Stock Talk Podcast 62 Show Notes

KeyStone’s Your Stock Our Take is Supremex Inc. (SXP:TSX), our Star is Intuit Inc. (INTU: NASDAQ), & our Dog is Freshii Inc. (FRII:TSX).

This week in our Your Stock, Our Take segment we look at Supremex Inc. (SXP:TSX), a North American manufacturer and marketer of envelopes and a growing provider of paper-based packaging solutions. A listener asks if it is time to take a look at this stock after what appeared to be a turnaround quarter reported late last week? Our Star of the week is Intuit Inc. (INTU: NASDAQ), the small business and tax software provider saw its stock surge 6.77% Friday and 25% year-to-date on strong second quarter fiscal 2019 earnings lead by growth in the company’s Small Business and Self-Employed Group revenues. Finally, our Dog of the week is Freshii Inc. (FRII:TSX), a leader in the quick-serve restaurant healthy eating segment operating 439 restaurants in 16 countries but primarily North America. Its restaurants offer salads, bowls, burritos, wraps, soups, juices, smoothies, and frozen yogurt. The stock is down over 16% last Friday and is off 60% in the past year. Is it a Dog or an opportunity?

I would again like to welcome my Co-Host, KeyStone’s Senior VP of Research, Mr. Aaron Dunn. How are you?

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In addition, I just wanted to note that one of our analysts, Connor Krawlitzki, published and interesting article on low-quality versus high quality earnings and he used one of Canada’s largest and lower cost Cannabis producers, Aphria as an example.

The article is provocatively titled, “Can You Trust Aphria’s Reported Earnings?”. It is posted on our website at www.keystocks.com, on our twitter, facebook, and LinkedIn feeds as well. I encourage listeners to check it out.

Can You Trust Aphria’s Reported Earnings?

From an investment perspective, the short answer is no.

From an accounting perspective, the earnings are what they are. And in the case of Aphria (APR:TSX), one of Canada’s largest and lower cost Cannabis producers, earnings appear accurate. Once the accountants have gotten a hold of numbers, checked and rechecked and provided a full audit, we should be able to “trust” the stated earnings are correct.

But, from an investment perspective, the question of whether headline reported earnings figure be used for valuation purposes is a very different one.

Your Stock, Our Take

Supremex Inc. (SXP:TSX) saw its shares move higher last week after dropping like a stone in 2018. What is driving the stock and is it an opportunity – the dividend is around 9%?

• – via twitter.

Your Stock, Our Take

Supremex Inc. (SXP:TSX)

Current Price: $3.03

Market Cap: $ 85.69 Million

What does the company do?

They are a manufacturing company with 2 segments to their business: 1) envelopes, which is 72% of revenue and 2) packaging, which accounts for the other 28%.

Important to understand about Supremex is that the envelope business is in decline.

Their strategy is to divert cash flow from their declining envelope business into growing the packaging segment, mostly through acquisition.

In 2018, the company’s Canadian envelope revenue declined 7.2% to $94.8 million and the U.S envelope revenue increased 2.5% to $43.4 million.

The packaging segment grew revenue 64.4% to $56.9 million due primarily to two acquisitions made during the year and some organic growth.

Key Points:

Recent Quarterly Financials 

The last quarter was quite good and the stock has responded positively, up 15% over the last 5 trading days. Revenue in the last quarter was up 9.7% and adjusted earnings increased 7.4%.

Conclusion

The stock is quite cheap, trading at 6 times trailing adjusted earnings and it also pays a dividend which yields over 9%.  But we never picked up coverage on the stock and we still are not confident enough in the story to see Supremex as a good investment.  The problem is that the while the company puts out good quarters from time to time, the financial performance fluctuates a lot. While the last quarter reported showed decent growth, in the quarterly previous to that adjusted earnings were down 40%.  We have observed these ups and down in the Supremex’s financials and this lack of visibility in the company’s performance is not something that the market generally like to see.  The company’s share price is down about 35% over the last year and has been cut in half over the last 3 years.  The company has a good strategy and is cheap but the lack of consistency is a big risk.  It is going to take more than one good quarter to gain our confidence.  We will continue to follow the company but we wouldn’t be buyers at this time.

Weekly Dog

Freshii Inc. (FRII:TSX)

Current Price: $2.75

Market Cap: $ 85.6 Million

Friday – down $0.5600 or -16.92%.

 What does the company do?

Founded in 2005, Freshii Inc. develops, franchises, and operates quick-serve restaurants in Canada, the United States, and internationally. Its restaurants offer salads, bowls, burritos, wraps, soups, juices, smoothies, and frozen yogurt. Freshii has opened 439 restaurants in 16 countries around the world.

Dog Performance:

This week, Freshii reported weaker Q4 numbers. Adjusted EBITDA dropped in the fourth quarter and for the year. Most concerning, same-store sales for Q4 2018 were down (6.1%), compared to same-store sales growth of 6.4% for Q4 2017. For fiscal 2018, same-store sales were down (1.2%) compared to 5.5% in fiscal 2017.

What is Driving the Stock?

In the end, it is the underlying Driving the negative growth management cited repeated challenges on net store openings and a cohort of underperforming stores that need to be addressed.

Conclusion

Freshii has been through 3 years of very rapid growth, going from 178 stores at the end of 2015 to 439 stores at the end of 2018 – the company has not handled that growth well and the results showed in the second half of 2018. Management believes they have “right sized” operations with cuts in Q4, but the business was not profitable in the latest period. There is a solid net cash position in the business of around $28 million which is 30+% of its market cap. We monitor it as a potential turn around target, but until we see hints of a same-store-sales growth turnaround, we would stay on the sidelines.The stocks 16% drop on Friday and 60% drop in the last year give it the not so coveted status of our Dog of the Week.

Weekly Star

Intuit Inc. (INTU: NASDAQ)

Current Price: $250.94

Market Cap: $65.12 Billion

Stock up nearly 7% on Friday and 25% year-to-date in 2019.

What does the company do?

Intuit is a one of the largest small business and tax software provider’s who’s offering included TurboTax, QuickBooks, Mint and Turbo.

What drove the stock higher?

Despite the fact that the first wave of tax filings in 2019, as tracked by the IRS, reveal an early slump in volume versus 2018, Intuit posted Fiscal Q2 revenue growth of 12.8% and per share earnings growth of 2.8%.

Key to the share price jump was the fact the company exceeded the top range of its previous revenue guidance, which anticipated 11% year-over-year growth for the quarter. Intuit’s top-line performance was fueled by its small business ecosystem, which expanded revenue by 38% 

Conclusion

Looking forward

Management left previously issued guidance for fiscal 2019 unchanged in its earnings release. The company expects 8%-10% year-over-year revenue growth against fiscal 2018, within a range of $6.53 billion-$6.63 billion. Diluted earnings per share (EPS) of $5.25-$5.35 will represent 3%-5% expansion over 2018’s earnings.

Intuit is a quality business with solid sustainable earnings. The growth is decent, but not what we would call high. The quality of earnings is good. The market is very aware of this has afforded the stock high multiples of 48 times next years earnings and an EV/EBITDA multiple of roughly 34. The stock is expensive – investors are paying up for a quality name.

The share price gains this week and year-to-date in 2019, make it our star of the week!