KeyStone’s Your Stock Our Take Covalon Technologies Ltd. (COV:TSX-V) our Star is XPEL Inc. (DAP.U:TSX-V), & our Dog is Cronos Group Inc. (CRON:TSX).
This week in our Your Stock, Our Take segment we look at Covalon Technologies Ltd. (COV:TSX-V), a researcher, developer, manufacturer, and marketer of patent-protected medical products that improve patient outcomes and save lives in the areas of advanced wound care, infection management and surgical procedures. This week, the company announced record Q2 results and a listener asks us if we would still BUY the stock. Our Star of the week is XPEL Inc. (DAP.U:TSX-V), manufactures, sells and distributes, and installs after-market automotive products, including automotive paint protection film, headlight protection film, automotive window films and other related products. The stock jumped 22% this week on very strong Q2 financial results and is now up 400% in 2018. Finally, our Dog of the week is Cronos Group Inc. (CRON:TSX) – is a vertically integrated cannabis company with a presence across four continents. The company operates two wholly-owned Canadian licensed producers regulated under Health Canada’s Access to Cannabis for Medical Purposes Regulations. While there has been a number of high flyers in this segment of late, Cronos was hit by a short report today and shares plummeted 28% on the day. Is it a Dog or an opportunity?
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Now, let’s dig into the show.
I welcome back my co-host, KeyStone’s VP and Senior Analyst, Aaron Dunn.
Your Stock, Our Take
I picked up on Covalon a couple of years ago when it was recommended in a report I got from KeyStone? They put out what I thought were great financials this week – the stock surged – what is your take?
- Colin via email.
Covalon Technologies Ltd. (COV:TSX-V)
Current Price: $8.80
Market Cap: $191 million
What does the company do?
Covalon Technologies Ltd. is a researcher, developer, manufacturer, and marketer of patent-protected medical products that improve patient outcomes and save lives in the areas of advanced wound care, infection management and surgical procedures.
The majority of Covalon-branded products are sold through independent distributors to various health care providers such as hospitals, wound care centers, burn centers, extended/alternate care facilities, acute care facilities, home health care agencies, and physicians’ offices. Many of our products require regulatory clearances and are sold on a prescription basis in the United States, Canada, the Middle East, Europe, Asia, Latin America and a number of international countries.
Covalon is up over 70% year-to-date. Much of this came from massive share price gains the company experienced in May, when it won a series of competitive contracts in the Middle East with an estimated sales value of $100 million over a three-year period. This was followed in late May by the release of its quarterly financial results, leaving the company 90% higher at the end of May than it was at the beginning.
This week, Covalon released its record quarterly results, which were received positively by the market and investors, with the share price jumping over 20% on over the past 5-days.
Recent Quarterly Financials:
- Revenue for the second quarter ended June 30, 2018 was $7.9 million, an increase of 34.4% over the prior year period.
- Net Income grew to $2.2 million in the second quarter of 2018, compared to $0.5 million in the second quarter of 2017.
- On a diluted per-share basis, it grew to $0.09 from $0.02 in the prior year period.
- Adjusted EBITDA was $2.7 million in the second quarter of 2018, compared to $0.8 million in the second quarter of 2017.
Current Ratio: 4.75
Little to no debt
Covalon has seen massive share price gains in the last few months, backed up by large growth and a squeaky clean and liquid balance sheet. The company’s strong fundamentals and financial condition, along with its $100 million contracts over the next 3 years, give it a great base to grow from. Its valuation is looking a little high based on the last 12 months, but if it continues to put up the numbers that it has, those should drop as its earnings catch up. The quarterly profit could be somewhat of a game changer in terms of forward looking valuations if this was what we could expect consistently on a go forward basis. We do note however that $4.5 million of the gains in the quarter came from a license payment which tend to be lumpy in nature. Product revenue actually decreased, but this was likely to do shipment delays on the Saudi Arabian contract.
Covalon is a well run growth business and the potential for further growth is real – at present we rank it a HOLD given the premium valuations.
