We certainly would blame you if you decided not to log into your brokerage account over the last ten days or so.
We’re witnessing some of the most significant volatility on the markets since the early days of the COVID-19 pandemic. As we’ve mentioned in numerous newsletters over the last few weeks, we don’t expect it to settle at any point soon.
The Japanese Yen carry-trade risks still exist, and many are starting to worry that the Federal Reserve may have taken a bit too long to cut rates as the economy weakens.
As always, these headlines should just be unnecessary noise to the long-term investor. We should welcome volatility to the downside, as it will allow us to accumulate shares of high-quality companies for cheaper.
In this week’s newsletter, we’ll go over some earnings summaries on stocks featured here, as we’re right in the thick of earnings season. But first, my portfolio moves on the week.
My portfolio moves
I made a few moves on the week, mostly with weekly portfolio contributions and some leftover dividends I had sitting in cash.
First, I added to my Boyd Group Services (TSE:BYD) position. The current Value Call here at Stocktrades, I still feel the market is weighing Boyd down in price because of some temporary headwinds the company really has no control over, that being the decline in used automobile prices impacting repair demand and a softer consumer opting to put off non-insurance repairs that are not necessary.
If you want to hear my commentary on why I believe Boyd will be a strong market performer moving forward, feel free to click the link below to go back to our comprehensive writeup when we named it our Value Call back in June.
Click here to read our writeup on Boyd
As for this quarter’s earnings from Boyd, I’ll speak more on that below.
My second addition was Berkshire Hathaway. My addition to Berkshire was mostly on the back of what I felt were extremely strong earnings. I won’t speak much about that here; I’ll cover it in the earnings sections below.
Earnings
Boyd Group Services (TSE:BYD)
Boyd reported another weak quarter in Q2. However, this quarter was much expected as the company was guiding towards relatively soft earnings, and the stock price jumped by about 7% on earnings day as results were not as bad as anticipated.
From an estimate standpoint, revenue of $779.2M USD topped expectations and earnings per share of $0.56 USD missed estimates by 5 cents.
Same-store sales declined by 3.2% as the company witnessed repairable appraisals fall by more than 7%. As we’ve mentioned previously, the decline in used automobile prices is causing more and more insurers to decide to write off vehicles rather than opt for repairs. As a result, this is impacting the overall demand for Boyd’s services.
Outside of this, the company cites a change in consumer activity due to lowered demand, primarily consumers driving less to save money where possible, and putting off non-essential repairs to vehicles.
As we’ve stated numerous times before, we view both of these situations as temporary. Boyd should be able to adjust to the different levels of demand. On the consumer side of things, this change in driving activity should be temporary. When rates come down, the consumer should lighten up regarding savings.
Despite margins remaining below historical averages, on a sequential basis (compared to last quarter), Boyd reported a notable increase in overall gross margin, now sitting at 45.6% compared to 41.9% last quarter.
Because of the lower overall demand, Adjusted EBITDA fell to $89.6M on the quarter, down around $6M compared to one year ago today.
The company added 13 new locations on the quarter, 10 via acquisition and 3 being start-ups.
Overall, the company is looking like it is weathering the storm well, and in my opinion, adding on weakness in Boyd’s price at this time should prove fruitful for those who are willing to be patient and wait the temporary headwinds out.
You can view our full report on Boyd Group Services here
Berkshire Hathaway (BRK.B)
Berkshire reported a strong second quarter. Revenue of $93.65B topped expectations of $88.5B, and earnings per share of $5.38 was ahead of estimates for $4.76.
The most notable news on the quarter was the fact that the company trimmed its position in Apple by 55%. Apple has routinely made up 40%+ of Berkshire’s overall portfolio.
The company cut around 110M shares off its Apple position in the first quarter, stating it was for “tax reasons.” However, in the second quarter, the company cut an additional 390M shares of Apple out of its portfolio, signalling that the move out of Apple is much more than simply a tax-related situation.
There are multiple reasons the trimming of its Apple position could make sense for Berkshire. For one, they may feel the markets are starting to get frothy from a valuation standpoint. Secondly, the company may feel like Apple is starting to make up too large of an allocation to the portfolio and presents a level of concentration risk, especially at higher valuations. And finally, as an insurance company, it does need to keep quite a bit of cash on hand.
Overall, it is important we don’t panic based on this news. Many headlines are painting doom and gloom about the markets due to Buffett’s cash balance (over $270B at this point in time) and his decision to trim Apple extensively. However, relative to the company’s overall assets, their cash balance is not all that much higher than historical averages.
When we look to operating results, Berkshire is continuing to post outstanding results. Operating income came in at $22.8B, a 22% increase from the year prior, and as has been the case for many quarters now, insurance is driving the bulk of the growth. Insurance underwriting income has nearly doubled year over year, and it continues to earn strong returns on its insurance investments, growing by more than 40%.
