Updated Reports
We have a new and an updated report on its way in the next 48 hours, but with markets on the move, we wanted to get a jumpstart on the week with an update on the recent market selloff and a few noteworthy news items on coverage companies.
Company News
Pason Systems (PSI)
PSI reported earnings per share of $0.12 vs. $0.13 expected. Revenues were $68.4 million vs $67.6 million expected. North American drilling activity fell over the quarter which really weighed on results, however, this was partially offset by international activity. Adjusted EBITDA of $26.7 million missed consensus estimates of $28.4 million. Rental days of PSI hardware were down 29% year-over-year in Canada and 24% in the US. The company is still well-positioned for growth and maintains a strong market position with a healthy amount of cash on its balance sheet. While still in the early stages, the company is thinking ahead on alternative energy, building services around solar and energy storage.
Leon's Furniture (LNF)
The recent quarter looked solid at LNF and a consistent year overall. Revenue of $621 million was up 3.3% and same-store sales grew 2.4%. Adjusted EPS was up 10.6% to $0.52. The dividend was increased by 14.3% which we always like to see. Compared to estimates, LNF did well as analysts expected revenue of $618 million and EPS of $0.46. The company's ability to realize double-digit growth in earnings even with single-digit growth in sales demonstrates the company's resilience and financial strength, a good quality to have during economic uncertainty. After having grown gross margins for three consecutive years, LNF has certainly proved it can increase profits not only by growing sales and protecting market share but also through cost-cutting efficiencies. In the face of coronavirus concerns, we think the company is well-positioned to manage potential supply-chain disruptions with strong relationships and leverage with its suppliers.
Kinaxis (KXS)
KXS reported earnings per share of $0.29 compared to estimates of $0.22. Revenue was $56.3 million vs forecasts of $54.7 million and 2020 Guidance called for $210 million to $215 million in revenue, marginally ahead of estimates. Revenue rose 47% with SaaS backlog up 40%. Revenue guidance of 25% growth is probably conservative and we think the results are positive. With the current market and virus concerns, the market impact on KXS will not likely be as severe given it is a software company. Finally, the recent concerns over supply chains might actually highlight the utility of services like what KXS has to offer.
Market Update
Volatility has come roaring back over the last week with one of the quickest corrections (defined as a 10% decline) on record and the worst week since the financial crisis in US markets. The TSX has gone from a strong start to the year, being up around 12% over the last 12 months to now essentially being flat. Similarly, the S&P 500 has gone from a 20% 12-month return to being up just under 4%. It has been a harsh decline and may still have some downside left. The one thing we do have confidence in, however, is that the faster and deeper the correction is, the more likely we are to be on the other side.
Since 1980, there have only been about 9 drawdowns on the S&P 500 of 19% or greater. In other words, a drawdown in excess of 19% would be a low probability event in our view. Of course, this does not mean it cannot happen, we simply think it helps to frame the declines in the sense that the deeper they go, the more likely we are to be through the declines. As of February 19, 2020, the latest peak, the S&P 500 is already approaching a 14.5% drawdown as we write this.
The next important question, then, is that if this is a ‘low probability event’ where we see a decline greater than 19%, are we looking at something more like a 21% drawdown or 50% drawdown? Of course, no one can know this answer in advance but we can weigh the odds, while keeping in mind that this is a serious virus impacting many lives across the world. Given what we know with the rate of deaths from the virus and recoveries, it does appear as though the virus itself is something society will ‘get through’ and not an ‘apocalyptic’ event. Turning to economic impacts, while it could have the potential to push economies into a recession, we are coming out of an ok economy currently with solid company fundamentals. Meanwhile, banks and governments across the board seem to be indicating willingness to take steps to mitigate impacts where possible. These types of factors make us lean more toward a ‘mild recession’ type of scenario (if any) and not something like 2008 where the backbone of the economy potentially grinds to a halt. In the present scenario, certain areas will certainly be impacted more than others but it is tougher to see the ‘critical blow’ that brings the economy to its knees. So again, we would tend to lean to the side of any downturn being more on the ‘20% side’ vs. 50%. It is important to note though, that we are thinking more fundamentals here. If complete panic sets in for some reason or the virus ends up being far worse than expected, then things can still get worse.
