KeyStone’s Your Stock Our Take MTY Food Group Inc. (MTY:TSX): Star is Aritzia Inc. (ATZ:TSX), Dog: SNC-Lavalin Group Inc. (SNC:TSX).
This week in our Your Stock, Our Take segment we look at MTY Food Group Inc. (MTY:TSX), a Canadian-based franchisor operating in the quick service food industry in both the U.S. and Canadian markets – one of the largest in this segment and a true Canadian success story that really fly’s under the radar. This week, the company reported remarkable strong earnings growth in its third quarter which handily beat street estimates – the stock has jumped 40% since May – a listener asks if we still like the stock. Our Star of the week is Aritzia Inc. (ATZ:TSX), a vertically integrated, innovative design house of fashion brands, which boasts over 90 stores and a solid online presence and, most importantly happens to be a favourite shopping spot for a prominent member of my household. The stock posted a nice gain this week, in what was generally a poor week for North American markets – one of the worst in recent memory. Finally, our Dog of the week is SNC-Lavalin Group Inc. (SNC:TSX), the embattled global engineering and construction company saw its stock drop 13% mid-week after it was reported – that federal prosecutors would not agree to negotiate a deal in regards to alleged illegal dealings with public officials in Libya between 2001 and 2011. The market hates uncertainty and the speculation of a trial is weighing on the stock. 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
I bought MTY Food Group on your recommendation 4 years ago. It has performed well but had stalled for over a year until its recent surge in the market – what is driving the share price and your thoughts on current valuations?
- Harman, Vancouver
MTY Food Group Inc. (MTY:TSX)
Current Price: $66.00
Market Cap: $1.67 billion
What does the company do?
MTY Food Group is a Canadian franchisor operating in the quick service food industry. It franchises and operates corporate-owned locations under different approximately 75 banners and brands offering multiple cuisines such as Korean, Japanese, and Mexican.
The stock is up 12% year-to-date but has only been on the rise this year since May. Closing at a low of $45.55 on May 3rd, it has risen 38% since then.
MTY has completed a string of acquisitions and business combinations this year. On March 1st, the company completed a combination with Imvescor Restaurant Group, a restaurant franchise and licensing business. Then on March 16th, the company completed its acquisition of Grabbagreen, a healthy fast food brand. On April 5th, MTY completed its acquisition of Timothy’s World Coffee as well as Mmmuffins from Threecaf Brands, a subsidiary of Le Duff America. Finally, on September 26th, MTY completed its acquisition of sweetFrog Premium Frozen Yogurt.
On July 11th, the company released its Q2 earnings report to an 8% jump in one day. The company just released its third quarter results on October 10th (yesterday).
Recent Quarterly Financials:
- Revenue for the third quarter ended August 31, 2018 was $91.2 million, an increase of 26.1% over the prior year period.
- Net income grew to $22.3 million in the third quarter of 2018, compared to $12.0 million in the third quarter of 2017, up 85.1%.
- On a diluted per-share basis, it was $0.88 compared to $0.56 previously, up 57.1%.
- EBITDA was $39.6 million in the third quarter of 2018, compared to $25.6 million in the third quarter of 2017, up 54.7%.
Eric Lefebvre – CFO
“Our results benefited from a strong performance from some of our recent acquisitions, more particularly Imvescor Restaurant Group and The Counter Custom Burgers, as well as cost control initiatives and operational leverage which together drove EBITDA margins to new levels… Looking forward, we will focus on maximizing shareholder value by integrating recent acquisitions, adding new locations of our existing brands and seeking potential acquisitions to increase market share.”
Current Ratio: 0.56
Goodwill and Intangible Assets make up a combined 89% of Total Assets
From a fundamental perspective, MTY Food Group showed fantastic growth in its last quarter – 26% revenue growth, 85% income growth (57% on a per-share basis), and 55% EBITDA growth. Growing revenues while growing margins is a positive sign – the company has historically been a free cash flow generating machine. There is limited organic growth, so the company will have to keep growing by acquisitions given the fact it also continues to close current locations. It is fair value in the near-term in its current range, but we would bet on it outperforming long-term over the next 2-5 years.
Aritzia Inc. (ATZ:TSX)
Current Price: $17.85
Market Cap: $1.123 billion
The stock jumped 11% between market close on October 4th and market open on October 5th, from $16.06 to $17.80. Additionally, Aritzia is up 41% year-to-date.
What does the company do?
