Billy 5i Research Coverage at 5i Research
Member since: Aug '20 · 2202 Opinions
BYD trades at a premium valuation of 37X forward earnings, and so there is room for multiple contraction, which can help explain some of the volatility recently. We consider BYD one of the higher quality names in the TSX, and it does have some near-term headwinds, but largely we do not feel the story has changed.
Over the past 10 years its total return CAGR has been 20%, over the past five years, 9.7%, and the past three years 5.4%. Its recent momentum is not great, and we could see lower prices in the near-term, but for a long-term hold we would be quite comfortable holding this name.
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LW reported misses on both top and bottom lines, revenue came at $1.61B compared to the consensus estimate of $1.71B, While EPS came at $0.78 missing the expectation of $1.26. Management also gave out weak guidance for FY2025 growth in the range of 3%-5%. The recent weakness management mentioned is largely due to restaurants raising menu prices, which can negatively affect consumer demand.
LW operates in a stable industry, but the recent earnings and guidance have been concerning, momentum in LW has also been poor, and it could take quite some time before LW starts to recover. We would not be in a rush here to add but wait until there is a clear sign of a recovery in place and better stock momentum
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The Impact of Commissions:
Another aspect related to trading stocks that we wanted to touch on was the impact that commissions have. A typical discount brokerage charges a commission of around $10 per trade. There are an increasing number of exceptions here with discount brokerages having cheaper rates and even offering low/no fee trading and free trading of ETFs. For simplicity reasons, we will use the $10 assumption to do a quick analysis to see how this impact returns:
Total revenue rose 13.5% year-over-year to $84.74B beating analyst estimates of $84.29B. EPS also beat expectations of $1.85 coming in at $1.89. Search revenue and cloud revenue beat estimates, however Youtube ad revenue missed estimates for the quarter ($8.66B reported vs. $8.93B expected). Additionally, capital spending rose to $13.2B primarily supporting AI programs which exceeded analysts’ estimates of $12.2B. The market did not like the Youtube ad miss and the continued spending in AI with not much profitability to show for it yet. The quarter displayed solid growth from GOOG as a whole, but ROI on AI has been a painpoint for investors over recent weeks.
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CNR is now trading at 19X Forward P/E. In the 2Q, CNR’s revenue grew 7% to $4.33B, slightly missing the estimates of $4.38B and EPS of $1.84 missed estimates of $1.93. The operating results slightly missed expectations. The balance sheet has an OK net debt/EBITDA of 2.5x. The company continues to repurchase shares aggressively and pay healthy dividends. Overall, results missed expectations but management is still expected to compound diluted EPS in the range of 10%-15% over the 2024-2026 period along with a healthy ROIC. We think CNR’s long-term fundamentals remain intact.
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VRT reported Q2 EPS of 67c beating expectations of 57c. Net sales came in at $1.95B increasing 12.7% from the prior year and just beat estimates of $1.94B. Guidance was also upped and within range of analyst estimates. Tough comparables from a strong prior year play a factor into the stock's decline, but these look like good results to us and the drop in price may be driven by broader weakness in tech today. The stock is still expensive at 34x forward earnings but we think adding some here is OK as the earnings look solid, while acknowledging that a rotation out of AI names could continue in the short to intermediate-term, but we do not think the long-term demand side of spend for AI is over.
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Company Highlight: CAE Inc (CAE):
CAE is a technology company which digitalizes the physical world by deploying simulation training and critical operations support solutions. It is managed through three segments: Civil Aviation, which provides comprehensive training solutions for flight and other personnel; Defense and Security, which provides global training to ensure mission readiness; Healthcare, which provides virtual education and training solutions.
For the third quarter of fiscal 2024 Revenue of $1094.5 million was up 12.8%; Operating income at $121.6 million was down 14% and net income at $56.5 million ($0.18 per share)was down 28% ($0.24). Adjusted order intake at $1273.9 million was up 7% leading to adjusted backlog of $11,746.3 million, up 9%. Civil service segment margins were a bit light with product mix being a factor; defense revenue margins were low in part due to legacy contracts. Management remains confident in the future.
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We would agree GMIN is interesting. It is fully funded to production, which it expects in the next 6 months. Ore is starting to be processed. Assets look good as does the management team. Brazil is a solid safe jurisdiction, and Guyana (where Oko West is) is OK. With the gains this year market cap is now over $1B, and this can attract new interest. For a soon-to-be midcap producer, it looks good.
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The stock has really jumped over the last month and the most recent news we see is relating to CKI renewing its NCIB (share buyback plan). CKI plans to buyback 5% of outstanding shares over the next year. Results vary significantly period-to-period making it harder to anlyze and give a clear answer if we are seeing a long-term trend of fundementals improving. The balance sheet has quite a bit of debt at $137.8M in net debt. On a trailing earnings basis, CKI is very expensive at 44.2x. While the recent performance has been strong, we do not like the lumpiness in results and the size risk at $327M in market cap. We think investors could look elsewhere for a small cap TFSA investment. It is essentially a holding company and two shareholders own 88% of the company. With no dividend, we would prefer to see secular growth and better liquidity.
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CRWD has about 12% of the global market for end point security. Certainly the news is not good, but it is important to realize that this was not a security breach, but rather the company itself adding a software patch to existing customers. Of course, the outcome, i.e. a software shutdown, is largely the same and still a big expense and inconvenience for customers. There will be charges to fix this, and it could be a very manually-intensive fix. Lawsuits are possible. Competitors will use this as a way to try to win contracts from customers using CRWD. But, the stock will drop on the opening, but it will not be a fatal blow. Certainly it will damage reputation, but a security breach would have been worse, in our view. It will get a lot of media attention, but we think ultimately the company recovers over time. Its premium valuation multiple may diminish in the short term. If the problem can be fixed quicky, less damage will be done. It is probably going to create a buying opportunity in the stock, eventually, but as of now there is still too much uncertainty.
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Market Update:
Canada’s inflation cooled down faster than expected in June to 2.7 percent compared to the consensus estimate of 2.8 percent, increasing the odds of another rate cut. On the other hand, the European Central Bank left interest rates unchanged at 3.75 percent after June’s cut, indicating that borrowing costs will remain restrictive for some time to ensure inflation returns to 2 percent. The Canadian dollar was 73.01 cents USD. The U.S. S&P500 ended the week down 0.5%, while the TSX was up 1.0%.
All but one sector rose this week. Real estate and financials added 3.2% and 1.8%, respectively, while consumer discretionary and industrials added 1.2%, each. Consumer staples rose 1.1%. Energy and technology ended the week slightly up 0.2% while materials gave up 0.2%. The most heavily traded shares by volume were Royal Bank of Canada, Bitfarms, and Air Canada.
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While the chart looks like it may have bottomed, however, RHI is heavily sensitive to the macroeconomy and labour market. If unemployment in the US and Canada continues to worsen, there will be less demand from the firm. Analyst estimates predict that things will improve nicely in 2025 onwards while 2024 will continue to see drawdowns in 2024. We are skeptical on the strength of the labour market in North America and can see continued choppiness in price of over the next few quarters.
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We would still be comfortable buying it for the long term. As a premium company, the stock rarely, if ever, gets 'cheap' on valuation. We just wanted to note that it is more expensive than most stocks, but deservedly so.
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The stock is cheap, and acting better. The sector (in the US, mostly) has been seeing some good numbers recently. It hit a 52-week high this week. We think it can be held, and >$10 is possible, even $12 under good conditions. $16 we think would be a stretch.
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