Using this framework, if an investor agrees with it, we can then think about how to react in the current environment. If we believe we are closer to the end of the drawdown than the beginning, we think it makes sense to start looking hard for opportunities in the markets. In times like this, we tend to prefer to focus on the larger cap names with stability that should have little problem getting through an event like this (financial flexibility). We also might focus on those larger, more popular brand types of names that might have had just too high of a valuation to justify in the past and are now looking ‘interesting’ from a value point of view. In terms of how to implement a strategy like this, we think the best course of action is to average in over the next few weeks, or as news develops. No one will be able to time the bottom perfectly, which is why averaging in can make sense in times like this and is particularly helpful from a psychological standpoint if markets fall further from here. To summarize, at this stage we might focus on larger-cap, quality names that may have been just ‘out of reach’ for the last few years and as always, we would be thinking in terms of years, not months when considering any investments.
We know we can sound like a broken record at times on diversification, but a pullback like this is a great example as to why diversification (such as holding a bit of fixed income) can be so helpful. For one, it makes declines like this far more bearable but perhaps more importantly, assets like fixed income can be a source of cash when equities go down. This makes it far easier to take advantage of stocks when they go on ‘sale’.
At market close on Friday, February 28, 2020, there was a bit of a reversal and some indices even turned green by the end of the day. While we think this is a positive sign, investors should still be prepared for volatility and keep building their ‘wish-list’ of stocks to own on further weakness. To help members get started on building their wish list, here is a list of companies we think deserve a closer look, along with their return over the last month (as of Feb. 29, 2020):
Air Canada (AC), -22.7%
Lightspeed (LSPD), -22.7%
BRP Inc. (DOO), -18.5%
Maple Leaf Foods (MFI), -13.7%
Dollarama (DOL), -12.5%
Aritzia (ATZ), -11.6%
Gildan Activewear (GIL), -11.3%
Alimentation Couche-Tard (ATD.b), -7.8%
Canada goose (GOOS), -6.7%
Descartes Systems. Group (DSG), -6.1%
WSP Global (WSP), -5.9%
We have a new and an updated report on its way in the next 48 hours, but with markets on the move, we wanted to get a jumpstart on the week with an update on the recent market selloff and a few noteworthy news items on coverage companies.
Company News
Pason Systems (PSI)
PSI reported earnings per share of $0.12 vs. $0.13 expected. Revenues were $68.4 million vs $67.6 million expected. North American drilling activity fell over the quarter which really weighed on results, however, this was partially offset by international activity. Adjusted EBITDA of $26.7 million missed consensus estimates of $28.4 million. Rental days of PSI hardware were down 29% year-over-year in Canada and 24% in the US. The company is still well-positioned for growth and maintains a strong market position with a healthy amount of cash on its balance sheet. While still in the early stages, the company is thinking ahead on alternative energy, building services around solar and energy storage.
Leon's Furniture (LNF)
The recent quarter looked solid at LNF and a consistent year overall. Revenue of $621 million was up 3.3% and same-store sales grew 2.4%. Adjusted EPS was up 10.6% to $0.52. The dividend was increased by 14.3% which we always like to see. Compared to estimates, LNF did well as analysts expected revenue of $618 million and EPS of $0.46. The company's ability to realize double-digit growth in earnings even with single-digit growth in sales demonstrates the company's resilience and financial strength, a good quality to have during economic uncertainty. After having grown gross margins for three consecutive years, LNF has certainly proved it can increase profits not only by growing sales and protecting market share but also through cost-cutting efficiencies. In the face of coronavirus concerns, we think the company is well-positioned to manage potential supply-chain disruptions with strong relationships and leverage with its suppliers.
Kinaxis (KXS)
KXS reported earnings per share of $0.29 compared to estimates of $0.22. Revenue was $56.3 million vs forecasts of $54.7 million and 2020 Guidance called for $210 million to $215 million in revenue, marginally ahead of estimates. Revenue rose 47% with SaaS backlog up 40%. Revenue guidance of 25% growth is probably conservative and we think the results are positive. With the current market and virus concerns, the market impact on KXS will not likely be as severe given it is a software company. Finally, the recent concerns over supply chains might actually highlight the utility of services like what KXS has to offer.
