Stock Talk Podcast Episode 250 Show Notes

KeyStone’s Stock Talk Show Episode 250. 

Great to be back in the saddle after a successful research trip to New York City.  To start the show. Brett will kick us off with a preview of Big Tech’s Q1 earnings slated to be released over the next couple for days including numbers from Microsoft, Meta Platforms, Alphabet, and Tesla. I will hit the viewer mailbag to answer a question TFI International Inc. (TFII:TSX), a North American leader in the transportation and logistics industry. The stock has been an long-term winner and a viewer asks if the recent pullback is an opportunity of a sign of things to come. Aaron revisits his take on Exro Technologies Inc. (EXRO:TSX) an e-mobility technology company that is developing advanced power control electronics and propulsion systems for electric vehicles. The stock has cratered 51% year-to-date, and 75% over the past year – Aaron reviews Exro today and takes a look at some of the hate-mail he received when he recommended viewers avoid the stock 9-months ago. Finally, Brennan answers a question on TELUS Corporation (T:TSX), the Canadian telecommunication giant which has seen its share price lose 37% year-to-date. The viewer ask Brennan what is causing the declines and whether or not it may continue.

Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett, and Brennan.

Big earnings April 2024
1)

Major earnings are coming out this week, 4 of the magnificent 7, even though one may not be so magnificent anymore.Tesla on the 23rd,

Meta on the 24th

Microsoft and Alphabet on the 25th

2)

First up Tesla, TSLA on the Nasdaq

The stock has had a rough 2024 and is down 43% to $142, so the earnings could be a pivotal moment for the company’s near term.

Analysts are expecting earnings per share to drop 42% year-over-year for the first quarter, at $0.50 a share, before trending higher sequentially throughout the remainder of 2024. The company has beat earnings expectations 5 of 8 times over the past 2 years.

There has been media attention around both Musk as a CEO and his compensation package, the weakening EV demand and resulting price cuts. The quarter could move the needle on how investors vote for Musk’s previously voided record compensation package of now ~$47 billion in shares. The vote is in June so this will be the last earnings announcement before it.

Past the actual financial earnings, the earnings call and additional info will likely be pivotal as they will set expectations, during perhaps the weakest perception of the company’s outlook given weaker deliveries. Some other topics that might be in the call are the recent Cyber Truck recall, robo-taxis and the rumoured but denied cancellation of the Model 2.

3)

Moving on to Meta, previously Facebook symbol META on the Nasdaq

The stock is up 39% year-to-date at $481 a share.

Analysts are expecting earnings per share to grow a strong 98% to  $4.36 per share from $2.20 in the prior year. The stock has beat earnings 6 of 8 times over the past 2 years.

Some topics that will likely be mentioned is the company’s adoption and integration of AI, the company has invested heavily in AI infrastructure specifically Nvidia H100 GPUS which will be employed throughout 2024 and into 2024. The question which should be on investors’ minds is, is the significant CapEx improving the underlying company allowing for improved returns? The company has a wider range of CapEx guided for 2024 at the end of the last quarter, so it will be interesting to see where they end up in the $30 to $37 billion range.

Past AI, the company may have an increased focus on Reels in the wake of the regulatory crackdown on TikTok, with the US House passing a bill that could ban or force a sale of the app. Meta may benefit by increasing its market share of short-form video content.

4)

Now onto Microsoft,

The company is up 8% year-to-date trading at $400 a share.

Analysts are expecting an EPS of $2.84 a share up 16% from $2.45. The company has beat EPS expectations 7 of 8 times over the past 2 years.

Some topics that are going to be front and center are the growth of Azure, Microsoft’s Cloud platform,  the growth of Office and its productivity suite, and the adoption and integration of its AI assistant Co-Pilot. Co-pilot was launched in September 2023, so it will be interesting to see the uptake of the AI assistant. The degree of investment in future AI products will let be influenced by the success or failure of co-pilot and other AI assistants will be taking notes.

5)

Rounding out the week is Alphabet.

The stock is trading at $159 up 14% year to date.

Analysts are expecting EPS to grow 29% to $1.50 a share from $1.17 in the prior year. The stock has beat expectations 5 of the last 8 times over the last 2 years.

The eyes for Alphabet are always on search especially given the push last year by Microsoft to promote Bing with AI integration. Google’s search dominance has so far remained strong but if there is any broad sense of change to that the stock would be hit hard, so it’s an important question.

As well Alphabet is directly competing against Microsoft in cloud computing with Google Cloud so it’s growth will also have eyes on it. As well Google’s AI assistant Bard on its Gemini platform will likely have some interest as the AI market is competitive.

YSOT TFII

What does TFI International do?

TFI International (TFII), formerly known as Transforce, has grown rapidly through acquisition and now stands as the largest trucking company in Canada. Operations span the spectrum of North American trucking, from Package and Courier (P&C) to Less than Truckload (LTL), Truckload (TL), and Logistics.

I will quickly point out that TFI International’s stock has performed very well over the past 5-years and all-time for that matter. We see here, the stock is up roughly 357% over the past 5-years. Long-term, it is hard to bet against the execution here.

Let’s take a quick look at the current fundamentals.

This slide should give you a snapshot of the business over the past 10 years.

Steady increase in revenues overtime – not the post COVID, pent up demand and increased pricing spike period in 2021-2022 and the pullback in 2023, but a general upward trend through the 10 years. 

Gross profit, earnings from continuing operations and Normalized EPS follow the same trend.

Net debt has increase over time, but at a lower pace than revenue and earnings which is a good thing and the share count is actually down over the past 10 years – a good sign, and one not often seen.

