Month: May 2023

What to do with the securities of Bombardier, Exchange Income Corporation and Dollarama? Here are some analyst recommendations that could move prices soon. Note: the author may have a completely different opinion than that expressed by the analysts.

Bombardier (BBD.B, $56.08): the company wants to improve its profitability, regardless of economic cycles
BMO Capital Markets hosted Bombardier executives for meetings with investors between May 23 and May 25, including a tour of the company’s premises in Biggin Hill, UK.

Analyst Fadi Chamoun came out more convinced in his investment thesis, which is based on an “outperformance” recommendation and a one-year target price of $85.

“Bombardier continues to put in place a few initiatives that we believe will support improved profitability and cash flow regardless of economic cycles for a year or two,” he said.

The analyst is of the opinion that the business jet sales cycle is not overheating. “Bombardier management clarified that demand for business jets remains strong, with an expected book-to-delivery ratio of 1 for fiscal 2023 despite the current macroeconomic weaknesses,” he said.

Fadi Chamoun maintains that the after-sales service division is on track to reach the upper end of the $1.6 billion to $1.7 billion revenue range this year. “Bombardier is increasing its market share, its aircraft fleet is expanding and the high level of aircraft utilization continues to generate robust organic growth in this division with high profit margins,” he said. In his opinion, Bombardier will have no trouble reaching its annual revenue target of $2 billion in 2025.

“After a period of investment and expansion to increase its presence across the world in aftermarket services, the company is turning its attention to efficiencies, which will further improve its profitability. Bombardier wants to achieve a 50% market share in this niche by 2025, but there will still be opportunities for the company to seize thereafter,” believes the analyst.

The latter notes the weakness of orders in the first quarter (19-20 devices), while the company hopes to obtain 140 in 2023. However, he expects a rebound in the second quarter.

“Aircraft availability remains very low by historical standards and the increase in users in recent quarters has driven the number of flights up,” he said, adding that one of the company’s largest customers Bombardier, VistaJet, reported a 55% year-over-year increase in hours sold in the first quarter.

What to do with the shares of Stella-Jones, Transat and Canadian Western Bank? Here are some analyst recommendations that could move prices soon. Note: the author may have a totally different opinion from that expressed by the analysts.

Stella-Jones (SJ, $60.53): the first day of investors gives confidence
Stella-Jones had given a taste of its outlook through 2025 when it released its first-quarter results, which explains why the stock of the maker of telephone poles and railway sleepers reacted little on the rise. financial objectives during the first Investor Day, held on May 25.

It must be said that the action of Stella-Jones had soared 28% for six months on the stock market following record results in 2022.

Hamir Patel, of CIBC Capital Markets, still came out more confident than before from the meeting that quantified the growth path by 2025.

Stella-Jones confirmed that the growth in revenues and margins will be mainly based on the performance of telephone poles, whose momentum will moderate after 2024. Indeed, poles will provide half of the revenues within three years.

Growth will be strongest in 2023 and 2024 based on the projected compound annual increase of 20% in pole sales in 2023 and 2024. In 2025, this growth will increase to a rate of 5 to 7%.

About 40% of the increase will come from the increase in the number of units sold and the rest from higher prices.

Moreover, the producer even increases its capacity by 20% to meet demand and automates certain tasks, including the stacking of poles.

“Stella-Jones does not assume any significant pole price increases after 2023,” says Hamir Pattel.

By 2025, the manufacturer is therefore aiming for a compound annual growth of 6% in revenue and 9% in operating profit, without taking into account potential acquisitions. “In 2025, total revenues will reach $3.6 billion while the operating margin is expected to be 16% for the three years, 140 percentage points higher than the 14.6% achieved in 2022. », Specifies the analyst.

While strong demand for poles is providing the lion’s share of the expected growth, Hamir Patel also appreciates the non-cyclical nature of power and telecom and railroad maintenance and the escalation of contract prices.

