KeyStone’s Your Stock Our Take: American Tower Corporation (AMT:NYSE) and Destiny Media Technologies Inc. (DSY:TSX-V), and Star: Parex Resources Inc. (PXT:TSX).

In our Your Stock Our Take Segment we answer two listener questions this week. The first on a large U.S. real estate investment trust, American Tower Corp. (AMT:NYSE), which owns and leases a portfolio of approximately 170,000 cell towers globally.  A listener asks us if this is the REIT is a good way to play the expansion and rollout of 5G technology.

Our second Your Stock Our Take is on profitable micro-cap, Destiny Media Technologies Inc. (DSY:TSX-V), which provides software as a service (SaaS) solutions to businesses in the music industry solving critical problems in distribution and promotion. With the company posting strong earnings growth in 2019, a listener asks us our take on the stock.

Our Star of the Week is cash-rich international but TSX-listed energy producer, Parex Resources, Inc. (PXT:TSX). Parex is engaged in the exploration, development, production and marketing of oil and natural gas in Colombia. The stock is up 27% in the past month – we let you know why.

 

Your Stock, Our Take

American Tower Corporation (AMT: NYSE)

Current Price: $228.55

Market Cap: $102 billion

Yield: 1.7%.

What does the company do?

American Tower is a real estate investment trust which owns and leases and portfolio of approximately 170,000 cell towers globally. The company leases its towers to wireless service providers who in turn install equipment on the towers to support their own wireless networks. About 40,000 of the company’s towers are in the United States. American tower also has a large presence in India and Brazil.

Key Points:

The listener’s question was is American Tower really a 5G play or is it just an overpriced REIT?

For those who need a refresher, 5G is fifth generation wireless network. The current state of the art if 4G. 5G is expected to have download speeds between 10 and 100 times faster than 4G. The deployment of 5G is just starting now and its expected to produce a tremendous amount of economic value over the next decade and facilitate advancing technologies like internet of things and robotics.

American Tower is a partial play on 5G. The deployment of 5G will increase demand for the company’s existing infrastructure. In addition, over time, the continued growth in data usage will increase demand for infrastructure and American Tower is well positioned in this area.

I say that the company is a partial play on 5G because I want to temper people’s expectations. Although 5G is in the beginning phase of deployment now, 4G networks will continue to carry the vast majority of data usage for several years to come. I believe that American Tower will benefit from 5G but I don’t necessarily expect there to be a huge uptick in growth over the next 6 to 18 months.

Recent Financial Results:

  • American Tower released its Q3 2019 financials on October 31st.
  • Total revenue was up 9.4% to $1.94 billion.
  • Adjusted funds from operations, or AFFO per share, which is a proxy for free cash flow, was up 9.7% to $1.93.
  • The company is expecting $7.87 per share for the full year 2019; this puts the valuation at about 29 times.
  • AFFO per share has grown historically at a compound rate of about 14% per year but based on management’s 2019 guidance it will be flat compared to 2018.
  • The company has about $25,000 in total debt and the debt to total capital ratio is about 80% which I would consider to be high. I would need to compare this to other REITs in a similar space.

Our Take:

Overall, I think that American Tower is a fine company. It does provide exposure to 5G but I would temper expectations as I don’t believe there will necessarily be a massive uptick in growth in the near term. More than likely, 5G will just provide a base of opportunities from which the company can continue to grow at an incremental rate. From a valuation perspective, the company appears to be trading at close to fair value. I wouldn’t consider it particularly expensive for cheap relative to U.S. stocks with similar fundamentals. We would like to see growth close to its historical rate of 14% to justify the valuation.

 

Your Stock, Our Take

Destiny Media Technologies Inc. (DSY:TSX-V)

Current Price: $1.30

Market Cap: $14 million

What does the company do?

