This week in KeyStone’s Stock Talk Podcast we do a traditional Star and Dog of the Week, while introducing a comparison segment of two hot Canadian tech stocks.
Our Star of the Week is Mav Beauty Brands (MAV:TSX), a personal care company which sells hair care, body care and beauty products. The stock, which had been on a downward trend since its IPO in June of 2018, has rebounded over 45% in the past 5 trading days.
Our Dog of the Week is Slack Technologies Inc. (WORK: NYSE), a business communication and remote work collaboration platform which offers features, including persistent chat rooms, private groups, and direct messaging. The stock which had performed relatively well during COVID-19, is down nearly 20% over the past 3-days. We let you know why.
Our quick comparison this week pits two hot mid-sized Canadian Software companies against one another – the first, Kinaxis (KXS:TSX), creates supply chain software while the second, Enghouse Systems (ENGH:TSX), is no stranger to our clients. Enghouse utilizes its existing software businesses to generate strong cash flow, and creates growth through strategic acquisitions targeting the Contact Center, Telco Networks (OSS/BSS), and Transportation/Public Safety sectors. Both stocks have performed very well over the past year and we take a look at their relative valuations.
Crisis Portfolio Building Webinar 2.0
Live Webinar Dates & Times
June 2, 2020 @ 7:00pm PDT _ SOLD OUT
June 9, 2020 @ 7:00pm MDT
June 16, 2020 @ 7:00pm EDT
New Topics, New Stocks – but at its core, the Live Webinar will show you how to take action during a crisis and start building a simple 15-25 stock portfolio designed to enrich you, not your advisor.
New Topics Include:
- Explore how the current crisis could be a tipping point for technological change in areas such as work from home, cloud computing, cybersecurity, artificial intelligence, the internet-of-things and more.
- Examine how in an environment where 10-year bonds are a paltry half a percent, high quality dividend growth stocks, many yielding over 5.5%, are your most powerful tool.
- The webinar will provide specific opportunities in healthcare, U.S. tech, gold, and alternative energy.
- How to deal with any hot stock tip and immediately classify it as speculation or investment worthy.
Why Attend?
All five stocks recommended in KeyStone’s Spring webinars have produced strong gains including Photon Control (PHO:TSX), jumping 100%+ and Enghouse (ENGH:TSX) jumping 53% in the crisis on record earnings! Plus, they’ll provide five current Buy recommendations to add to your portfolio today!
Attend if you simply want to become a better investor – build your portfolio with a proven, but completely different approach that you will find with a Big Bank Advisor.
Q1 Quarterly Numbers – Some Observations
So right now, we continue to spend our time identifying great companies that we want to own. We may be layering into positions…
Observations from looking at thousands of Q1 financial statements from Canadian over the past couple of months. While we price the investment, we look at on a forward basis, the numbers we get are 30 to 60 days old.
During the current V-shaped market recovery, From an earnings perspective – we are seeing a couple of one-time events in first quarter numbers that have made earnings numbers look better than they actually were in a normalized environment. In a number of sectors, because the first quarter ended March 31st – there was a huge amount of panic buying of certain goods (not just toilet paper) – right at the end of the quarter – we are seeing this stockpiling affect actually benefitting the numbers. I looked a cosmetic company that had a great Q1 – as its clientele bought 5 packs of eyeliner instead of the one they typically buy for fear of being caught without any. We believe there was a good deal of well stocked cosmetic bags during Q2, for example, which will likely make a very weak Q2 set of numbers, even worse.
Forex gains – a number of Canadian companies doing primary business in US dollars which have seen big forex gains in Q1 – boosts straight to the bottom line caused by the rapid drop in the Canadian dollar during calendar Q1. This is not operational earnings so not sustainable. This has reversed somewhat of late and will hit in what will be a terrible upcoming quarter. Example – one of the Canadian Small-Caps we cover closely reported a $2.6 million Forex Gain in Q1 – With the company’s operating income at $6.5 million you are increasing net income by roughly 40% – that is a significant non-operational boost to the reported numbers.
Finally, most companies have pulled guidance given the unprecedented situation. Investors are flying blind, so to speak into the upcoming quarter in which there was a stockpiling affect and a less positive forex environment.
These are a couple things we will keep our eyes on. The markets always look forward, but we just hope investors are prepare for some putrid Q2 numbers at the very least.
Comparison – Enghouse Systems (ENGH:TSX) and Kinaxis® (KXS:TSX). Which do prefer?
We got a question on a listener on the relative valuations of two Canadian mid-sized software firms that have performed very well over the past year; Enghouse Systems (ENGH:TSX) and Kinaxis® (KXS:TSX).
While the businesses are by no means an apples to apples comparison, we can take a quick look at what the businesses do and the multiples the market is asking you to pay for the stocks at present.
First off, what do they do?
Kinaxis® (KXS:TSX) makes supply chain software. From all accounts, Kinaxis has great products and the right time. For example, the company’s RapidResponse system has allowed customers cope with unprecedented supply chain disruptions during the pandemic and likely bodes well for future growth as companies worldwide rethink their supply chains.
Enghouse Systems (ENGH:TSX) – has been around a lot longer than Kinaxis as a public company. The company was the 4th best performing stock in Canada over the past decade. No stranger to our clients, the company utilizes its existing software businesses to generate strong cash flow, and create growth through strategic acquisitions targeting the Contact Center (integrates with Microsoft Teams), Telco Networks (OSS/BSS) (software that enables video for telemedicine) and Transportation/Public Safety sectors. The company made a couple opportune acquisitions over the past year in the arena’s of telemedicine and video communications which play well into the remote work space.
| ENGH | KXS | |
| Market Cap: | $3.58 Billion | $4.56 Billion |
| Revenue Last Quarter: | $140.90 | $52.75 |
| Growth: | 58% | 15% |
| Adjusted EBITDA: | $49.30 | $15.05 |
| Growth: | 81.30% | -6% |
| Cash Flow From Op.: | $50 | $20.96 |
| Growth: | 72.50% | 12% |
| Cash on Hand: | $168 | $233 |
| EV/EBITDA( Exp. 2020) | 20 | 61 |
So what gives here? Higher market cap on KXS despite lower total revenues, cash flow, growth etc.
