Of note, this e-mail today will replace our Sunday e-mail this week. So, do not expect an e-mail Sunday.
We’re happy to announce two additions to the Bull List this week, one to the Dividend Bull List and another to the Growth Bull List.
Our addition to the Growth Bull List marks our first-ever US addition to a Bull List.
We had spoken about potentially adding US items to the Bull Lists, and we have finally pulled the trigger on one.
First, let’s get to the Dividend Bull List addition.
We’ve added Exchange Income Corporation (TSE:EIF) to the Dividend Bull List
Exchange Income Corporation was previously added to the Bull List during the pandemic. However, we removed the company when valuations had exceeded levels we were comfortable with.
In hindsight, we were much better off “letting winners win,” as we speak about here. However, the company has executed so well over the last year that we feel valuations are now on a level we would consider attractive yet again.
Exchange Income Corp is a unique blend of income and growth for investors looking for the best of both worlds. Don’t make the mistake many do and cast this company aside because it is in the airline industry.
First, it has many other operations outside the airline sector that diversify its revenue base. Secondly, this is not a traditional airline like Air Canada. Although it does provide charter and passenger flights to the more remote regions in Canada, for the most part, it deals with things like medivac services, pilot training, surveillance, and aircraft parts. Outside the aerospace segment, its manufacturing segment contains operations like bridge and mat construction to allow customers to operate machinery in difficult-to-access or environmentally sensitive areas.
In addition to this, the company also runs multiple subsidiaries that take care of high-rise window installation and maintenance. Finally, the precision manufacturing segment deals with constructing and maintaining wireless and wireline infrastructure, stainless tanks and vessels, and much more.
The company pays a high-yielding, well-covered dividend. This company scores relatively weak inside our dividend screener because the standardized payout ratios are not the right way to evaluate this dividend. We dive deeper into that in the dividend section of our report.
The company recently made the prudent move to enter fixed-rate agreements on most (66%) of its debt. With the Bank of Canada going back on its rate pause, this move has proven to be wise. The company states that the move will reduce interest on its $540M in fixed-rate debt by up to 1.5%. This works out to be around $8.1M annually.
You can read our full report on Exchange Income Corporation here
We’ve added Paypal (PYPL) to the Growth Bull List
The fintech industry has taken an absolute beating over the past year. From the new kids on the block to well-established behemoths, outside of credit card companies, no fintech pure-play has been spared. This includes Paypal, one of the largest payment processors in the world.
While the company did benefit from a slight rebound before the most recent downtrend, Paypal’s stock had an 80% drawdown from its all-time high of $310.16. This year, the company’s stock is down 10.85%, largely a result of disappointing Q2 guidance, which spurred the recent downtrend.
In our opinion, since sentiment is bearish, it provides an opportunity for those with a long-term view. Paypal is one of the few fintech pure-plays that has achieved consistent profitability and has averaged double-digit, top-line growth.
While revenue growth is expected to slow to the high single-digits, this company should still deliver double-digit earnings growth. Considering the company has an impeccable record against estimates, we believe that it is highly likely Paypal will meet these growth targets.
Today, Paypal is trading at only 2.6X sales, 3.5x book value, 14.4x free cash flow, and has an EV/EBITDA of 13.08, all of which are at significant discounts to historical averages. Now, we understand that valuations in the industry have come down, but Paypal is also trading at a discount to industry averages pretty much across the board.
Finally, between 2019 and 2021, Paypal deployed significant cash toward acquisitions. It hasn’t made a big M&A splash since 2021 and exited the quarter with $15.3B in cash and cash equivalents. Considering the company generates more than $1B in FCF quarterly, we wouldn’t be surprised to see Paypal make an opportunistic move.
Overall, we think the company is too beat up at these levels and provides a pretty unique value play at this point.
