It was an interesting week on the markets. We witnessed the TSX outperform the US major indexes for the first time in quite some time.
Inflation came in a little hotter than expected and as a result the market got a little spooked. There is almost zero doubt there is rate cuts priced into the market at this time, and CPI prints above expectations only add doubts as to whether or not rates will come down this summer and throughout 2024/2025.
As always though, we don’t invest based on monetary policy. Absolutely no one knows which direction rates will head in and how fast. We simply buy strong companies and hold them for the long-term.
In this weeks newsletter, we’ll continue to go over the earnings of featured companies here. It was an outstanding week, as we had multiple companies hit all-time highs post earnings.
Keep in mind, we don’t include all of the report updates in the emails, as it would simply be information overload. If you’d like to view the entire list of updates, just head to your dashboard to see what we’ve updated.
My moves this week
There was no major transactions in my portfolio this week. I made my routine additions to Park Lawn Corporation (TSE:PLC) and Alphabet (TSE:GOOG) as I do feel they’re discounted at todays prices. I’ve been added aggressively to both holdings over the last few months and will continue to do so.
In addition to this I added to my Brookfield Corporation (TSE:BN) and Boyd Group Services (TSE:BYD) positions with dividends received inside my TFSA.
For those who are curious, I do not DRIP my dividends. Instead I collect them and deploy them where I see fit. This is not a strategy that everyone will want to deploy, but I do like the added flexibility of being able to direct the money where I believe there is value.
Remember, you can view my entire portfolio and transaction notes here.
Earnings
Waste Connections (TSE:WCN)
Waste Connections put up a solid fourth quarter to close out Fiscal 2023. Earnings per share of $1.11 beat estimates by 2 cents, and revenue of $2.04B was in line with expectations. The company continues to climb and continually make new all-time-highs. On a full-year basis, the company grew revenue by 11.2%, adjusted EBITDA by 13.6%, and adjusted EBITDA margins by 0.7%. The company generated over $1.2B in adjusted free cash flow and completed acquisitions that should add $215M in annualized revenue. The company also released its 2024 forecast:
- Revenue is estimated at approximately $8.750 billion
- Net income is estimated at approximately $1.096 billion
- Capital expenditures are estimated at $1.150 billion
- Adjusted free cash flow is estimated at $1.200 billion
The company’s free cash flow growth looks to be stagnant over the next year; however, the company does have a couple of one-time cost outlays impacting cash flows to the tune of $225M. If we adjust these costs out, cash flows come in at around $1.425B, signaling strong growth. Although many would say adjusting cash costs out is a bit misleading, considering the costs, which are closure costs for a landfill and renewable natural gas investments which are likely to prove profitable for the company in the future, we think it’s fair to look at cash flows excluding them to get a better picture of underlying growth.
Although there is a decline in volume regarding its solid waste, it’s been able to increase core pricing to offset this. Pricing increased by 9.5% while surcharges, volume and recycling all declined.
When factoring this all in, solid waste growth came in at 5.7%, showing the importance of an economic moat, which has allowed Waste Connections to offset volume declines with higher prices. Solid waste collection, disposal, and recycling are the vast majority of this company’s business, so it’s an important number to keep an eye on. Overall, 2024 looks like it will be another solid year for Waste Connections.
Intact Financial (TSE:IFC)
Intact Financial had a solid quarter to close out Fiscal 2023. Earnings per share of $2.78 were in line with expectations. Net operating income per share of $4.22 topped estimates by nearly $1 a share.
Again, earnings per share (EPS) can contain all earnings generated by the company, while net operating income per share (NOIPS) strictly looks at the insurance side of the business to give you a better idea of the company’s core business operations.
In terms of growth on the quarter, the company increased premiums written by 4%, with both Canada and the United States growing in the high-single digits while its UK segment decreased by 9%.
This was mostly because of the company’s exit from the UK Personal Lines and was expected. On the year, the company reported 14% premium growth in the US, 6% premium growth in Canada, and a 3% decline in the UK.
The company’s combined ratio, an important metric of their underwriting skills and the health of their insurance segment, came in at 90.1%, a 3.1% decline from the fourth quarter of 2022. Remember, with the combined ratio, lower is better. As soon as an insurer has a combined ratio of over 100%, it means they’re paying out more than they’re bringing in in premiums.
On the year, the company’s combined ratio increased to 94.2% from 91.8%, primarily because of the struggles of the UK business. We expect this to normalize over the course of Fiscal 2024, and the company will get back on track.
The company’s debt-to-total capital ratio, which is a measure of financial leverage for an insurer, came in at 22.4%. This is steady from Q4 of last year and higher than historical averages due to the acquisition of Direct Line’s Commercial Lines operations in the UK. Over the medium term, it plans to get this number back down to 20%.
