KeyStone’s STARS: XPEL Inc. (XPEL:NASDAQ) & Fortinet Inc. (FTNT:NASDAQ) and DOG: Canada Goose Holdings Inc. (GOOS:TSX).
Our first Star of the Week is no stranger to KeyStone’s clients having been in our Canadian Small-Cap research Focus Buy Portfolio for over 2-years is, XPEL Inc. (XPEL:NASDAQ), which provides protective films and coatings, including automotive paint protection film, surface protection film, automotive and architectural window films and ceramic coatings. The stock jumped 30% on Monday after reporting excellent Q3 financial results and is now up over 850% since we recommended it to clients at US$1.42.
Our second Star of the Week is also no stranger to KeyStone’s clients as it holds a place in our US Growth Stock Research Focus Buy Portfolio, Fortinet Inc. (FTNT:NASDAQ), a pure-play cybersecurity company with a product line that unified threat management appliances, firewalls, network security, and its security platform, Security Fabric. The stock is up 10% over the past 5 days and around 25% since they released their Q3 financial results in late October.
Our Dog of the Week is, Canada Goose Holdings Inc. (GOOS:TSX), a Canadian-based designer, manufacturer, and retailer of premium outdoor apparel for men, women, youth, children, and babies. The company is down 8% in the last 2 trading days, after initially dropping 15% on news that the company’s Hong Kong business would be significantly impacted by protests in the country. Is it a Dog or opportunity?
Weekly Star
XPEL Inc. (XPEL:NASDAQ)
Current Price: US$13.68
Market Cap: US$374.43 Million
Star Performance:
The stock was up 30% on Monday after reporting great financial results and is now up over 850% since we recommended it to clients just under two years ago at US$1.42.
I do want to note that on Monday, trading volume on XPEL nearly surpassed 1 million shares traded, which almost doubled the previous one-day trading volume record on the stock. So the market seems to have been very excited about the results.
What does the company do?
XPEL is a global provider of protective films and coatings, including automotive paint protection film, surface protection film, automotive and architectural window films and ceramic coatings. The primary product and service is automotive paint protection film – typically applied aftermarket – but the company works with dealers as well. The film prevents annoying scratches and dings on your vehicle, caused by flying debris or minor bumps.
What is driving the stock?
On Monday, the company reported record third quarter financial results.
- Revenue increased 21.9% to $35.6 million compared to the third quarter 2018 – sequentially, revenue growth was 18.4% compared to the second quarter of 2019.
- Gross margin improved to 34.5% compared to 30.3% in the third quarter of 2018. This led to better profitability.
- Earnings per share grew to $0.16 compared to $0.08 per share in third quarter 2018 and this also beat the analyst consensus expectation by about $.06 – so you can see why the market got so excited about the company’s performance.
Conclusion:
Another positive take away from the quarter was that Ryan Pape, the CEO, stated that the company “Saw continued revenue growth across all of our geographic regions including a return to growth in China, where revenues increased 16.5% in the third quarter. We’re excited by the interest we’re receiving for our portfolio of products and installation services and as we move through the fourth quarter, we believe we are well positioned to drive continued growth and profitability as we close out 2019.”
While the stock performance has been excellent, what is encouraging going forward is that the price gains have been driven by the underlying fundamentals and growth in the business remains strong. Revenues have more than doubled in the past 2-years and profitability has been increasing with margin expansion.
However, it didn’t come as a surprise that on Monday, BNN didn’t even touch on XPEL’s impressive results as KeyStone is basically the only independent research house covering the stock, and the only way it could have made it into your portfolio was by being a client of our research.
All in all, XPEL’s jump this week and impressive performance over the past 2-years give it the coveted status of our Star of the Week.
And again, we would like to congratulate all clients who owned the company.
Weekly Star
Fortinet Inc. (FTNT:NASDAQ)
Current Price: $99.56
Market Cap: $17.0 Billion
Star Performance:
The stock is up 8% over the past 5 days but up 22% since they released their Q3 financial results on October 31st.
What does the company do?
