KeyStone’s Stock Talk Show, Episode 219.
We have a great show for you this week. Aaron will start with a review of high growth U.S. Small-Cap, Zynex Inc. (ZYXI:NASDAQ), which develops, manufactures, markets, and sells medical devices used for pain management and rehabilitation as well as non-invasive fluid, sepsis, and laser-based pulse oximetry monitoring systems for use in hospitals. The company reported strong preliminary numbers this week and Aaron takes a look at the impact on valuations. I will answer a listener question on Neo Performance Materials Inc. (NEO:TSX), which manufacturers rare earth and rare metal-based functional materials, which are essential inputs to many high technology applications including batteries in EVs. The company broke ground on its rare earth magnet facility in Estonia, and a listener asks us if it is an opportunity to buy. Brett will answer a viewer question on Snap-on (SNA:NYSE) an innovative manufacturer, and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users performing critical tasks in vehicle repair, aerospace, the military, natural resources and manufacturing. The stock is currently up 51% over the past year, with a dividend yield of 2.2%. Brett answers if it still offers value and growth potential. Finally, pro-golfer Brennan rounds out the show with our Star and Dog segment – his dog Canopy Growth Corporation (WEED:TSX) is down approximately 21% in the last week, 42% in the past month, and 85% YTD. Once called the “Apple of Pot Stocks”, Canopy Growth engages in the production, distribution, and sale of cannabis and hemp-based products for recreational and medical purposes primarily in Canada, the United States, and Germany. Brennan let’s you know if this company could go to zero. His Star and favourite food producers is is: MamaMancinis Holdings (MMMB:NASDAQ), the meatball producing juggernaut is up 44% in the past month and 118% YTD. Brennan looks at the run and current valuations.
Let’s get to the show – my co-hosts Aaron Dunn and the killer B’s, Brett, and Brennan.
Neo Performance Materials Inc. (NEO:TSX) – because rare earths and EV related stocks remain topical, we continue to get questions on Neo. A listener asks if you are more positive on Neo Performance after it announced it ha started construction of rare earth magnet plant in Estonia.
Neo Performance Materials Inc. (NEO:TSX)
Price: $8.78
Market Cap: $400.89 Million
Company Description: Neo Performance manufacturers rare earth- and rare metal-based functional materials, which are essential inputs to man high technology applications including batteries in EVs. –business is organized along three segments: Magnequench, Chemicals & Oxides and Rare Metals. Historically, Neo has manufactured industrial materials – magnetic powders and magnets, specialty chemicals, metals, and alloys – and is in the process of vertically engineering moving to be a potential producer to a builder of permanent magnets.
Event: This past week, Neo held a groundbreaking ceremony for its rare earth magnet facility in Estonia.
Details: The 24,000 square meter rare earth magnet manufacturing facility is scheduled to commence production in early 2025, with the target of achieving full phase 1 output by 2027. This output is estimated to be 1,500 tonnes of magnets, equivalent to supplying materials for approximately 1.0-1.5 MM electric vehicles.
Our Take:
While the start of construction is a positive in terms of the company’s goal of vertically integrating operations, it is just putting a shovel in the ground, so to speak. Phase 1 production is scheduled to commence in 2025, with the target of achieving full phase 1 output by 2027 – this remains 3.5-4 years off for phase 1. A lot can change over that time, so while a positive, the success remains speculative at this stage.
In June, NEO announced that a third party would invest in the project and hold a 30% interest in phase 1 – while diluting its interest, this is likely a positive as Neo, which has historically operated as a net cash business (holding more cash than debt, with vertical integration plans, it could quickly moving to net debt as phase 1 in Estonia is estimated to cost $25-30 million and phase 2 is estimated in the range of $40 million – with significant working capital needed in addition. The plant will likely be cash flow negative for at least the initial year. Net cash is estimated to be in the range of $80 million at present, which provides decent liquidity, but when plans to become a producer in Greenland are including, the company will need to raise significant capital over the next 2-5 plus years to execute on its plan.
Neo Performance is a cyclical business which has faced significant headwinds near-term as rare earth prices have declined and the company faced a negative lead lag of 3-5 months – currently selling from higher priced inventory.
- Q1 2023 revenue declined from $166 million to $135.5 million.
- Operating loss of $4.0 million in the quarter.
- Adjusted Net Loss(1) of $9.0 million, or $(0.19) per share.
While the groundbreaking is somewhat positive, it is just a start in a long, uncertain journey for the company and does not change our stance from MONITORING the business to buying it.
YSOT Snap-on SNA:NYSE
1)
Snap-on symbol SNA on the NYSE is a leading innovator, manufacturer, and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users performing critical tasks in vehicle repair, aerospace, the military, natural resources and manufacturing.
The stock is currently trading at $296 up over 51% over the past year, with a dividend yield of 2.2%.
2)
A quick run down for Q1 2023,
Net sales increased 7.8% to $1.2 billion, which was an organic growth rate of 10.2% that was offset by foreign exchange translation.
Gross profit increased to $590 million with a gross margin improved by 110 basis points to 49.8%. Operating margin before the financial services segment was up 170 basis points to 22% and including financial services up 80 basis points to 25.6%, resulting in operating earnings growing by 11.1% to 326 million.
