KeyStone’s Stock Talk Podcast Episode 158

After a brief hiatus spent testing a new video format for the podcast we are back! Video podcasts should start to be available next week on YouTube – so stay tuned.

This week, we start by discussing Ryan’s recent research trip to LA at the Fall LD Micro Event. Next, we will introduce topics for our new series of Live Webinars.  In our first YSOT Brennan digs into a listener question regarding VirTra Inc. (VTSI: NASDAQ), a provider of judgmental use of force training simulators, firearms training simulators, and driving simulators for the law enforcement, military, educational and commercial markets.

In our second YSOT, Aaron takes a look at Alaris Equity Partners Income Trust (AD.UN: TSX), a royalty streaming company that provides alternative financing to smaller, mid-market, private companies in exchange for ongoing royalty payments. The stock yields over 7% and Aaron lets you know our take on its current valuations.

LD Micro Event:

Let me summarize the event – and then you gentlemen can ask me a few questions about it. So, there are around 200 companies 500-600 analysts. Each company gets a 20-minute presentation and analysts such as ourselves, can book 1 x 1 meetings with the management teams. We review all of the companies in advance and book meetings with teams we think could potentially enter our coverage. Great interviews in the past – companies we have met at the event multiple times include XPEL Inc., Viemed, Zynex, Acme United, Sangoma, and more.

It was a good event – obviously not at busy as usual – 200 companies versus 400-500 and 500 investors versus 1,500 – but great to actually sit down across the table from a few select management teams and get to know them and the businesses a little further. This is always very valuable.

How to Position your Stock Portfolio for 2022 & Beyond.

November 2nd and November 9th

November 2nd at 7:00 pm Pacific / 10:00 pm Eastern

November 9th at 4:00 pm Pacific / 7:00 pm Eastern

We are extremely excited to launch the newest in our Live Webinars and our last in 2021! This event will sell out, so we encourage you to claim your ticket while they are still available.

If you are looking to fix your existing portfolio or finally take the plunge and build a simple 15-25 stock portfolio consisting of well-researched growth and dividend growth stocks – don’t miss it.

You Need a Plan.

There are over 10,000 stocks in Canada & the U.S. to choose from – some offer game-changing return potential, but many are land mines with the potential to destroy your hard-earned dollars.

KeyStones’ Simple Portfolio Building Plan – how to build a simple 15-25 growth & dividend growth stock portfolio designed to enrich you, not your advisor.

Learn why 2-3 Great Investment Ideas Can Change Your Portfolio – real examples from our research including Boyd Group (BYD: TSX) the best-performing stock in Canada over the past decade up over 10,500% and XPEL (XPEL: NASDAQ) the best-performing stock to graduate to the NASDAQ up over 5,000% in 4 years.

7 Great Stocks You Can Buy Today – KeyStone’s top REIT, top SaaS tech, top disruptive healthcare, top FAANG, top gold related, top dividend growth stock, and more.

Hot Topics: Inflation & your portfolio, China & why we avoid this market, Explaining the NFT craze – opportunity or bubble?

FAANG Stocks & Big Tech Opportunities – Revisiting Facebook, Alphabet, Apple, Amazon, and Netflix – are they overpriced, fair, or undervalued and our top pick.

Learn to Take Advantage of December 2021 Tax Loss Selling – find out what tax-loss selling is and why it could produce extraordinary opportunities this year in the small-cap segment.

Fresh Research – Findings from reviewing 4,000 U.S. stocks with market caps under $2 billion: is there value & growth and where?

Why Cash Flow Growth & Profitability Matter in Your Portfolio – We show you why stocks that make money, make you money and how to avoid long-term losers.

Live 30-40-minute Q&A Session: Ryan Irvine & Aaron Dunn – Answer your questions on stocks and strategies.

 

Your Stock Our Take

 

VirTra Inc. (VTSI:NASDAQ)

Current Price: $8.92

Market Cap: $96.2 Million

 

What does the company do?

VirTra Inc. is a provider of judgmental use of force training simulators, firearms training simulators and driving simulators for the law enforcement, military, educational and commercial markets. The company’s patented technologies, software, and scenarios provide intense training for de-escalation, judgmental use-of-force, marksmanship, and related training that mimics real-world situations.

Key Points:

  • On October 5, 2021 – VirTra received a $1.3 million order from a federal law enforcement agency in a European country for use-of-force simulators, weapon recoil kits and other training accessories.
  • On September 16, 2021 – received a $1.37 million order from a country in the Middle East for use-of-force simulators and various training tools, software and accessories.

Recent Financial Results: (Q2, 2021)

  • Revenue was up 90%, to $5.3 million compared to the same quarter last year
    • The increase was attributable to an increase in the number of simulators and accessories that were delivered.
  • Net Profit was $530 thousand up from a loss of $600 thousand in Q2 2020.
  • Balance sheet – $21.5M in net cash.
  • Trailing Adjusted EBITDA was $5.5 million, providing the company with an EV/EBITDA multiple of 13.5 times.