Market Update
Volatility has come roaring back over the last week with one of the quickest corrections (defined as a 10% decline) on record and the worst week since the financial crisis in US markets. The TSX has gone from a strong start to the year, being up around 12% over the last 12 months to now essentially being flat. Similarly, the S&P 500 has gone from a 20% 12-month return to being up just under 4%. It has been a harsh decline and may still have some downside left. The one thing we do have confidence in, however, is that the faster and deeper the correction is, the more likely we are to be on the other side.
Since 1980, there have only been about 9 drawdowns on the S&P 500 of 19% or greater. In other words, a drawdown in excess of 19% would be a low probability event in our view. Of course, this does not mean it cannot happen, we simply think it helps to frame the declines in the sense that the deeper they go, the more likely we are to be through the declines. As of February 19, 2020, the latest peak, the S&P 500 is already approaching a 14.5% drawdown as we write this.
The next important question, then, is that if this is a ‘low probability event’ where we see a decline greater than 19%, are we looking at something more like a 21% drawdown or 50% drawdown? Of course, no one can know this answer in advance but we can weigh the odds, while keeping in mind that this is a serious virus impacting many lives across the world. Given what we know with the rate of deaths from the virus and recoveries, it does appear as though the virus itself is something society will ‘get through’ and not an ‘apocalyptic’ event. Turning to economic impacts, while it could have the potential to push economies into a recession, we are coming out of an ok economy currently with solid company fundamentals. Meanwhile, banks and governments across the board seem to be indicating willingness to take steps to mitigate impacts where possible. These types of factors make us lean more toward a ‘mild recession’ type of scenario (if any) and not something like 2008 where the backbone of the economy potentially grinds to a halt. In the present scenario, certain areas will certainly be impacted more than others but it is tougher to see the ‘critical blow’ that brings the economy to its knees. So again, we would tend to lean to the side of any downturn being more on the ‘20% side’ vs. 50%. It is important to note though, that we are thinking more fundamentals here. If complete panic sets in for some reason or the virus ends up being far worse than expected, then things can still get worse.
Using this framework, if an investor agrees with it, we can then think about how to react in the current environment. If we believe we are closer to the end of the drawdown than the beginning, we think it makes sense to start looking hard for opportunities in the markets. In times like this, we tend to prefer to focus on the larger cap names with stability that should have little problem getting through an event like this (financial flexibility). We also might focus on those larger, more popular brand types of names that might have had just too high of a valuation to justify in the past and are now looking ‘interesting’ from a value point of view. In terms of how to implement a strategy like this, we think the best course of action is to average in over the next few weeks, or as news develops. No one will be able to time the bottom perfectly, which is why averaging in can make sense in times like this and is particularly helpful from a psychological standpoint if markets fall further from here. To summarize, at this stage we might focus on larger-cap, quality names that may have been just ‘out of reach’ for the last few years and as always, we would be thinking in terms of years, not months when considering any investments.
We know we can sound like a broken record at times on diversification, but a pullback like this is a great example as to why diversification (such as holding a bit of fixed income) can be so helpful. For one, it makes declines like this far more bearable but perhaps more importantly, assets like fixed income can be a source of cash when equities go down. This makes it far easier to take advantage of stocks when they go on ‘sale’.
At market close on Friday, February 28, 2020, there was a bit of a reversal and some indices even turned green by the end of the day. While we think this is a positive sign, investors should still be prepared for volatility and keep building their ‘wish-list’ of stocks to own on further weakness. To help members get started on building their wish list, here is a list of companies we think deserve a closer look, along with their return over the last month (as of Feb. 29, 2020):
Air Canada (AC), -22.7%
Lightspeed (LSPD), -22.7%
BRP Inc. (DOO), -18.5%
Maple Leaf Foods (MFI), -13.7%
Dollarama (DOL), -12.5%
Aritzia (ATZ), -11.6%
Gildan Activewear (GIL), -11.3%
Alimentation Couche-Tard (ATD.b), -7.8%
Canada goose (GOOS), -6.7%
Descartes Systems. Group (DSG), -6.1%
WSP Global (WSP), -5.9%
Refer a Friend, Get Two Months of 5i Research FREE!
We wanted to remind members that you can get up to 2 years of 5i Research for free if you refer your friends. Each friend referral that subscribes to 5i Research gets you an extra two months automatically added to your subscription (up to two years). All you have to do is send them the link found here (or by clicking 'Refer a Friend' in the members section) and get them to sign up!
Best wishes for your investing!
www.5iresearch.ca
Comments
Login to post a comment.