Today we have a great show again highlighting three very intriguing Canadian growth stocks. In our Your Stock, Our Take segment we take a question from a listener about Savaria Corporation (SIS:TSX), a great small-cap growth winner that just reported record year end number this past week – we take a look to see if now is the time to buy. Our dog of the week is actually a relatively a solid growth stock, Lumenpulse Inc. (LMP:TSX), which was unable to live up to the lofty expectations for growth the market had expected of it this past week. Our star of the week is, Enghouse Systems Ltd. (ENGH:TSX), a long-term BUY in our Canadian Small-Cap Growth Stock universe for the past 6 years which reported strong 2017 first quarter results, sending the stock soaring.
If this is your first time listening, then thanks for stopping by. This podcast is produced every week for your enjoyment and show notes are found at www.keystocks.com. Come back often and feel free to add the podcast to your favorite RSS feed or on iTunes. You can also follow us on Twitter @KeyStocks and on Facebook.
Now, let’s dig into the show.
Your Stock, Our Take
Savaria Corporation (SIS:TSX)
Business Overview
Savaria is one of North America’s leaders in the accessibility industry. It provides accessibility solutions for the elderly and physically challenged to increase their mobility and independence. The diversity of its product line, one of the most comprehensive on the market, includes stairlifts, wheelchair lifts, patient lifts and residential and commercial elevators and the conversion and adaptation of vehicles.
2016 Annual Results Announced This Week
Savaria’s performance reached new heights in 2016, both in terms of revenue and adjusted EBITDA. Revenue reached $120 million, up 26% from 2015, while adjusted EBITDA reached some $20 million, up 41% from 2015. Cost control enabled the company to achieve a ratio of adjusted EBITDA on revenue of 17%, our best annual performance ever
| (in thousands, except per-share amounts and percentages) | Quarters Ended December 31, (Unaudited) |
Years Ended December 31, | ||||
| 2016 | 2015 | Change | 2016 | 2015 | Change | |
| Revenue | $30,986 | $26,605 | 16.5% | $119,728 | $95,263 | 25.7% |
| Gross margin | $11,134 | $8,713 | 27.8% | $40,569 | $29,577 | 37.2% |
| As a % of revenue | 35.9% | 32.7% | n/a | 33.9% | 31% | n/a |
| Net income | $3,740 | $2,867 | 30.4% | $12,301 | $8,944 | 37.5% |
| As a % of revenue | 12.1% | 10.8% | n/a | 10.3% | 9.4% | n/a |
| Earnings per share – diluted | $0.10 | $0.09 | 11.1% | $0.34 | $0.28 | 21.4% |
| Adjusted EBITDA | $5,882 | $4,372 | 34.5% | $20,467 | $14,559 | 40.6% |
| As a % of revenue | 19% | 16.4% | n/a | 17.1% | 15.3% | n/a |
| Adjusted EBITDA per share – diluted | $0.15 | $0.13 | 15.4% | $0.54 | $0.45 | 20% |
- Earnings before interest, taxes, depreciation, amortization and business acquisition costs (see section Compliance with International Financial Reporting Standards)
Great results, great growth – is the stock trading at a reasonable price?
Valuations:
EV/EBITDA is 15.8 – rich, but not completely unreasonable given the growth.
Outlook 2017
Factoring in the benefits of the acquisition of Premier Lifts that was completed in February, the Corporation forecasts revenue of approximately $143 million and adjusted EBITDA in a range of $25.5-$26.5 million (27% growth) for the twelve-month period ending December 31, 2017.
As at December 31, 2016, we had more than $51 million in cash. This enables Savaria to consider strategic transactions in 2017, whether it is marketing new products or acquiring new territories or sales networks. With the growing needs of people with reduced mobility coupled with the aging of the population, management is looking toward Savaria’s future with optimism.
Quick Take – the stock is not cheap. If you believe in the growth story, you hold your nose at the current valuations and would buy long-term with a 2 to 5-year outlook and look for management to continue to grow the business.
Ryan
Star & Dog of the Week
Our star and dog of the week provide a great example of what can happened to a stocks that are trading at premium valuations due to growth expectations when they miss or beat those expectations.
In this case, our Dog of the week Lumenpulse Inc. (LMP:TSX), missed growth expectations and dropped 20% in one day, while our Star Enghouse Systems Ltd. (ENGH:TSX), beat expecations and saw its shares jump 10% on Friday alone.
