KeyStone’s Your Stock Our Take: AirIQ Inc. (IQ:TSX-V), DOG: Bombardier Inc. (BBD.B:TSX), and STAR: TerraVest Industries Inc. (TVK:TSX).
In our Your Stock Our Take Segment we answer a timely question on, AirIQ Inc. (IQ:TSX-V) which offers an intuitive web-based platform that provides fleet operators and vehicle owners with a suite of asset management solutions to reduce cost, improve efficiency and monitor, manage and protect their assets. A listener asks us if recent quarterly growth is sustainable in this profitable micro cap which just hit new 52 week highs.
Our Dog of the Week, Bombardier Inc. (BBD.B:TSX), the Canadian transportation giant which, creates innovative and game-changing planes and trains (at least when they can get them finally delivered). The stock has dropped over 30% in the past week after cutting Q4 guidance and saying it may need to pull out of its JV with Airbus to build commercial jets because rising production costs threaten future returns on its investment. The stock is off 56% from its highs this past year.
Our Star of the Week, TerraVest Industries Inc. (TVK:TSX), an industrial company that manufactures and sells goods and services to various end-markets including energy, agriculture, mining, and transportation. The stock was up around 13% in the last week and up 45% in the past year. We let you know what is driving it and if it is sustainable.
Your Stock, Our Take
AirIQ Inc. (IQ:TSX-V)
Current Price: $0.30
Market Cap: $9.2 million
What does the company do?
AirIQ offers an intuitive web-based platform that provides fleet operators and vehicle owners with a suite of asset management solutions to reduce cost, improve efficiency and monitor, manage and protect their assets. Company services are available online or via a mobile app, and include instant vehicle locating, boundary notification, automated inventory reports, maintenance reminders, security alerts and vehicle disabling and unauthorized movement alerts.
Second Quarter Highlights (for the three months ended September 30, 2019)
The Company achieved increases in a majority of its key metrics during the quarter when compared to the same quarter in the previous year, including the following:
- Total revenue increase of 39% to $1.42 million from $1.02 million in Q2 2018.
- Recurring revenue increase of 10% $762,063 from $691,271
- Hardware and other revenue increase of 98% or $326,196 to $658,401 from $332,205
- Gross profit increase of 26% or $145 to $706,235 from $560,724
- Operating profits increase of 96% to $302,113 from $153,851
- Net income increase of 258% to $240,496 from $67,132
- Cash balance increase to $ 1,817,043 from $854,113.
All great things.
Looking historically – over the past from 2016 to 2019 AirIQ grew revenues a total of just 11% from $3.31 million to $3.68 million – so a low growth rate. However, on a trailing 12-month basis, the company has now done over $5 million in revenues. Great growth this year.
We note that while total revenues were up 39% in the last quarter, recurring revenues moved just 10% higher. There was a very significant increase in hardware sales, which can be lumpy.
From a valuation perspective, the company’s trailing PE is in the range of 22 and trailing price to FFO is in the range of 12, both after cash on hand is removed. These ratios are not too high, but on the higher end of the scale given the lumpy nature of the hardware revenue for a company like this.
We like the business and expect to see some increases in the recurring revenues following the new hardware installs. But, we expect continued quarterly lumpiness and given the fact management provides no guidance in its quarterly numbers going forward, we see the business trading at near-term fair value at present. Certainty long term potential, but priced in at present.
Bombardier Inc. (BBD.B:TSX)
Current Price: $1.22
Market Cap: $2.9 billion
What does the company do?
Bombardier manufactures transportation solutions, from commercial aircraft and business jets to rail transportation equipment and related services. The company is headquartered in Montreal, has operations in 28 countries and employees approximately 74,000 people. Revenue in 2018 was $16.2 billion which was split roughly evenly between its aerospace and rail transportation businesses.
Thursday of last week, the company’s share price opened with a decline of 37% from the previous day after it released its Q4 preliminary results and update to its turnaround plan. There has been a slight recovery in the share price over the last few days but the stock is still down 30% over the past week and approximately 75% over the past 18 months.
What was in the preliminary results that caused such a drop in the share price?
The company announced that it now expects Q4 and full year 2019 performance to be below its guidance. This is the third time the company has reduced guidance since the start of 2019.
Debt rating agency Fitch also cut Bombardier’s long-term issuer default rating to ‘CCC+’ from ‘B- ‘with a “negative outlook”. Fitch commented that the cut was due to “large sustained negative free cash flow”.
