KeyStone’s Stock Talk Podcast – Ten Peaks Coffee Company Inc. (TPK:TSX), Great Canadian Gaming Corp. (CG:TSX), & Callidus Capital (CBL:TSX).
We have another busy show for you this week. We begin with a discussion some unintended consequences related to an ongoing taxation issue regarding stock options.
In our Your Stock, Our Take segment we take a question from a listener about, Ten Peaks Coffee Company Inc. (TPK:TSX), a unique BC-based small-cap which uses its proprietary process to decaffeinate premium green coffee – the company reported a strong second quarter this week, is it a BUY, SELL or HOLD? Our star of the week is Great Canadian Gaming Corp. (CG:TSX), also BC-based which operates in the gaming, entertainment and hospitality business in 4 provinces across Canada and Washington State. The stock has jumped over 25% recently after announcing a big deal with Brookfield Properties. Finally, our dog of the week is alternative finance company, Callidus Capital (CBL:TSX). The company’s shares are down 26% in the last 7 trading days after the Wall Street Journal reported that at least four unnamed individuals have filed whistleblower complaints with the Ontario Securities Commission with allegations of fraud.
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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, is so impressed with the crossover success of the MacGregor-Mayweather fight that he are proposing that I appear as a crossover analyst on the show – say yes to the dress, because picking stocks and picking dresses have about the same in common as Boxing and MMA – Mr. Aaron Dunn.
Remove the Stock Option Deduction – Beware of Unintended Consequences
Can we just talk a bit about a tax benefit known as the stock option deduction and unintended consequences…
At issue for the past several years is something called the stock option deduction — a tax break for employees that critics say largely benefits Fat-Cat wealthy corporate executives. According to the finance department, keeping this perk intact will cost Ottawa a projected $840 million this year. (of course, no benefits of the plan are included such as employee retention etc.)
That’s one reason many critics would like to see the deduction eliminated.
“It’s outrageous,” says Dennis Howlett with the advocacy group, Canadians for Tax Fairness. “Why would we give more money to those who are already overpaid and extremely wealthy?”
The federal Liberal Party at one time agreed with this sentiment – As part of its 2015 campaign promise “to target tax loopholes that particularly benefit Canada’s top one per cent,” it pledged to cap the stock option deduction.
Fortunately, many of Trudeau’s promises in the 2015 election were not worth the paper they were written on and the stock option was not removed in the 2016 budget.
I think it is important to point out for those who do not really know how stock options work – that they are only valuable if the company’s share price increases from the point or price the option was granted at. In the long-term a stock price only increases if the business makes more money and if the business makes more money it is creating more jobs, paying more taxes and growing the economy generally – these are all win-win scenarios. A stock option is worthless if the business does poorly and no tax in generated at all..
There are very real unintended consequences to implementing this type of tax policy.
It is not just rich, fat-cat executives who potentially benefit from stock options. In fact, for young start-up ventures – the type of businesses that can really growth the economy if they hit – stock options are part of the culture. Just look at the burgeoning tech sector in Waterloo, Ontario which is positioning itself as Silicon Valley North. Tell any of the talented software engineers and developers and entrepreneurs in the thousands of start-ups in this tech hub that their stock options will be fully taxed and many of the firms or the employees will just up and move to Silicon Valley or anywhere in the US where they are not subject to the tax – it is a globally competitive market and increasing taxes on stock options would be a major hit to this segment well outside of the Fat-Cat CEO’s it was intended to penalize.
Heading into the 2017 budget, some thought the Liberals would revisit the idea they came up with themselves during the election, pledging to fully tax individual stock options gains over $100,000.
Then in March, according to the Canadian Press, Finance Minister Bill Morneau halted the plan, stating that he was informed by “many small firms and innovators that they use stock options as a legitimate form of compensation for their employees.”
Economists from the Centre for Policy Alternatives – have stated Dennis Howlett with the advocacy group, Canadians for Tax Fairness. “Why would we give more money to those who are already overpaid and extremely wealthy?”
They advocate a cap.
I think this is ridiculous. It is like saying we will allow you to make a little more money for the risk you are taking, but as soon as we see you hitting a level we have arbitrarily picked for you are now a rich fat cat and should be taxes as such.
You may be creating a whole new company with thousands of employees who all pay a ton of taxes but now that you are becoming successful – we think you have enough and should be taxed more and now should be punitively taxed because you are making more money.
Your Stock Our Take
We have a question from Abigail in Toronto.
Ten Peaks Coffee Company Inc (TPK:TSX)
The company owns all of the interests of the Swiss Water Decaffeinated Coffee Company Inc. (SWDCC), a premium green coffee decaffeinator located in Burnaby, BC. It also owns and operates Seaforth Supply Chain Solutions Inc. (Seaforth), a green coffee handling and storage business located in Metro Vancouver.