Fortinet is a leading, pure-play cybersecurity company with over 360,000 customers globally. Its products include unified threat management appliances, firewalls, network security, and its security platform, Security Fabric.
What is driving the stock?
On October 31st, the company reported very strong third quarter financial results.
- Total revenue was up 21% to $547.5 million.
- Non-GAAP earnings per share were up 36% to $0.67.
- Free cash flow was up 29% to $203.7 million.
- The company also increased its 2019 guidance and now expects non-GAAP EPS of about $2.40 per share compared to previous guidance of $2.25 per share.
- On an earnings basis the stock is far from cheap, but Fortinet has generated free cash flow of $741.2 million over the trailing 4 quarters.
- The company is also cash rich with $1.94 billion in cash and no debt; net cash of $11.28 per share.
- Factoring in this net cash position, Fortinet is trading at a valuation of about 20 times free cash flow.
Conclusion
KeyStone recommended Fortinet as a Focus BUY to our U.S. Growth stock clients on May 2018 at a price of $62 per share.
We made this recommendation as part of a comprehensive analysis of the cybersecurity sector. We like characteristics of cybersecurity as an investment because its an area where enterprises have no choice but to spend. We hear about data hacks and leaks all the time and they are very costly to these organizations. The sector globally has been growing and this is expected to continue for at least the next few years.
When we did your analysis, we identified 36 stocks in North America in cybersecurity and researched everyone of them. Fortinet in our view, represented the best opportunity based on market leadership, growth, profitability and value. We have been very happy with the performance, with the company’s share price up 60% since our initial recommendation.
The question now is what do we do going forward. Is the company still a buy or should investors start to take profits? We will be putting out an update to our U.S. Growth stock clients very shortly with the answer to that question.
Weekly Dog
Canada Goose Holdings Inc. (GOOS:TSX)
Current Price: $47.41
Market Cap: $4.64 Billion
Dog Performance:
The stock is down 8% this week and 24% drop year to date.
What does the company do?
Founded in a small warehouse in Toronto, Canada in 1957, Canada Goose has grown into one of the world’s leading makers of performance luxury apparel. The company operates in two segments, Wholesale and Direct to Consumer. It offers parkas, jackets, shells, vests, knitwear, footwear, and accessories for fall, winter, and spring seasons.
What is driving the stock?
Canada Goose posted strong quarterly sales that beat expectations on Wednesday, but its stock fell nearly 11% as political upheaval in Hong Kong “significantly” affected performance in that region.
Speaking on a conference call with analysts, Canada Goose chief executive Dani Reiss said the situation on the ground in Hong Kong has “intensified” and impacted store performance “significantly.” While the company said unrest in Hong Kong has led to weaker performance in the region, it pointed to strong sales in North America and “standout performances in Asia” as factors that were able to offset the slower traffic.
Q2 Financial Results
- Total revenue increased by 27.7% to $294.0m from $230.3m, or 28.3% on a constant currency basis
- Net income was $60.6m, or $0.55 per diluted share, compared to $49.9m, or $0.45 per diluted share.
- Adjusted EBIT(1) was $79.2m, compared to $66.5m.
- Adjusted net income(1)was $63.6m, or $0.57 per diluted share, compared to adjusted net income(1) of $51.1m, or $0.46 per diluted share
Conclusion
Consensus EPS (earnings per share) call for $1.70 for the current year and 24% growth to $2.11 in Fiscal 2022.
Based on this the company is trading at roughly 28 times this year’s earnings and a more reasonable 22.5 times next years’ expected EPS.
Overall the outlook for Canada Goose, a true Canadian success story is positive. Several analysts have cut their one year target prices from the mid $70 range to the low to mid $60 range. We would have classified the original targets as aggressive.
We think the uncertainty regarding Hong Kong is a bit overblown and the recent sell off is more about the multiple the market was paying for the stock coming back to reality, rather than a true fear of a collapse long-term in one of its markets.
The stock looks to be trading close to fair value near-term and holds growth potential long-term if the company keeps growing in the 20% range long-term.
Nevertheless, its drop this week and 24% drop year to date, give it the not so coveted status as our Dog of the Week!
