Stock Talk Podcast Episode 201 Show Notes

KeyStone’s Stock Talk Show, Episode 201.

Great to be back with – this evening we are hosting the first of our Live Webinars in 2023 – if you do not get your ticket for a session this week, you will have to wait until the Fall for the next – so grab a ticket for the March 7th, 9th or the full VIP Package on the 12th. I will start by touching on what I talked about this weekend on Money Talks with Michael Campbell including an update on Hammond Power Solutions Inc. (HPS.A:TSX) a boring growth business which is enabling the electrification of the world – the stock is is up 75% from this Fall (it was recommended at our last Webinar as well) and well over 2,000% since our original recommendation to clients – Hammond Power is starting to drive returns in the range of an XPEL or Boyd (that is rarefied air). In our Your Stock Our Take segment, Aaron will start by answering a listener question on Sleep Country Canada Holdings Inc. (ZZZ:TSX), the largest retailer of mattresses and bedding accessories in Canada operating in  three segments Sleep Country/Dormez-vous, Endy, and Hush. Sleep Country is a name we have owned and sold for strong gains in the past in our Canadian Income Stock portfolios and we are monitoring it again for a potential long-term opportunity. Brett answers a viewer question on Costco Wholesale Corporation (COST:NASDAQ) AKA where Brennan brings his lunch dates. Needing limited introduction, Costco is a leading warehouse club with 847 locations worldwide. The company just reported its Q2 numbers in a challenging period and the viewer asks where this long-term viewer is today in terms of valuations and if it remains a long-term buy. In our third YSOT, Brennan take time from his Costco lunch date to review Dentalcorp Holdings Ltd. (DNTL:TSX) which acquires and partners with dental practices to provide health care services in

Canada. While conceptually a “roll-up” strategy in the dental market in country appears intriguing, Brennan let’s you know if Dentalcorp is actually executing on the plan in a profitable manner.

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1. March 7 @ 7:00PM Pacific
2. March 9 @ 7:00PM Eastern

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Hammond Power Solutions Inc. (HPS.A:TSX)

October 2022 Price: $16.60

Today: $29.20

Gain Since October: 75%

Original Money Talks Recommendation on Hammond Power in 2002-3: $1.15  (this makes me feel old!).

Gain of Over: 2,430%

Market Cap: $345 million

What Does the Company Do?

Founded over 100 years ago, enables electrification through its broad range of dry-type transformers, power quality products and related magnetics. HPS’ standard and custom-designed products are essential and ubiquitous in electrical distribution networks through an extensive range of end-user applications.

Growth:

⋅   Growth in its traditional custom business in the energy, mining, silica chip manufacturing, and data center markets.

⋅     New opportunities in evolving technologies like EV recharging, solar energy, and energy storage applications. Example, every Tesla charging station in Canada uses Hammond Transformers.

⋅     Near-term backlog all-time highs.

Recent Financials (Q3 2022):

Revenues increased 56% to a record $149 million.

Earnings per share increased to $0.97, compared with $0.34 in Q3 2021

Order backlog increased 141% – record high.

Valuation: Hammond Power is poised to produce in the range of $3.00 in EPS for 2022 – trades at 9.7 times earnings. By applying a multiple of 10 fair value is in the range of $30 – fair value near-term, so still undervalued, but closer to near-term fair value. Volatile, but a good business which is now cash rich low debt.

Jim Cramer ETF’s actually launched

https://www.newsmax.com/finance/streettalk/jim-cramer-inverse-etf/2023/03/03/id/1111007/

Tuttle Capital Management has launched a pair of inverse exchange-traded funds (ETFs) to let investors bet against the stock recommendations of CNBC “Mad Money” host Jim Cramer.
Cramer recently roasted his mistaken calls in a tweet: “As always, I welcome people betting against me. I have done this for 42 years. Those who know me know that you would have been betting against Apple at ($)5, Google since inception, Meta at $18, Amazon at ($)ten and AMD at $5. i welcome all comers.”

Tuttle Capital Management launched the two ETFs based on the polarizing stock picker’s calls on Thursday, the Inverse Cramer Tracker ETF (SJIM) and the Long Cramer Tracker ETF (LJIM).

“If he specifically says either buy, buy, buy a stock, then we’re gonna go short that stock at the next practical moment,” Matthew Tuttle, CEO of his eponymous firm said on Bloomberg’s Trillions podcast.

“If he tells you he hates a stock, or sell, sell, sell or something like that, then we’re gonna go long that name again at the next kind of practical entry point.”

Tuttle is managing the ETFs, which charge a 1.2% expense ratio, in a very low-tech manner. Tuttle and two of his colleagues watch Cramer’s TV appearances throughout the trading day and monitor his Twitter account to manage baskets of stocks of just 20 to 50 names. The turnover of the holdings is high, Tuttle said.

YSOT Dentalcorp Holdings Ltd. (DNTL:TSX)

Price: $9.71

Market Cap: $1.802 Billion

Description:

Dentalcorp Holdings acquires and partners with dental practices to provide health care services in Canada. As at September 30, 2022, Dentalcorp is the largest provider of dental services in Canada as it owns and operates a network of over 538 dental practices with approximately 8,450 team members, including over 1,650 dentists, over 2,000 hygienists, and over 4,800 auxiliary dental health professionals.

Slide 3

Looking at the company’s growth strategy

The company aggressively grows through acquiring independent dental practices with a selection criteria of $2.0-$2.3M in revenue and $450-$500K in EBITDA. With a current pipeline of over 720 identified target practices, of which approximately 190 are in more advanced stages of negotiation. And management claim’s that following an acquisition of a practice they can reduce costs and increase the practice’s EBITDA margin by 10-15% following the first year.

