This week in KeyStone’s Stock Talk Podcast, our Your Stock Our Take is The Trade Desk Inc. (TTD:NASDAQ), our Star of the Week is IEC Electronics Corp. (IEC:NYSE) and our Dog, OrganiGram Holdings Inc. (OGI:TSX).
In our Your Stock Our Take Segment we answer a listener question on The Trade Desk Inc. (TTD:NASDAQ) a global technology platform provider for buyers of advertising. While valuations appear high, the company has reported solid growth in 2019 – revenue growth was 38% in its just reported Q3 – we let you know if it is a BUY/SELL/HOLD.
Our Star of the Week is, IEC Electronics Corp. (IEC:NYSE), a company that provides electronic manufacturing services (EMS) to advanced technology companies that produce lifesaving and mission critical products for the medical, industrial, aerospace and defense sectors. Strong fiscal 2019 numbers have the stock up 18% this week, 27% in the last month and 47% year-to-date.
Our Dog of the Week is, OrganiGram Holdings Inc. (OGI:TSX), a licensed producer of cannabis and cannabis-derived products in Canada. The stock is down 33% in the last month and 68% from its mid-May 2019 highs. What is driving the drop and is there an opportunity?
Your Stock, Our Take
The Trade Desk Inc. (TTD: NASDAQ)
Current Price: $262.83
Market Cap: $11.8 billion
What does the company do?
The Trade Desk is a technology company that empowers buyers of advertising. The company provides a self-service, cloud-based platform, which allows ad buyers to create, manage, and optimize more expressive data-driven digital advertising campaigns. The Trade Desk is headquartered in California and has operations across the United States, Europe, and Asia.
The Trade Desk has been a great stock to own so far in 2019 with the share price more than doubling since the start of the year. The stock is also up 36% just over the past couple of weeks since the release of the company’s Q3 financial results on November 7th.
Recent Financial Results:
- Released Q3 2019 financials on November 7th.
- Quarterly revenue was up 38% to $164.2 million.
- Adjusted EBITDA was up 31% to $47.8 million.
- Adjusted earnings per share (EPS) was up 15% to $0.75.
- TTD has a strong balance sheet with net cash of $2.51 per share.
The company reported strong spending growth from customers as well as strong customer retention of 95%.
Management also provided guidance for 2019 and expects revenue of at least $658 million and adjusted EBITDA of $209 million. This guidance was revised upwards slightly in the quarter and implies annual growth of 38% in revenue and 31% in adjusted EBITDA.
There was no guidance provided for earnings per share. It appears that the company is on track for about $3.40 per share in adjusted EPS for 2019 which would put the valuation at about 77 times earnings.
There is no doubt that The Trade Desk is a company with very solid financial characteristics. The company has produced consistent profitability and very strong double-digit growth in revenue, EBITDA and earnings per share. It is also sitting on a solid financial footing with a net cash balance sheet.
However, what would keep KeyStone from recommending this stock is valuation. At 77 times earnings, it is trading at a huge premium to the market. One concern is that earnings per share growth did not keep pace with other metrics in the third quarter. EPS increased only 15% in Q3 while it was up over 35% year to date. The question is whether or not this is an anomaly or a if we can expect EPS growth to be lower going forward. When you are trading at a valuation of 77 times, the market is going to expect you to maintain a very high growth rate and in many cases this will not be realistic.
For pure growth investors, I think that The Trade Desk is something to take a good look at. But for investors that are more price sensitive, the valuation is likely out of range.
IEC Electronics Corp. (IEC:NYSE)
Current Price: USD$8.41
Market Cap: USD$86.95 Million
The stock was up around 18% last week, 27% in the last month and up around 47% year-to-date.
What does the company do?
IEC Electronics Corp. provides electronic manufacturing services (“EMS”) to advanced technology companies that produce lifesaving and mission critical products for the medical, industrial, aerospace and defense sectors.
The company specializes in delivering technical solutions for the custom manufacture of complex full system assemblies by providing on-site analytical testing laboratories, custom design and test engineering services combined with a broad array of manufacturing services encompassing electronics, interconnect solutions, and precision metalworking.
For the most recent year end on September 30th, 2019, sales by sector were:
- Aerospace & Defense – 60%
- Medical – 22%
- Industrial – 18%
What is driving the stock?
The company’s positive financial performance and attractive underlying fundamentals appear to be propelling the stock higher. As just over two years ago the company was barely breaking into profitability.
Financial Results (August 8, 2019)
- Revenue increased 28.4%, to $43.9 million compared to the same quarter last year.
