Billy 5i Research Coverage at 5i Research
Member since: Aug '20 · 2486 Opinions
A competitor reported softer results which took some of the wind out of the sails of the shares and in general, a lot of these more economically sensitive names have seen these larger drawdowns on no real news. Fear of higher rates is likely having an impact as investors become concerned on its impact on economic activity and homebuilding. At 14.4X forward earnings, we think URI looks fine here. We always like having 'more' information especially when earnings are so close so might wait for that even before adding but overall don't see much fundamentally that has changed here.
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Much of the weakness is likely due to concerns over a homebuilding slowdown, as rates have moved higher and the whole space has seen a bit of a drawdown. We see no real news here and while it is a bit of an extreme downdraft, investor boredom/sentiment could be playing a role as well. Longer-term, we wouldn't be too concerned here. It is a well run company and is growing organically as well as through acquisitions while trading at 14.7X forward earnings and 8% to 10% EPS growth expected for the next few years.
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What is the P/E Ratio?
The price-to-earnings ratio, or otherwise known as the “P/E” ratio, is a financial metric commonly used to measure how expensive a stock is compared to its earnings. The ratio can be rephrased as the amount that an investor is willing to pay for every $1 of earnings for a specific company. The ratio involves two components; the first is the ‘P’ portion, which is the current price per share of the stock, and the second is the ‘E’ portion, which is the Earnings Per Share (EPS) of the stock. For example: if Stock A has a current price per share of $30, and an EPS of $1, then the P/E ratio is 30X (calculated as: $30 Price / $1 EPS = 30X P/E). To maintain a stable P/E ratio over time, the price must appreciate at the exact same rate as the earnings per share. For instance, for the P/E to remain at 30X in the next year, if the share price increases by 10% from $30 to $33, then the EPS must also increase by 10% from $1 to $1.1 (calculated as $33 Price / $1.1 EPS = 30X P/E).
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Following its inventory issues of a couple of years ago, ATZ has staged an impressive turnaround, certainly. EPS of 71c beat estimates of 62c; sales of $728.7M beat estimates of $698M. EBITDA of $136M beat estimates by 15%. Aritzia could meet the high end of 4Q sales guidance of 31% growth (adjusting for the extra week) to C$850 million, driven by three upsized flagship reopenings -- two in New York and one in Chicago -- along with 11 new boutiques opened. It could also achieve a comparable sales increase in the high teens. The flagships are the equivalent of 10 regular stores. Ebitda margin, which expanded 450 bps year to date, is poised to grow another 500 bps in 4Q, on higher initial mark-ons, lower clearance and as the company leverages fixed costs. Bloomberg notes consumer-transaction data indicates 4Q-to-date adjusted observed US sales are tracking well above consensus, supporting guidance for a 25% rise, with one less week this year vs. last. We would be quite fine moving to a full position along with the strong results, guidance and positive momentum.
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BNS is certainly a bank that investors like to hate on, and for generally good reason these past few years. After skipping in 2024, we would be quite surprised if it did not raise its dividend this year. Sentiment is low here, and the bank needs to get its act together. Investors would appreciate low, but consistent, dividend increases. It is cheap at 10X earnings with a high yield of 5.72% that is likely quite secure. We can see it as an accumulate.
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When companies buy back their own shares, the company can either cancel them or hold them as treasury shares. It is mostly just accounting terms, the primary purpose of the share buybacks are still the same - it is intended to reduce the total share outstanding and boost EPS in the near term.
A share buyback is a more tax-efficient alternative method to return capital to shareholders compared to raising dividends, potentially creating a compounder over time. Despite strong performance recently, EQB is trading at only 8.8x Forward P/E; we think EQB’s valuation is quite attractive as of today.
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Keys to Managing Your Portfolio - Keep Costs Low
This is unlikely to be a surprise to many at this point as it is well discussed and written about. It is worth repeating though, as over the long-term, fees can destroy the value of a portfolio.
If you consider fees, taxes and tack on inflation, it can be very hard to just break even. Fees are one of the few items totally in an investor's control, so it is something all investors should keep a tight leash on. No all fees are bad but it is important to understand and be sure you are getting value for the fees paid.