Its railroad and utility divisions continue to struggle; however, this is to be expected in this current environment. We can see many Canadian railways and utility companies struggling, and they should rebound if rates continue to fall and the economy returns to growth.
The company continues to deploy capital towards share buybacks, spending $345M on the quarter. This brings the company’s total buybacks on the year to $2.9B.
Overall, Berkshire continues to deliver strong results. If the company can get its smaller utility and railroad divisions back on track and continue to deliver exceptional results on the insurance end of the business, it should be a continued tailwind for the foreseeable future.
Intact Financial (TSE:IFC)
Intact posted a mixed second quarter, with revenue of $5.3B missing expectations of $5.5B, but net operating income per share of $4.86 topped expectations of $3.47 per share in a big way.
The company continues to prove time and time again why it is one of the best insurance companies in North America.
Premiums written grew by 6% year-over-year, and the bulk of it was organic due to strong growth in most of its personal insurance line segments. Return on equity came in at 13.7%, and the company managed to increase its book value per share by 15% on a year-over-year basis.
There are two important areas of Intact we have highlighted for members here for quite some time: the combined ratio and the debt-to-total-capital ratio.
Both of these ratios continue to improve, and it looks like the struggles from their UK operations are now somewhat stabilizing. The company’s combined ratio on the quarter came in at 87.1%, down more than 9% on a year-over-year basis. When we look to the first 6 months of the year, it sits at just over 89%, a 5% improvement from the first 6 months of 2023.
Remember, the lower the combined ratio, the better. This is because it represents the relationship of premiums collected versus insurance claims paid out. A company with a combined ratio of 110% is paying out $1.10 in insurance claims for every $1 it collects. On the other hand, a company with a combined ratio of 89% is paying out only 89 cents in claims per $1 in premiums.
Its UK business had been a drag on the company’s combined ratio for the better part of a year, but that seems to be going away now.
On the debt-to-total-capital front, it sat at 19.8%, a 2.5% improvement from one year ago today. This is a metric that highlights how much of Intact’s business is funded through debt versus available capital.
Because of an acquisition last year, the company’s debt-to-total-capital ratio crept up above what the company would view as optimal, that being in the 20% range. Because of strong operations over the course of the last year, it is now back down to reasonable levels and should continue to decline.
Overall, every segment of the business is reporting an increase in premiums written not only on a year-over-year basis but also when we look to the first 6 months of the year and compare them to last. In addition to this, every segment of the business reported a reduction in combined ratios, highlighting the company’s underwriting skills.
This quarter is further confirmation that Intact Financial is, in my opinion, the best P&C insurer in North America, and with a 17%~ market share, it has plenty of room to grow.
You can view our full report on Intact Financial here
Alaris Equity Partners (TSE:AD.UN)
Alaris reported a mixed second quarter of 2024. The company’s revenue of $42.1M, although ahead of guidance for $39.5M, fell short of analyst expectations and earnings per share of $0.69 topped expectations by a penny.
Because so few analysts cover this company, it is unlikely to trade based on earnings beats/misses. Instead, it will mostly trade based on the company’s overall growth and the health of its partners, which I will get to in a bit.
Earnings per share are up 13% on the year, and revenue has grown by double digits as well. Book value now sits at over $22 a share, which is a 4.2% increase from the second quarter of 2023.
In my opinion, the company’s discounted valuation from a price-to-book basis is created mainly out of fear of economic weakness impacting its partners. Although a company like Alaris is unlikely to trade at book value or at a premium to book, I believe the large discount is an opportunity over the long term.
The company’s run-rate payout ratio now comes in at 68%, which aligns with its guidance of anywhere from 65-70%. The company stated that the health of its partners and a few of them getting back on track in terms of distribution payments will help them keep that payout ratio within guidance for the remainder of 2024.
The company does have two partners that have dipped below a 1X Earnings Coverage Ratio, which means the company does not have enough earnings at this point to make full distribution payments to Alaris. These two companies are SCR Mining, a long-term partner since 2013, and Heritage, a masonry company based in the United States.
Heritage is currently undergoing a new CEO integration along with some delays in legacy projects that are impacting cash flows, so it has opted to defer distributions to Alaris until the latter half of the year.
We’ll be keeping an eye on the status of these two companies as the year progresses. At this point in time, there is no reason to be too concerned, as we do expect both to rebound by the end of the year.
Even if they don’t, the fact they are relatively small partners in terms of overall revenue generation for Alaris will allow them more time while still preserving Alaris’s distributions to shareholders.
You can view our full report on Alaris here
