Once again, we have an interesting show planned for you. In our Your Stock, Our Take segment we take a question from a listener about Altius Minerals Corporation (ALS:TSX), a base-metal royalty streaming company that reported seemingly strong quarterly numbers the week – we let you know if now is a good time to buy. Our star of the week is a past recommendation from our Canadian Income Stock Research, Premium Brands Holdings Corporation (PBH:TSX), a specialty food manufacturing and distribution business, which jumped this week on record year end results. Our dog of the week is former Pharmaceutical giant, Valeant Pharmaceuticals International Inc. (VRX:TSX), a stock which is no stranger to this space and saw its shares sink to new depths this week.
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I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man by who has been counting down the days with bated breath to the release of Disney’s reboot of Beauty & the Beast, Mr. Aaron Dunn.
YOUR STOCK / OUR TAKE
· This week we have a question from Mary in Winnipeg.
· The question is on Altius Minerals….symbol ALS.
· Altius directly and indirectly holds diversified royalties and streams that generate revenue from 15 operating mines. These are located in Canada and Brazil and produce copper, zinc, nickel, cobalt, iron ore, potash and thermal (electrical) and metallurgical coal.
· The company reported its third quarter fiscal 2017 results on Wednesday which at face value looked quite strong.
· Revenues for the quarter doubled to $14 million.
· Operating earnings almost doubled to $11 million.
· The company did report a net loss on the bottom line in the quarter resulting from a non-cash impairment charge of $72 million on one of its royalty interests which was due to policy changes in the province of Alberta that are intended to phase out coal fired electrical generation by 2030.
· Striping out this impairment charge would put earnings at about $4.5 million for the quarter.
· We like the revenue growth and the balance sheet as well as reasonable debt levels.
· However, from a profitability and valuation perspective we have some reservations.
· The company only generated about $5 million in cash flow over the last 3 quarters and has a market capitalization of almost $600 million.
· That is a massive price to cash flow valuation and the company would have to grow profitability and cash flow substantially in order to justify that market value to us.
· We would also want to look further into the company’s coal exposure the potential for another asset impairment charge.
· We generally aren’t fans of investing in the mining sector due to the commodity price exposure but within that space we do see value in the structure of some of these royalty companies.
· They do tend to trade at higher valuations and that is certainly the case with Altius.
· We would look for signs of improving profitability and cash flow in future quarters but we would not rush out to buy this stock right now.
STAR – Premium Brands Holdings Corporation (PBH:TSX
· For our Star of the week we have an old recommendation from our KeyStone Income Stock Research….Premium Brands Holdings…symbol PBH.
· The company is in the specialty food manufacturing and distribution business in Canada and the United States.
· They own a number of packaged food brands including Grimm’s, Harvest, McSweeney’s and Piller’s to name a few.
· We put out a recommendation on this company back in 2010 and then sold it in 2013 for a gain of 57% including dividends.
· While we were very happy with the gain, this is definitely one we sold a little too early – but we do remind listeners that we have never seen anyone go broke selling early and pocketing a 57% gain!
· The company released record results on Thursday and increased its dividend by 10.5%.
· Fourth quarter revenue was $533 million up 33%.
· Adjusted earnings per share were $2.48 up 37%.
· The company credits acquisitions and investments into organic growth for the strong performance.
· The stock was up about 10% on the release of the results which is decent but it’s also up 50% over the last 12 months and 250% over the past 3 years.
· It’s trading at $78 per share today and offers a 2.5% dividend yield.
· The valuation is about 31 times trailing earnings; this is what we would consider a premium valuation but they should be able to justify that if they can continue to put up those high growth numbers.
· One of the key concerns that we had when we sold the company in 2013 was very high debt.
· A key leverage ratio we look at debt-to-EBITDA which was over 5 times back then…indicating very high debt levels of that industry.
· But the company has addressed this as well and debt-to-EBITDA now sits at 2.6 times which is within a range that we would consider healthy.
· Great job by Premium Brands.
· The valuation is a little high for us today but it has become an excellent growth story.
· For this week’s Dog we have a familiar name….Valeant Pharmaceuticals….symbol VRX
· I think this is the third time we have had Valeant as our Dog of the week.
· But more news frustrated the stock early this week when one of its key shareholders, Bill Ackman from hedge fund Pershing Square, announced that he has sold he entire stake in the company, incurring a $3 billion loss.
· For those now familiar with Bill Ackman, he is one of the larger and more well known hedge fund managers and activist investors in the U.S.
· Ackman reportedly invested $3.2 billion into Valeant shares in 2015 when the stock price was well over $200 per share and has since seen the shares tank to less than $20 per share leaving his fund and investors with only US$221 million.
· Ackman was listed as Valeant’s second largest investor.
· As we discussed in previous podcasts, Valeant was one a darling of Bay and Wall street started to fall apart after it came under government scrutiny in the US for unfair drug pricing practices.
· In addition to the government scrutiny, we also think that the company highly complex structure and huge reliance on debt contributed to its decline.
· The shares were down over close to 10% on Tuesday after the announcement was released.
· The stock is also down 22% from the start of the year and 60% over the last 12 months.
· Debt continues to be a major concern.
· I feel like many in the market that we have beaten up on this stock a lot but this is a dog with a serious flee problem.