KeyStone’s Your Stock Our Take is Strongco Corporation (SQP:TSX), Our Star is Parkland Fuel Corporation (PKI:TSX), & Our Dog is Maxar Technologies Ltd. (MAXR:TSX).
This week in our Your Stock, Our Take segment we look at Strongco Corporation (SQP:TSX), a distributor of new and used equipment for the infrastructure, construction, mining, oil and gas exploration, forestry, and industrial markets in Canada and in the United States. After a strong Q2 a listener asks us if the turnaround is on and whether it is a BUY, SELL, or HOLD. Our Star of the week is Parkland Fuel Corporation (PKI:TSX), Canada’s largest and one of North America’s fastest growing independent suppliers and marketers of fuel and petroleum products and a leading convenience store operator. The stock has surged 49% year-to-date and a 16% in the last week alone – it should be no stranger to our clients an listeners having been recently re-recommended in our Canadian Income Stock Research in the $28 range. Finally, our Dog of the week is Maxar Technologies Ltd. (MAXR:TSX) – an integrated space and geospatial intelligence company with a full range of space technology solutions for commercial and government customers including satellites, Earth imagery, geospatial data and analytics. The stock has fallen 25% over the past 2-weeks after reporting a quarterly earnings miss. Is it a Dog or an opportunity?
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Now, let’s dig into the show.
I welcome back my co-host, KeyStone’s VP and Senior Analyst, Aaron Dunn.
Your Stock, Our Take
Do you think Strongco Corporation is a company that is turning around operations – your thoughts?
- Riley via Twitter.
Strongco Corporation (SQP:TSX)
Current Price: $2.63
Market Cap: $35 million
What does the company do?
Strongco Corp sells and rents new and used equipments and provides after-sale product support and services, operating in infrastructure, construction, mining, oil and gas exploration, forestry, and industrial markets Canada and in the United States.
The primary lines distributed include those manufactured by:
- Volvo Construction Equipment North America Inc. (“Volvo”), for which Strongco has distribution agreements in each of Alberta, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland;
- Case Corporation (“Case”), for which Strongco has a distribution agreement for a substantial portion of Ontario; and
- Manitowoc Crane Group (“Manitowoc”), for which Strongco has distribution agreements for the Manitowoc, Grove and National brands, covering much of Canada.
The stock is up over 30% year-to-date and is up 12% in the last week following the release of the company’s quarterly financials.
Recent Quarterly Financials:
- Revenue for the second quarter ended June 31, 2018 was $122.0 million, an increase of 21.2% over the prior year period.
- Net earnings grew to $1.6 million or $0.13 per share in the second quarter of 2018, compared to a loss of $0.5 million in the prior year period.
- EBITDA was $7.3 million in the second quarter of 2018, compared to $3.7 million in the second quarter of 2017, up 97%.
The most recent quarter for the Company (ended June 31st) amounted to only the third quarter in the last 3 years that has been profitable – not the best recent track record. But, on a positive note, the other two profitable quarters were both in the last year.
In general, business activity follows a weather-related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year-end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPO’s. In addition, purchases of snow removal equipment are typically made in the fourth quarter.
P/E: 29.22 (this figure is higher than recent quarters would suggest, due to the company having not been profitable for much of last year.)
Current Ratio: 1.11
Strongco is a distributor with relatively low margins. The company operates in a cyclical and seasonal business and is subject to very lumpy quarterly results. It also possesses high debt levels. In other words, it is high risk and unpredictable – likely not suitable as a long-term buy and hold situation.
On the bright side – the last quarter was strong, management is in cost control mode, and the overall markets for heavy equipment across Canada are expected to show continued improvement in 2018. Management remains cautiously optimistic regarding the outlook for 2018.
The company does not have consistent enough of an earnings profile to rank as a buy for KeyStone but it may continue to show near to mid-term strength.
Not a long-term buy – look at it as a high-risk trade if you believe in higher energy prices near-term and an increase in infrastructure spending.
Parkland Fuel Corporation (PKI:TSX)
Current Price: $40.25
Market Cap: $5.32 billion
No stranger to our clients as it was again recommended in the $28 range earlier this year – our original buy was at $17.25.
The company has had tremendous gains in share price both recently and year-to-date. It was trading at $26.95 at the beginning of January and $34.82 just one week ago, making it a 49% year-to-date increase and a 16% increase in just the last week.
What does the company do?
