This week, after incredibly positive feedback for our new Case For, Case Against segment we are making it a return engagement. This week, I will face off against Brennan in an epic rematch. In the line of fire is, WELL Health Technologies Corp. (WELL:TSX), who’s mission is to modernize the Canadian healthcare industry by digitizing it. The stock has been on fire in 2020 and just completed an $80 million financing to continue its growth-by-acquisition strategy. We argue both sides of the BUY/SELL argument for the stock. This week’s Your Stock, Our Take was sent in from a listener on Superior Plus Corp. (SPB:TSX), which distributes retail and wholesale propane, natural gas, and liquid fuels to Canada and the U.S. as well as specialty chemicals, primarily sodium chlorate to the pulp and paper industry. Finally, our Star of the Week, Pinterest Inc. (PINS: NYSE), one of the worlds largest picture sharing apps, and Brennan’s favourite way to spend a Saturday night. Pinterest has more than 400 million monthly users. The stock was up 14% over the last week, 32% over the last month and 186% since the start of the year. We let you know is it can continue.
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1. November 10 @ 10:00pm Eastern / 7:00pm Pacific
2. November 17 @ 7:00pm Eastern / 4:00pm Pacific
The segment will be called The Case For & Against a Stock. This week, Brennan will be providing the case for or the agreement for investing in WELL Health Technologies Corp. (WELL:TSX), and I will be apposing him with the case against slapping your hard earnings dollars down on this stock and Ryan will be arguing the case against Canopy at present. Aaron will act as the judge, jury, and ultimate executioner to determine who wins this grudge match.
Each participant will only get one minute to get out their argument.
The Case for and Against:
WELL Health Technologies Corp. (WELL:TSX)
Quick description: focused on consolidating and modernizing clinical and digital assets within the primary healthcare sector. WELL owns and operates 20 primary healthcare clinics, is Canada’s third largest digital Electronic Medical Records (EMR) supplier, and is a provider of digital health and cybersecurity related technology solutions.
Current Price: $7.84
Market Cap: $1.23 Billion
For Case:
- Digitization of healthcare is a massive opportunity for Well Health as the Canadian healthcare sector has been underdeveloped as a whole due to a large amount of fragmentation across provinces.
- Significant tailwinds driving digital health following COVID-19
- Especially among patient adoption of virtual/telehealth.
- Well Health has become the largest clinic operator in B.C., is Canada’s 3rd largest Electronic Medical Records (EMR) company and is now a provider of telehealth (as one of the top 3 telehealth providers in Canada). Showing that the company does have some legitimacy as they work into profit.
- Healthy Balance Sheet with $21 million in cash ready for future acquisitions.
- The company has completed well over 30 purchase agreements since inception and has over 100 possible assets in its M&A pipeline.
- Revenue has been growing at a very fast pace:
- 212% in 2019
- Anticipated growth of 34% in 2020
- And Anticipated growth of 37% in 2021.
- The company is in the right direction as Management expects Adjusted EBITDA to go positive in 2021 at $4.1 million.
Case Against
Number 1: While revenue grew 43% to $10 million in the last quarter, the business was EBITDA negative losing ($543 thousand).
Number 2: The highly attractive SaaS portion of digital services revenue which could support premium multiples, remain at only 20% of total revenue.
Number 3: High valuations. Enterprise value is $1.2 billion with trailing sales of only $35 million and negative cash flow. Well trades at 31 times sales well above its’ industry average of 8.
Number 4: Looking forward the optimistic estimates are for Well to lose ($0.07) per share this year, ($0.03) in 2021, and to break even on adjusted earnings in 2022. Trades at 100 times a guestimate of 2023 earnings.
Number 5: Look, there is a strong management with a great track record, the business is cashed up and ready to grow, but the company is riding telehealth mania and is ahead of its underlying cash flow – good business, not a good price near-term.
Win: Ryan
Ryan’s Additional Positive for WELL Health.
The management team has done it in the past. Hamed Shahbazi is the Founder who build TIO Networks which was a public company sold to PayPal for $304 million. The company also boasts Li Ka-shing, well-known Hong Kong investor as an early investor. Li Ka-shing is the 35th richest person on the planet – so there is a great track-record there.
WELL Health’s mission to modernize the Canadian healthcare industry by digitizing it, I believe is a great one. It is an industry in Canada that really hasn’t changed much for decades, the company has plenty of integration to do with a long growth runway. And they just raised $80 million to be able to acquire and digitalize other primary healthcare clinics.
Despite the run-up in its shares, insiders are not selling.
Your Stock Our Take
JP via Email
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Superior Plus Corp. (SPB:TSX)
Current Price: $12.10
Market Cap: $2.14 Billion
Yield: ~6% yield.
What does the company do?
Superior, through its subsidiaries distributes retail and wholesale propane, natural gas, and liquid fuels to Canada and the U.S. as well as specialty chemicals, primarily sodium chlorate to the pulp and paper industry.
The company has three operating segments:
- Canadian Propane Distribution – (36%)
- U.S. Propane Distribution – (43%)
- Specialty Chemicals. – (21%)
Key Points:
The company’s sales are seasonal, with its sales normally peaking in Q4.
And it is growing primarily through acquisition, with its most recent on August 3, 2020, where it acquired the assets of a retail propane distribution company, Champagne Energy, for approximately CDN $36.5 million.
The purchase price was paid primarily with cash from Superior’s credit facility, as well as deferred payments. Champagne is an independent retail propane distributor delivering approximately 42 million litres of propane and distillates annually to retail and commercial customers in Maine.
Recent Financial Results: (Q2, 2020)
- Revenue was down 17%, to $450.8 million compared to the same quarter last year. Primarily impacted by decreased oil prices and demand from the shock of the COVID-19 pandemic. As well as decreased oil-field activity in Western Canada.
