KeyStone’s Stock Talk Podcast Episode 135
In our Ask Us Anything segment, Brennan answers a listener question on Churchill Capital Corp IV (CCIV:NYSE) a SPAC that is set to merge with pre-revenue Electric Vehicle company Lucid Motors.
Our Case For / Case Against debate is back to take a look at Air Canada (AC:TSX), Canada’s largest domestic and international full-service airline. Brennan argues the bull case, I crush him with the bear case, and Aaron sits in as judge, jury, and executioner.
For the third week in a row, one of our Stars comes directly from our Canadian Small-Cap Growth Stock Research. VersaBank (VB:TSX), a Canadian Schedule I chartered bank with a difference. VersaBank ranks among the world’s first fully digital financial institutions. The stock was recommended to clients a couple of years ago as an alternative to Canada’s Big Banks when it traded at $7.15. VersaBank’s shares trade today at $15.80, have jumped 41% in the past 30-days, 72% year-to-date, and 120% since our recommendation – crushing the performance of the Big Banks over that period. Congratulations to clients who own the stock.
The second Star is Groupon Inc. (GRPN:NASDAQ), a global voucher and e-coupon marketplace. Groupon reported its Q4 financial results on February 25th and in the four trading days since the release, Groupon’s stock has shot up nearly 60%. We look into the rally and whether or not the fundamentals suggest it should continue.
Finally, in our YSOT segment we answer a listener question on Good Natured Products Inc. (GDNP:TSX-V), a high growth small-cap which produces and distributes high-performance bioplastics for use in packaging and durable product applications.
Air Canada (AC:TSX)
Market Cap: $8.8 Billion
Air Canada is Canada’s largest domestic and international full-service airline, operating a fleet of nearly 400 aircraft, inclusive of Jazz, to nearly 200 destinations worldwide. Primary hubs are located in Toronto, Vancouver, and Montreal. Air Canada is also a founding member of the Star Alliance network.
- There is a normalization case to be made with AC.
- More normalized levels of travel are expected to return in the second half of 2021 as Canada and the U.S. vaccinate a majority of its citizens.
- Right before the pandemic AC was trading with a trailing P/S multiple of approximately 0.7x sales. Now AC is currently trading at 1.3x trailing revenue which does look more expensive, but if revenue is able to normalize to even 70% of pre-pandemic levels AC would be trading at just 0.6x revenue, which could provide some upside.
- Air Canada and its peers began bailout negotiations with the government back in November of 2020. Air Canada is a Canadian staple and News of a bailout could send the stock soaring!
- Air Canada has laid off over 3,200 employees in 2021 alone which should help the company recover from the pandemic.
- Currently has a healthy balance sheet with over $7.5 billion in Cash.
- Air travel has been decimated and it will take years for it to return to normal, yet Air Canada’s shares trade at the same level as it entered 2019 and only 24% lower than it was at the start of March 2020, prior to travel restrictions.
- It’s not like the stock is at a huge discount – with an EV/Expected 2021 EBITDA of 25, and 12.5 times the 2022 number -– that is not exactly cheap – remember this is a volatile business.
- With $5.78 Billion in net debt, Air Canada already has close to half the debt it possessed when it last went bankrupt – debt will continue to skyrocket this year.
- Total revenues declined 70% in 2020 and operating loss was $3.77 Billion – despite massive subsidies.
- Fuel is one of the company’s biggest input costs, and energy prices are on the rise in 2021 – shrinking profits.
- Buying businesses that have gone bankrupt in the past and continually require government bailouts and subsidies is not a profitable playbook –Air Canada remains a no fly zone!
Market Cap: $333.3 Million.
Firstly, congrats to all clients who own the stock which was recommended to clients in late 2018 early 2019 at $7.15. VersaBank’s shares jumped 41% this month, 72% year-to-date, and 120% since our recommendation – crushing the performance of the Big Banks over that period.
What does VersaBank do?
VersaBank is a Canadian Schedule I chartered bank – one of the world’s first fully digital financial institution using a highly efficient business-to-business model driven by the company’s proprietary state-of-the art financial technology. VersaBank obtains all of its deposits and provides the majority of its loans and leases electronically, with innovative deposit and lending solutions. Two primary services – deposits and financing. The bank is organized around these two distinct operating divisions. VersaBank financing two underserved areas: Point of Sale Financing (e-Commerce), and Project Financing which encompasses Public Sector Financing as well as Real Estate and Development Financing, and Commercial Lending.
Recent News – Driving Share Price Gains
In November, the company made a smart acquisition of Digital Boundary Group (DBG), that has been immediately accretive in a hot sector.