Aritzia is a vertically integrated, innovative design house of fashion brands. The Company designs apparel and accessories for its collection of exclusive brands. The Company’s expansive and diverse range of women’s fashion apparel and accessories addresses a broad range of style preferences and lifestyle requirements. Aritzia extends across 90 retail stores and its eCommerce business, aritzia.com.
What is driving the stock?
On October 4th, Aritzia released its Q2 financial statements, showing strong operational and bottom-line earnings growth. This continues the positive growth figures demonstrated in the Company’s Q1 results.
Q2 2019 compared to Q2 2018
- Revenue was $205.4 million compared to $174.0 million, up 18%.
- Comparable sales growth was 11.5% compared to 5.4%.
- Net income was $15.1 million compared to $5.0 million, up 203%
- On a diluted per share basis, $0.13 compared to $0.04
- Adjusted EBITDA of $33.0 million compared to $20.7 million, up 60%.
- On a diluted per-share basis, $0.28 compared to $0.18
“The net revenue increase was primarily driven by comparable sales growth of 11.5%, resulting from continued momentum in the Company’s eCommerce business as well as strong performance in the stores. Net revenue growth also reflects the addition of seven new stores and eight expanded or repositioned stores since the second quarter of fiscal 2018…increase in gross profit margin was driven primarily by improvement in product costs related to ongoing sourcing initiatives, the weakening of the U.S. dollar compared to last year and a favorable sales mix shift toward exclusive brands, partially offset by increased warehousing and distribution costs.”
Current Ratio: 2.03
In Aritzia’s last two quarters, it has demonstrated impressive growth up and down its income sheet. As the company expands its sales, it is succeeding at keeping its costs down, increasing its profit margins. Looking at the balance sheet, Aritzia is currently looking financially healthy with a current ratio 2.03 and a debt-to-equity ratio of 0.23. If the company continues in the direction it is currently at, there can be significant value to be found.
Its stock price increases reflect this, making it our pick for Star of the Week!
SNC-Lavalin Group Inc. (SNC:TSX)
Current Price: $44.86
Market Cap: $7.875 billion
On October 10th, the stock plummeted 13% in one day after staying mostly steady for 2 months.
What does the company do?
SNC-Lavalin Group Inc. is a global engineering and construction company offering engineering, construction, and commissioning services in international markets. It serves the oil and gas, mining and metallurgy, infrastructure, and power sectors.
What is driving the stock?
SNC-Lavalin has been previously embattled by a series of scandals and lawsuits involving former executives. In 2015, SNC was charged with illegal dealings with public officials in Libya between 2001 and 2011. Since then, the company has been seeking a negotiation with federal prosecutors for a deal that would set aside unproven fraud and corruption charges in return for fines, co-operation, and other reparations. On the morning of October 10th, the company announced that federal prosecutors would not agree to negotiate a deal on the matter. This led to the plummet in stock price to its lowest point in 2 and a half years.
*note* there are many “noise” costs that make a large difference between net income and adjusted EBITDA, such as settlement costs, losses and gains of assets, and restructuring costs.
Q2 2018 compared to Q2 2017
- Revenue was $2.470 billion compared to $1.868 million, up 32%.
- Net income was $83.2 million compared to $134.4 million, down 38%
- On a diluted per share basis, $0.47 compared to $0.91, down 48%.
- Adjusted EBITDA of $139.7 million compared to $45.1 million, up 210%.
- On a diluted per-share basis, $0.80 compared to $0.30, up 167%.
Neil Bruce – President and CEO
“We are entering the third quarter of 2018 with a strong backlog, a number of recently signed master service agreements and a high-quality prospects list across our key sectors and geographies; poised for a strong second half of 2018. The integration of Atkins business continues to progress well, and we have been able to share technologies, data and knowledge that is improving and broadening our services to clients.”
Current Ratio: 0.94
Goodwill and Intangible Assets make up a combined 53% of Total Assets.
From a fundamental perspective, the company is difficult to read into. Operationally, SNC shows strong growth in both sales and EBITDA. However, costs associated with a combination of lawsuits, restructuring, acquisitions, disposals, and impairments leads to a very noisy bottom line, which we see in the massively slashed net earnings margin, down from 7% of revenue to 3% of revenue.
Now, its ongoing legal proceedings proceed another obstacle in valuation. Seeing how the company’s largest drop in share price in over two years came about due to a development in lawsuits that have been ongoing for nearly six years, the share price seems beholden to these legal proceedings, and the fallouts that can result.
It is likely undervalued fundamentally, but past transgression likely overhang the stock near-term.
The 14% drop mid-week make SNC our Dog of the Week.