Stock Talk Podcast Episode 293 Show Notes

You are listening to KeyStone’s Stock Talk Show – Episode 293

Great to chat with you again this week. Just ahead of our first Live Webinars series of 2025 – April 8th is the last one and nearly sold out – get it on demand if you are listening to this after the 8th. There are 7 stocks on sale today presented. Ok, I will begin with a small snippet from that webinar defining corrections and bear markets generally, whether the valuations suggest we are facing a correction or bear, and what to focus on in your portfolio. This week Aaron looks at t week’s announcement on the liberation Day Tariffs and how they are impacting markets. In our YSOT segment, Brennan begins with a viewer question and update on NowVertical Group Inc. (NOW:TSX-V), a data analytics and AI solutions company that provides comprehensive software and services to private and public enterprises. The viewer asks if NowVertical is potentially offering up a viable turnaround story with revenues and earnings increasing significantly following recent divestures. And last, but not least, Brett answers a viewer question on Telesat Corp. (TSAT: TSX|NASDAQ), a global satellite operator providing communication services since the 1960s, which despite a recent pullback is up smartly on the year as Satelitte companies capture the markets attention – Brett will let you know Telesat’s current fundamentals and whether or not the gains are justified.

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

Poll Question

Spring 2025 Webinar Preview: Current Market Valuations

This week, we are presenting our first Live Webinar Series of 2025 – today, I will provide a very brief snippet from that Webinar where we give you 7-8 stocks to buy today, while they are on-sale.

With the significant downturn markets have produced facing a trade war, we define corrections and bear markets generally, whether the valuations suggest we are facing a correction or bear, and what to focus on in your portfolio.

Correction: In the stock market, a correction is a significant drop in the price of a stock, asset, or entire market, generally defined as a decline of at least 10% from a recent peak, but less than 20%.

Bear Market: A decline of 20% or more is considered a bear market, a more severe downturn than a correction.

Now, these are traditional definitions and we will stick with them…but in recent years, markets have been subject to higher volatility than historical norms – we can reference to Flash Crash following the onset of the pandemic – which produced a 20% plus decline, but a quick and violent bounce back – so not a traditional bear market, but a bear by dropping more than 20%. It was also a great buying opportunity – we may see an opportunity, albeit more drawn out, presenting itself today.

In a number of markets, we have or are entering correction territory – as we can see in this table – in each of these market, the NASDAQ, S&P 500, Toronto, and in Bitcoin, we are definitely in a correction.  The tech-heavy NASADAQ has entered bear territory, driven by the negative move in the MAG 7 and the S&P 500 is close to bear territory – also driven by the outsized influence of Apple, Alphabet, Amazon, Meta, Microsoft, NVIDIA, and Telsa, and the TSX just moved into the red interms of a correction (commodities have helped here. Bitcoin, by the strict definition has entered a bear, but with its historic volatility, a 25% move may not indicate a true bear.

Most of the highs for this group were made in late February, declines of this magnitude are rare and shocking and not seen since the Pandemic initial shock.

Of course, all of these index numbers are “price based” – to invest successfully, you need to look at the markets from a value perspective.

Because as Warren Buffett famously stated…

To determine general market valuations, from a historical perspective…one metric we utilize is the Shiller PE. It is a more reasonable market valuation indicator than the regular PE ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles.

The chart below is the Shiller over the past 20-years. The ratio reached is highest point in November of 2021, in the range of 38.6, which is roughly 44.56% above the average PE of the last 20 years of 26.7.

The November 2021 peak was the highest ratio in the past 20-years and has been eclipsed literally once since its was being tracked (over 100 years) during the dot come madness in 1999 at roughly 44 (seen in the chart below).

Your question is now – where is the Shiller PE today?

Today, the Shiller PE sits 31.2 (in the correction to start 2025 the ratio has decreased from 37.8 in NOV 2024 and is down from 35.5 in APR 2024 one year ago) and is now 16.1% higher than the recent 20-year average of 26.7. (vs. 41.57% in NOV and 34.7% in MAR).

The recent correction has improved the Shiller PE to a better range than the 38.6 hit in November of 2021 (42.32% higher than the recent 20-year average). But, it is instructive to point out that Shiller PE is remains 77% above its all-time average of 17.6 – indicating the US markets are not nearly historically cheap. On a more positive note, the Regular Trailing PE, following the correction, dropped below its 20 year average this week to 24.2 – the Recent 20-year average being 24.9). We have not seen that in some time.

Near-term, we are cautious, but opportunities are developing.

Let’s take a quick look at the Regular or trailing PE (which is based on the last 12-months of earnings) on the S&P 500 over the last 20 years.

As we can see here the US market is no longer close to all time highs, but not near 20 year or historic lows – in fact, it remains on a valuations basis around average, despite the significant near-term correction.

