We’re getting into earnings season now, which means one thing here at Stocktrades Premium. Weekly newsletters will be jam-packed with highlights, commentary, and some of the best opportunities in the Canadian market.
This is possibly the most interesting and critical time to be a Premium member, as we bring dozens of fresh reports to the table for you to read and utilize.
But before we dig into earnings, we want to make a quick status change from neutral back to bullish on one of our Bull List stocks.
We’ve moved Telus International (TSE:TIXT) back to bullish status
If you’ve been a Premium member for a while, you’ll know we frequently shift stocks on our lists from Bullish to Neutral status and vice versa.
Typically when this is done, a company has either hit our price target on a discounted cash flow basis (which was the case for Telus International) or the thesis hasn’t fully changed, but it has changed enough to warrant caution. An example would have been our move to Neutral on BRP Inc when its Russian operations were uncertain when the war started.
For Telus, we had maintained a $40~ fair value on the company, and when it hit that price point in early August, we decided to shift our stance. But now, the company has retraced back to the $34 range.
However, that’s not all. We also love the company’s recent acquisition, even though it may have paid a bit too much. Telus International recently acquired WillowTree for a total value of USD 1.225B. The company has multiple Fortune 500 companies as clients. Overall, it adds more than 50 brands to Telus International’s client base in things like mobile app development, web development, and design.
Telus International reports earnings on November 4th. So, we will have an updated report on the company at that time with much more on the acquisition.
US Foundational Stock Earnings
It was a rough week for big tech in the United States. The only company that did not undergo an onslaught post-earnings was Apple. However in our opinion, we’re at the point where bad news is somewhat good news regarding the stock market.
We must remember that rapidly increasing interest rates is an effort to slow the economy. The faster this happens, the faster policymakers can reduce rates once inflation has stabilized.
As long-term investors, downward trajectories in terms of earnings and outlooks due to an economic cycle like a recession simply allow us to scoop these companies up at cheaper prices. When this is all over, earnings will grow, and prices will rise in the next bull run.
Use this time to continue to add to strong companies. Remember, as stocks get cheaper, future returns from buying them get larger. Once you accept this concept, buying during bear markets becomes a no-brainer.
Alphabet (GOOG)
Google reported earnings that missed on virtually all fronts. Revenue came in 2% short of expectations, and earnings were around 15% lower than expected. This shouldn’t come as a surprise for many, however, and we’re not that concerned.
With rates increasing to tighten spending, advertising will inevitably slow down. Where Google witnessed this the most was actually in its Youtube segment. And this makes complete sense.
During a shutdown/work-from-home situation, video content will likely be utilized more. Now that we are back to a somewhat normal environment, it is difficult for the company to keep up with year-over-year growth in this department.
Its other segments are more than healthy, however, and still growing. Youtube ad revenues will come back, and we have no concerns with the company over the long term. We view it as one of the best opportunities out of the US big tech companies right now, trading at a 33% discount to its 5-year historical averages.
Amazon (AMZN)
Because of Amazon’s large-scale retail exposure, this company has undergone significant volatility around earnings.
The company reported earnings that exceeded expectations for both revenue and earnings. However, it was its forward-looking guidance that caused this one to tumble as much as 21% after hours.
An interesting fact? Amazon’s 21% fall in the after-hours caused its market cap to fall by more than $250 billion. This move was greater than the largest publicly traded company in Canada Royal Bank, which has a market cap of $174 billion. The after-hours fall was short-lived anyways, as the company settled on post-earnings losses of 6.8%.
As mentioned, forward-looking guidance is what caused this dip. It guided to $140-$148B in fourth-quarter revenue. Original estimates had been more than $155B.
Again, its exposure to retail will impact the company during a cycle where policymakers are trying to reduce spending to tame inflation. It’s short-sighted to be selling based on this, as it will no doubt be short-term.
That, and the fact that Amazon Web Services is growing at a 27% pace year-over-year, makes us believe that the selloff in Amazon is way overdone.
