KeyStone’s Stock Talk Podcast – We look at IMF numbers, Goodfood Market Corp. (FOOD:TSX), Scientific Games Corporation (SGMS:NASDAQ), which develops and manufactures gaming and lottery machines. The stock jumped over 40% this week after reporting better than expected numbers, and our dog of the week is Twitter Inc. (TWTR:NYSE)
We have another busy show for you this week. We start off by looking at some stats just released by the IMF (International Monetary Fund) just released their revised outlook for the global economy in for the remainder of 2017 and 2018. And we talk about what a tough time it has been for Canadian investors over the first 7-months of 2017. In our Your Stock, Our Take segment we take a question from a listener about newly listed Canadian small-cap, Goodfood Market Corp. (FOOD:TSX), a leader in the emerging Canadian meal-kit market – is it a BUY, SELL or HOLD? Our star of the week is, Scientific Games Corporation (SGMS:NASDAQ), which develops and manufactures gaming and lottery machines. The stock jumped over 40% this week after reporting better than expected numbers. Finally, our dog of the week is Twitter Inc. (TWTR:NYSE) which dropped 14% today on the heels of a disappointing set of second quarter numbers – #stocktakesitonthechin.
If this is your first time listening, then thanks for stopping by. This podcast is produced every week for your enjoyment and show notes are found at www.keystocks.com. Come back often and feel free to add the podcast to your favorite RSS feed or on iTunes. You can also follow us on Twitter @KeyStocks and on Facebook. Or listen to us on our 24-hour Penny-Stocks streaming radio station Pennystocks.fm for coverage of US and Canadian Small-Cap stocks.
Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man who, it rumoured to be sending out his first tweet this week on Twitter #lovetheservicenotthestock, Mr. Aaron Dunn.
Intro: IMF – World Economic Outlook Update
- The IMF (International Monetary Fund) just released their revised outlook for the global economy in for the remainder of 2017 and 2018.
- Overall, the IMF is expecting global economic growth of 3.5% in 2017 and 3.6% in 2018.
- The expectations haven’t changed but what has changed is where they think the growth is coming from.
- U.S. growth projections are lower which reflects their assumption that fiscal policy will be less expansionary than was promised by the current administration.
- Growth was revised up for the Euro area, Japan and China.
- Canada is expected by the IMF to lead the G7 nations in economic growth for 2017 at 2.5%.
- This is interesting…declining expectations for the US and an improving outlook for Canada.
- Of course, Canada posted a huge job number in for May with almost 55,000 new jobs created driven by 77,000 new full time jobs which were offset by a decline in part time jobs.
- The pace of annual wage rate increases accelerated to 1.3 per cent in May.
- Manufacturing added 25,300 jobs during the month and the embattled sector has produced a 43,000 employment increase so far this year.
- Still, services have done the heavy lifting over the past year, accounting for 295,200 of the new jobs.
- Real GDP rose 3.7% in the first quarter. In comparison, real GDP in the United States grew 1.2%.
- Growth was led by final domestic demand (+1.2%) while exports edged down.
- Gross domestic product and final domestic demand
- Household final consumption expenditure rose 1.1% following a 0.7% gain the previous quarter. Outlays on goods grew 1.5% as purchase of vehicles increased 2.3%. Outlays on services (+0.7%) also rose.
- Business gross fixed capital formation rose 2.9% following declines in eight of the previous nine quarters. Growth was driven by housing investment (+3.7%) and investment in machinery and equipment (+5.8%).
- Exports edged down 0.1% as services decreased 0.5%. Exports of goods were unchanged.
- The US economy added 138,000 jobs in May, down from 174,000 in April and below analyst predictions of 185,000 jobs, the US Bureau of Labor Statistics (BLS) said today.
The Toronto Stock Exchange’s S&P/TSX composite index settled up 73.68 points, or 0.49 percent, at 15,202.37. It is trading down so far this year, compared to 8 to 20 percent gains for major U.S. indexes.
Canadian investors are in a tough spot, as those who have allocated more to U.S. stocks watch a strengthening loonie wash out any gains. (unless you happened to buy Applied Optoelectronics on our recommendation – the 500 plus per cent more than makes up for the relatively small currency move. Of course, that is the extreme example.
Your Stock Our Take
Goodfood Market Corp. (FOOD:TSX)
A leader in the Canadian meal-kit industry. What the heck is a meal-kit and how does it work?
How does it work?
Goodfood create original recipes via an in-house culinary team uses premium ingredients to create unique menus.
You choose your preferences. – meat, chicken, vegan, vegies etc…
Choose from a variety of healthy, delicious meals each week that accommodate your dietary preferences.
Delivery
Goodfood delivers weekly – for free.
Your ingredients are packaged in our refrigerated boxes, so food stays fresh – even when you aren’t at home.
You cook incredible meals at home.
Goodfood’s recipes are created to cater to all cooking levels and styles. Each meal can be prepared in about 30 minutes.
A family package cost around $78 for a week.
Goodfood Goes Public
The company recently went public, raising $21 million via a private placement at $2.00 (above its current trading range of $1.47.