What is causing the volatility – at this point, it should go without saying, but the uncertain surrounding a global trade war (Aaron will detail his thoughts in the next segment) is the biggest near-term influence. The out sized influence of the Mega-Cap 7 adds to volatility – their influence has become so great that if they get the sniffles, the market gets a cold – 28% of the entire S&P 500 is these 7 stocks. It causes higher volatility generally.

Heading into 2025 we saw the markets as historically expensive – the markets have only twice been as expensive as they were to start this year, and thus vulnerable to any significant shock –With that backdrop, it is not surprising to see weakness given the significant uncertainty largely surrounding a new potentially more protectionist period – as I stated, in the near-term, the markets hate uncertainty and a trade war creates uncertainty. We are a bit surprised the market had not corrected further in some names – we saw more of that movement today –  that is not to say there are not some opportunities but are we aggressively buying auto parts manufacturers or steel makers – no.

There are some select companies we see value in today and, because our process is to look from fundamental cash flow basis at every stock in Canada and over 8,000 in the US annually, we have a book of names we are monitoring closely at all times – businesses we really like but have not yet bought or perhaps want to buy more off that in many cases, have been too expensive. We await these quality businesses dropping to more attractive buy ranges.

We actually released a new buy on one today – down 45% recently – good company – now trades in a range we want to buy.

Most people believe you get rich in the boom times – but we see it differently. You actually make your money in down markets – positioning yourselves in great business that come on sale in sympathy with the market – now…   you realize the fruits of your labour – reap the harvest of that portfolio during a bull surge, but it is the work we do during weaker or uncertain economic times that allows clients to profit in the good times.

For example, from the silly pandemic highs of late 2021, the entire NASDAQ dropped well over 30% by mid 2022. There were excellent buying opportunities for the next 12-18 month until the fall of 2023 – we were able to buy high quality cash rich businesses a significant discounts – stocks like drug manufacturer Cipher Pharmaceuticals (CPH:TSX) – in August 2023 it held half its market cap in cash, with zero debt, growth and low valuations – the stock has jumped from $3.75 to over $12 in 18 months – it still looks reasonably priced. While the current trade war certainty has not produced that type of value, there is a list a companies we are monitoring for similar entry points and long-term opportunities.

Great companies that we can enter into with a margin of safety (in terms of the discount to intrinsic value) that you would not get in normal economic conditions. This is both on the small-cap end of the market but also right up to the Mega Caps.

Hopefully, we see many of you in our upcoming Webinar and we can go over some of those names. Most importantly, our clients will be receiving timely updates on opportunities in the current sell off in the coming weeks.

YSOT NowVertical Group Inc. (NOW:TSX-V) – Viewer Question

Company Description

NowVertical Group is a data analytics and AI solutions company that provides comprehensive software and services to private and public enterprises. Operating within the big data and analytics industry, the company transforms data investments into actionable business solutions.

As Aaron previously noted, the stock price has been performing well in late 2024 and now into 2025 as the company’s financials have been trending in the right direction… but he stated we should monitor the business over the next few quarters to see if the positive trend in its financials can continue… so lets look at the Q4 results.

FY & Q4 2024 Results

Looking at the most recent financial results for Q4 2024, ended December 31, 2024 (All $ are USD):

• Revenue shows that it was up 7.6% year-over-years, but if we exclude the recent divestitures – of Allegient Defense on May 24, 2024, and Seafront Analytics on December 31, 2023 🡪 Q4 2023 revenue was $5.6 million, translating to year-over-year growth of 94%.
• SO GOING FORWARD HERE I AM JUST GOING TO BE REFERENCING THE Y/Y INCREASE IF WE EXCLUDE THE DIVESTITURES….
• Gross profit was $5.7M, growing 37% y/y.
• Administrative Expenses decreased 40% y/y which is a direct result of management’s restructuring effort to become an operator first model, capitalizing on the expertise existing within the markets to reduce overhead costs and increase efficiency in the business.
• As such. Adj. EBITDA was up 430% to $2.6M.
• And Net Income increased to $600K or $0.01 per share, up from a loss of $3.9M or ($0.05) per share in Q4 2023.

So the positive trend in profitability continues…

Balance Sheet

Looking at the balance sheet, the company has $4.6M in cash & Short Term Investments, debt and leases were $15.4M, providing a net debt position of $10.8M. And if annualize the Q4 2024 results… we get a trailing net debt to EBITDA multiple of 1.0x which is down from about 1.4x when Aaron covered the stock on the podcast two months ago.

Valuations

On a valuation basis, I am again using the annualized Q4 results for both Adj. EBITDA and Price-to-Earnings.

The business is trading at about 4.1x forward EV/EBITDA which compares to 7x when covered last.

And on an earnings basis, the company is trading at about 13x annualized earnings.