- Adjusted EBITDA was up 13%, to $67.7 million compared to $59.7 million for the same quarter last year.
- GAAP Net Earnings per share for the quarter were $0.04 compared to a loss of ($0.17) for the same quarter last year.
- The company is trading with an EV/adj. EBITDA multiple of ~7.8x which I would say is attractive.
- They have a net debt position of $1.8 billion and a net debt-to-adj. EBITDA multiple of 3.6x which is getting up there, but I do not believe that it is overall concerning yet – but if you are a shareholder – definitely something to keep an eye on.
- TTM Dividend Payout ratio from Adjusted Operating Cash Flow is 31%.
Financial Outlook for each Segment:
- Canadian Propane Distribution – EBITDA from operations is expected to be weaker through 2020 compared to 2019 due to lower sales volumes and headwinds in the Canadian oil sector.
- U.S. Propane Distribution – EBITDA is expected to be consistent with 2019 due to acquisitions completed in 2020 offsetting impacts from Covid-19.
- Specialty Chemicals – is expected to be weaker.
Conclusion:
Given my analysis, I believe that Superior Plus Corp. is one to keep your eye on. It has a nice dividend yield along with a sustainable payout ratio out of adjusted operating cash flow and trades at what I believe a reasonable EV/adj. EBITDA multiple. One could make the argument that the stock is trading at a discount due to limited growth near term, which is valid, but the nice thing with a stock like Superior is you are getting paid generously to wait. But I wouldn’t expect much dividend growth as it has remained at $0.06 monthly since 2015.
Now things that are concerning to me is that the company does have a considerable amount of debt. Now I do not believe that it is unsustainable but certainly something to keep your eye on if you are an investor. Additionally, the company does have some exposure to the Western Canadian oilfields which we know have been fighting an uphill battle. And lastly, the company is expecting overall operations to be weak going into 2021.
Now with all of this in consideration we will definitely be keeping the stock on our monitor list. And I would just like to thank you JP for submitting the stock. It was a great one to look into.
Weekly Star & Brennan’s favourite app to spend a Saturday night on…
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Pinterest Inc. Class A (PINS: NYSE)
Current Price: $51.62
Market Cap: $31 billion
What does the company do?
Pinterest is a visual discovery, or picture sharing app, with more than 400 million monthly users. People use the app to share content about all sorts of subjects including recipes, home and style ideas, and travel destinations, just to name a few.
Key Points:
Pintrest is in the social media space. Its actually somewhat surprising that the company trades on the NYSE. Most of the tech and social media companies tend to trade on the NASDAQ.
This is a somewhat topical discussion for me as just this weekend I received a tutorial what’s cool with young people in the world of social media from my teenage nieces.
I have to admit. I was a little surprised that Pinterest came across my screen as a top performer. I haven’t even heard the company’s name mentioned in recent memory. Certainly, I hear a lot about Instagram from my social media savvy family and friend. And as I learned from my nieces, Snapchat and Tik Tok are what’s cool with the kids today.
But Pinterest has been a strong performer as of late, up 14% over the last week, 32% over the last month and 186% since the start of the year.
Let’s take a look under the hood and try to find out what’s moving Pinterest shares.
Financial Performance:
- Pinterest is actually releasing its Q3 results tomorrow which will be October 28th.
- Looking at the Q2 results, revenue grew by a mere 4% to $272 million and the company reported a loss from operations $104 million, compared to a loss of almost $1.2 billion in the same quarter last year.
- The financial results look lackluster but where the company shined in the quarter was with user growth. Pinterest reported Global Monthly Active Users of 416 million which was an increase 39%.
- The company did state that it was not providing adjusted EBITDA guidance for 2020 due to uncertainty caused by COVID-19. However, Pinterest did provide revenue guidance and expects revenue growth of about 35% for Q3.
- It’s the growth in user activity that has been driving the share price and that is no surprise as user growth is by far the most important metric for most social media investors.
- Looking at the breakdown, it appears that most of the user growth is coming from the global market as opposed to North America. This makes sense and is probably why I haven’t been hearing much about Pinterest lately.
Conclusion:
The bottom line is that Pinterest is not a stock that KeyStone would recommend. Yes, the company has good user growth, is expecting strong revenue growth and the loss from operations has declined. But we look first and foremost for profitable growth and Pinterest, to date, continues to lack profitability.
There are other options in the social media space that I would find more interesting than Pinterest. Facebook, for example, does have profitable growth and trades at a more attractive price to sales valuation of about 10 times compared to Pinterest at 26 times. If we wanted to relax our profitability criteria then we might look at SnapChat which recently reported 50% revenue growth in its last quarter and trades at a similar price to sales valuation to Pinterest of about 30 times.
Great points – other options for your investment dollars if you really want exposure to that segment.
Webinar: Build a Modern Stock Portfolio with 15-25 Quality Stocks.
There are two types of tickets as follows.
1) Early Bird Tickets – ($29.95). KeyStone’s 2020 Canadian Green/Alternative Energy Stock Report ($599 value)
2) VIP Tickets – ($79.95). Includes the 2020 Canadian Green/Alternative Energy Stock Report ($599 value), On-Demand Webinar: Dividend Growth Stock Investing ($79) 4 great dividend stocks to buy today, and KeyStone’s 2020 U.S. Profitable Small & Micro-Cap Growth Special Report ($599)
To order, go to: https://keystocks.com/fall-2020-live-webinar/
Here is the schedule.
1. November 10 @ 10:00pm Eastern / 7:00pm Pacific
2. November 17 @ 7:00pm Eastern / 4:00pm Pacific