In particular, the company should benefit from the investments required to strengthen infrastructure for automotive electrification, 5G communications and optical fiber to the home.

The producer also plans to distribute $500 million to its shareholders between 2023 and 2025, in the form of dividends and share buybacks, while remaining on the lookout for small additional acquisitions.

Hamir Patel recommends buying the stock, but maintains his target price of $69, or 9.25 times expected operating profit in 2024, less debt. This multiple is lower than the 10 times average of the last five years because the growth prospects of the residential wood division are more uncertain than before.

The CAC40 regained 1.24% to 7,319 pts at the close, ending four sessions of decline… Operators remain attentive to the situation in the United States where an agreement on the debt ceiling is still being made wait, even if, according to the latest news, some progress has taken place… In the wake of very favorable sales forecasts from Nvidia, European “tech” has also stood out. Casino, on the other hand, fell after the announcement of the opening of a conciliation procedure with its creditors.

On the oil market, crude is up slightly with a barrel of Brent trading at $76.55 in London. On the currency market, the dollar index fluctuated around 104 pts, while the euro fell to $1.07 between banks.

RISING VALUES

Waga Energy soars nearly 19%. The company started its first renewable natural gas (biomethane) production unit in Canada in partnership with Énercycle and Énergir. Waga Energy and Énercycle have begun injecting renewable natural gas (RNG), also called biomethane, into Énergir’s network by starting up the WAGABOX(R) unit installed at the waste landfill site in Saint-Étienne-des -Grés (Quebec, Canada). This unit has the capacity to inject up to 130 GWh of RNG per year, i.e. 12.4 million cubic meters each year, into the gas network, thus contributing to the objectives set by the “Plan for a green economy” of the Government of Quebec. .

Coface jumped 10%. The title had not recorded such a daily increase for more than a year! The credit insurer had a very good start to the year with net income (group share) of €61.2 million, up 17%, for consolidated revenue of €475.1 million, up +11.4% at constant scope and exchange rates. Insurance premiums increased by 10.9% like-for-like and the combined ratio net of reinsurance stood at 66.2%, an improvement of 1.8 ppt over one year and 7.2 ppt compared to the previous quarter. Following this good publication of results, Oddo BHF raised its forecast for NR 2023 by 7% to 226 ME. To ‘outperform’ on the value, the analyst notes that Coface continues to benefit from favorable operating dynamics, with a good combined ratio and growth that remains sustained (even if it should logically slow down by the end of the year) . Based on the current price, the stock offers an attractive 2023 yield, estimated at 9.9%.

Aramis climbed another 9% with Forvia (+7%) and Valeo (+5%), supported by more favorable broker ratings. Jefferies has, in particular, awakened automotive suppliers listed in Paris by moving from ‘underperforming’ to ‘buying’ on the two French supplier groups. The broker explains that OEMs are beginning to benefit from a more favorable operating environment as the post-pandemic earnings decline cycle comes to an end. Suppliers have significantly underperformed automakers over the past three years and their margins are “depressed”. The broker raised its price target on Faurecia from 16 to 24 euros and from 15 to 22 euros on Valeo.

Atos wins 5%. On May 25, the United States Court of Appeals overturned a lower court ruling for the Southern District of New York in the ongoing litigation between Syntel and Cognizant subsidiary TriZetto. It found Syntel, now part of Atos, liable for $570 million in damages due to misappropriation of trade secrets and alleged copyright infringement. The case started in 2015, before Syntel was acquired by Atos in 2018. Atos maintains its assessment, as previously communicated, that the maximum amount of damages legally available to TriZetto is approximately 8.5 million of dollars. This favorable decision raises considerable uncertainty for Atos and its stakeholders, underlines the digital services company.