XPEL Inc. (DAP.U:TSX-V)
Current Price: $7.00
Market Cap: $194 million
No stranger to our clients as it was recommended just under a year ago when the shares traded at $1.42. Then in March once again with the stock at $1.59 and in May when it crested $3.00. The shares closed today at $7.00. The stock jumped 22% on Wednesday this week and has now gained 400% year-to-date in 2018 making it the single best performing non-penny stock on the TSX and TSX Venture this year.
What does the company do?
XPEL manufactures, sells and distributes, and installs after-market automotive products, including automotive paint protection film, headlight protection film, automotive window films and other related products. Additionally, the company began selling commercial and residential window film and security film in 2018.
In the United States, Canada and parts of Europe, the Company operates primarily by selling a complete turn-key solution directly to independent installers and new car dealerships which includes XPEL protection films, installation training, access to the Company’s proprietary design software, marketing support and lead generation.
Additionally, the Company operates six Company-owned installation centers in the United States as well as one installation center each in the United Kingdom, the Netherlands, and Canada that serve wholesale and/or retail customers in their respective markets. In Mexico, the company operates as a distributor.
What is driving the stock?
On Wednesday morning, the company released its Q2 results, showcasing huge growth numbers. The market responded in kind, with the 18% jump in price that occurred. This is continuing a trend of strong financials and fundamentals that underscores the Company’s phenomenal 2018 to date.
Q2 2018 compared to Q2 2017
- Revenue was $28.9 million compared to $17.0 million, up 69%.
- Net income was $2.5 million compared to $0.8 million, up 230%
- On a diluted per share basis, $0.09 compared to $0.03, up 200%.
- Adjusted EBITDA of $3.9 million compared to $1.7 million, up 137%.
- On a diluted per-share basis, $0.14 compared to $0.06, up 133%.
Management’s outlook remains strong.
Current Ratio: 1.97
As XPEL continues to grow, its fundamentals continue to shine. Its revenue, and income are growing at record pace, and its balance sheet remains clean and strong. Its growth has in fact it made it the best performing stock on the TSX-V in 2018! Happy for the gains our clients have received to date on this stock from our Canadian Focus BUY Research – those gains, makes XPEL our Star of the Week!
Cronos Group Inc. (CRON:TSX)
Cronos Group, one of Canada’s multibillion marijuana stocks, got clobbered today, down 28%.
- That $850 million of value lost.
- The company was hit with a short report earlier this morning which alleged that they were misleading investors by not disclosing the size of the distribution agreements signed with Provinces.
- The stock started the day at over $16.00 and ended it at $11.77.
- This after a 120% run up over the previous few weeks.
- The question investors are asking themselves…is this an opportunity to buy a multibillion marijuana stock at a temporary discount.
- Well we’ve looked deeply at the numbers.
- The company does have positive revenues and posted massive sales growth in the last quarter to $3.4 million compared to $643K in the same quarter a year ago.
- Great revenue growth but the company is still losing gobs of money and reported negative operating cash flow of $20 million for the first six months of the year plus an additional $38 million in reported investment expenditures.
- The cash short fall was funded by $146 million in share issuances.
- Looking at the valuation, the stock has a market cap of $2.2 billion but made only $3.6 million in sales for the quarter.
- On an annualized basis, this is a price to sales multiple of 152 times…that’s an insane valuation relative to sales.
- Now obviously there is an expectation that sales are going to grow substantially, even exponentially from here.
- However, one of the things we would look at to evaluate the growth potential of a company is the value of the contracts they are signing and the hard numbers underpinning their outlook.
- The basis of the short report issued today is that Cronos is not making specific, hard number disclosures around the contracts that it’s signing.
- These are disclosures that other Cannabis companies like Canopy are generally making.
- So that’s a problem with us and in addition to that, Cronos is still trading at a price to sales valuation premium relative to the 3 top players in the space, Canopy and Aurora which are trading at 120 to 130 times sales and Aphria which is trading at about 80 times sales.
- You can make lots of arguments that Cronos will rebound depending on what new news comes out over the next few weeks and months.
- But that’s just speculation and not investment.
- We wouldn’t be buyers on this dip and the big drop today makes the company our Dog of the Week.