Plus, they target 3%+ medium term practice revenue growth by increasing frequency of patient visits, and by increasing service offerings with clear aligners through their partnership with Invisalign®, and ortho treatments & implants.

Slide 4

Operational Updates:

On November 21, 2022, the company announced a Strategic Review process to “unlock shareholder value”. Which the board has established to potentially sell the business, following some unsolicited expressions of interest from other parties. They noted that there can be no assurance that the process will lead to the approval or completion of any transaction, and it does not intend to provide any updates with respect to the review until the Board approves a specific transaction or otherwise concludes review of its alternatives.

And as a sagway into the financials, I just wanted to note the company’s most recent equity raise of $115M in January 2022, as the company aggressively acquires practices and either needs to fund this through debt, share issuances, but most importantly – through internally generated CASHH FLOWW.

And you can see in share count chart from Y-Charts, the company’s share count has increased increase from to 185 million shares outstanding.

Slide 5

Recent Financials (Q3 2022)

• Revenue for Q3 2022 was $312.1M an increase of 25% from $250.2M in Q3 2021.
• Adjusted EBITDA was $59.3M an increase of 28% from $46.2M in Q3 2021.
• Net income was a loss of $(14.7)M or $(0.08) per share compared to a loss of $(18.4)M or $(0.11) per share compared to nil for Q3 2021.
• As at Q3 2022 Dentalcorp held $133.0 million in cash and Debt & leases of $1.35 billion, providing a net debt position of $1.22 billion and a trailing net debt to EBITDA multiple of 5.5 times. And if we look at the Interest Coverage Ratio (EBIT/Int. Expense), in the last quarter the company’s was 0.12 times… so we can see the company’s earnings before interest and tax is not sufficient to pay the company’s interest charges. (generally, this ratio should be well above 1)
• Trades with an EV-to-EBITDA multiple of 13.8x and an EV-to-CFO multiple of 20x.

Management anticipates modest quarterly acquisition pacing in 2023 and is “well positioned to generate double digit revenue and adj. EBITDA growth, while generating strong free cash flow to accelerate its pace of de-levering the balance sheet without the need to raise additional debt or equity capital”.

CONCLUSION

To conclude, though a slight hiccup to growth during the pandemic dentalcorp has shown impressive double-digit growth in revenue and EBITDA, albeit through taking on a significant amount of debt and issuing shares. The business does generate positive cash flow, which is good, but given the highly levered balance sheet, rising interest rates, lack of bottom line profitability, and the need for additional funds to continue to grow the, the risk of an investment in the business is heightened. And the future growth rate comes under question as its access to funds are being strained (unless it decides to do an equity raise). It is interesting that the business is conducting a strategic review – which I am not sure if it will amount to anything – but what I would like to see from the business is to lower the leverage on its balance sheet, and try to get into meaningful bottom line profitability.

YSOT Costco COST:NASDAQ

1)

Brenda Via Email asked for our take on Costco Wholesale Corporation symbol COST or cost on the NASDAQ. Costco is the leading warehouse club, Costco has 847 locations worldwide. It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. The stock is trading around $488 with a market cap of 216 Billion and is up roughly 8% year to date. The company also pays a dividend providing a ~0.8% yield.

2)

Costco released its fiscal Q2 2023 earnings on March 2nd, reporting an increase of net sales including membership fees by 6.5% to 54 Billion. But that growth was due to gas inflation and foreign exchange, when removing the pricing changes of those net sales shrunk by 8.7% showing a weaker picture than just standard net sales. It is important to consider effects like foreign exchange and specific price changes that are out of the management and the company’s control and don’t always represent the changes in the actual company operations.  Earnings per share slightly increased by 2.7% to $3.07 per share from $2.99. Looking at a longer time period, trailing twelve months the company had an EPS of $13.26 compared to $11.65 over the previous trailing period. The limited growth for the quarter compared to the trailing twelve months can be attributable in part to the larger macro slowdown. Costco saw big ticket discretionary items sales drop by 15% while memberships actually grew 7% and Food grew by 9.6%, showing the shift in consumer spending habits.

3) Moving to the balance sheet. Simply put it is strong. The company does have a debt of $9 billion including leases, but has a cash position of $10.9 billion, resulting in a net cash position of  $1.8 billion. A net cash position is always great to see when economic conditions are unfavourable. Further, the debt which it does hold is Fixed, so heightened interest rates are less impactful unless the company desires to raise or roll over the existing debt. The next senior note is due in May of 2024 for $1 billion which it could easily pay off with its cash position if desired. For comparison, direct competitor Walmart symbol WMT of New York Stock Exchange has a net debt position of $50 Billion, Walmart is a larger company but is clearly the more leveraged company.

4) Next up valuation, Costco trades at a trailing price to earnings of 36 times, which is expensive given its growth. A strong balance sheet should allow it to trade higher than a leveraged company. But, 36 times is still high. Looking at the historic price-to-earnings ratio it has come down from its all-time high of 46 times but is well above the 20 to 30 times we saw in the 2010s. So even if the company does continue to do well you could see multiple contractions, meaning if the EPS goes up and the stock price stays the same the PE becomes lower. You can see this in analyst expectations for Walmart, it currently trades at a trailing PE of 33x but using analysts’ EPS expectations for its fiscal 2024 it only trades at 23x. Whereas CostCo’s forward PE for its fiscal 2023 and 2024 is still 34x and 31x respectively. I will note that the year ends aren’t the same Walmarts ends in the middle of the two projected Costco’s but is still materially lower than both.

Concluding, Costco is a strong company, but I would like to see the price fall or earnings grow to reduce its valuation multiple before taking a position.