Destiny Media Technologies provides software as a service (SaaS) solutions to businesses in the music industry solving critical problems in distribution and promotion. The core service, Play MPE, provides promotional music marketing to engaged networks of decision makers in radio, film, and TV. Customers range from small independent artists, small to large independent record labels, to the major record labels such as Universal Music Group, Warner Music Group, and Sony Music Entertainment.

Key Points:

Recent Financial Results:

2019 Results 

Play MPE currency adjusted revenue for fiscal 2019 grew by 9.1% over fiscal 2018. Increases in revenue were driven by expanded major record label use in Europe and the USA and expanded independent label use in the USA and Australia. Foreign currency fluctuations reduced the overall positive impact that Play MPE revenues by 3.0% resulting in a net 6.1% increase in reported Play MPE revenue and total unadjusted revenue increase of 5.6%. For Q4, unadjusted revenue is up 8.9% over Q4 2017. However, year-over-year, adjusted EBITDA is down 20.6% and adjusted EPS is down 26.1% for the quarter. FFO has risen slightly by 2.2% year-over-year in Q4.

Mixed results overall.  

Our Take:

Destiny is a profitable solid little business, with little being the operative word in the context of the North American public markets. We like the business and the increase in recurring revenues is encouraging. As it stands, 49% of the company’s revenues are recurring, out of which 98% coming from self-service deals with major labels rather than independent labels. This is a strong recurring revenue base on which to add activity-based revenue streams on top of. The company has a strong balance sheet for a company of its size, with some cash to continue expansion plans. In terms of valuation, the company trades for 16 times adjusted earnings, or 11.5 times adjusted earnings after accounting for the company’s strong net cash balance. These multiples are a discount to average market multiples, but the discount is justified, based on the size of the business. Earnings growth was slightly negative in 2019 and revenue grew by only 5.5%.

We like the business and balance sheet, but the company’s small relative size and lack of significant revenue growth have KeyStone ranking the shares as slightly undervalued to close to fair value near-term. We Monitor it and the company will be included in our upcoming Cash Rich Special Report.

 

Weekly Star

Parex Resources, Inc. (PXT:TSX)

 Current Price: $24.78

Market Cap: $3.54 Billion

What does the company do?

Parex Resources Inc. and its subsidiaries are in the business of the exploration, development, production and marketing of oil and natural gas in Colombia.

Star Performance:

The stock was up around 27% in the past month. 

What is driving the stock?

Driven by enthusiasm after the company announced an oil discovery on one of its properties on December 17, 2019. The newly found oil well was tested using an electric submersible pump and over a 76-hour period a total of 4,750 barrels of 28 API oil was produced.

Longer term, the company’s share price has also been performing quite well, driven by slow but steady upward trajectory in its financial performance.

Financial Results (Released November 6, 2019)

Q3, 2019

  • Revenue increased 13.9%, to $243.3 million compared to the same quarter last year.
  • EBITDA increased 44.4% to $146 million compared to $101.1 million for the same quarter last year.
  • Fully diluted earnings per share (EPS) decreased 29% to $0.39 per share compared to $0.55 cents for Q3, 2018.

Conclusion:

Taking a look at the company’s balance sheet, they have very little debt and a net cash position of around $350 million.

Looking at the company’s current valuation multiples, they are trading at a price-to-sales multiple of about 9.3 times trailing revenue and around 4.8 times trailing funds flow provided by operations (FFO). These multiples do appear to price Parex attractively, but they don’t seem be pricing much growth in going forward. As the company did provide FFO guidance for the 2020 fiscal year, which came in at US$520-550 million, which would provide a forward price-to-FFO multiple of around 5.10 times. So again, considering these numbers, limited growth is anticipated going forward for the 2020 fiscal year.

Of the oil producers we do like Parex Resources. They have a large cash position on its balance sheet and their financials have shown an upward trajectory over the long-term despite net income being quite volatile. One of the biggest concerns that we have with the company which keeps us from recommending it to clients at present is their lack of growth going forward.

Overall, the company’s recent oil discovery and decent financial performance has propelled the stock higher and allowed Parex to claim our coveted status of Star of the Week.