Recent Financial Performance
- Based on the company’s preliminary financials, 2019 full year EBITDA is expected to decline 37% and the company will report negative $1.2 billion in free cash flow.
- For Q4, EBITDA is expected to be zero compared to $370 million in Q4 last year.
- The company also had about $9.3 billion in debt as of their last reported quarter and negative $6.3 billion in shareholders equity.
Our advice would be to stay far away from Bombardier. It really embodies many of the attributes that we work hard to avoid. The stock is burning through cash flow, has massive declines in operating earnings, management lacks credibility and the balance sheet is horrendously overleveraged.
Many people will look at a stock like Bombardier and wonder if it represents a good turnaround story or if it provides value as a sum-of-parts investment. I would love to see the company turn itself around but in spite of all of the handouts that this company has taken from government coffers over the years, the financial management and outlook continue to look horrendous. With respect to a sum of parts valuation, the company has billion more in debt than it does assets and negative shareholders equity so investors would be likely not to receive a penny if this company goes into bankruptcy and assets are liquidated.
We don’t like the company. We would avoid it. Bombardier is our Dog of the Week.
after cutting Q4 guidance and saying it may need to pull out of its JV with Airbus (OTCPK:EADSY) to build commercial jets because rising production costs threaten future returns on its investment.
The company says the need for additional cash to finance the production of the A220 jets in Alabama may undermine any prospect of future profits, potentially forcing a substantial writedown of the venture’s value.
Airbus, which owns a 50.6% stake in the A220 program, says it remains committed to funding the jetliner.
The Canadian company has limited financial resources to absorb additional costs after production problems with major commuter train orders delayed deliveries in recent years.
In its guidance update, Bombardier said it now expects FY 2019 adjusted EBITDA of ~$400M, compared with a previously forecast range of $700M-$800M, and free cash flow for 2019 of negative $1.2B vs. its prior outlook of negative $500M.
TerraVest Industries Inc. (TVK:TSX)
Current Price: $14.96
Market Cap: $255 million
Dividend Yield: 2.6%
What does the company do?
TerraVest is an industrial company that manufactures and sells goods and services to various end-markets including energy, agriculture, mining, and transportation.
The company operates through three segments:
1) Fuel Containment – Provides products and services to industries across Canada & US.
2) Processing Equipment – Fabricates equipment for various end markets.
3) Service – Well servicing in Saskatchewan
The stock was up around 13% in the last week and up 45% in the past year.
What is driving the stock?
This year the stock is being driven by a few acquisitions made with both cash and its existing credit facilities and its positive financial results.
- On December 16, 2019, TerraVest acquired Argo Sales, a privately-owned Alberta based company focused on manufacturing wellhead processing and production equipment for the Canadian Oil & Gas market.
- On September 3rd, 2019, TerraVest announced that it had acquired the assets of Countryside Tank, a privately-owned Iowa based company focused on manufacturing transportation equipment for the gas industry as well as steel projects.
Financial Results (Released December 11, 2019)
- Revenue increased 1.3%, to $80.3 million compared to the same quarter last year.
- EBITDA decreased 16% to $12.5 million compared to $14.8 million for the same quarter last year.
- Fully diluted earnings per share (EPS) decreased 14% to $0.36 per share compared to $0.42 cents for Q4, 2018.
Although these quarterly year-over-year figures do not seem impeccable, looking longer-term on a trailing-twelve-month basis – Revenue, EBITDA and fully diluted EPS are all up by over double-digit percentages showing a good trajectory in the financials.
Looking at the company’s balance sheet, they have a net-debt position of around $110 million and a net debt-to-EBITDA multiple of around 2.3 times, which doesn’t seem too unreasonable for a company in this industry.
On a trailing-twelve-month basis the company is trading at pretty attractive multiples considering its growth, with a price-to-earnings multiple of 11.3 times and an EV/EBITDA multiple of 7.6 times.
Now management didn’t provide any guidance for the upcoming fiscal year, but they did state that while they anticipate the Western Canadian energy market to be challenged, they expect TerraVest’s operating results for fiscal 2020 to be stronger than the prior year. This optimistic outlook has been driven by strong demand for its storage and distribution equipment, elimination of steel tariffs and its recently completed capital project that will improve the efficiency if its petroleum tank manufacturing.
Given the company’s strong operating results over the past couple of years, their most recent acquisitions, and positive outlook for 2020 it is certainly a stock that could possibly offer some value if the company is able to continue to grow like it has in the past. But to conclude given its strong share performance over the past week and year give it our coveted status of Star of the Week.