- EBITDA increased 56%, to $3.5 million compared to $2.24 million for Q4, 2018.
- After adjusting out a very large income tax benefit for Q4, 2018, Net Income increased 39%, to $1.79 million compared to $1.29 million for the same quarter last year.
- The company also increased its 2019 year-end backlog to $212 million, an increase of 59% from fiscal 2018.
Twelve-trailing-month (TTM) revenue increased 34%, compared to the same period last year, while (TTM) EBITDA increased 110% period over period – showcasing the company’s strong growth in profitability.
Taking a look at IEC’s balance sheet, they have a net debt position of $2.66 million and a net debt-to-EBITDA ratio of 0.25, so the company’s balance sheet does appear strong.
Now IEC’s management hasn’t provided any guidance for the upcoming 2020 fiscal year, but on a trailing-twelve-month basis the company is trading at a P/E multiple of 15.17x and an EV/EBITDA multiple of 8.63x. Both of which indicate the stock is trading at a slight discount to the market considering its impressive growth.
I thought it might be good to highlight that the company’s 5 largest customers accounted for approximately 51% of net sales, therefore, if the company is to lose one of these large customers, operations would be negatively impacted.
Although IEC is not a stock that KeyStone currently recommends, it is definitely one that we are monitoring going forward. The company’s recent financial results, robust growth, healthy balance and relatively attractive trading multiples have caused the share price to surge. Allowing IEC to claim our coveted status of Star of the Week.
OrganiGram Holdings Inc. (OGI:TSX)
Current Price: $3.42
Market Cap: $534.10 Million
The stock is down 33% in the last month and 68% from its mid-May 2019 highs.
What does the company do?
Organigram (OGI) is an innovative cultivator of marijuana that is based in Canada. It boasts industry-leading costs, cutting edge growing techniques and remains one of the three growers in Canada to have secured agreements with all 10 provinces for the sale of cannabis. Unlike most of its peers, Organigram has been EBITDA positive for four straight quarters and maintains a healthy balance sheet which will allow it to fund its future growth through 2020
What is driving the stock?
In July, Organigram reported a weaker near-term outlook and recently reported weak Q4 2019 results.
- Q4 2019 net revenue of $16.3 million compared to Q3 2019 net revenue of $24.8 million. Q4 net revenue reflected about $20.0 million of sales and about $3.7 million in a provision for product returns and pricing adjustments.
- Q4 adjusted EBITDA was negative $7.9 million compared to positive Q3 2019 adjusted EBITDA of $7.7 million. Q4 negative adjusted EBITDA was impacted by lower adjusted gross margin and higher SG&A compared to Q3 2019.
Management stated that the lack of a sufficient retail network and slower than expected store openings in Ontario continued to impact revenue growth in Q4 2019 and were further exacerbated by increased industry supply. Quarter to quarter revenue is expected to continue to be volatile due to the timing of large pipeline orders for Ontario, in particular, where there is a centralized distribution model and where store additions are difficult to forecast.
On a positive note, Q4 2019 cash and “all-in” costs of cultivation of $0.66 and $0.94 per gram of dried flower harvested6, respectively, decreased from $0.95 and $1.29 per gram in Q3 2019 as yield per plant increased in line with historical levels.
The company’s latest outlook – as at November, management stated as at this point in the first quarter of fiscal 2020 (ending November 30, 2019) (“Q1 2020”), Organigram had shipped more sales compared to the same point in Q4 2019. The company believed at that time it was neither possible nor prudent to provide any further guidance given the dynamic forces and uncertainty in the industry today. Combine and uncertain near-term outlook with poor current quarterly results, and you can see why the stock has lost over 60% of its value since mid-May.
In Ontario in particular, the retail rollout has been delayed for various reasons and this in turn has significantly affected the sales that companies such as Organigram were targeting – giving rise to an industry wide concerns of over-promising and under-delivering. A trend investors loathe.
Ontario’s recent announcement to expand the retail network and believe this could be an important catalyst to drive further growth for Organigram and the industry as a whole.
Organigram appears to have a relatively low cost structure and has been more focused on profitability that some of its peers. We continue to monitor it as there may be a long-term opportunity in the company given the strong revenue growth planned. At it’s highs, the stock got well ahead of the underlying fundamentals and we caution that many of the analyst targets on this industry have been fueled by efforts to gain financing revenues rather than based on providing investors with great advice and great share price returns.
We continue to monitor Organigram – the drop in the past month and 68% plummet since May make it our Dog of the Week.