KeyStone’s Your Stock Our Take; Alacer Gold Corp. (ASR:TSX), our Star of the Week is Skechers U.S.A., Inc. (SKX:NYSE), and our Dog is NFI Group Inc. (NFI:TSX).
This week in our Your Stock, Our Take segment we take a look at, Alacer Gold Corp. (ASR:TSX), a low-cost junior-intermediate gold producer, with two producing operations in Turkey. The company recently completed a significant sulfide production plant, at its Çöpler Gold Mine which is now set to produce 3.5 million ounces at low costs, generating robust free cash flow for approximately the next 20 years, albeit in a risky geopolitical arena. With the uptick in the price of gold, a listener asks us if Alacer is a good option going forward. Our Star of the Week is, Skechers U.S.A. Inc. (SKX:NYSE), the popular marketer and manufacturer of Skechers-branded lifestyle footwear for men, women and children. The stock was up 15.5% this week, 25.5% in the last month and is up 33% year-to-date. We let you know what is driving the move and whether it is sustainable. Finally, our Dog of the Week is, NFI Group Inc. (NFI:TSX), a global manufacturer of buses operating under several brands. NFI vehicles incorporate a wide range of drive systems including: clean diesel, natural gas, diesel-electric hybrid, and zero-emission electric (trolley, battery, and fuel cell applications). The former TSX darling has seen its share price drop 12% over the last 6 trading days and 19% over the last month. Is it a Dog or opportunity?
Your Stock, Our Take
I know KeyStone has profiled Alacer Gold in a number of your Cash Rich Special Reports. The stock has performed well this year – what is driving it and how do you feel about its prospects going forward?
Emile, Edmonton – Emailed the question.
Alacer Gold Corp. (ASR:TSX)
Price: $4.96
Market Cap: $1.45 Billion
What does the company do?
Alacer is a low-cost junior-intermediate gold producer, with an 80% interest in the world-class Çöpler Gold Mine (Çöpler) in Turkey operated by Anagold Madencilik Sanayi ve Ticaret A.S. (Anagold), and the remaining 20% owned by Lidya Madencilik Sanayi ve Ticaret A.S. (Lidya Mining). The Çöpler Gold Mine is located in east-central Turkey in the Erzincan Province, approximately 1,100 kilometers east from Istanbul and 550km east from Ankara, Turkey’s capital city. Alacer continues to pursue opportunities to further expand its current operating base to become a sustainable multi-mine producer with a focus on Turkey. The Çöpler Gold Mine is processing ore through two producing plants. With the recent completion of the sulfide plant, the Çöpler Gold Mine will produce over 3.5 million ounces at first quartile All-in Sustaining Costs, generating robust free cash flow for approximately the next 20 years.
Key Points:
While we considered mining and mining related stocks to be relatively poor investments generally long-term, particularly junior exploration and production companies, as the listener points out we have profiled Alacer in the past due to its strong balance sheet, low cost gold production projects and potential to producer strong cash flow. The stock has performed very well already in 2019 – up 93%.
In its first quarter, with the new sulfide plant online at its Çöpler Gold Mine gold, production grew to over 89,000 ounces, generating positive unlevered free cash flow of $35 million. Management re-iterated that the company is track to meet its full year gold production guidance of 320,000 – 380,000 ounces from the two producing plants – up significantly from 2018.
Our Take:
In Q1 2019, the year-over-year gold price was actually down US$26 per ounce from the previous year, but this has reversed significantly in the second quarter of this year, with gold moving to new 5-year highs. Couple this with the production gains from the new sulfide plant at its Çöpler mine and one can see why the share price has jumped.
The price of gold is the most significant external factor affecting profitability and cash flow of the company.
Trailing-twelve -month (TTM) EBITDA is $108.4 million, and is at the company’s highest point since 2015 – we expect this to continue. Debt levels are at the higher end of what we like to see net debt level (debt minus cash on hand) at 3.9 times its TTM EBITDA. With the recent expansion this is planned, and cash flow would allow the company to quickly deleverage.