Canadian Foundational Stock Earnings
There was only a single Foundational stock on the Canadian end to report earnings this week, and that was Fortis.
Fortis (TSE:FTS)
Utilities have been under significant pressure, given higher rates. While it can be easy to panic in times like these, remember that Fortis is still one of the best regulated utilities in North America.
While it can’t raise rates as fast as inflation, regulated utilities have inflationary increases built into their contracts. While it is usually backwards looking, eventually, they’ll be able to offset some of these raises.
In the meantime, Fortis continues to execute as third-quarter earnings beat on both the top and bottom lines. Earnings of $0.71 beat by $0.03, and revenue of $2.55B beat by $160M.
The company also announced that it plans to raise the dividend by 4-6% through 2027. While this is slightly lower than the 6% annual raise from previous guidance, it is likely a result of higher rates/costs incurred by the utilities.
As fixed income like bonds and GICs become more attractive, people don’t have as much desire to buy a regulated utility like Fortis. This is because they offer virtually the same reliability as a bond. But again, this allows us to buy one of the most stable stocks in North America for cheaper. Not much to complain about here.
Bull List Earnings
TMX Group (X)
One of the most reliable stocks on the TSX Index is the stock itself. TMX Group continues to do its thing, quietly underperforming the Index with returns of ~6% YTD compared to the ~8% loss of the S&P/TSX Index.
In Q3, earnings of $1.68 beat by $0.02, while revenue of $269M missed expectations for $278M. Despite the miss, the company did grow revenue by 16% while earnings grew in the mid-single digits.
It’s important to note however, that the recent acquisition of BOX continues to bear fruit as it was solely responsible for the increase in revenue. Without it, revenue would have been flat year over year. Finally, the trend of lower transactions and higher dollar value continued this quarter.
Overall, despite significantly outperforming all major markets in 2022, we feel TMX Group is still trading at very attractive levels, and would have zero problems adding to the stock today.
You can read our full report of TMX Group here
TFI International (TFII)
While the markets didn’t like TFII’s quarterly earnings as it closed down 6% on the day of earnings, it wasn’t actually a bad report despite mixed results. Of note, all numbers are in USD.
Earnings of $2.01 beat by $0.03 and revenue of $2.24B missed by $20M. The miss was nothing to really be concerned about, especially when you consider the strong cash flow generation (+73% increase in free cash flow).
Speaking of which, strong cash flows is good news for dividend investors.
Remember last weeks piece when we spoke on low-yielding, high dividend growth stocks and how they’ve typically outperformed their higher-yielding counterparts by a wide margin?
TFI International is an example of why as it increased the dividend by a whopping 30% to $0.35 per share. We haven’t seen many big raises like this outside of the oil & gas industry which is also generating considerable cash flows.
The only major weak point was TForce Freight in which growth outlook slowed thanks to the US economic downturn. But again, we’re in a situation where bad news is good news in our opinion. It means rate hikes are working, and normalcy is at least in sight now.
You can read our updated report on TFII here
A&W Royalty (TSE:AW.UN)
A&W continued to put up strong growth in the third quarter. The company’s same store sales growth sits at 8.9% throughout 2022. The fact its restaurants no longer need to limit the amount of guests or even potentially shut down due to COVID-19 is causing results to normalize.
This same store sales growth is down from the 14.9% it grew in the third quarter of 2021, but it is important to understand that the company was realizing this large growth due to the fact many of its restaurants were reopening and sales were very weak in the prior quarters due to shutdowns and restrictions.
The company bumped the distribution to $0.16 a month. It has been able to do this due to strong growth in distributable cash flow per unit.
Right now, rising fixed income yields are causing downward pressure on A&W’s share price. The market views this income fund as a defensive option, one that is purchased primarily for its yield. So, when fixed income starts to approach the yields that A&W offers, the market may feel there is not enough premium to the risk they’re taking on when buying A&W versus a guaranteed income through a GIC.
Again, as long term investors, we’re not overly concerned with the short term fluctuations in price. In fact, we should be welcoming them. The income fund is now yielding above 5.5% and is trading at attractive levels.