Parkland is Canada’s largest and one of North America’s fastest growing independent suppliers and marketers of fuel and petroleum products and a leading convenience store operator. Parkland serves customers through three channels, Retail, Commercial, and Wholesale. Parkland optimizes its fuel supply across these three channels by operating the Parkland Burnaby Refinery and leveraging a growing portfolio of supply relationships and storage infrastructure.
What is driving the stock?
The last week’s jump in share price can be attributed to its most recent quarter’s earnings report release on the evening of August 2nd, where the Company jumped 8.7% overnight.
It may not be directly relevant to the recent week’s stock performance, but it should be noted that Parkland Fuel Corporation made significant acquisitions in the last year including Chevron (which continues its operations mostly in British Columbia and Alberta) and Ultramar (which continues its operations mostly in Quebec).
2018 Q2 compared to 2017 Q2
- Revenue was $3.783 billion compared to $1.806 billion, up 109%.
- Net income was $60 million compared to a loss of $1 million
- On a diluted per share basis, $0.45 compared to a loss of $0.01
- Adjusted EBITDA of $249 million compared to $54 million, up 361%.
Bob Espey, President and CEO
“Our record results in the second quarter continue to highlight the contribution of the Chevron and Ultramar Acquisitions, the significance of the Annual Synergies we are realizing, and the underlying strength of Parkland’s pre-acquisition operations. Through these acquisitions, we have established a significant Canada-wide scale that enables strong opportunity for continued organic growth.”
Current Ratio: 0.98
The record results in the second quarter continue to highlight the contribution of the Chevron and Ultramar Acquisitions, the significance of the Annual Synergies the company is realizing, and the underlying strength of Parkland’s pre-acquisition operations. Through these acquisitions, Parkland has established a significant Canada-wide scale that enables strong opportunity for continued organic growth.
The company’s growth in both revenues and earnings have been significant in the last year. Its portfolio of brands continues to grow adding Chevron and Ultramar to its existing portfolio that included Esso, Fas Gas and Pioneer and place the company in an increasingly prominent position in the Canadian fuel industry. The company’s very strong gains over 2018 and its strong quarterly report has earned its designation as our Star of the Week!
Maxar Technologies Ltd. (MAXR:TSX)
Current Price: $49.93
Market Cap: $3.53 billion
On July 30th, the stock was trading for $67.32. In less than 10-days, it has dropped 25% to $48.93.
What does the company do?
Maxar Technologies is an integrated space and geospatial intelligence company with a full range of space technology solutions for commercial and government customers including satellites, Earth imagery, geospatial data and analytics.
What is driving the stock?
On July 31st, the company released their Q2 earnings that missed investor expectations, turning a net loss for the first time in two years. The company actually posted strong revenue growth.
2018 Q2 compared to 2017 Q2
- Revenue was $578.9 million compared to $375.2 million, up 54%.
- Net income was a loss of $18.6 million compared to a gain of $19.3 million
- On a diluted per share basis, a loss of 0.33 compared to a gain of $0.52, up 310%.
- Adjusted EBITDA of $171.2 million compared to $66.0 million, up 159%.
- On a diluted per-share basis, $2.99 compared to $1.81, up 65%.
Adjusted EBITDA dropped from previous quarter for first time since Q1 2017 (From $187.4 million to $171.2 million).
Only quarter reporting net loss in last 2 years.
Howard L. Lance, President & CEO
“We are reaffirming our full year 2018 guidance for revenue, cash flow from operations and our full-year adjusted EPS outlook. We remain focused on delivering solid financial results throughout the year…Maxar is unique, at the nexus of the new space economy, with four leading commercial business brands. Our diversification strategy is working as evidenced by recent wins, we are delivering on the cost synergies from the DigitalGlobe acquisition, and we are making progress on the long-term strategic and financial objectives for growth laid out at the Company’s inaugural investor days hosted in March 2018.”
Current Ratio: 1.03
61% of Total Assets are Intangible and Goodwill.
In terms of year-over-year growth, the Company’s revenue growth and EBITDA growth actually look fairly decent. The dip in net income is mostly due to a reported Depreciation and Amortization that is 6 times higher than the same quarter in the previous year. Despite the negative income, the Company is seeing good operating cash inflow. Nevertheless, the revenue being unable to keep up with the non-cash expenses have dipped the company into a net loss, leaving investors unimpressed and making it our Dog of the Week!
While revenue growth was strong in this quarter, the growth overall in revenues from the business in the last 5-years has been less than spectacular.