Stock Talk Podcast Episode 298 Show Notes

You are listening to KeyStone’s Stock Talk Podcast – Episode 298

Great to chat with you again. Our Star of the week is professional services and project management company AtkinsRéalis Group (ATRL:TSX) which specializes in engineering services and the nuclear field. The stock jumped 16% this past week after reporting strong Q1 numbers and I will let you know if AtkinsRéalis is a smart way to play the potential resurgence of nuclear power. In our YSOT segment, Aaron kicks it off with a look at Home Depot (HD:NYSE) with the world’s largest home-improvement retailer releasing Q1 numbers today. Brennan revisits Jessica Alba co-founded personal care company, The Honest Company (HNST:NASDAQ) – giving his honest opinion on the valuations of the business. Last, and not least, Brett answers a viewer question on SolarEdge Technologies, Inc. (SEDG:NASDAQ) a Dog of the Week in late 2024. After cratering from highs, the stock is up 41% year-to-date – is it sustainable or a dead cat bounce – Brett let’s you know.

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

Poll Question

AtkinsRéalis Group (ATRL:TSX) | Star of the Week

Company Description

Founded in 1911, AtkinsRéalis is a fully integrated professional services and project management company specializing in engineering services and the nuclear field. AtkinsRéalis offers a broad range of expertise spanning consulting & advisory, intelligent networks & cybersecurity, design & engineering, procurement, project & construction management, O&M, decommissioning, and sustaining capital.

AtkinsRéalis offers a wide range of services within the nuclear industry, encompassing the entire nuclear lifecycle, from design and new build to decommissioning and waste management. The company is a significant global player in nuclear technology, particularly with the CANDU® nuclear technology. AtkinsRéalis acts as the steward of this nuclear technology, operating on four continents.

CANDU was developed by Atomic Energy of Canada Limited (AECL), a Canadian Crown corporation. The development began in the 1950s through a partnership with Ontario Hydro and the Canadian General Electric Company. While AECL initially developed and marketed the technology, it later sold its reactor division to SNC-Lavalin’s CANDU Energy subsidiary in 2011. CANDU is still owned by Atomic Energy Canada – by they have a memorandum of understanding with AtkinsRéalis as the quasi licensee.

Why is AtkinsRéalis our star of the week? A nearly 17% jump over in the last 5-days driven strong Q1 FY 2025 number.

And the chart is up 68% over the past year.

Ok..let’s take a look at the strong Q1 FY 2025 just released which are driving the stock higher at present – basically record results across the board.

Q1 FY 2025 Highlights

Services revenue totaled $2.5 billion, an increase of 14.8%, or 10.1% on an organic revenue growth basis.

• Engineering Services Regions revenue totaled $1.7 billion, an increase of 1.0%, or a decrease of 3.8% on an organic revenue contraction basis.
• Nuclear revenue totaled a quarterly record-high of $538.3 million, an increase of 80.3%, or 76.9% on an organic revenue growth basis.
• Linxon revenue totaled $223.9 million, an increase of 40.9%, or 35.8% on an organic revenue growth basis.

Adjusted net income from PS&PM increased by 36.2% to $100.5 million, or $0.57 per diluted share, compared to $73.8 million, or $0.42 per diluted share in Q1 2024.

Services backlog totaled $20.2 billion as at March 31, 2025, an increase of 32.2% from March 31, 2024. Backlog for Engineering Services Regions, Nuclear and Linxon all reached new record-high levels – significant increase here.

Balance Sheet

• Cash: $435.90 million.
• Debt: $2.19 Billion.
• Net Debt to EBITDA: 1.1x

Guidance / Outlook

The company raised its Nuclear revenue outlook for full year 2025 to between $1.9 billion and $2.0 billion, from the previous range of between $1.6 billion and $1.7 billion, reflecting strong growth year-to-date and confidence in demand continuing over the balance of the year, supported by its record backlog.

Management also adjusted its Nuclear Segment Adjusted EBIT to segment revenue ratio outlook for full year 2025 to between 11% and 13%, from the previous range of between 12% and 14%, reflective of the 2025 expected business mix.

Let’s take a quick look at valuations.

Valuations

• P/AEPS (2024a): ~49.3x
• P/AEPS (2025e): ~33.9x
• P/AEPS (2026e): ~26.9x

Premium valuations but the growth in earnings and backlog support higher multiples.

Conclusion

Overall, Q1 results were ahead of consensus forecasts and the company revised its 2025 and 2025-2027 Nuclear segment expectations.

AtkinsRéalis Services backlog reached a new record high of $20.2 billion (+32.2% Year-over-Year, with Nuclear at a record high of $5.2 billion.