Gaussin (+5%) signed a partnership contract with Plastic Omnium (+4%) aimed at accelerating the development of Gaussin’s hydrogen range with the integration of complete Plastic Omnium H2 systems within APM vehicles. This partnership should make it possible to increase the performance of Gaussin vehicles and accelerate their marketing. For Plastic Omnium, the agreement increases the field of application of its technology and places its know-how at the service of pioneers in zero-emission mobility. The contract signed by Gaussin and Plastic Omnium provides for the cooperation of the two players with a view to integrating Plastic Omnium’s complete hydrogen systems into Gaussin’s APM vehicles. Innovation is at the center of this partnership and thus opens up promising prospects, with a hydrogen solution for applications.

What to do with the stocks of Apple, Bank of Montreal and Canadian Pacific Kansas City? Here are some analyst recommendations that could move prices soon. Note: the author may have a totally different opinion from that expressed by the analysts.

APPLE (APPL, US$171.56): On the lookout for the mixed reality headset
The next WWDC conference will highlight the latest technologies developed by Apple, including a mixed reality headset that could well propel a good part of the company’s revenue in a few years, estimates Bank of America.

In addition to updates rolling out to iOS, iPadOS, macOS, watchOS and tvOS, analyst Wamsi Mohan also expects the unveiling of a mixed reality headset, a product that could prove transformative for the company with the weather.

Despite slow public acceptance of virtual and augmented reality headsets, added to lukewarm enthusiasm surrounding the Metaverse, the analyst suggests not to underestimate Apple, which has a history of inventing new categories products that have the potential to destabilize the market (such as AirPods) or create an entirely new market.

Keep in mind, he continues, that the headset will be cheaper, more efficient and will have more applications (gaming, entertainment, productivity, fitness, education, training, shopping, social media, etc.) than the which will be presented this year.

Wamsi Mohan adds that he expects the adoption of the mixed reality headset to substantially boost the software side (high-margin services). He estimates sales of around 200,000 units in 2023. Assuming the mixed reality headset’s software and services are more immersive in nature, he sees a hardware-to-software revenue ratio of two. In a scenario where Apple succeeds in gaining significant buy-in, it believes the headset could provide one-third of app-generated revenue by 2026.

Bank of America maintains its target price for Apple shares at US$176.

What to do with securities from BRP, Stella-Jones and CAE? Here are some analyst recommendations that could move prices soon. Note: the author may have a totally different opinion from that expressed by the analysts.

BRP (DOO, $100.67): its depressed valuation offers a good margin of safety
Martin Landry of Stifel GMP predicts another strong quarter for the recreational vehicle maker despite the uncertain economic environment. BRP will release first quarter results on June 1.

The analyst expects earnings per share to grow 44% to $2.38 per share, slightly above the consensus of $2.32.

Its confidence is partly based on the encouraging results and outlook provided on April 25 by rival Polaris Industries (PII, US$106.51).

Earnings of US$2.05 per share, up 55%, beat consensus of US$1.71 as the US manufacturer claws back market share. Polaris also maintained its annual guidance, which suggests consumers are sticking with it, he says.

Certain factors favor BRP in 2024, including the launch of the new Manitou pontoon boat and the momentum provided by market share gains in 2023.

BRP has already warned that the return of promotions will shave 200 percentage points from its margin in 2024. Thankfully, adjusting prices to higher inflation and improving the supply chain will stave off the impact. of these promotions, explains Martin Landry who still keeps an eye on the rivals’ strategy.

The Manitou pontoon should give the marine division a good boost in 2024, although problems with a parts supplier will still delay some deliveries until the end of the summer. BRP predicts a 45-50% jump in marine sales in 2024.

Now that working capital needs are decreasing, BRP could also proceed with a substantial buyback of its shares in the coming months thanks to the free cash flow of one billion dollars expected in 2024. Martin Landry recalls that the manufacturer bought back $250M of shares at $103 each in May 2022 and $350M at $103.50 each in July 2021.

Above all, at the current price, BRP offers a good risk-return ratio. The stock is trading at a multiple of 7 times earnings, or 45% below the historical average valuation, which provides a good cushion if the industry were to slow down, the analyst said.

