KeyStone’s Stock Talk Podcast Episode 168

We’re back – following a week in California at the LD Micro-Cap Conference. From the approximate 200 companies attending we interviewed roughly 20 management teams and Ryan highlights a couple companies of interest including Richardson Electronics Ltd. (RELL:NASDAQ), DocGo Inc. (DCGO:NASDAQ), and DMG Blockchain Solutions Inc. (DMGI:TSX-V), as well as companies currently in coverage including Geodrill Limited (GEO:TSX), Quipt Home Medical Corp. (QIPT:TSX), and Acme United Corporation (ACU:NYSE) that we sat down with at the event.  Ryan will also look generally at the markets in light of the significant market correction which boarders on a crash in technology and risk assets.

In our Your Stock, Our Take segment Brennan answers a listener question on Nutrien Ltd. (NTR:TSX), one of the world’s largest producers and distributors of potash, nitrogen and phosphate products. Is there value in the business in the current volatile environment.

Finally, Aaron answers a listener question on lockdown and work from home darling DocuSign Inc. (DOCU:NASDAQ). The world leader in digital signatures has seen its share price drop 63.8% year-to-date and over 80% from its 2021 highs. A listener asks if we are starting to see value in this battered tech name.

Welcome Aaron and Brennan.

Interesting markets. Dow plunges more than 700 points, Nasdaq falls 4%, and S&P 500 erases 2021 gains as recession fears mount.

It may get worse, before it gets better.

We talked at the start of the year, that valuations appear to matter once again. Our theory was that companies priced at premium or, quite frankly in many cases, ridiculous valuations would suffer the most in 2022 if the market focussed back on cash flow to value stocks. That is occurring.

Year-to-date Returns:

Alphabet (GOOG:NASDAQ): -26.5%

Shopify (SHOP:NASDAQ): -77.6%

NASDAQ: -32.6%

Bitcoin: 55% – no cash flow – I cannot even value.

Geodrill Limited (GEO:TSX): +11.11%

Quipt Home Medical Corp. (QIPT:TSX): -16.25%

Acme United Corporation (ACU:NYSE): -7.60%

S&P 500: 25%.

These are small-caps which should be more volatile and should be subject to more volatility than the general market. In other words, when the market is down 30%, in theory, due to the higher risk profile generally in smaller companies, they should be down 40% or more. In the case of the three that were in our coverage already at buy, all bested the market return year-to-date in 2022 by a factor of 2 at minimum. In the case of GeoDrill it is actually up 11% with the NASDAQ down over 32% and the S&P 500 down roughly 24%.

Again, it reinforces the fact the market is more focussed on value with growth at present. Each of these 3 businesses had low cash flow multiples compared to the market average and strikingly low multiples when compared to most tech-related stocks – different businesses, but the multiple gap was too large.

We expect further volatility and weakness in many tech names that were bid to unrealistic valuations through 2022, but this is where huge opportunities will emerge. Which is why we are authoring a Special Report on the crash in US tech – what to avoid and what to start buying – to be released shortly.


LD Micro – Quick Review.

My notes:

#1) Travel sucks – Brennan missed the first day of the conference due to flight delays and my 2 hour and 50-minute flight home turned into an 8 hour adventure. Staffing issues at airlines and airports continue….have fun flying this summer!

Companies of Note:

Richardson Electronics Ltd. (RELL:NASDAQ)

On June 6th, announced preliminary net sales and backlog results for its fourth quarter and fiscal year ended May 28, 2022.

  • 2022 fourth quarter net sales are expected to be between $60.5 and $62.5 million, representing 19.9%-23.8% growth compared to the prior year’s fourth quarter. Strong end-market demand and successful new product expansion initiatives.
  • Backlog also increased for the fourth quarter to $206.2 million from $175.6 million at the end of the third quarter, and $110.0 million at the end of the prior year’s fourth quarter.

Interesting business with solid growth and valuations look reasonable and pays a dividend. Would likely be vulnerable in a recession and we do have concerns that the record backlog may include some safety stock buying from its end customers given the current supply chain issues, but it does look interesting.

The company reminded me a bit of Hammond Power in that it is in the electrical industry to a degree, has been around 70+ years (Hammond over 100) and in that the current CE0, Edward Richardson bears the company name having had the business passed through his father as with Bill Hammond of Hammond Power. Richardson appears a bit more innovative.


 Operates in medical transportation and mobile health end markets, providing scheduled ambulance rides and last mile mobile in-home healthcare.

The company is generating cash with ~$200 million on the balance sheet (as at the next quarter) and expects to close on a $150 line of credit soon. Good balance sheet to start.

