This week, we start by looking at what we are calling the “normalcy trade”, sparked in part by positive vaccine news and what appears to be a Joe Biden presidency. While returning to the old normal can sound great, for the stock market it may be a case of “be careful what you wish for”. In this week’s Your Stock, Our Take segment, we take a look at two companies. The first, Pfizer Inc. (PFE:NYSE), is certainly in the eye of the storm this week after it announced positive initial results for its COVID-19 vaccine. We let you know the current valuations on Pfizer and the potential impact moving forward. Our second Your Stock, Our Take is on Richards Packaging (RPI.UN:TSX) which has found a perfect storm during the pandemic driving record earnings and pushing its share price to all time highs. We examine the growth and comment on the sustainability.
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Is the Old Normal a Good for the Markets?
Over the past week, markets have cheered the mere thought of normalcy. Be it in the political world (party politics aside) the idea of a few months without inflammatory ALL CAPS tweets from a sitting President helped drive U.S. markets to new highs. Economically and from a health perspective, Pfizer’s Monday COVID-19 vaccine breakthrough prompted a scramble for burnt-out ‘value’ stocks and away from lockdown winners, safe-havens and anti-globalisation plays.
But can the old normal come back and in some cases should we want it back.
Don’t get me wrong – we all want to get back to taking the kids out without restrictions, conducting business without restrictions, better job creation, travel etc. I am with you.
Just the hope of this in what we call a “normalcy trade” sent aerospace giant Boeing Company (BA:NYSE) stock up 20% and movie theatre giant AMC Entertainment Holdings Inc. (AMC:NYSE) soaring 68% in two days this week.
On the flipside, a companies like Zoom Video Communications, Inc. (ZM:NASDAQ), which benefitted enormously from remote work during the lockdown initially dropped 20% on the positive vaccine news.
Likewise, New York’s NYFANG+TM index — grouping tech giants Apple, Amazon, Facebook, Alphabet and others — fell 6% Monday.
With the gap between value stocks and growth stocks in MSCI’s global index at its highest in 20 years, investors have been itching to rotate for a long time.
A flight from safe-haven assets like gold and Swiss francs, or long-term bonds supported by economic gloom and central bank purchases, mirrored those moves.
While it sounds optimistic, vaccine-aided immunity among developed world populations is possible by the second half of 2021, shifting those economies away from their crisis-footing as early as the first quarter.
But is this all good from a market perspective? Not necessarily – more normalcy will mean a rethink of the monetary and fiscal policies that have kept economies and markets afloat for nine months – this may mean that we will finally start looking at corporate income statements and regular household incomes without subsidies. This may not look so rosy.
For the hospitality, travel, tourism and retails segments to name few, less restrictions and limited health risks are undoubtably positive, but significant damage has been inflicted to many of these companies and each will have to be looked at individually to pick the long-term winners. Many are likely still in trouble. Many are subject to discretionary dollars and without government checks, and weaker employment, this pie remains significantly lower than 12 months ago – and should remain that way for some time.
Finally, many of the digital mega-trends that were already developing have been given a huge boost by the pandemic and its passing may simply usher in the “next normal”, of further digital transformation, with all the winners and losers that brings.
The belief that we will go back to all in person meetings eschewing more efficient video calls seems silly. For what its worth, we believe the digital transformation is here to stay.
Trend or Theme Investing
As far as trends or themes go generally from an investment perspective – look at each and every investment on its own merits, based off of cash flow. Make sure you are not just buying a trend, but buying a business at a reasonable price that can benefit from a trend.
A great example of this: with the legalization of Cannabis in Canada, Cannabis related stocks have been a very hot topic for several years. Many investors saw years and years of growth in store for the segment – and rightfully so.
But it is not enough to just identify the trend. You must invest in the right companies.
Cannabis is a perfect example of this – A tale of two companies.
Tilray Inc. (TLRY:NASDAQ), a producer and distributor of medical Cannabis and once a market darling seeing its share price top out at over $140. While it has produced some revenue growth, the company has not produced a dime of profits to date and its share price drop 95% from its highs and 65% in the last year.
On the other hand, KeyStone’s top recommendation in the Cannabis segment, Trulieve (TRUL:CSE), which is profitable and growing, has seen its share price jump 155% in the past year and hit new all-time highs today.
It is not enough to just identify the trend – you need to bet on the right horse.
With the thought in mind and looking at remote work – a quick comment on Zoom.
Zoom Video Communications, Inc. (ZM:NASDAQ) – video communications giant – there is certainly a massive trend in video communications.
Good company, good growth but you are paying 170 times next years earnings – rich valuations. There are other very significant competitors including MicroSoft & Alphabet which we would not like to be in a fight against.
Great trend, we are not sure you are paying a reasonable price for Zoom at present.
Your Stock, Our Take
Pfizer Inc. (PFE:NYSE)
Current Price: $37.90
Market Cap: $210 billion
What does the company do?
Pfizer is one of the largest pharmaceutical companies in the world with annual sales of over $50 billion. The company develops and markets pharmaceuticals for the treatment and prevention of a wide range of diseases. Pfizer has been in operation for over 150 years. 50% of sales are from outside the United States.
Key Points:
Pfizer made the news on Monday, when the company and its German partner BioNTech announced that their COVID-19 vaccine candidate has been 90% effective in ongoing Phase 3 trials. Pfizer’s stock price shot up after the news and at one point was up nearly 15% during the day.
Since then however, Pfizer shares have pulled back and are now up only 4% from when the news was released.
News of a successful COVID-19 vaccine has been highly anticipated.
