This week we begin with a preview of our upcoming Canadian Alternative / Green Energy & Sector Report. In our Your Stock, Our Take segment we take at the ridiculous movement of shares in Eastman Kodak Company (KODK:NYSE) over the past week. Most of our listeners will know of the storied company well, for those that do not, Kodak is a global technology provider focused on print and advanced materials and chemicals. Our Star of the Week is no stranger to KeyStone Clients, having been recommended and sold for a 400% gain, then re-recommended just 5-months ago to clients. The company, Photon Control Inc. (PHO:TSX), primarily designs and produces precision temperature and position sensors used by semiconductor wafer fabrication equipment (WFE) manufacturers. The stock is up 25% this past week and156% in the last 5-months since our re-recommendation. Our Dog of the Week is SIR Royalty Income Fund (SRV:TSX), owns a portfolio of 60 restaurants in Canada. SIR’s Concept brands include: Jack Astor’s Bar and Grill®, with 38 locations; Scaddabush Italian Kitchen & Bar® with 10 locations; and Canyon Creek®, with five locations. The stock is off 13% in the past 5-days and 70% year-to-date.
Special Canadian Alternative Energy / Green Services Report
As we are putting our final touches on our Special Canadian Alternative / Green Energy & Services Report, it was interesting to see news today from London-based traditional energy giant, BP alongside its rather terrible Q2 financial results.
BP reported a massive second-quarter loss and the company cut it’s dividend in half, but the shares actually moved higher as investors took heart in the energy giant’s longer-term plans to cut costs and focus on being greener.
The second quarter numbers were a direct hit from the coronavirus pandemic, which pummeled demand for energy in the second quarter, which in turn prompted BP to unveil, earlier than expected, a plan to reduce its oil and gas output by 40% and boost investments in renewable energy such as wind and solar, over the next decade.
BP stated that, within 10 years, it plans to raise its annual low carbon investment 10-fold to around $5 billion a year. It also aims to have developed around 50 gigawatts of net renewable generating capacity by 2030 – a 20-fold increase from 2019.
BP’s shares, which were down 42% on the year, moved 7.5% higher today on the further shift to green energy.
Higher multiples and a mainstream push to clean energy is one of the reasons we have been putting together our Special Report on Canadian stocks in this segment. We look forward to its release.
Weekly Star
Photon Control Inc. (PHO:TSX)
Current Price: $2.25
Market Cap: $233 Million
What does the company do?
Photon Control Inc. designs, manufactures, and distributes a wide range of optical sensors and systems to measure temperature and position. Primarily, the company designs and produces precision temperature and position sensors used by semiconductor wafer fabrication equipment (WFE) manufacturers.
The semiconductor market is cyclical in nature and historically has produced boom and bust type cycles. The manufacturing process is becoming more complex and challenging as semiconductor devices scale to atomic level dimensions and become more three-dimensional or 3Din nature. This plays well into Photon’s technology longer-term.
Star Performance:
The stock has increased 25% in the past week and had rocketed 156% since we recommended it to clients just 5-months ago.
What is driving the stock?
Optimism in the semiconductor industry is part of it…
Record First Quarter Highlights:
- Revenue jumped 116% to $17.3 million from $8.03 million for Q1 2019.
- Net income rocketed to $6.6 million for Q1 2020 versus $70,000 in Q1 2019.
- Record order backlog of $30.9 million at March 31, 2020 versus $20.8 million at December 31, 2019; and,
- Cash and cash equivalents of $41.2 million at March 31, 2020 versus $33.4 million at December 31, 2019.
The record backlog provides a strong near and mid-term outlook.
Conclusion:
Photon Control checks off most of KeyStone’s boxes. It is cash rich, currently growing and at $0.88 earlier this year, was very inexpensive. The last couple of years for the company have been a tale of two periods. 2018 was the culmination of a longer-term strong growth period that saw a consistently rising backlog, the company boasts its cash position and post $0.10 in earnings per share. In 2019, the company experienced negative conditions in its end market, a declining backlog and earnings per share were just $0.022.
We expect a strong 2020 overall, but are monitoring how the near-term backlog build was driven by key customers stocking inventories in fear of supply chain issues. The Q1 results were also boosted by significant forex gains in the range of $0.02 per share. We expect Photon to be able easily best the record $0.10 in EPS the company reported in 2018 on a normalized basis.
The gains this week and this year, make Photon our Star.
Your Stock, Our Take
Eastman Kodak Company (KODK:NYSE)
Current Price: $14.59
Market Cap: $642 Million
What does the company do?
Kodak should be familiar to most listeners – but if it isn’t, the company is a global technology provider focused on print and advanced materials and chemicals.
It provides hardware, software, consumables and services primarily to customers in commercial print, packaging, publishing, manufacturing and entertainment.
But it is kind of making a business shift which I will touch on shortly.