  • Total revenue was $117.9 million. The Company estimates that Q1 2022 Covid testing revenues amounted to $38 million.
  • Net income was $9.4 million, compared to a net loss of $2.0 million in the first quarter of 2021.

Covid revenue, $58 million in 1H22, is expected to go to zero in 2H22, and

the company must grow non-Covid revenue $10mn sequentially in both 3Q/4Q to achieve the midpoint of guidance. There are multiple new

contracts in 2H22, which provide that visibility plus growth into 2023. 

DMG Blockchain Solutions Inc. (DMGI:TSX-V), a vertically integrated blockchain and cryptocurrency technology company. Crypto miner – bitcoin.

Q2 2022 Highlights:

  • Increased quarterly revenues to $11.9M, up 377% from same period a year ago
  • Increased EPS to $0.03 per share for six months ending March 31, up from (0.01) loss per share for the same period a year ago
  • 372 BTC held as of March 31, 2022
  • Strong balance sheet with $125M in total assets as of March 31, 2022

Interesting – they were profitable but will be tied, sentiment wise, with bitcoin and crypto generally.

Interesting – acquisition growth from Mamamancini’s Holdings, Inc. (MMMB), (DMGGF) – margins concern us, but if management can push margins back to historical numbers it is intriguing.

Geodrill Limited (GEO:TSX), Quipt Home Medical Corp. (QIPT:TSX), and Acme United Corporation (ACU:NYSE) – the first two GEO and QIPT reported robust business. United faces good business but cost increases. The company expects margins to return to normal by the end of the year.


Your Stock Our Take

Ryan – Just wondering if you could take a look at Nutrien or Saskatchewan Potash with the rise in fertilizer costs and potential for food shortages coming up. I understand that they are commodity driven but do they offer value beyond that risk?


 Nutrien Ltd. (NTR:TSX)

Current Price: $110.81

Market Cap: $61.0 Billion

Dividend Yield: 2.2%

What does the company do?

Nutrien is the world’s largest provider of crop inputs and services, playing a critical role in helping growers increase food production in a sustainable manner. We produce and distribute approximately 27 million tonnes of potash, nitrogen and phosphate products world-wide. With this capability and our leading agriculture retail network, we are well positioned to supply the needs of our customers.

Key Points:

United States2%
  • 2021 Production by Country: (Belarus & Russia = 37% overall Potash market)
  • EU & U.S. sanctions on Belarus, supply constraints have led to an increase in Potash prices by over 188% over the last year, and resulted in Nutiren announcing that it would accelerate the ramp-up of its annual potash production capability to 18 million tonnes by 2025 in response to the uncertainty of supply from Eastern Europe. This represents an increase of more than 5 million tonnes, or 40% compared to production in 2020.
    • Nutrien is advancing previously announced brownfield expansion projects that are expected to add approximately 500,000 tonnes of capacity by the end of 2025. We are also evaluating the potential for additional low-cost brownfield expansion and emissions reduction projects with a final investment decision expected over the next 12 months.
    • Nutrien’s annual nitrogen sales volumes could increase to approximately 13.5 million tonnes by 2027 through the completion of inflight brownfield projects and additional growth projects under evaluation.
  • General comments on the long-term prospects of the tightening Supply/Demand Picture with the war in Ukraine:
    • In regard to fertilizer prices, Nutrien’s CEO said during the conference call – “We are watching the impacts that sanctions are having first on Belarus and Russia. And while potash itself is not sanctioned in Russia, certainly, the enabling activities for export of anything out of Russia at the moment are challenged, whether it’s banking or shipping or insurance and so on. So we’re looking at duration and how might long this which could be well beyond 2022, and hence, are looking at our own capabilities accordingly.”
    • Their chief Economic Strategist further stated – “There’s a really large potential for supply constraints in 2022 just given, the restrictions on Belarusian shipments and all of different sanctions impacting Russian production. In terms of quantifying the impact, if we compare to the sort of base operational capability in Belarus around 13 million tons, operational capability in Russia around 15 million tons. We think Belarusian supplies will be down around 6-8 million tons this year and Russia in the range of 2-6 million tons this year. Going forward, it will take some time to rebuild those export capabilities. And we believe Belarus will continue to be most restricted going forward as they have the need to rebuild or build port capacity, which takes time especially in the face of sanctions. And then, we also know that, that region makes up about 60% to 70% of the capacity additions that we expect to come forward over the next five years.”

Recent Financial Results: (Q1, 2022) ALL IN USD$

  • Revenue was $7.7B an increase of 64% over the previous year.
  • EPS was up substantially to $2.70, compared to just $0.29
  • Adjusted EBITDA was $2.6B up 224% over the previous year.
  • Balance sheet – Cash was $577M; Leases & Debt were $12.3B. Providing net debt of $11.7B.