Recently released its financial results for the third quarter and nine-month period ended May 31, 2017.
Of note:
· Active subscribers reached 23,000 as at May 31, 2017, up from 2,300 at the end of the third quarter of 2016. During the quarter, Goodfood added 10,000 net new subscribers, which represents an increase of 77% from the end of the second quarter of 2017.
· Revenues jumped more than five-fold to $6.4 million for the quarter and $12.3 million year-to-date.
· Gross profit percentage or gross margins for Q3 improved to $1.4 million, or 21.2% of revenue, compared to $0.1 million, or 12.8%, for the corresponding period of 2016
Outlook:
The meal-kit subscription service industry has become one of the fastest growing industries worldwide, but it is every evolving and remains relatively new in Canada. Goodfood believes that there are significant opportunities to rapidly grow its subscriber base by continuing to invest in highly targeted marketing campaigns, capacity expansion and in establishing a national platform. As the company grows its subscriber base, it is confident that it can achieve economies of scale which will lead to further improvements in gross margin.
Big Question
Will the uptick in subscriber base and gross margins lead to profitability and a cash producing business? It appears the company is on the right track, but is not close to that mark yet. The company lost $1.2 million in the last quarter and over $6 million year-to-date. And with promised marketing spends to increase its subscription base, may move farther away from cash flow positive in the near-term.
Competition is also a big concern.
Amazon, the biggest of big in retail is looming. In a July 6 trademark application, Amazon subsidiary Amazon Technologies Inc. revealed it’s planning “prepared food kits composed of meat, poultry, fish, seafood, fruit and/or and [sic] vegetables…ready for cooking and assembly as a meal,” as well as primarily grain-based offerings.
The product’s tagline: “We do the prep. You be the chef.”
Amazon already sells other companies’ meal kits, including Tyson Foods Inc.’s (TSN) Tyson Tastemakers. Martha Stewart is even offering meal kits on Amazon Fresh, the company’s grocery delivery service.
Our Take
The growth at Goodfood has been impressive and the company appears to be carving out a niche in the Canadian mealkit market. Perhaps it becomes a takeover target for a larger entrant, but the company could also get squashed like a cockroach in what is becoming a very competitive segment.
While the stock is interesting, it’s lack of current cash flow prevents it from checking off one of our most important boxes. We will monitor it, but today we remain on the sidelines until it proves the model can produce profitability.
We note that a big U.S. competitor in the space Blue Apron (APRN:NASDAQ) has suffered from the looming Amazon shadow of late and is now trading 30% below the IPO price.
Dog
Twitter Inc. (TWTR:NYSE)
- The stock was down almost 14% today on poor Q2 results.
- It’s also down 18% for the week.
- This is mainly an issue with the company’s inability to grow average monthly active users which were 68 million in the second quarter compared to 70 million the first quarter.
- Monthly active users, a key performance indicator for social networking services, is typically calculated by tabulating the number of users who have logged in and logged out during the 30-day period.
Star
Scientific Games Corporation (SGMS:NASDAQ)
Scientific Games Corporation is a leading developer of technology-based products and services and associated content for worldwide gaming and lottery markets. The company’s portfolio includes instant and draw-based lottery games; electronic gaming machines and game content; server-based lottery and gaming systems; sports betting technology; loyalty and rewards programs; and social, mobile and interactive content and services.
The Gains
Shares of casino and lottery gaming company Scientific Games jumped as much as 24.5% on Monday after it reported its second-quarter financial results. The next day, shares rallied again as one of the only analysts following the stock raised his price target from $24 to $35.
What is Driving the Stock?
Scientific Games reported Q2 revenue of $766.3 million and a loss per share of $0.44. Both metrics were better than analysts were expecting. On average, analysts had forecast revenue of $733 million and a loss per share of $0.52.
Importantly, with its Q2 revenue increase of 5% year over year, Scientific Games has now posted seven quarters in a row of revenue growth. Last quarter, that was driven by gains in global gaming machine sales, gaming systems, table products, and interactive gaming. Perhaps more importantly, free cash flow was up substantially.
The Analyst Upgrade (a quick look)
While reports cite the analyst upgrade as helping to drive the stock, we see it as coincidental as the language and rating of the report did not appear to make it a table pounding buy. First off, the report raised the stocks target price to $35 from $24, which is actually below the current price of the stock and the. Perhaps more importantly, despite the raised target the rating remained at HOLD which is rather curious.
Now What?
Long-term, improving earnings will be far more significant than any analyst price target. But keep in mind that analysts are still expecting a loss of $1.05 per share in 2018, so although cash flow is there by some definitions, profitability is still a long way off. That’s a big reason to stay away from betting on this lottery stock and will keep me away from shares today.
It is a turnaround story that is focussed on the right things, restructuring debt and focussing on producing cash flow. For us however, with a market cap of just over $3 billion and over $8 billion in debt, and with the company participating in a gaming industry that is historically fraught with scandal which produces lower than average multiples, we avoid the stock.
I am not saying this star could very well become next week’s dog, but we are not an investor in the stock today – the 46% jump this week makes this lottery pick our star of the week.