However, people may want to temper their expectations if they think this means that life is going back to normal anytime soon. The facts seem to indicate that we still don’t have a lot of information about this vaccine, its long-term effectiveness and who can actually take it…meaning is it safe for the elderly or vulnerable people.
There is also some news circulating around about how Pfizer’s CEO, Albert Bourla, sold 63% of its shares in the company, for a total of US$5.6 million, on the day that the news was released.
Recent Quarterly Financials
- Pfizer release Q3 results on October 27th.
- The company reported quarterly sales down 4% to $12.1 billion and adjusted earnings per share down 3%.
- For the 9-month period, sales were down 8% and adjusted earnings were down 4%.
- Historically speaking, Pfizer has not been a growth stock and revenue has actually declined slightly over the past 3 years.
- The company is in the process of spinning out a part of its business and management has provided guidance of 6% revenue growth to 2025 for what they refer to as the “New Pfizer”.
- Currently, Pfizer trades at a price-to-earnings valuation of 13 to 14 times (trailing adjusted EPS of $2.87).
Conclusion
Wow…you would think that a successful COVID-19 vaccine would transformation for whichever company discovered it. However, it appears to me that the market is showing some skepticism right now as Pfizer’s stock price isn’t up that much since the announcement.
There are clearly a lot of questions still to be answered. I have to provide the disclaimer that I am no expect in the process of testing and distributing pharmaceuticals. One thing I have read is that it is generally standard practise for pharma companies to release this kind of news in a peer-reviewed research paper as opposed to press release.
All I can say is that I would not get too excited yet. This may or may not be the vaccine that solves the problem of COVID-19. Certainly, the CEO making a major sale of shares on the day of the press release is not a good sign.
Financially, Pfizer appears to be doing okay and is trading at reasonable valuation but this has not been a growth stock and would not be likely to recommend Pfizer without more information on the prospective vaccine.
There is certainly upside if more positive information is released but a lot of this potential appears to be still be speculative. Our strategy here is to not get too excited. We will continue to follow the story and when more news and information are released, we would consider a recommendation then.
Your Stock Our Take
Greg via Email
He says – I purchased shares in Richards Packaging (RPI.UN:TSX) back in 2013 and it has exploded this year during COVID. I am sitting on a tidy profit and would like to know if you rate it as a buy/sell/hold as I am considering selling some to fund other investments?
——————–
Richards Packaging Income Fund (RPI.UN: TSX)
Current Price: $74.63
Market Cap: $856 Million
Yield: ~1.8%
What does the company do?
Richards Packaging Income Fund is involved in the packaging distribution businesses. The company principally distributes plastic and glass containers and associated closures used in packaging for cosmetics, healthcare, food, beverage, and other products. Geographically, it derives a majority of revenue from the United States.
Key Points:
The company has benefited from the COVID-19 Pandemic, with organic revenues growing at 41% in Q2 & 25% in Q3. And just to give you an idea this increase in demand from COVID-19 was due to items such as bottles for hand sanitizer as well as some pent-up demand from medical clinics reopening.
On the acquisition front, in June of 2020, Richards Packaging increased its footprint in the healthcare market by acquiring Clarion Medical Technologies, a leading Canadian provider of medical, aesthetic, vision care and surgical equipment and consumables. For a purchase price of $64.4 million.
Recent Financial Results: (Q3, 2020)
- Revenue was up 33% to $129 million from $87 million in Q3, 2019. And (like I said before) ~25% of this 33% growth was organic, with the rest coming from the Clarion Acquisition. So good growth here recently from both organic growth and acquisitions.
- GAAP Net Income Per Unit for the quarter was down to $0.58 compared to a gain of $0.80 for the same quarter last year.
- Year-over-Year TTM Adjusted EBITDA increased by about 72% to $83.5 million again driven by the COVID-19 pandemic.
- Currently the company is trading with a trailing EV/EBITDA multiple of ~11x. Which is attractive if this level of revenue & EBITDA can persist post COVID-19. But at these current valuations, if trailing EBITDA declined back down to near pre-pandemic normalization, the stock would currently be trading near ~18x which I would say is close to fair value or even slightly overvalued.
Conclusion:
I really like the business that Richards Packaging operates in as most consumable products in this day and age have some sort of bottle, or simple packaging that the product comes in. They have a healthy balance sheet, but their TTM payout ratio is pretty high at around 80%, which is probably common for an income fund structure, but just something to keep in mind as they do not have much in earnings after paying dividends to fund future growth.
Now the big question here is whether growth in revenue & EBITDA can continue or will both figures slip somewhere between Pandemic & Pre-Pandemic levels. In the company’s most recent financial results released at the end of October, management poses exactly this question, stating “As impacts of the coronavirus unwind, the burning question is what level of sales increase and earnings are sustainable in a covid-free environment?”
Now, this question is very difficult to answer, but it is of my opinion that since we have already begun to see a slowing of revenue growth after the first wave of COVID, that growth in revenue will continue to taper-off close to pre-pandemic levels of approximately 6% annually. And that TTM revenue and EBITDA could possibly even decline from where it is right now as the pandemic subsides.
So, to give you an answer Greg, in the near term we rate the company as a HOLD right now. If EBITDA can remain at these levels and annual growth can continue at around 10-15% I believe that the stock is a bargain. But with the uncertainty surrounding the company’s future growth rate or where revenue and EBITDA will normalize to, we believe that the stock is near fair value right now.
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.
- November 10 @ 10:00pm Eastern / 7:00pm Pacific (SOLD OUT)
- November 17 @ 7:00pm Eastern / 4:00pm Pacific