So I would say the business appears reasonably attractive if the company can continue to post strong organic growth numbers. But keep in mind, we are using Annualized Q4 results to get these forward multiples.

Conclusion

• Interesting business in a transition as it divests assets and refocuses operations; strong revenue growth historically and is transitioning into consistent net profit (which we will continue to monitor).
• Insiders have been buying shares in the open market – up to approximately 27%.
• Time to jump on a call with management, they recently brought on Bristol Capital as their Investment Relations firm, who we have a high regard for. So we will be reaching out to get a call with management. And potential questions I have for management include:
  • Do you have a target organic growth rate?
  • Do you have a target Net Income margin?
  • Do you have plans to prioritize debt reduction?
  • Do you have plans to slowdown equity dilution?
  • And let me know if you have any other questions for us to ask – post them below in the comments.

So overall, our take is the company is worth continuing to follow closely. The business is showing solid progress. Do I think that it is “definitely a 10x stock???” Not necessarily. But I do believe the business shows promise and is trending in the right direction.

YSOT Telesat Corp. TSAT: TSX|NASDAQ – Viewer Question

Company Description

Telesat Corp, symbol TSAT on both the TSX and NASDAQ is a global satellite operator providing communication services since the 1960s. The company currently has 2 operating segments: geosyncroneous earth orbit business and Broadcast and Enterprise. The big interest in the company is the satellite constellation that the company is currently developing, telesat lightspeed. The first Lightspeed satellites are expected to launch mid-2026, and global service is expected to begin in late 2027.

The stock is currently trading at C$23.60 a share and a $1.2 billion market cap. The stock has had a great performance over the past year up 124% despite the recent pullback.

2024 Financials

Revenue came in at $571 million down from $704 million. Due to lower direct to home revenue and foreign exchange.

Adjusted EBITDA, which removes the impact of foreign exchange and interest, which the company had major impacts due to US denominated debt repurchased. Adjusted EBITDA fell 28% to $384 million from $534 million. At a margin of 67% compared to 76%.

GAAP EPS fell negative to a loss of $6.29 a share from an income of $11.29 a share.

The financial decline was expected and is expected to continue for 2025

Management guidance has revenue between 405 to $425 million

Adjusted EBITDA between 170 to 190 million, which is impacted by higher LEO expenses of 110 to 120 million.

The company expects CapEx of $900 million to $1.1 billion primarily for the Telesat Lightspeed project.

Clearly, Telesat isn’t a company you are buying for the next year, the value is expected to come from Lightspeed.

Telesat Lightspeed

So lets take a look at the company’s longterm outlook starting in 2028, as I said, Lightspeed service isn’t expected to begin until late 2027.

2028 revenue is expected to be $600 million with growth to $3.2 billion in 2032, a CAGR of  52% over this period.

EBITDA is expected to be at $400 million in 2028 growing to $2.7 billion in 2032 a CAGR of 61%.  Obviously great margins, as the main costs are the initial capital expenditures. The company does expect to start disclosing Lightspeed backlog in Q1 2025, with external analysts currently expecting approximately $1 billion in backlog.

So how do they get there? To fund the initial 156 satellites, which has a cost of US$2.8 billion, operational costs of $700 million and they have a contingency of $300 million for a total of US $3.8 billion.

To fund this they have already received government loans from the government of Canada and Government of Quebec for $2.54 billion Canada or $1.9 billion US, with the remainder being funded by the company’s equity for $1.6 billion plus $300 million in Vendor Financing.

Further, the company is going to use internal cashflows of $800 million for an additional 42 satellites, which are expected to be in service by the end of 2030.

Putting the total project at $4.6 billion in CapEx.

Balance Sheet

So, looking at the balance sheet,

The company has cash of $552 million and long-term debt of $3.1 billion, resulting in a net debt position of $2.5 billion.  The company did receive its first funding from the Canadian and Quebec governments in January, and the company is looking to continue to restructure its debt, so the cash and debt position will shift. But overall debt levels are obviously high, on a trailing basis it’s 6.6 times net debt EBITDA and will likely shift even higher until Lightspeed starts to be cashflow positive. If there are major mishaps or substantial setbacks, the level of leverage can impact the company’s viability.

Operational Highlights

The company partnered with MDA Space, another public company, as its prime satellite contractor, and they announced in December that the program had successfully completed the spacecraft preliminary design Review. Which validates the performance capabilities of the satellites.

The company has service contracts or expected agreements with Viasat, Space Norway, Orange Telecom and ADN telecom for Lightspeed.

Conclusion

Telesat is very much in the wait-and-see from a fundamental point of view. They have funding for a very capital-intensive project but now we need to see if Lightspeed can be built on schedule within the current funding and then produce the strong growth profile once in service. The company has loads of debt and will be very free cash flow negative until 2028 as funds are invested.