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There has been no material news, and the last news of any kind was a target price upgrade at National Bank in early December. Small caps had a rough December, and tariff fears are playing out in many sectors. But we have no news here and would consider it quite attractive today.
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Names in the restaurant industry and some companies that are considered “value names” have been under pressure recently. In addition, the weak revenue growth of QSR in recent quarters also compressed the valuation multiples of QSR from around 20x to 17.6x now. QSR has the lowest P/E among the restaurant royalty names like YUM, MCD, and DPZ.
We think QSR is a high-quality capital-light royalty name that is facing a near-term headwind; its valuation looks more decent than ever before. We think QSR continues to have a long runway for growth in the international markets, given its brand portfolio is still relatively underpenetrated in emerging markets. It could be considered within the top 10% of Canadian names in terms of business quality. That being said, the restaurant industry is fiercely competitive, so we would size the position appropriately.
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Nothing has changed from our view. As mentioned in a prior question, yesterdat nearly every growth stock got hit. Bond yields moved higher which put investors in a 'risk off' mood. We would still consider SHOP a premier CanadIan growth stock.
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What is the Private Equity playbook in the public market?
Firstly, Private Equity investors do not look for the “traditional compounders” of high-growth, disruptive businesses early in their life cycle and hold on for decades. The primary criteria the private equity industry tends to look for are businesses with a high degree of predictability and a low risk of disruption.
In addition, these investors constantly seek companies with a high degree of recurring revenue, low customer churn, strong pricing power, and consistent cash flow generation. The purest forms of such businesses are subscription-based businesses like software, consumables, consumer brands and other high-recurring revenue products/services, etc. These businesses tend to be highly durable, independent of access to the capital market and able to support a decent amount of debt on the balance sheet even during a tough environment.
One of the primary value-creation engines of private equity investors is to raise prices prudently, control costs efficiently and put a moderate to high level of the amount of debt on these companies’ balance sheets. The debt level tends to vary for different companies, as some are more well-equipped to carry a higher level of debt, but the target leverage levels usually range between 2.0x – 5.0x net debt/EBITDA. The purpose of the debt is to amplify the value creation of the business either through organic growth or cost management.
As the business can grow EBITDA, then the leverage levels naturally go down, and these companies can leverage up again to maintain the target leverage levels and use the proceeds to do some value-creating strategies like acquisitions, buying back shares or paying out special dividends. The model reinforces itself, making even a low, moderate-growth business in EBITDA become a double-digit total return investment over time.
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CB is a large property and casualty insurance company, which has shown disciplined underwriting and risk management over the years, leading to its large scale and strong profitability. It pays a yield of 1.4%, it has grown its sales and earnings at a 10.6% and 22.4% five-year CAGR, respectively. Forward growth is expected to be strong, and it has increased by 18% over the past year. It trades at a 12X forward earnings, and overall we would be quite comfortable with CB as a defensive play.
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The REIT sector is sensitive to the economy and rates. It has not performed so well, with a five-year return of 1.56%. Rates moving lower in Canada should add support, but our economy may be a bit iffy for a period of time. We would consider ZRE OK for general real estate exposure, but not hugely attractive.
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At 22X earnings, it is on the 'expensive' side of things, but is still likely attractive to most for its 6% dividend, considering the rate picture in Canada. We would not consider it a SELL, but in the $66+ range we might look at it as source of cash if an investor wanted to move to a more growth-focused company. But we continue to like it overall, and would consider it a 'safe' name in a market correction. But we would certainly not expect another 36% gain as we saw last year.
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It was a good quarter. But it is important to note that one quarter does not make a trend, and there is still lots of work to be done here. It is still in turnaround mode. It still has a massive amount of debt. It is cheap, though, and the quarter might see shorts start to cover a bit. So the trend will likely be 'up' and the worst 'could' be over here. But there remains plenty of risk and we would prefer to see another quarter or two of continued improvement, and even pay more once the turn is indeed fully established and on a firm foothold. Much could still go wrong here.
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