To explain debt-to-total capital as easily as possible, let’s say you need $10,000 to start a business. If you have $8000 in cash and you have to finance $2000, you’d have a debt-to-total capital of 20%. If you had $2000 in cash and $8000 in debt, you’d have a debt to total capital of 80%.
From a risk perspective, the 80% debt-to-total capital is much riskier because you are financing more of your operations and have less equity in the business. For insurers, this ratio is an important one to keep track of. Intact has one of the strongest in the sector.
Overall, it was a strong year for the insurer, dragged down by some issues in the United Kingdom that should resolve themselves over the next year.
You can view our full updated report on Intact here
Goeasy Ltd (TSE:GSY)
It was another strong quarter for Goeasy, which ended Fiscal 2023 on a high note. Adjusted EPS of $4.01 (+32%) beat by $0.10, and revenue of $338M was in line with estimates. It is worth noting that the company continues to put up quarterly record growth despite the environment being pretty difficult.
On the year, EPS has grown by 23% – far above analyst estimates for single-digit growth as they underestimated the company’s earnings potential.
Despite fears of an economic slowdown, the company is witnessing strong loan originations. During the quarter, loan originations came to $702M, a 12% increase over the $632M it generated in Q4 of 2022. This led loan growth of $220M, topping goeasy’s estimates for $175-200M. As of the end of the quarter, it had a loan portfolio of $3.65B, up 30% year-over-year (YoY).
Net charge-offs – a metric that will be heavily scrutinized moving forward as it is a highlight of loans it expects to go unpaid – came in at 8.8%, flat QoQ and in line with Fiscal 2023 guidance of 8.5-10.5%.
Throwing a bit of caution to the wind, the company’s weighted average cost of borrowing rose to 6.4%, up from 5.5% as of the end of Fiscal 2023. Although this bears watching, it seems to have no real impact on the company’s ability to deliver and meet targets.
Speaking of which, management made several changes to Fiscal 2024 and 2025 targets and also released an outlook for Fiscal 2026. These will be available in the full report on the website.
On the year, the company added 40.3K new customers, up 15% year over year. It received a record quarter in terms of applications (531K), up 29% from the end of Fiscal 2022. There is no question that goeasy’s business fills a gap left void by the strict lending requirements of traditional financial institutions.
The company is also making strides in becoming an industry-leading non-prime, non-bank auto lender in Canada. In Q4, it saw record loan originations of $100M, up 48% YoY and increased its dealer network by 200 from 3,100 to 3,300.
All in all, it was another great year for the company, and despite the recent run-up in price, we feel it still provides value at these levels.
You can view our full report on Goeasy Ltd here
Opentext (TSE:OTEX)
OpenText posted a strong Q2 of fiscal year 2024 that beat on the top and bottom lines. The company reported earnings per share (EPS) of $1.24, surpassing estimates of $1.19.
This represents a significant increase of 31.2% compared to the same quarter of the previous year. Open Text also posted $1.535 billion in revenue, exceeding estimates for $1.492B.
This revenue figure marks a 71% increase year-over-year, however the bulk of this growth is coming from the Micro Focus acquisition.
This impressive growth was also underpinned by a substantial increase in cloud revenues, which rose to $450 million, reflecting 10% year-over-year (YoY) growth. Annual recurring revenues were particularly strong, reaching $1.146 billion, a 58% increase from the previous year and accounting for 73% of total revenues.
The integration of Micro Focus significantly contributed to the company’s performance, with OpenText reporting $566 million in adjusted EBITDA.
The ongoing successful integration of Micro Focus will lead to a return to organic growth and align with OpenText’s adjusted EBITDA margins of 36% to 38% within the fiscal year. Speaking of organic growth, it surprised to the upside as it came in at 1.2%, a noticeable improvement from Q1’s drop of 0.6%.
Cloud Bookings remained strong, up 63% YoY to $236M (a quarterly record) vs previous guidance for +20% quarterly growth. As a result, OpenText effectively doubled its Fiscal Year 2024 Cloud Booking guidance. It now expects 25-30% growth vs the >15% previously announced.
OpenText also reiterated long-term guidance for 2-4% organic growth and 7-9% organic cloud growth. The company’s current overperformance in cloud bookings aren’t likely to have a notable impact in 2024, but will position the company well to achieve long-term guidance.
The balance sheet remains robust, with a strong liquidity position of approximately $1B in cash, up from $920M last quarter.
We’ve also added in the company’s Fiscal 2024 guidance in our full report on OpenText, which you can find here.
