far, that’s looking to be true, as the company has returned around 38%~ more than CN Rail since we made the swap.
The company continues to confirm my thesis that it is an industrial company that can operate in practically any economic environment. Revenue came in at $2.33B, topping expectations for $2.29B, and earnings per share of $1.35 beat estimates of $1.29.
The company is executing on its pricing power, which is one of the main reasons I’m so bullish on the company. Overall, waste volume continues to decline while recycling stays relatively flat. However, the company has been able to increase core pricing by 6.8%, more than offsetting the changes in volume.
Core pricing growth isn’t anywhere near peak-pandemic levels. However, it is still well above pre-pandemic numbers.
Overall solid waste growth increased by 5.4% on the quarter and 4.7% on the year. Considering solid waste collection and disposal makes up 93%~ of the business, this is a key metric you need to be keeping an eye on if you’re a Waste Connections owner.
The company continues to execute its strategy of accretive acquisitions as well. Acquisition-related revenue contributed $356M to the top line through the first 9 months of the year, which is a low single-digit increase on a year-over-year basis. The company states it is on pace to have $700M in annualized revenue from acquisitions over the next year, highlighting the fact that it isn’t slowing down in this regard.
Adjusted EBITDA is up 17.3% year-over-year, and EBITDA margins increased by 120 basis points (1.2%). Free cash flow came in at just over $1B. Strong cash flow generation led to the company making a 10.5% increase to the dividend.
The company updated its 2024 outlook, increasing revenue expectations to $8.9B, which is a $150M increase. It expects free cash flow to be around $1.2B and Adjusted EBITDA of $2.91B. Previous guidance for Adjusted EBITDA was $2.9B. These are relatively small upgrades to guidance, but upgrades nonetheless.
It is looking to be a solid year for Waste Connections in 2024, and despite a fairly rough economic environment, the company is continuing to grow earnings. This is a strong sign for the company’s growth potential when economic activity picks up, as it should ultimately lead to increased volumes, of which the company will see amplified benefits from core pricing growth.
Starbucks (SBUX)
Starbucks reported a soft quarter to close out Fiscal 2024, as the company faces a myriad of headwinds. Sales of $9.07B missed expectations of $9.3B, and earnings of $0.8 missed estimates for $1.01.
Same-store sales are down 7% company-wide on a year-over-year basis, and earnings are down 25% over the same time period. When we look to same-store sales in North America, they declined by 6%. As you can see by the chart below, this is the third straight quarter of falling comparable store sales.
This is a result of a large decline (10%) in overall transactions. This was partially made up for with an increase in average ticket price, meaning the average dollar amount someone spends when they come into the store, but it’s a decline nonetheless.
If we looked to the stacked bar chart below, we can see that revenue from practically every segment of the business is struggling.
China comparable stores declined by 14%. However, the key difference here is that there was not only a decline in average traffic but also a decline in average ticket price.
As I’ve mentioned numerous times before, Chinese consumers are generally on the more conservative side when it comes to spending, and considering their economy is weaker overall than the United States, these are currently two large headwinds the company is facing.
In my opinion, investors would be better off ignoring short-term results and instead focusing on the large-scale turnaround plans the company has with new CEO Brian Niccol in place. No matter how you look at the results, they’re going to be rough from an operational standpoint.
But it’s also important to understand that a turnaround of the company with the new CEO in place is not going to be something that happens in a quarter, or even a year.
I believe that many investors feel the same way I do, as the soft results, which were well below analyst expectations, have only caused the stock to dip by mid-single-digits. There is a level of confidence in a turnaround that supports high valuations despite weak results at the moment.
To instill some confidence in the company’s ability to turn operations around, it increased its quarterly dividend from $0.57 to $0.61, or 7%.
The company’s free cash flow payout ratio only sits at 65%~, so there is certainly room for this growth. If they don’t turn things around in the next year or so, we’ll likely see them defer dividend growth in an attempt to improve operations even further.
Overall, it was a soft but expected quarter.
Canadian Pacific Kansas City (TSE:CP)
CPKC reported yet another strong quarter against a pretty tough economic backdrop. Revenue and earnings per share of $3.54B and $0.99 aligned with analyst expectations.
The story is similar across both railways here in Canada. Operational costs are rising, and although demand has somewhat stabilized, it is still relatively weak. There is nothing CPKC can do about this, as it is just a company that is highly susceptible to fluctuations in economic activity.
However, when we look to year-over-year numbers, we’re starting to see the benefits of the Kansas City Southern acquisition hit results.
Revenue is up 6% year-over-year, earnings are up 8%, and its operating ratio sits at 62.9%. Top and bottom line numbers remain over and above CN Rail, largely due to the acquisition. Although operating ratios increased by 120 basis points (1.2%) on the quarter, they’re mostly in line with CN Rail as well.
The operating ratio is an important indicator in the railroad industry. In a nutshell, this ratio calculates the amount of money the railway has to spend relative to the revenue it generates. For CPKC, an operating ratio of 62.9% indicates it has to spend $62.90 to generate $100 in revenue. Ultimately, the lower the operating ratio, the better.
Work stoppages were a short-term headwind for the company on the quarter, impacting quite a few segments like intermodal and coal shipping. It is highly unlikely the market will factor in any sort of downside in terms of price from the labour headwinds, as they’re resolved.
However, intermodal revenue is heavily reliant on a strong economy, and as you can tell by the chart below, this is the company’s third straight quarter of declines in this area.
Lumber demand remains relatively soft, which is to be expected during times of economic weakness, as housing starts generally go down. However, the demand for automotive and petroleum shipping remains well ahead of that of its major competitor, CN Rail.
In terms of outlook, the company expects to close the year out with double-digit earnings growth and high single-digit revenue growth. When you look at CN Rail’s earnings, you’ll likely notice that CN’s revenue is flat, and earnings are growing in the low single-digits, primarily fueled by buyback activity.
It is important to note that CN Rail doesn’t have the tailwinds of the Kansas City Southern acquisition. As such, we can’t expect the company to grow at the same rate.
