KeyStone’s Stock Talk Podcast Episode 117 

Listen to the full podcast here.

This week in our Your Stock, Our Take segment we start by taking a listener question on Yamana Gold Inc. (YRI: TSX), a dividend paying, Canadian gold producer with a stable of exploration and development-stage projects located throughout the Americas. Our second YSOT comes in from a listener on Vibe Bioscience Ltd. (VIBE: CSE), a micro-cap US-based Cannabis business with the goal of becoming a become a vertically integrated operator. We let you know if it looks like a contender or pretender. While it would have been a Dog last week, this week’s volatile Star is Tesla (TSLA: NASDAQ) is a vertically integrated sustainable energy company. The company is best known as the largest electric vehicle manufacturer in the world with global deliveries of 367,000 vehicles in 2019. We let you know our take on the current valuations. 

Your Stock, Our Take

I have been a big fan of Yamana Gold. I invested without looking at fundamentals, but it has done well. – Zacharia Via Email

Yamana Gold Inc. (YRI:TSX)

Current Price: $8.36

Market Cap: $7.96 Billion

Dividend Yield: 1.3%

What does the company do?

Yamana Gold Inc. is a Canadian-based precious metals producer with significant gold and silver production, development stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile and Argentina. Yamana plans to continue to build on this base through expansion and

optimization initiatives at existing operating mines, development of new  mines, the advancement of its exploration properties and, at times, by targeting other consolidation opportunities with a primary focus in the Americas.

Second Quarter Highlights:

EBITDA is expected to grow from $720.7 million in 2019 to $877.5 million in 2020. Largely due to the increase in the price of gold.

The balance sheet is ok. The company ended Q2 with $324.8mm of cash and equivalents. Yamana repaid $100 million of debt during the quarter, and long-term debt stood at $993 million as at quarter-end which is very manageable given current cash flow.

Cash costs are reasonable at $1,020‒$1,060 per ounce.

Conclusion:

Yamana is trading at ~1.80x NAV (net asset value), which is above its peer average of 1.25x, and at 5.7x 2021E EV/EBITDA, which is above its peer average of 4.8x. Valuations are low compared to the average company market multiple, but this is typical for a highly cyclical commodity based company, but they are higher than its peer group. Is this justifiable? Looking at total production growth, it does not appear so.

Total Production: 

2017a: 977,000 ounces.

2018a: 1,033,000 ounces.

2019a: 900,000 ounces.

2020e: 808,000 ounces.

2021e: 888,000 ounces.

Yamana will likely do as well as the price of gold near and mid-term. If gold rises, Yamana will rise. But we do not expect it to outperform peers given its premium multiple to its peer group and the lack of production growth. The wildcard, would be an exploration win, but that is basically just a lottery ticket at this stage. At present, we would prefer a gold producer with a growing production profile to Yamana. 

Tesla (TSLA: NASDAQ)

Current Price: $445

Market Cap: $415 billion

What does the company do?

Telsa is a vertically integrated sustainable energy company. The company is best known as the largest electric vehicle manufacturer in the world with global deliveries of 367,000 vehicles in 2019. Telsa also sells solar panels, solar roofs and battery storage units for residential and commercial properties.  

Key Points: 

I didn’t know whether or not to highlight Telsa as a Star or a Dog today. 

I had the stock pegged as a Dog last Tuesday after the share price fell 34% over 5 trading days from its all time high of $500 to a price of $330 per share. 

However, the stock has made a good recovery over the past week up 35% to about $445 per share today. 

Why all of this volatility? For one, the stock has been on a tear in 2020, up 400% since the start of the year. When we see this kind of price movement, in such a short period of time, we have to expect a consolidation in the share price, at some point, as some investors lock at least a portion of the exceptional profits made. 

Often, this profit taking is preceded by some sort of a catalyst. For Telsa last week there were two. The first was a general pull back in stocks, which was felt mostly in the tech sector. Also, more company specific, was an announcement last Tuesday that future Tesla competitor Nikola had signed a partnership agreement with GM, under which GM would manufacturer Nikola’s first electric pickup truck with production expected to commence in 2022. 

With all this said, where do we stand on the company now? To answer that we need to take a look at Telsa’s financial performance. 

Financial Performance:

  • Tesla’s Q2 results were released on July 22nd.
  • Total revenue for the quarter was $6 billion which was down 5% compared to the same quarter of the previous year. 
  • Gross profit margins improved to 20.8% compared to 14.5% in the previous year. 
  • The company also reported $451 million in non-GAAP or adjusted earnings in the quarter. 
  • In fact, Telsa has now reported 4 consecutive quarters of non-GAAP net profit (totalling $1.4 billion) for the first time in its history. 
  • From a valuation perspective, this equates to a price to earnings multiple of almost 300 times. That’s a huge valuation, very expensive, and certainly implies that the market is expecting substantial earnings growth over the next few years. 

Conclusion:

We are impressed that Telsa has finally reported 4 consecutive quarters of earnings. However, based on KeyStone’s criteria, Telsa is still not a stock that we would invest in. 

