Glacier Media - 2012 Q3 Update

After accounting for one-time items, and the seasonality of the assets acquired last year from Postmedia, Glacier Media posted solid results in the third quarter.  The company's focus on local newspapers, as well as business and trade publications that consumers are willing to pay for, means that it's largely able to escape the pressures suffered by larger papers that compete infinite alternatives, many of them free of charge.  Still, the soft national advertising market in Canada has some effect on Glacier Media, as it has all year.

Glacier has a glowing opportunity to create value for shareholders over the next few years, even in the absence of any new acquisitions.  With $131 million, or $1.47 per share in net debt ($27 million of it's non-recourse), management can add significant value simply by paying it down.  In addition, the company intends to repurchase shares, and increase the dividend over time.  In fact, management offered a fairly strong hint that a dividend increase is forthcoming, noting that the topic will be addressed in early 2013. 

At today's payout level of $0.06 per year, Glacier Media's stock offers investors a dividend yield of about 3.5%, significantly higher than the market's average yield, which has long stood at about 2%.  If the dividend were increased even to $0.08 per annum, the yield would jump to 4.5% at the current share price.  Given the general wariness about newspapers and similar content, it's possible that Glacier Media will behave more like a trust than a stock, with significant income, but less than dramatic share price performance.  No matter: for a company that throws off $0.40 or so in free cash flow, there's ample room to increase the dividend; shareholders that reinvest the dividend will do well over time.  And eventually stellar performance will surely mean some upward movement in the stock price, too.

My original analysis of Glacier Media is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Home Capital Group - 2012 Third Quarter Update

As ever, Home Capital Group posted stellar results in the third quarter.  Earnings were up 18.3% (EPS increased slightly faster, at 18.7%), and return on equity was 25.6%.  Sharply increased earnings allowed the company to add to their dividend, which now stands at $0.26 per quarter, for a 2% yield.  Dividends, the CEO pledged, will amount to about 15% of earnings over time, meaning that they'll increase at roughly the same rate as earnings.

At Home Capital Group, strong earnings never come at the cost of higher risk or a weaker balance sheet.  Credit quality remains rock-solid: net non-performing loans were just 0.28% of overall loans, and provisions for credit losses stood at 0.10%.  On the balance sheet, the tier 1 capital ratio was nearly 17%, while total capital ratio was nearly 21%.

The company addressed the much discussed topic of Toronto's condo market.  HCG's exposure to the condo market in general is about 7% of their residential mortgage portfolio.  However, half of those are insured (no credit exposure), and about 60% of the other half are townhouses, which are very popular.  Townhouses have a position in the market that is much closer to single family dwellings, rather than high rise condos, which represent 1-1.5% of their residential mortgage portfolio.  In short, whatever the problems that may come from Toronto's overheated condo market, HCG is unlikely to be affected much.  In general, management reiterated its long-held position that the Canadian real estate market is not likely to implode, though they conceded that prices could correct by 5-10%.

The company sees opportunities for significant growth far into the future, in part because the big banks are pulling back in certain areas, which will increase the pool of potential lenders that HCG caters to.  At current prices, the stock trades at perhaps 8 times 2012 earnings, with those earnings primed to growth rapidly in the years to come, offering long-term investors a tremendous opportunity. 

My original analysis of Home Capital Group is here.

 

Disclosure: At the time this article was posted, the author had a long position in HCG.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Tim Hortons - 2012 Third Quarter Update

Tim Hortons recently reported a rather soft third quarter, at least by its usual standards.  Sales were up 10.3% year-over-year, and adjusted operating income increased a modest 6.2%.  On a per share basis, the results were better, up by 11.8% (excluding a one-time charge) thanks to a lower share count as a result of the company's ongoing buyback program.  Same store sales growth eked out a 1.9% gain in Canada, and 2.3% in the US, over the prior year, far less than the usual 5% or more increments that shareholders have grown to expect.  Of note, the number of transactions actually fell, but were more than offset by increased prices and cheques.  Affirming the company's business model, however, corporate revenues grew significantly faster than system wide sales, which grew by only 5.9%.  Such a discrepancy cannot continue indefinitely, of course, but it highlights the fact the store operators absorb pressure more than - or at least before - shareholders do.  For example, when commodity prices increase, it tends to squeeze owners, while remaining about neutral for corporate.