A couple things at play – #1 in the short-term, the markets are not always correct. Perhaps Mr. Market will be proven correct in this case long-term or perhaps not. KXS has a few things in their favour including a higher percentage of SaaS sales and higher organic growth. (low teens versus higher single digit).
Anecdotally, one thing I find is that “newer tech” which Kinaxis is verus Enghouse, appears to receive higher valuations. They are the shiny new toys where nothing can go wrong. Some of this comes from the SaaS or software-as-a-service model many of these companies employ – which is stickier in most cases and likely justifies a higher premium to the business given the higher degree of predictability inherent in this model.
At times, it can appear to be out of step with reality. And, in the case of Enghouse, perhaps it can provide an opportunity.
Both are good companies, and neither are cheap – one you are clearly paying less for oat present.
Weekly Star
Mav Beauty Brands (MAV:TSX)
Current Price: $3.48
Market Cap: $138 Million
What does the company do?
MAV Beauty Brands is a global personal care company dedicated to providing consumers with a wide variety of hair care, body care and beauty products. Its products are sold in over 30 countries around the world and in over 100 major retailers.
Star Performance:
The stock was up over 45% in the past 5 trading days.
What is driving the stock?
The gains were driven by better than expected Q1 financial results which were released on June 5th.
Financial Results
Q1, 2020 (All in US$)
- Revenue increased by 30% to $31.4 million compared to $24.1 million in Q1 2019.
- Adjusted EBITDA increased by 34% to $8.3 million from $6.2 million in Q1 2019.
- Adjusted Net Income increased by $0.9 million, to $3.6 million in Q1 2020 from $2.7 million in Q1 2019.
- Basic adjusted earnings per share (EPS) increased 43% to $.10 per share from $0.07.
Management provided some commentary following the quarter, stating that first-quarter sales and Adjusted EBITDA showed strong year-over-year increases from healthy organic growth and the addition of The Mane Choice (An acquisition that was announced in November of 2019, which is a brand serving the hair-care market).
Furthermore, management said that first-quarter sales reflect the positive impact of 2020 shelf gains, and consumers stocking up on essential items as the majority of North American food, drug, and mass retailers have remained open during lockdowns.
Conclusion:
So, the question to ask here, is whether this increase in sales is sustainable considering people were stock-piling necessities before the crisis? And does it mean that future quarters will be weaker since people have bought an abundance of supplies for the future? This is something that we are going to have to remain cognizant of as we navigate financial statements that were impacted by COVID-19.
Mav has had a decent trajectory of revenue and adjusted EBITDA growth over the past few years. Looking at their balance sheet, they have a net debt position of $152 million and a net-debt-to-aEBITDA multiple of over 4.5 times indicating that the company is highly levered, especially for a retail company. On a current valuation basis, they are trading at a trailing EV/aEBITDA multiple of around ~8 times which I believe is attractive for the growth that the company has been showcasing.
To conclude, we have been monitoring MAV for some time now because of its impressive growth and decently attractive valuation. Despite these attractive fundamentals it is not a current recommendation of KeyStone. We will continue to monitor it, especially the sustainability of the company’s sales in future quarters, but its recent share price performance after its positive financial results that were somewhat propelled by the Covid-19 pandemic make it our Star of the Week.
Weekly Dog
Slack Technologies Inc. (WORK:NYSE)
Current Price: $31.17
Market Cap: $17.5 billion
What does the company do?
Slack is a business communication and remote work collaboration platform which offers features, including persistent chat rooms, private groups, and direct messaging. Slack reported around 12 million free and paid daily active users as of October 2019.
Key Points:
Slack’s stock had been performing well in the COVID-19 environment as demand for the platform grew with the need to remote work.
However, just over the last 3 trading days the stock price has declined nearly 20%.
Recent Financial Performance
Slack is certainly not a stock that KeyStone would generally spend much time researching. This is because right away the company fails our minimum investment criteria which is profitability. Slack report net losses of $70 million in the last quarter and over $570 last year.
However, revenue growth has been very strong, up 50% in Q1 to over $200 million and up nearly 60% in 2019 to $630 million. We also note that there has been a small amount of positive operating cash flow in the last 2 consecutive quarters.
Operationally the company reported 122,000 paid customers in Q1, up 28% year over year, which included a record additional 12,000 net new customers, up 50% compared to the same quarter last year.
Conclusion
Although the stock is down almost 20% in less than a week this has to be viewed in the context of the strong performance of the stock in the weeks beforehand. Slack’s shares are right now trading at the range they were just only in late May.
The Q1 results looked strong from a revenue and paid subscriber standpoint but investors also have to understand that many of these high growth companies are already priced to perfection and the expectations are high. Slack has a market cap of over $17 billion which puts the price-to-sales valuation at 25 times (even after the recent pullback). Investors are expecting a high growth rate and many will sell the stock if they start to see the growth decline.
Another reason why we think that the stock declined recently is that COVID-19 restrictions are starting to ease everywhere. The expectation is that this will reduce the need for remote work platforms in the near term, even if the long-term outlook for that space remains strong.
Ultimately for KeyStone, this is not a company we would consider at least until they were able to produce consistent profitability.