Recently introduced 2027 financial targets, including:

1) 2025–27 Engineering Services Regions organic revenue CAGR of >8% and a segment Adjusted EBITDA margin (as a percentage of segment Net Revenue) of 17–18% (vs. 15% in 2023); and,

2) 2027 Nuclear revenue of $1.8–2.0B (midpoint of range implies a strong ~16% revenue CAGR from 2023 to 2027) and a segment Adjusted EBIT margin (as a percentage of segment revenue) of 12–14% (vs. 13.9% in 2023). 

Reasonable option to gain nuclear exposure – premium multiple on stock near-term.

YSOT The Honest Company (HNST:NASDAQ)

Company Description

The Honest Company is a personal care company dedicated to creating clean-and sustainably-designed products. Its products include baby clothing, diapers, wipes, nursery products, skin-care, and makeup.

The company was co-founded by actress Jessica Alba and IPO’d at $16 per share in 2021 raising over $400 million.

I included the 2023 breakdown of revenue by products to give listeners a general sense of the breakdown, as unfortunately in their May 2025 presentation they do not include an updated pie chart….

Since its IPO in 2021 the stock has really been in free-fall as the company has been unable to generate any profitability or sustainable cash flow…. But when I covered the stock last it was up significantly driven by the company’s strong Q3 2024 results.

However, the stock price has tapered off back below $6.00 per share, so lets get an update on the business overall.

Q1 2025 Financials

When we looked at the long-term financials last time, since 2019 we could see that revenue was growing with a CAGR of 10%, and while operating and net income was still negative, it was trending in the right direction.

Now looking at the recent quarter of Q1 2025:

• Revenue increased 13% to $97M and was driven by strength in baby products and its wipes portfolios.
• Gross margin increase 170 basis points to 38.7% driven by product and supply chain costs savings.
• Adjusted EBITDA was positive $7 million compared to $3 million for the same period last year. This represents the Company’s 6th consecutive quarter of positive adj. EBITDA.
• Net income was a gain of $3.2 million compared to a loss of $1.4 million for the same period last year.

So like I concluded last time, it appears the profitability is continuing to trend in the right direction which is good to see

FY 2025 Guidance

Now the company was able to achieve its FY 2024 guidance with revenue growing in the “High Single Digits” – coming in at 10% for the year. And Adj. EBITDA exceeded the high end of management’s “$20-$22 million” range at $26 million.

Looking toward FY 2025, the company is only guiding toward mid-single digit revenue growth and Adj. EBITDA is expected to be up 10%. So growth in revenue is expected to moderate to some degree.

And in November when I covered the stock, based off of its 2024 guidance it was trading at 31x forward EV/EBITDA. But now using its 2025 guidance it trades closer to 19x. And on a Price-to-Cash Flow basis, over the twelve-trailing-month period cash flow has gone negative so we unfortunately cannot get a gauge on the valuation when it comes to cash flow. And the same can be said about the price-to-earnings multiple as net income is negative.

Balance Sheet

Now looking at the balance sheet, it remains quite healthy with cash of $72.8 million, no debt (as it just had leases) and a net cash position of $61.8M. But we can see that the company’s share count continues to creep up, as last time I covered the stock it was at 100M shares outstanding, but is now up to 110 million shares or about 115 million fully diluted.

Operational Updates

The company continues to be in its “Strengthen” phase, but management indicates there is scalable growth opportunities by increasing its distribution points from 45,000 doors selling at the end of 2024, with 65,000 remaining doors available for the company to tap into.

They also believe that they have opportunity for larger presence on the shelf, with competitors possessing over triple the average products on shelf per store.

Conclusion

• The Honest Company is in highly competitive markets with over 60% of its revenue coming from diapers & wipes. But these are Consumer Staples which are more defensive.
• The company has a good track record of producing high single digit revenue growth – growing with a CAGR of 10% from 2019-2024 – and the business has increased margins now with 6 consecutive quarters of positive Adj. EBITDA. But revenue growth is moderating in 2025.
• The balance sheet remains healthy with net cash per share of $0.56 per share.
• The stock’s valuation is better than we covered it in November 2024, down to 19x forward EBITDA from 30x fwd. EBITDA, but revenue growth is expected in the mid-single digit range with EBITDA growth expected to be around 10%. So right now, I think that the business is trading closer to fair value. Or it at least isn’t screaming value at this point, if revenue was expected to grow in the mid teen-percentage range along with EBITDA at 20%, then I would think it was more appealing.

Overall though it’s not a bad business and checks off a lot of boxes for our investment criteria, but I continue to think the business is a little early for us as we would like to see continued ability to massage margins higher to generate more meaningful profitability. As keep in mind they only did Adj. EBITDA margin of 7% in FY 2024. And the business is expected to be at approximately 7% Adj. EBITDA margin in FY 2025.