It basically comes down to growth and valuation. The valuation to earnings is very high at 300 times. Clearly, the market is not really valuing the company on its earnings but rather on the possible future potential of growth as electric vehicles further penetrate the auto market. But there is too much speculation in that investment thesis for us. 

Just to provide some perspective, Microsoft, which is a leading tech stock, growing at a double-digit rate and increasing market share in the high growth cloud computing space, trades at a price to earnings multiple of about 36 times. In fact, all of the leading FANG tech stocks have substantially cheaper valuations compared to Telsa while generally producing better revenue growth and with far better margins and balance sheets.

This isn’t to say that we would bet against Telsa. We wouldn’t. The potential is real. But rather than speculate what a company could potentially become one day, we believe a more prudent strategy is to focus on stocks that have the growth and value fundamentals that make them attractive investments today.  

Your Stock Our Take

Matt via Email

This is a very small micro-cap stock that is very thinly traded. I was a part of the original IPO and has been a roller coaster ride (mostly downhill). The stock went from .90 to .02 and is back up to .60 with a little bit of volume coming into the stock in the past weeks. Financials seem good and seems to have good growth quarter after quarter. They recently acquired another company that is supposed to help grow the business. It does seem like they didn’t overpay for the business and should help continue their growth. I am wondering if I should slowly try to get out of the company since I am finally profitable again or if you think there is more upside potential. I know this is probably not a stock you would ever recommend but would love your thoughts. Thank you!

Your Stock Our Take

Matt via Email

This is a very small micro-cap stock that is very thinly traded. I was a part of the original IPO and has been a roller coaster ride (mostly downhill). The stock went from .90 to .02 and is back up to .60 with a little bit of volume coming into the stock in the past weeks. Financials seem good and seems to have good growth quarter after quarter. They recently acquired another company that is supposed to help grow the business. It does seem like they didn’t overpay for the business and should help continue their growth. I am wondering if I should slowly try to get out of the company since I am finally profitable again or if you think there is more upside potential. I know this is probably not a stock you would ever recommend but would love your thoughts. Thank you!

—————–

Vibe Bioscience Ltd. (VIBE:CNSX) 

Current Price: $0.55

Market Cap: $43 Million

What does the company do?

Vibe Bioscience’s business is to evaluate, acquire and develop cannabis cultivation and manufacturing assets and retail cannabis dispensaries, predominantly in the U.S., in order to become a vertically integrated cannabis operator.

So, the company is primarily growing through acquisition and currently operates three dispensaries and one cultivation operation in the State of California.

Key Points: 

On that note of growing through acquisition, Vibe recently acquired all the issued and outstanding shares of Cathedral Asset Holding (a licensed distributor in California) for CA$333,360 in an all-share transaction based upon the 30-day volume weighted average price (which I believe will increase the company’s shares outstanding by at least 750,000).Vibe will also assume the lease obligation for the Santa Rosa facility and the existing inventory of vape products. 

Based on what we know from the news release, it is almost impossible to say whether Vibe overpaid for the business as there are no details in the potential run-rate of sales or adjusted EBITDA. 

Just a bit of education, when a company does make an all-share acquisition, this means that the acquiring company is issuing its own shares to the target shareholders to complete the buyout – and hence the target company’s shareholders who are getting bought out and receiving shares are thus taking part in the risk of the future operations of the business. So, from this perspective, I do think that it was at least a decent time to issue the shares and purchase the business with Vibe’s stock trading around $0.50.

Recent Financial Results: (Q2, 2020)

  • Revenue was up 84%, to $5.7 million, compared to the same period last year. 
  • Adjusted EBITDA Increased 600% to $792 thousand from only $113 thousand for the same quarter last year.
  • Earnings Per Share (EPS) was $0.006 per share compared to a loss of ($0.011) for Q2 of 2019. 

Looking at the company’s balance sheet to see how well they can support future growth. Vibe has a Net Debt-to-EBITDA Multiple of ~0.5 which indicates as of right now they are not too levered and could possibly support future debt. But they do have negative working capital which, if this persists into the future, the company may need to raise additional cash in order to finance its current liability deficit. (So, this is something to keep an eye on). 

On a relative valuation basis, the company is trading with a trailing EV/EBITDA valuation multiple of ~34x, which I would say is quite expensive for a relatively new Cannabis company that is in a highly competitive landscape and at a disadvantage to many first market movers.  

Our Take:

If it was me holding shares in the company, I would probably take my profit and run. Now, the reason being is we have seen companies and shareholder capital absolutely decimated in the cannabis industry due to continual dilution to stay afloat or grow the business. 

This isn’t to say that Vibe will not become one of the dominant Cannabis players in the state of California. But because the company is just starting out it will most likely have to issue additional shares or raise debt to support growth and right now the stock trades at a very expensive EV/EBITDA multiple which might indicate the company is currently overvalued. I think that the risk is just a bit too rich for my blood and not a stock KeyStone would ever recommend. 

 



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