We are also happy to report that the Star, Enghouse, has been a long-term BUY in our Canadian Small-Cap Growth stock research for the past 5-years.
Dunn
Lumenpulse Inc. (LMP:TSX)
Designs, develops, manufactures and sells a wide range of high performance and sustainable specification-grade LED lighting solutions for commercial, institutional and urban environments.
Shares dropped nearly 20% this past week as the company missed earnings expectations and lowered its growth guidance – overall, the results showed good growth, but the company could not hit the lofty expectations.
Key Financial Results for Q3 Fiscal 2017
Consolidated revenues grew by 49.4% versus Q3 of Fiscal 2016, reaching $53.1 million
Reflecting a change in product mix and acquired product portfolio, gross margin stood at 46.1% versus 48.8% for Q3 of Fiscal 2016
Adjusted Gross Margin at 47.3% versus 50.3% for Q3 of Fiscal 2016
Operating income stood at $1.4 million, up from a negligible operating loss for the same period last fiscal year
Adjusted EBITDA1 of $5.3 million up from $3.6 million for the same period last year
Net loss of $3.7 million (or $0.15 per diluted share2) down from net income of $1.6 million (or $0.06 diluted per share), primarily caused by a $3.4 million change in fair value of contingent consideration impact in Q3 Fiscal 2017 related to the Fluxwerx earn-out.
Adjusted Net Income at $2.8 million (or $0.10 per diluted share2) down from $4.1 million (or $0.16 per diluted share)
What caused the drop?
F2017E guidance reduced due to “temporary volatility” – Citing several factors, management noted that the pipeline of projects is not converting to orders at the same rate at which it has in the past. While they believe this is a temporary issue, the market is taking more cautious approach and reduce forecasts for revenue growth, and with this, earnings forecasts – when this happens to a stock trading a high growth multiples, the correction is swift and violent.
Trump Tax Uncertainty
In the company’s conference call the company commented that they do not see a significant risk from potential changes to US tax/trade policy – but the market is again taking a more cautious view and pricing in this potential risk. LMP sources their electronics from the US, and while final assembly of LMP’s products is typically done in Canada, they do have assembly capability in the US (and this could be expanded for a relatively low cost if needed). Further, a stronger US dollar, increased economic activity, and an acceleration of infrastructure related projects should support LMP’s revenue growth.
Long-term, we may have an opportunity, but the company will be in the penalty box near-term.
Shares will likely continue to trade at a discount to the peers until a more consistent track record of growth is established: LMP trades at 10.9 times 2018 expected EPS now a discount to its peers which are in the range of 14.5 times. Prior to the correction, the shares at traded at or at a premium to its peers heading into 2017.
Ryan
Enghouse Systems Ltd. (ENGH:TSX),
Enghouse a diverse software company – built through strategic acquisitions targeting the Contact Center, Networks (OSS/BSS) and Transportation/Public Safety sectors.
The company is cash rich, with no debt, management own a significant stake in the shares and cash flow has consistently grown overtime. We have been recommending the company’s shares for over 5 years when the stock traded in the $8.00 range.
This Friday the stock jumped 10% to close over $60.
Driving the jump were the company’s Q1 2017 earning which bested estimates.
First quarter revenue increased to $78.8 million, compared to revenue of $74.4 million in the first quarter of the prior year. Increased revenue in the quarter reflects incremental revenue from acquisitions net of the unfavourable impact of foreign exchange estimated at $5.2 million.
The real beat came from income from operating activities was $22.4 million compared to $17.8 million in prior year’s first quarter, an increase of 25.8%. Net income for the quarter was $11.7 million or $0.43 per diluted share compared to $8.5 million or $0.31 per diluted share in the prior year’s first quarter. Adjusted EBITDA for the first quarter was $23.2 million or $0.85 per diluted share compared to $19.1 million or $0.70 per diluted share last year, an increase of 21.4%.
Enghouse closed the quarter with $88.3 million in cash, cash equivalents and short-term investments, compared to $85.9 million at October 31, 2016.
Enghouse increased its quarterly dividend 14% to $0.16 per common share, payable on May 31, 2017 to shareholders of record at the close of business on May 17, 2017. Enghouse has now increased its dividend in each of the past nine years.