SWDCC employs the proprietary SWISS WATER® Process to decaffeinate green coffee without the use of chemicals, leveraging science-based systems and controls to produce amazing coffee that is 99.9% caffeine free.
Many people do drink coffee just for the caffeine…
Timely question as the company reported its second quarter results this week.
Higher volumes boosted revenues for both the second quarter and year-to-date. Second quarter sales totaled $21.9 million, an increase of $3.8 million, or 21%, over the same period last year.
Net income for the second quarter increased by 127% to $1.7 million and by 62% to $3.2 million for the year-to-date, compared to the same periods last year. Higher operating income, gains on risk management activities and a fair value adjustment boosted net income in both periods.
We have looked at the company a number of times – it is based in BC and they seem to have an interesting business. It can be boom and bust on the earnings front from year to year as the company’s business is subject to the whims of coffee pricing.
For example, During the first half of this year, the New York ‘C’ Arabica coffee futures price averaged US$1.38/lb compared to US$1.24/lb in the first six months of 2016. However, while the NY’C’ was higher on average, it has trended downward through 2017. This has had a positive impact on SWDCC’s business, contributing to its higher year-over-year volumes. When the NY’C’ declines over a sustained period, customers tend to add to their inventories. In 2016, sales orders declined when the NY’C’ started rising, as customers chose to consume inventories rather than build them.
A sustained low price trend for coffee is good for business and the opposite it bad.
For the balance of 2017, the company will continue to focus on executing its capacity expansion plan, and working to grow its market share in the US and internationally. Margins in the second half of this year may be reduced if the current weakness in the US dollar continues.
During the second quarter, shipments of our decaffeinated coffees rose by 19% over the same period last year and were up by 10% for the year-to-date. This is the third quarter in a row we have recorded volume growth, with gains coming from across the business. Looking ahead, we expect our volume shipments to continue increasing, but to slow somewhat, as the second half of last year was particularly strong. As a result, we anticipate our annual volumes will be up by between 3% and 7% over 2016.”
It suggests a weaker second half.
As a result and while we see some value in the business, it would rank as a hold at present form our overview.
STAR – Great Canadian Gaming Corp
- This week’s STAR is Great Canadian Gaming; symbol GC; trades for $32 per share on the Toronto stock exchange.
- Based out of Coquitlam, BC, this company operates in the gaming, entertainment and hospitality business in 4 provinces across Canada and Washington State.
- The Company owns approximately 22 gaming properties including four racetracks and 14 casinos.
- The shares are up 26% since the company announced two weeks ago that it had been awarded, along with Brookfield Properties, a contract to operate 3 casinos in the Greater Toronto Area for at least 22 years on behalf of The Ontario Lottery and Gaming Corp.
- Great Canadian would operate the facilities and hold a 49 per cent stake in the partnership with Brookfield.
- The company also released it second quarter results on August 10th.
- Revenues grew 15% in the quarter and earnings per share were up 19% to $0.43.
- Over the past year, the company reports generating earnings per share of $1.40 which puts the price-to-earnings valuation at about 23.
- This is above the market average but the company has produced double digit revenue and earnings growth this year, the outlook appears positive, and they are reinvesting in the business.
- The combined revenue for the 3 casinos they will operate with Brookfield is over $1 billion.
- We don’t know how much Great Canadian Gaming will be making but we would expect it to be meaningful.
- Overall we think the fundamentals look pretty good with revenue and earnings moving in the right direction and a fairly reasonable valuation.
DOG – Callidus Capital
- This week’s Dog is Callidus Capital; the symbol is CBL on the Toronto exchange and it trades for just over $11 per share.
- This is an alternative finance company; they provide funding to companies that cannot access traditional lending sources.
- The shares are down 26% in the last 7 trading days after the Wall Street Journal reported that at least four unnamed individuals have filed whistleblower complaints with the Ontario Securities Commission with allegations of fraud.
- As far as we know none of this has been confirmed yet and the company denies it is subject to whistle-blower complaints.
- But true or not, this creates uncertainty for Callidus and many investors don’t want to wait and see if the allegations have any validity.
- If just an article in the Wall Street Journal can cause the company to lose 20% of its market value then just imagine what would happen if the OSC confirms the allegation.
- But putting all this aside, the company also recently reported its second quarter results for 2017 and I was very unimpressed with what I saw.
- Net loans receivable declined by about 50% compared to the same time last year and net interest margin fell to 3.5% compared to 12.5% in the second quarter of 2016.
- The company also reported a net loss of $28 million compared to net income of $37 million last year.
- We often get asked about some of these alternative finance companies and one of the things we don’t like about the space is that is really hard to figure out what is happening under the hood.
- Obviously they are extremely interest rate and interest spread sensitive but it’s also very complex and sometimes impossible to get a good grip on the credit quality of the underlying portfolio.
- This company has several issues right now and I wouldn’t go near it.