Management explained the so-so performance by pointing to a sluggish Canadian economy, capacity constraints at Tim Hortons stores, and aggressive promotions by competitors.  The first problem will, hopefully, solve itself.  Too much demand is a high-class problem, and expanding capacity is a relatively straightforward and low-risk opportunity for the company: higher throughput drive-thrus, rearranged counters in stores, and adding stores near locations that are currently overflowing with business.  The last and most serious problem is increasingly intense competition, notably from McDonalds and Subway, particularly in coffee.  When one of your chief competitors is offering coffee free of charge, it can be difficult to match them; instead, Tim Hortons will respond by fighting on other turf, especially in food, especially the lunch menu.    

There is little reason for shareholders to panic.  Tim Hortons still outperformed most of its competition; its results were mediocre only compared to its own stellar past performance.  The company stood by its annual EPS guidance of $2.65-2.75 (excluding charges), and set out a clear and attainable path to increased sales and earnings.  Shares were hit after results were released, and if prices continue to fall, it could offer investors the chance to buy a stake in a very fine company for a reasonable price.

 

My original analysis of Tim Hortons is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

ARC Document Services - 2012 Third Quarter Update

ARC Document Services reported a predictably soft third quarter, given difficult end markets, and the secular shift away from traditional reprographics services.  Simply put, customers are printing less, and moving instead to cheaper and more efficient digital distribution.  In fact, in September, for the first time, large format black and white printing accounted for (just) less than half of ARC’s revenues.  In response to this shift, the company cut 10% of its staff, and more than 10% of its locations in October, in order to squeeze unnecessary costs out of a declining business.  The focus is now on devoting resources to the growing areas of managed print services, high-quality color printing and digital services.  ARC has landed several large contracts with multi-billion dollar firms, giving some visibility in future years.  In managed print services in particular, ARC has a solid competitive advantage, because it can support on-site printing with company branches located nearby - for example, to handle printing overflows.

Given the declining sales, margins have remained quite firm, and are almost certain to widen in the future, as end markets come back to life, and costs come down.  Operating cash flows, too, were a solid $14 million in the quarter, and at $31 million for the first 9 months, were up slightly year-over-year.  Capital expenditures, though they remain fairly low, have risen in recent quarters, as the company now purchases some equipment that it chose to lease in the past.  The company reiterated previous operating cash flow guidance, which is still expected to be $35-45 million.

My original analysis of ARC Document Services is here.

Disclosure: At the time this article was written, the author was long ARC stock.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Potash Corp - 2012 Third Quarter Update

Among the reasons that many investors prefer potash to other minerals and commodities is that it tends to be less volatile - in terms of both prices and volumes.  In many cases, that's true.  The potash industry, however, remains a lumpy business.  The soft results of the third quarter - EPS was $0.74, down from $0.94 in the year-ago quarter - are a result of demand lumpiness from both China and India.  Prices have remained quite firm, though, at $429 per tonne, in line with the second quarter, though down about 5% from a year ago.

In China, demand for seaborne potash has been weak in recent months, as the country meets in near-term needs by drawing down domestic inventories, as well as increasing purchases of more locally sourced production.  The Chinese are very shrewd negotiators, and some of their recent behavior is motivated by the desire to purchase fertilizer at lower prices.  Ultimately, however, Chinese demand for potash increases every year, and short-term tactics to gain negotiating leverage do not change the long-term supply-and-demand equation, which favors suppliers.  Potash Corp management - along with the other members of Canpotex - has elected to counter reduced demand with reduced supply, and pledged to continue doing so into next year, despite the ever-growing gulf between the company’s capacity and its actual production.

India poses a different and trickier problem.  Indian fertilizer buyers depend on heavy government subsidies.  The subsidy regime, though, has been reorganized in the past year, and now favors outlays on nitrogen-based products, at the cost of potash.  But Indian crops face a widening fertilizer imbalance, where the proportion of potash as a percentage of overall fertilizer inputs is far below the scientifically recommended number.  In consequence, India's yields are far below those enjoyed elsewhere in the world.  Over time, this problem will be corrected, but given the political element to it, how and when any remedial action plays out is unclear.

Happily for shareholders, potash demand is robust in virtually all areas outside of China and India, particularly in North America and Brazil.  Given that the two countries have a combined 2.5 billion mouths to feed, and relatively high food inflation, it’s only a matter of time before agreements are signed and potash shipments resume.

As Potash Corp moves closer to completing its large, long-running capex program, the company will begin to generate substantial amounts of free cash flow, especially compared to today's stock price.  Management recently approved a significant increase of the dividend, to $0.21 per quarter, a 2.1% dividend yield at the current share price.  Though significant, a dividend payout at that level leaves ample room for further dividend increases, share repurchases and acquisitions (management reaffirmed their long-term intention to take control of one or more of the companies that Potash Corp owns common stock positions in).

My original write-up on Potash Corp is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.