The company is trading at 14 times EBITDA and 1.2 times book value. These valuations are slightly pricey, given the company’s dependency on economic factors (such as gold price) as well as its above average geopolitical risk from its mine in Turkey. However, with the company’s low production costs, and if the price of gold remains in its current range or moves higher, the multiples should become significantly more attractive by year’s end. It appears management is executing well, but the price of gold over the next year and moving forward typically determines the fate of a gold producer such as this. If the company continues to execute, and gold moves higher the shares likely do well. Even if management continues to execute and gold moved lower, the shares likely underperform the market. That is the rub with speculation in gold related companies. For those who want to speculate on higher gold prices, Alacer is an option, but the company has priced in its current positive news near-term, nearly doubling already in 2019.
Weekly Star
Skechers U.S.A., Inc. (SKX:NYSE)
Current Price: USD$39.63
Market Cap: USD$6.4 Billion
Star Performance:
The stock was up 15.5% this week, 25.5% in the last month and is up 33% year-to-date.
Just in the last week the stock hit a new 52 week high, going from around $33.50 up to around $39.30, testing previous highs made in early 2018.
What does the company do?
Skechers U.S.A, Inc. is a designer and marketer of Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers Performance brand name. It also offers apparel, accessories, eyewear, scrubs and other merchandise.
What is driving the stock?
On Friday, July 19th, 2019, the company reported better than expected Q2 financial results.
The gain was pushed by impressive growth in international sales.
- International sales, which comprise of 55% of total sales were up 19.8% for the quarter, driven by men’s and women’s sport, and men’s and women’s street footwear sales.
The COO, David Weinberg said that the company’s record second quarter performance was “a testament to the demand and strength for our brand and products. We experienced growth in every region, with the biggest dollar increase coming from India, the Middle East and China”.
Financial Results
Q2 2019 (June 30, 2019)
- Revenue increased 10.9%, to $1.259 billion from $1.135 over the same quarter last year.
- Net Income increased 66% to $75.2 million from $45.3 million.
- On a diluted per share basis up 69%, to $0.49 from $$0.29 for the prior year period.
- Comparable same store sales increased 4.9%.
Conclusion:
For Q3, the company expected to see revenue growth to remain strong – climbing approximately 13% from the prior period, and EPS to be $0.70 compared to $0.65 for the same period last year.
Looking at the company’s fundamental ratio’s the company trades at a trailing twelve-month price-to-earnings ratio of 19x, has a debt-to-equity ratio of 0.05 and a current ratio of 2.5.
So, given the company’s impressive quarterly results and optimistic guidance, the stock has risen considerably and claimed the coveted status of Star of the Week.
Weekly Dog
NFI Group Inc. (NFI:TSX)
Current Price: $31.23
Market Cap: $1.96 Billion
Dog Performance:
NFI’s shares are down 12% over the last 6 trading days and down 19% over the last month. The company’s share price peaked in May of last year at about $60 per share. In the 3 years previous, NFI was a top performer on the TSX but the share price has undergone a steady decline since then.
What does the company do?
NFI is a global manufacturer of buses operating under several brands. The company operates more than 50 facilities in 10 countries and employs 8,900 people. NFI vehicles incorporate a wide range of drive systems including: clean diesel, natural gas, diesel-electric hybrid, and zero-emission electric (trolley, battery, and fuel cell).
What is driving the stock?
There are a couple of things impacting the stock. Over the past year, we have seen generally weakness in the company’s financial performance. This is after several years of strong growth in revenue and earnings.
More recently, the company issued a press release on July 16th, outlining its Q2 2019 deliveries, orders and backlog. At the end of Q2 2019, NFI’s total backlog declined to 9,997 units (valued at $4.82 billion) compared to 10,587 units (valued at $5.16 billion) at the end of Q1 2019. This press release precipitated the share price decline over the last week.
Financial Results
Q1 2019 (released May 8th) compared to Q1 2018
- Revenue of $567 million decreased by 2%.
- Adjusted EBITDA of $60.3 million decreased by 18%.
- Adjusted Earnings per Share of $0.26 decreased by 54%.
- Q2 results are expected out in early to mid-August.
Conclusion:
NFI’s share price has had a rough week. The catalyst for this decline was certainly related to the lower backlog announced on July 16th. However, the bigger story is the near 50% decline in the share price over the last 14 months. Financial performance has weakened over this period which is what’s driving the share price lower. Long-term NFI is a very solid business. It’s a global business and has been completing acquisitions to further expand its footprint. We like the focus on energy efficient transport. However, one thing that I did learn about the company when doing my own research is that NFI’s market is cyclical. We would not advise buying into a company when the financial performance is trending lower, at least until we have some confidence that the business will start to turn around.