Looking at the longer-term growth rate:

 

 2017201820192020
Revenue$16.5M$18.1M$18.7M$19.1
Growth Rate 9.7%3.3%2.1%

 

  • 19% year-over-year increase in its backlog to a record of $17.0 million. So, growth going forward does look promising based on this.

 

Our Take:

In my opinion, VirTra is the antithesis to what many people were calling “defund the police”. I believe the police could use more funding – funding which could be used to purchase VirTra’s simulators and training devices so that officers on the front line are fully prepared to respond to any situation.

Fundamentally the business is strong, with solid revenue growth this quarter, decent growth over the last few years in the mid-single digits, as well a record backlog that could support attractive growth going forward. The business is profitable, has a cash-rich balance sheet, and a reasonable EV/EBITDA multiple of 13.5 times.

Considering the business’s low growth from 2018-to-2019 and 2019-to-2020, right now, I believe the company is trading near fair value unless we get an indication that the company is going to be able to ramp up growth into the mid-double digits. All-in-all it’s definitely a story I will continue to follow and dig into further to see what growth we can expect from the business for the full year of 2021.

 

Your Stock, Our Take

 

Can I get your opinion on Alaris? It pays a nice dividend which was recently increased. Is this a good income investment? – Doug – North Vancouver. 

Alaris Equity Partners Income Trust (AD.UN: TSX) 

Current Price: $18.50

Market Cap: $835 million
Yield: 7.1%

 

What does the company do?

Alaris is a royalty streaming company. The company provides alternative financing to smaller, mid-market, private companies in exchange for ongoing royalty payments.

Key Points:

  • Alaris currently has 20 royalty streams from a diverse range of businesses spanning areas of utility service, IT consulting, construction and even a fitness gym, just to name a few.
  • Over its history, the company has invested about $1.8 billion in 33 royalty streams.
  • The way this structure works is that Alaris provides capital to a private business that needs liquidity, growth funds or to recapitalize. The private business pays Alaris a percentage of its revenue for an indefinite period or until they make an additional payment to buy out the royalty and end the obligation.
  • Alaris’ existing portfolio is generating a baseline cash yield of 13%.
  • Alaris uses this cash flow to pay an attractive dividend to its shareholders.
  • The company has generally paid a consistent dividend to its shareholders over time, but in June 2020, Alaris reduced its dividend from $0.41 per quarter to $0.29 due to business disruptions caused by the pandemic. Since then, the dividend has been increased twice and is currently $0.33 per quarter.
  • The Trust’s Run Rate Payout Ratio is expected to be within a range of 55% and 60%.
  • In June, the company announced a $70 million investment into a new royalty partner which the company expects will increase distributable cash flow per share by 6.5%.

Recent Financial Performance:

  • Recent financials have been strong. Q2 revenue was up 37% to $35 million and cash flow per share was up 18% to $0.45.
  • The recent growth was largely the result of a recovery from the lower performance from last year.

Additional Takeaway:

  • An important metric that Alaris reports is something called Partners’ Earnings Coverage Ratio (“ECR”).
  • The ECR is the multiple of the investee’s annual earnings to the annual royalties paid to Alaris.
  • For example, if a royalty partner generated 2 million a year in earnings and paid 1 million a year in royalties, then the ECR would be 2 times.
  • This metric is used to measure the financial health of the royalty partners and the margin of safety between earnings and royalty obligations.
  • A higher ECR indicates better financial strength and lower risk while a low ECR can be an indication that a company is close to not being able to pay its royalty obligations.
  • Alaris reports that 11 of its partners have an ECR less than 2.0 times can 9 with an ECR greater than 2.0 times.

Conclusion

Overall, I think that Alaris is an interesting business. It has a long track record of paying out significant dividend income to its shareholders. It’s attractively valued relative to cash flow (trading at a price to cash flow ratio of less than 10 times) and the current outlook is generally positive.

However, I do consider the company to be higher risk and I have some concerns. The first is that it is very difficult to get any information on the company’s royalty partners as they are generally private businesses. The information we have is the earnings coverage ratio and I have always considered the ECRs reported by Alaris to be quite low. The majority of the company’s royalty partners have ratios below 2 times which I don’t believe provides a lot of coverage. 9 companies have ECRs above 2 times but we know how much above. These royalty partners are also paying Alaris average yields of around 13% which is expensive considering how low-interest rates are currently. These are businesses that clearly aren’t able to access bank financing at a lower cost and we have to consider the reasons for that.

Looking at the company’s stock price, it hasn’t done a lot over the last 10 years except move up and down. It does appear that the market is recognizing this risk.

This doesn’t mean that I think Alaris wouldn’t be a good investment. The fundamentals look reasonably strong right now and it does have that long track record of dividend payments. I would just remind investors that it’s a higher risk.

 



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