Q4 2023 Highlights

Revenue was flat at $1.97 billion, and revenue before fuel surcharge of $1.67 billion compared to $1.62 billion in the prior year.

Operating income dropped to$198.3 million compared to $216.9 million.

Net income dropped to $131.4 million from $153.5 million in Q4 2022, while adjusted net income was lower at $147.0 million compares to $151.8 million in Q4 2022

EPS was lower at $1.53 compared to $1.74 in Q4 2022, while adjusted diluted EPS was flat at $1.71 compares to $1.72 in Q4 2022

Q4 net cash from operating activities grew 22% over the prior year period and free cash flow grew 29% over the prior year period

Generally, TFII is experiencing a period of weaker freight demand but capitalized on its solid cash flow by significantly investing $2 billion of capital during 2023 into announced acquisitions and share buybacks.

Balance Sheet:

Summary:

Cash: $335.6 Million.

Debt: $2.34 Billion.

Net Debt: $2.0 Billion.

Valuations:

Summary:

EV/aEBITDA (TTM): 13.3x.

EV/aEBITDA (FY 2024e): 12.2x.

PE (TTM): 21x.

PE (FY 2024e): 19x.

Conclusion:

Near Term Industry Headwinds: 

Peer Commentary:

Overall, Peer Takeaway – near-term weakness continues, so current estimates from analysts for TFI may be a bit optimistic.

Current valuations are ok, but at slightly above general market valuations for an industry that has higher than average volatile and that is currently seeking weaker demand makes TFI a MONITOR in our research. 

Sell-off of 10-20% may be long-term opportunity. 

Of note: the company will report Q1 FY 2024 results this week on Thursday, April 25, 2024 after market close. The company will host a conference call on Friday, and we will monitor that.

YSOT Telus Corporation (T:TSX)

Slide #1

YSOT – Peter via email and he says “How low can Telus Shares go and Why?”

—————–

Price: $21.96

Market Cap: $31.9 Billion.

Dividend Yield: 6.85%

Company Description:

Telus provides a range of telecommunications and information technology products and services in Canada. It operates through two segments, Technology Solutions segment and Digitally-Led Customer Experiences segment. With about 86% of its business coming from the Technology Solutions segment.

Slide #2

Since Early 2022, the stock is down approximately -37% and let’s do a little digging to see why we have seen the pullback.

Slide #3

Looking at the last quarter (Q4 2023):

• Revenue was up 2.8% year-over-year.
  • This was led by strong performance in its core telecom business with the strongest Q4 customer growth on record, with a total of 404,000 net additions (up 34% Y/Y). The company also experienced its highest mobile phone net additions since 2010 with 443,000 net new customers.
• Adjusted EBITDA was up 9.4% to $1.8 Billion year over year.
• Net Income to common shareholders was up 16% to $288 million or $0.20 per share.
• Free Cash Flow was up 83% to $590 million.

So fundamentally I believe the results have been decent.

Slide #4

Looking at the balance sheet, net debt was $26.6 billion which provides a trailing net debt to EBITDA multiple of about 3.7x. And if we look at the same period last year, net debt was about $24.2B and the net debt to EBITDA was about 3.6x. So debt has increased slightly year over year.

But the weighted average interest rate in 2023 was 4.33%, up from about 4.0% in FY2022. And to put this into perspective, for the 2023 year, interest paid increased by about $380

Slide #5

Looking at the company’s guidance for FY 2024, they anticipate their Technology products and services segment revenue to grow 2-4% and Adjusted EBITDA to grow 5.5-7.5%, and consolidated FCF to be $2.3 billion, providing a forward Price-to-FCF multiple of about 13.9 times.

This compares to Rogers which trades at about 9.6 times forward FCF, and BCE Inc. which trades at about 13.9 times. Its worth noting though that Rogers does have significantly higher debt compared to both Telus and BCE which is a reason for the lower P/FCF multiple as it does not consider debt.

If we look a year ago when the Telus was trading in the $27.00 range, the stock was trading at about 20x forward FCF.

Slide #6

Quickly looking at the dividend, the company has increased the dividend for 14 consecutive years, with the payout ratios generally over 100%, but if we look at any of the Canadian Telecoms including Rogers and BCE, we typically see the same thing with payout ratios of over 100%.

Slide #7

To answer Peter’s questions on how low Telus’ shares can go and why we are seeing a drop.. I think it comes down to a few things.

1. Increased leverage and elevated interest rates are placing pressure on the business. I think the debt is sustainable but is certainly causing a bit of a headwind to profitability and higher interest rates are leading to a reduction in residential and business development project work compared to 2022.
2. Entering 2023, the business was trading at over 20x forward FCF which was a bit pricey, and during the year they ended up revising their guidance lower given headwinds facing the Telus International subsidiary as clients began to proceed more cautiously to spend on digital transformation in the current macro environment. These pressures continue to persist into FY 2024 which even led Telus to begin to break out guidance for their Technology Solutions segment whereas before they had consolidated their revenue guidance inclusive of Telus international.
3. So compared to 2023, growth is anticipated to slow in FY2024.

On how low the stock can go… I really think this is anyone’s guess, but given the attractive yield, the now more reasonable FCF multiple, and focus in 2024 on cost efficiency with restructuring investments of approximately $300 million as well as management voicing the desire to delever its balance sheet, I believe the stock should gain more of a footing in its current range. If interest rates do come down in Canada, I think there could be an argument for the stock to potentially get some legs. But overall for these low growth telecoms, its more the dividend that gets us excited, and considering the yield is just shy of 7%, I think that the business is reasonably attractive.