Fiscal 2022 Guidance:

 2022 Guidance2021 Actual% Change
Adjusted EPS$17.45$6.23180%
Adjusted EBITDA$15.5B$7.1B118%
Potash Sales Tonnes14.8M13.6M8.8%
Nitrogen Sales Tonnes10.9M10.7M1.9%

After converting the financial guidance to CAD:

  • Forward P/Adj EPS = 5.0x
  • Forward EV/Adj. EBITDA = 3.9x

Our Take:

Now to answer Ryan’s question as to whether the company offers value beyond its commodity risk… I believe that fundamentally the business looks strong right now, has solid growth projected throughout 2022 and has long-term targets for its potash division growing its annual sales to 18M tonnes by 2025 (32% over 2021) and in its Nitrogen division growing total sales to 13.5M tonnes by 2027 (26% over 2021). So, the path for growth is there and the company believes that the tight supply/demand picture remains strong throughout 2022… and potentially beyond. So if one believes Nutrien’s management is right and that the supply/demand picture will remain tight for the next few years elevating fertilizer prices, I believe there is a reasonable case to be made that the company could offer value over the next 2-5 years.

DocuSign Inc. (DOCU: NASDAQ)

Price: $56.00
Market Cap: $11 billion

What Does the Company Do?

Docusign provides cloud-based software that allows users to review and sign legal documents remotely. The company was founded in 2003 and went public in 2018.

Our Take

Share price has been crushed lately along with the rest of the Technology sector. Price is down over 30% over the last 5 trading days and down 80% over the last 12 months.

This was one of those highly visible, widely touted, high growth and high valuation software stocks. It performed very well during the pandemic. I’ve used the service many times when signing legal agreements and have found it to be very convenience, useful and easy to use.

But like so many once beloved software stocks, the company’s share price has crashed.

The question I want to answer is how is the company doing financially, what is the outlook and does it now offer good value here after declining 80%.

Financial Performance:

  • First Quarter Financial Highlights
    • Revenue up 25% to $588.7 million.
    • Non-GAAP earnings per share down 14%.
    • Free cash flow up 42% to $174 million.
    • Ended Q1 with $967 million in cash and $872 million in debt…small net cash balance.

Financial Outlook:

  • Guidance
    • Total revenue $2,470 to $2,482 million (21% growth year-over-year).
    • Non-GAAP operating income of $395 to $446 million (flat year-over-year).
  • Analyst Estimates:
    • Analyst consensus estimates are for $1.74 in earnings per share for the current year; down from 12% from $1.98 last year.
    • Analysts expect growth to resume next year with EPS of $1.98, an increase of 14%.


  • Currently, DocuSign is trading at about 23 times trailing free cash flow of $496 million- and 28-times analyst consensus estimates for next year.
  • Compare this with the company’s valuation 12 months ago which was 250 times trailing free cash flow. This was when the market value of the company was $56 billion as opposed to $11 billion today.


The financial performance on Docusign doesn’t look bad. The revenue is expected to grow and earnings may drop moderately but they aren’t expected to drop anywhere near the degree that the share price has. The reported free cash flow is strong and the valuation has improved exponentially.

Is this an opportunity to buy a leading SAAS technology company at a highly discounted price? Well, unfortunately, the jury is still out on that.

I’m going to leave an analysis of Docusign’s operating business, market share and competition out for now because there is another area of the company’s financials that I want to unpack. That’s the company’s stock-based compensation expense.

This is a really complicated issue. It deserves multiple segments of its own to really discuss properly but I think it’s a thematic issue that all technology investors need to understand at a basic level.

The technology sector in generally pays a lot of its compensation to employees in the form of stock-based compensation. They do this because it helps align employees with the future success of the company and it also doesn’t have any immediate cash outflow for the company. The problem is that it can severely distort and overstate both adjusted earnings and free cash flow. Since it is a non-cash charge it is almost always adjusted out of non-GAAP net income and it does not show up in the operating cash flow section of the cash flow statement.

In the case of Docusign the impact of stock-based compensation is substantial. In 2021, the company’s stock-based compensation was over $400 million which was about equal to the non-GAAP earnings. If you factor in stock-based compensation then this brings the company from a strong net profit to basically breakeven. It also brings the free cash flow multiple from 23 times to over 100 times.

Most analysts will not make the adjustment for stock-based compensation and will use the standard calculation of non-GAAP earnings or free cash flow. The trust is that this is in fact a very complicated issue. There are other areas of the cash flow statement where one can look to see the real cash outflow associated with stock-based compensation. The expense reported on the income statement may not be entirely accurate but its even more inaccurate to ignore stock-based compensation completely.


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