Last week reported strong Q1 Fiscal 2021 numbers: Sequential growth in all key financial metrics and year over year. Record sequential loan growth of $139 million, or 8%, to a new high of $1.8 billion, driven by significant loan origination activity.
Also, last week VersaBank reported it plans to launch a strong encryption based digital currency (cryptocurrency) represented one-to-one by a Canadian dollar bank deposit with the Bank, to be known as VCAD. VCAD is expected to be the first digital currency to represent a fiat currency, as well as the first in the world digital currency issued by and backed by deposits with a North American bank. As such, VCAD will offer the highest level of stability and security amongst all digital currencies in the market today.
While it too a bit of time to develop, VersaBank appears to be back in its growth trajectory and with an accretive acquisition in its Cyber division and a return to loan book growth, further potential remains. And, we reiterated our congratulation to clients who own the stock – its gains over the past month and year-to-date, make it our Star of the Week.
Groupon Inc. (GRPN)
Current Price: $58.60
Market Cap: $1.7 billion
What does the company do?
Groupon is a global ecommerce marketplace which acts as an intermediary between merchants and customers by offering vouchers for discounted rates on products and services. Groupon offers consumers daily deals (in the form of online vouchers) from local merchants and sells products directly to consumers. 60% of the company’s revenue is from direct sales and 40% is from the take rate on the purchase or usage of vouchers.
Groupon reported its Q4 financial results on February 25th and in the four trading days since the release, Groupon’s stock has shot up nearly 60%.
Groupon was another one of those companies that was incredibly hard hit by the pandemic. Much like the travel industry, Groupon depends on its users being able to leave their homes, and with many businesses shutdown, or at reduced capacity, the company’s financials have suffered.
The Q4 results do appear to be a major shot of adrenaline for the company’s stock price. The results themselves weren’t especially impressive, at least on a year over year basis. Fourth quarter non-GAAP, or adjusted net income per share was $0.51. This was down substantially compared to same quarter a year ago which produced $1.44 in earnings. However, it was a strong improvement sequentially over Q3 of the same year during which the company reported $0.15 in earnings per share. Revenue was also up from the most recent quarter by about 13% to $343 million.
Investors were also undoubtably encouraged by management’s outlook and commentary on the quarter. Aaron Cooper, Interim CEO, said that “Despite the challenges of 2020, we successfully implemented our restructuring plan and established a path for growth, and as a result, we are well positioned heading into 2021”.
With the move up this week Groupon’s stock price is now around where it was immediately before the pandemic. The question is, what should investors do now?
Groupon is a Star based on the stock price gains for the last week, but it is not a company I would be investing in.
I fully expect the company to recover financially over the next year; however, the pandemic is not the only challenge the company faces. Groupon has been struggling with revenue growth for years. Revenue was over $3.1 billion in 2016 and declined for 3 straight years down to $2.2 billion in 2019 and then again to $1.4 billion in 2020.
According to Statistica, the number of active users for Groupon has mostly been in decline after peaking in 2014 at about 54 million. The most recent estimate was 34 million. This is primarily the result of the company losing market share to competitors and alternatives.
We want to invest in companies that are providing products and services for which there is strong and growing demand and that can increase or at least defend their share of the market. The result of a strong product in a strong market should be growing revenue and an increasing number of customers.
Even with a full financial recovery, this is not the profile of business that we want to invest in.
Now I’ve always thought (and hear me out on this one) that a great promotion would be to do a “Groupon” on the famous mustard Grey Poupon to be called a “Poupon Groupon” or Brennan’s preference a Groupon Poupon.
Your Stock Our Take
Colin via Twitter
Good Natured Products Inc. (GDNP:TSX-V)
Current Price: $1.28
Market Cap: $206 Million
What does the company do?
Good Natured Products produces and distributes high-performance bioplastics for use in packaging and durable product applications.
The company offers eco-friendly home and business products, food packaging, restaurant/take-out containers, medical and industrial supplies with the goal to minimize waste and reduce environmental impact.
Recent Financial Results: (Q3, 2020)
- Revenues for the third quarter of 2020 showed good growth, growing 46.6% to $4.7 million from the same quarter last year.
- The company was still losing money, with adjusted earnings of approximately a loss of $(1.54) million, compared to a loss of $(1.06) for the same quarter last year.
- TTM Adjusted EBITDA was a loss of $(1.07) million.
- Balance sheet had net debt of approximately $17.8 million.
- Currently trading with a P/S multiple at 15x which is pricey.
To conclude on Good Natured Products Inc. I like that the business is operating with the goal of providing environmentally sustainable products which is clearly a positive. Looking at the business operationally they have put up great revenue growth over the past 5 years, growing revenue at a CAGR of 172%, but the company is not currently profitable, and over the past 8 quarters has shown very little improvement in regards to profitability.