So I can understand why the stock has pulled back since we covered it last – as it was projecting better growth in 2024 along with more of an inflection in margins due to its cost savings initiatives.

YSOT SolarEdge Technologies, Inc (SEDG:NASDAQ) – Viewer Question

Last time we looked at Solar Edge in late 2024, it was the dog of the week.  The stock collapsed due to poor financial performance as gross margins went negative, as there was an inventory glut in Europe driven by Chinese competition and globally, a weak solar market.

Company Description

A quick description of the company; SolarEdge specializes in creating direct current-optimized inverter systems for solar photovoltaic applications. Their offerings include power optimizers, inverters, and a cloud-driven monitoring platform catering to various solar market segments. This includes everything from small-scale residential solar projects to commercial and smaller utility-scale solar deployments.

The stock has had a strong performance in 2025, up 41% year-to-date at $20.89 a share. However, this is still only a fraction of the high $200 – low $300 range we saw before the 2023 collapse. So is the 2025 recovery built on sustainable growth, or is it just a death rattle?

Q1 2025 Financials

For Q1 2025, Revenues saw a slight growth of 7% year-over-year to $219 million.

However, more importantly, the gross margins are once again positive, at 8% on a GAAP basis, obviously still not great margins for a long-term business, but at least a shift in the right direction from the significantly negative margins in the last couple of quarters. Just for a point of comparison, prior to that major decline in 2023, gross margin normally was in the low thirties.

As gross margins are so slim, it is no surprise that the company continues its net loss streak at a loss of $98.5 million or $1.70 a share.

The balance sheet remains relatively strong. The company had a massive net cash position a couple of years ago, but has since fallen to $113 million. The company expects to use its cash position to pay down its 2025 convertible debt when it comes due later this year.

The company does still have $637 million in inventory on the balance sheet, slightly lower sequentially, which is positive to see a decline but the levels remain too high.

Guidance

The company has provided guidance for Q2:

• Revenue between $265-285 million
• Non-GAAP gross margin between 8 and 12%, which includes a 2% negative impact from tariffs
  • I will note here that this was before the lowering of tariffs on China, so the impact will likely be less during the quarter.
• And the company expects non-GAAP operating expenses of 90 to $95 million

Putting this all together, non-GAAP operating losses will still be in the $60 million range.

As well, for the full year, the company now expects to be free cash flow breakeven. This is lower expectations from prior expectations of free cash flow positive, the shift being due to tariffs.  A large part of this is working capital management related to working through the surplus inventory.

Europe

A couple of highlights from management commentary on its European Operations

They believe inventory in Europe will normalize by the end of Q2. The company has been providing discounts in the market to regain market share, and once the inventory levels are normalized, they believe they will be able to reduce the level of support to distributors.

The overall market is expected to decline year-over-year, but they have seen a shift in terms of their own market share.

Prior to the collapse in 2023, Europe was the company’s biggest market, but in the last quarter, is only 24% of revenue. So, a shift in the European market could be a major catalyst for recovery. Europe did have an energy crisis at the time so even without the massive supply influx, demand likely will not be the same, but a middle ground should be obtainable.

Valuation

Valuation-wise wise the company doesn’t have much to go on as it is not profitable in any means, the trailing price to sales is 1.3 times which is cheap built for obvious reasons.

Outlook

Looking forward,

• Debt seems fine at the current levels, with repayment of the 2025 notes being manageable under the current cash position. The next repayment is not being until 2029. So, solvency risk is not really a concern until then, giving the company time to recover. If the company can remain FCF breakeven or position.
  • Of course there is no guarantee that the company can remain FCF breakeven, but for 2025 that is what they are guiding. Long term we do need to see a shift back to a positive FCF to create real value for shareholders.
• Tariffs, while a negative for the company, probably won’t be the make-or-break factor for the company. The company does have US production, which avoids a degree of tariffs and has been ramping up production within the country. The company has a capacity of 70,000 inverters per quarter in the country at this time. Further, like most companies, SolarEdge is looking to diversify its supply chain.
• The 45x tax credit for renewable energy in the US appears to be intact, which should provide some tailwinds for the industry as a whole in the US which will benefit SolarEdge.

So, for investors, is this a turning point? Maybe prospects have improved but this is not a confirmed turnaround by any means. Gross margin has improved but is still far away from a high enough level to have a net profitable business. Further, economies of scale is still lacking, sales are low, Q2 guidance does imply strong sequential growth as well as year-over-year growth, but not to the levels needed long term. For now we are nowhere near a buy, but we will continue to Monitor the company for the turnaround potential.