Diluted EPS was up 15% to $4.60 per share.
Overall a strong quarter, and as CEO Nick Pinchuk said in the conference call, Snap-On’s momentum has been unbroken and vibrant. Highlighting that concerns about the recession were not being realized in the quarter.
3)
Now shifting to the balance sheet, the company has a net debt position of $413.3 million, resulting in a net debt EBITDA ratio of 0.3 times, meaning leverage is generally not a concern at this time, especially given strong cash flows and that all long-term debt is fixed at relatively low rates with the next refinancing not being until 2027 with the other two notes not maturing until 2048 and 2050. Generally speaking a strong balance sheet.
4)
But, as the company does operate consumer financings of its products it is always good to check in on the strength of the receivables. Snap-on has 2.3 billion gross financial receivables outstanding, and delinquency rates across the board are steady with minor fluctuations on a quarterly basis. But the net loss in relation to delinquency for extended credit was 2.46% of the portfolio, up 12 basis points from the same quarter last year but still 45 basis points lower than year-end 2019. If we see credit conditions tighten to the point it affects Snap-on’s financing customers we would see it in this metric and delinquency rates, but have not at this point in time.
5)
Now moving to valuation Snap-on trades at a trailing price to earnings of 17 times and price to cash flow of 15 times. Not particularly cheap given the historic growth and prospective future growth.
6)
Our Take,
The company is in a resilient in-demand market, but would likely have headwinds in a recessionary scenario. It has a great balance sheet and consistent cash flows supporting dividend growth and share buybacks. But given the run-up in price over the last year the room for stock price appreciation is questionable at the current price, which is why I see Snap-on as a hold but if the price pulls back it could potentially be a buy assuming no dramatic deterioration in fundamentals.
WEED (DOG) MMMB (STAR)
Slide 1
The Dog of the Week is: Canopy Growth Corporation (WEED:TSX)
The stock is down approximately 21% in the last week, 42% in the past month, and 85% YTD.
Where it now trades at:
Price: $0.485
Market Cap: $268 Million
Description:
Canopy Growth Corporation, was a front-runner in the Canadian cannabis industry and engages in the production, distribution, and sale of cannabis and hemp-based products for recreational and medical purposes primarily in Canada, the United States, and Germany.
Slide 2
Driving the Losses:
The company announced on July 14th that it plans to enhance its financial flexibility and de-lever the balance sheet by $437 Million over the next 6 months and lower annual interest costs by approximately $20 to $30 million.
e company plans to achieve this by settling approximately $193 million aggregate principal amount of its Existing Notes with a mix of consideration that includes common shares (90 Million shares) and newly issued unsecured non-interest bearing convertible debentures (with a conversion price equal to $0.55). Additionally, the company will reduce $100 million of principal indebtedness under the credit facility provided under the Credit Agreement for a cash payment of $93 million, with the expectation of further principal reductions at $0.95 on the dollar upon completion of certain asset sales.
And on this news, the stock was down 41%…. as the company will be getting rid of debt, but it will be using both cash and its shares as currency.
Slide 3
And let’s just quickly look at the company’s last financial statements quickly.
First on the balance sheet, the company has:
- Cash & ST Investments: $782.6M
- Debt & Leases: $1,445.6M
- Net Debt: $663.0M
- And because the company posted negative EBITDA of ($350M) for FY2023… we cannot calculate the company’s Net Debt-to-EBITDA multiple.
Slide 4
And as you can see, the company’s revenue has been declining over the past 3 years, it has been burning cash uncontrollably, while also diluting shareholders quite significantly…
Slide 5
And here is a quick graph showing how aggressively the company has been diluting shareholders since 2018.
Slide 6
The Star of the week is: MamaMancinis Holdings (MMMB:NASDAQ)
The stock is up 44% in the past month and 118% YTD.
Where its currently trading at:
Price: $3.88
Market Cap: $141.6 million
Description:
MamaMancini’s manufactures and markets prepared refrigerated foods primarily in the United States. The company offers beef and turkey meatballs, meat loaf, chicken, sausage-related products, and pasta entrees; and hot bars, salad bars, prepared foods, sandwich, and cold deli and foods-to-go sections. It sells its products directly to supermarkets, club chains, and mass-market retailers as well as food retailers and distributors, and through their website.
And we highlighted MamaMancini’s as a Monitor in our “US Under $2 Billion Market Cap, Profitable Small-Cap Special Report” which came out in June.
Slide 7
Driving the increase:
Has been:
- The company’s strong financial results:
- Revenue Growth 6%
- Gross Profit was up 65% – primarily due to an increase in prices as well as easing of commodity prices such as chicken and ground beef.
- EPS was $0.04 per share compared to breakeven for Q1 2023.
- New CEO, Adam Michaels is etnerting the company into a new growth phase, targeting the company to become an “all-in-one Deli provider”. He also provided Gross margin targets greater than 30%, Mid Single digit net income margins and long-term Net Income margins of 10%.
- The company’s most recent acquisition of Chef Inspirational Goods (CIF), a deli prepared food sales agent, which is expected to be Accretive and Drive Immediate Gross Margin and Operating Expense Synergies.