Stock Performance:
The company was up 96% in the past week and over 500% in the past 2-weeks.
What is driving the stock?
The stock is being driven by news that came out last week – with the company announcing it was shifting its business model towards drug production and subsequently receiving a $765 million government loan to boost production of a variety of drugs.
After this news, the stock momentarily shot up over 1,800% making the company’s market capitalization jump from a little over $100 million at the start of last week to almost $1 billion by Friday, but cooler heads seem to have prevailed as the stock has now pulled back from these outrageous highs.
Financial Results
Q1, 2020 (In USD$)
- Revenue has decreased 8% from the same quarter last year.
- Basic Earnings per share (EPS) was a loss of ($2.66) compared to a loss of ($0.40) for Q1, 2019.
- TTM Operational EBITDA was $9 million, which currently places the company’s EV-to-EBITDA multiple at ~67x which of course comes with no surprise that the stock is grossly overvalued. (This EV does not include the recent $765 million financing).
Conclusion:
Now back to the company news, the CEO has come under scrutiny as he was granted options for 1.75 million shares on Monday, the day before the news of the government loan was announced. And almost a 1/3 of these options vested immediately, allowing him to cash in on these options if he pleases. The company said that the options were granted to shield the CEO’s overall stake in the company from being diluted by a $100 million convertible bond deal clinched in May 2019 to help Eastman Kodak stay afloat.
Now this is where it gets quite interesting – prior to this week’s financing deal, in April the company warned investors it was at risk of not continuing as a going concern… Or in other words, it might be at risk of going bankrupt.
Many listeners probably remember that this is not the first time that Kodak has had operational issues, as the company filed for bankruptcy in 2013 as it did not adapt its film-based camera business to the then up-in-coming digital revolution.
It honestly surprises me that, let’s call them “investors”, want to hold a stock like this. Especially after restructuring the company only 7 years ago and now again announcing that Kodak may no longer be a “going concern”, are taking on debt to stay afloat and are now adapting the company into the business of pharmaceutical drugs. Needless to say, this is not a growing business and hoping that this once flourishing technology company will suddenly excel in the pharmaceutical industry is highly speculative.
In a final comment, it really surprises me that Kodak would receive this pharmaceutical financing deal and that it would not go to a major generic drug maker. But yet again maybe the U.S. doesn’t want to see another retail giant fail due to the Coronavirus. All in all it makes for some interesting news.
SEC investigates Kodak’s government loan disclosure – WSJ
REPORT OUT TODAY – Aug 4 (Reuters) – The U.S. Securities and Exchange Commission is investigating the circumstances around Eastman Kodak Co’s announcement of a $765 million government loan to make drugs at its U.S. factories, the Wall Street Journal reported on Tuesday, citing people familiar with the matter.
Weekly Dog
SIR Royalty (SRV.UN: TSX)
Current Price: $2.29
Market Cap: $20 Million
What does the company do?
SIR Royalty owns and operates a diverse portfolio of restaurants in Canada, with brands including Jack Astor’s Bar and Grill, Canyon Creek Chop House, Scaddabush/Alice Fazooli’s and signature restaurant brands.
Key Points:
SIR Royalty’s stock price has declined 17% over the past week and over 70% since the start of the year.
Clearly, the restaurant industry has been one of the hardest hit since the pandemic shutdown began in March. However, SIR’s challenges began well before that.
We have reviewed the company multiple times over the past several years for our Income Stock Research and took notice of the once high-income yield and low price to cash flow valuation. Thankfully, we never picked up coverage of the company due to the inconsistent performance of its various restaurant brands.
SIR is structured as a royalty trust with the objective of paying out a high percentage of operating cash flow to shareholders in the form of income distributions. Unfortunately for shareholders, the company suspended distributions completely on March 23rd. The question now is whether or not these income distributions will be reinstated and at what level.
Recent Financial Results:
- The company’s fiscal Q3 results were released on July 30th. Understandably, the company wasn’t making any money for the quarter as restaurant dine-in operations were suspended on March 16th and reduced capacity restaurant re-openings began only on June 9th.
- To get a more normalized sense of the company’s financial health, we need to look at performance pre-pandemic.
- For the full fiscal year of 2019, SIR reported same store sales down 5.3% and distributable cash per share down 6.5% to $1.16 per unit.
- The payout ratio was 106% compared to 97% in the previous years.
Conclusion:
SIR Royalty looks incredibly cheap on a price to cash flow basis if you use distributable cash flow from the previous year. The problem here is that the company may have a long road ahead of getting back to that level of cash flow. Even with restaurant re-openings, the industry will continue to be under pressure and we expect to see more restaurant closures. I’ll also note that even before the shutdown started, SIR’s stock price was down more than 50% in the 12 months preceding March 2020. We can’t make the assumption that distributions will be reinstated at close to the previous level and we would continue to steer clear of the company.
