It’s time for our December Value Calls!
A newer feature to Premium, we highlight the opportunities we feel present strong opportunities on the Bull Lists. These lists are sent out on the first week of the month, every month, and include 3 stocks.
Before we start though, we had a few companies report earnings this week. One being BRP Inc (more on that later) and the other being TD Bank.
Lets take a peek at TD’s earnings first
TD Bank posted strong second-quarter results in which it beat estimates on both the top and bottom lines. Revenue of $12.25B beat by $950M and earnings of $2.18 per share beat by $0.14. It was arguably the strongest quarter out of any of the major 6 banks.
When we look to the results on a year-over-year basis, both earnings and revenue were up by mid-single digits. In terms of segment growth, the company is putting up strong numbers. Its Canadian Personal and Commercial Banking saw net income and revenue growth of 11% and 16% respectively on strong volume growth. Similarly, US Retail was strong with a 16% increase in adjusted net income.
The company reported an adjusted return on equity of 16%, which was 10 basis points lower than the fourth quarter of Fiscal 2021. The CET 1 ratio came in at 16.2%, which was inline with last year.
Other points worth nothing was that Provisions for Credit Losses came in higher than expected, however this seems to be a direct result of stronger performance. More loans = higher PCLs.
On a forward looking basis, the company announced that it “expects to meet or exceed its medium-term adjusted EPS growth target range of 7-10% in fiscal 2023”. These are among the highest rates of the Big Six banks.
You can view our updated report of TD Bank Here
December Value Calls
BRP Inc (TSE:DOO)
With all the doom and gloom printed about a pending recession and reduced consumer spending, one would think a manufacturer of recreational vehicles would be most at risk of declining sales. However, BRP continues to defy expectations, delivering strong quarter after strong quarter.
This past week, BRP crushed expectations yet again. Earnings of $3.64 beat by $1.28 and revenue of $2.71B beat by $390M. It was a record quarter for BRP and the company also increased full-year guidance as per the table below:
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Assuming it hits guidance, which there is no reason to believe it won’t – the company is trading at only 8 times its Fiscal 2023 earnings.
If we were to take a relatively conservative approach from a discounted cash flow analysis basis and estimate that BRP Inc could grow at a 10% rate for the next 5 years, fair value is in the $145 range, leaving a wide margin of safety even at today’s prices.
So why did the company’s share price dip post-earnings? Well for starters, the large beat appears to be a timing issue as some Q4 units were pulled into Q3. It is largely expected that Q4 will be lighter than previously expected although in the end it is expected to be a net positive as BRP did raise guidance.
Secondly, it appears that the bears are focused on rising dealer inventory (which is up substantially). That said, this too appears to be more of a timing issue than anything. Management shrugged it off and while they are seeing some lower traffic at dealerships, it is thus far not seeing softening demand.
All in all, the strong quarter and positive comments regarding demand makes BRP at $105 per share quite attractive. Even if the company came in at the low range of expectations, it would still have a large double digit margin of safety.
You can view our report on BRP Inc here
Pfizer (PFE)
We’ve talked plenty about some of the tech stocks on our lists, but one stock that doesn’t get nearly enough attention is Pfizer (PFE). Pfizer is a global pharmaceutical behemoth with annual sales of ~$50 billion, with international sales accounting for almost 50% of revenue.
In 2022, Pfizer’s share price has lost ~11% of its value and today, is trading at a 40% discount to the company’s historical averages.
If one digs deeper, this undervaluation is further validated. Pfizer is trading at a double-digit discount on a price-to-earnings, price-to-sales, price-to-book, price-to-free cash flow, EV-to-EBITDA and EV-to-sales basis. That’s right, it is trading at hefty discounts across the board when compared against three and five-year historical averages.
While Pfizer has historically traded at a slight discount to industry averages, this discount is now magnified due to its recent performance. The company looks even cheaper on a forward basis with a forward P/E of only 7.87.
Given this, investors are likely asking themselves why? Well, the main issue facing Pfizer is that it is no longer benefiting from the spike in COVID-19 vaccine sales and the markets are pricing in a decrease in revenue and earnings tied to COVID-19 vaccinations. The company’s stock price was bid up quite a bit as it was one of the leading vaccine producers.
However, Pfizer was never a COVID-19 pureplay – remember, this is one of the largest pharmaceutical companies in the world. The company has a robust pipeline of drugs and expects around 18 new approvals in the next 18 months.
So while yes, revenue and earnings are expected to drop as revenues from COVID-19 normalize, it is well positioned to return to growth. We see today’s valuation as a good entry point for this global leader.
Worth noting, there aren’t many good health stocks on the TSX Index so it is almost necessary for Canadian investors to look beyond its borders in this sector. This is primarily why Pfizer is a Foundational Stock here at Premium.
Of note, there is no need to exchange your currency to buy Pfizer if you don’t want to. It also trades as a CDR on the Neo Exchange under the ticker “PFE”.
Telus International (TIXT)
Two main catalysts have Telus International stuck in a downtrend at this point in time.
For one, the acquisition of WillowTree. The company paid what was viewed as an expensive valuation in a time when debt is expensive and the market is going to scrutinize every move a company makes especially on the acquisition/debt front.
However, we view the acquisition as a strong one, and one that adds a ton of rock solid clients to Telus Internationals base. We are not worried at all about the long term integration of WillowTree and feel the acquisition will be one that adds shareholder value.
Secondly, the company reported mixed results in its most recent quarterly filing and scaled back revenue guidance. However, this was overblown on both fronts, as earnings are currently being impacted by wild fluctuations in currencies that will no doubt settle, and the company’s revision downwards from $2.55B in expected revenue to $2.49B is a very small revision (around 2.3%) in the grand scheme of things.
In fact, Telus (TSE:T) ended up purchasing more than 1.3 million shares in mid-November (around $35M worth) after the slide in price.
When we first added Telus International to the Bull List, we did so with the idea that fair value for this company was around $38 per share. This discounted cash flow analysis utilized 6% margins, a 7% required rate of return, and 15% annual growth from the company.
We still feel the 15% growth can be achieved, and at this time Telus International is trading at only 15.5 times its expected earnings and 20 times its trailing cash flows, both attractive multiples for its growth rates.
These also look to be growth rates that are not being priced into this stock right now by the market, which is exactly why its price to earnings to growth ratio (PEG) sits at 0.35. Anything under 1 is a strong sign a stock could be undervalued.
You can read our full report on Telus International here