This margin of safety, the potential buyback of shares and the multiple levers of growth for this quality company hoist the title among its favorites.

Martin Landry renews his buy recommendation and his target price of $150.

The European Union (EU) and the United States are ready to strengthen their cooperation on artificial intelligence (AI) in order to establish minimum standards before the implementation of legislation in this area, Margrethe Vestager said on Tuesday. , European Commissioner for Competition and responsible for technology issues within the EU.

The draft EU law on artificial intelligence could become the first piece of legislation in the world to set out a comprehensive framework for this technology, with new rules on facial recognition and biometric surveillance. EU governments and MEPs have yet to agree on a common text.

Margrethe Vestager, vice-president of the European Commission, told a briefing on Tuesday that this process could be completed by the end of the year.

Entry into force would then take “one or even two years”, she said, “which means we need something to bridge that period of time”.

The former Danish minister indicated that AI will be one of the focus areas of the fourth ministerial meeting of the Trade and Technology Council (TCC), which will be held in Sweden on May 30-31.

“We share the same sense of urgency. To get the most out of this technology, safeguards are necessary,” she said, wishing to discuss the establishment of “minimum” requirements for companies before the rest of the legislative process.

Margrethe Vestager is due to discuss AI on Wednesday with Sundar Pichai, CEO of Alphabet, Google’s parent company.

For his part, French President Emmanuel Macron receives Sam Altman, general manager of the company OpenAI, which developed ChatGPT, this Tuesday at the Élysée.

The conversation will revolve around the role of France and Europe in the race for artificial intelligence, according to the services of the presidency.

Meeting at a summit in Japan, the leaders of the G7 countries on Saturday called for the development of technical standards to keep AI “trustworthy” and instructed their relevant ministers to set up a working group by the end of the day. end of the year.

There is something I notice in the recent results of a few of our portfolio companies: the interest income of companies with a lot of cash has literally exploded.

It’s something Warren Buffett highlighted at the recent Berkshire Hathaway (BRK.B, US$330.62) annual meeting when he presented highlights of the company’s first quarter results. 2023: “Last year at the same date, we obtained the equivalent of 4 basis points (0.04%) on our cash position of nearly 125 billion US dollars (B$) ; now we’re getting close to 5% on our close to $130 billion in cash.” If you do the math, that means that in nearly a year, the company’s annualized interest income has gone from about $50M to nearly $6.5B. These are not peanuts!

The sharp rise in rates benefits companies in good financial health. Those with little or no debt will not be unduly affected by rising rates; those with large cash balances will see their interest income increase.

In addition to Berkshire Hathaway, at least two other examples come to mind among our portfolio companies: Copart (CPRT, US$88.33) and Enghouse Systems (ENGH, $37.24).

In the case of Copart, in its most recent quarter ended April 30, its balance sheet showed cash of just over $2.1 billion and debt of only $22.4 million, for net cash of nearly 2 .1B$. However, in the statement of results for the quarter, the item “net interest income” (expense) went from ($4.5M) to $17.9M. I estimate that this turnaround contributed almost 28% to the earnings per share growth (of 20.7%) recorded in the quarter compared to the same period a year earlier.

As for Enghouse, in its most recent quarter ended January 31, 2023, the company had cash on hand of $250.7 million and had no debt. In the quarter, its interest income reached $976,000 compared to $129,000 in the same quarter last year. If the rates offered on cash remain stable, there is reason to believe that these revenues could continue to increase in the coming quarters.

For the past many years, companies with a lot of cash were somewhat penalized. That’s why most companies haven’t kept such cash on hand and instead have gone into debt — why not take advantage of historically low interest rates?

Today, companies that have been cautious and patient over the past few years, such as Copart, Berkshire Hathaway and Enghouse, are in my view in a position of strength: they have a lot of capital. Until these companies invest this capital, they will continue to be rewarded with much more attractive cash interest income than in the past.