The CART Model

One of the greatest challenges in investing in individual companies is in identifying which companies to invest in. There are literally thousands of stocks to choose from, and trying to find great value is like looking for a needle in a haystack at times.

One of the easiest things to do is to use a stock screener, of which there are several. A stock screener will let you filter through all of the stocks on a particular exchange, based on preset criteria. For example, you could do a screen on the common shares of stocks listed on the TSX, with a P/E ratio of less than 30, that pay a minimum annual dividend of $0.50/share:

Your screener would then output a list of companies that match that criteria.

Often, some screeners have pre-built screens, such as the one at Yahoo:

However, a stock screen is only the first step. The challenge with screens is that they typically only show the most recent year’s worth of data. For that reason, you often have to dig a little deeper. That said, pulling the past ten years of fundamental data to drop into a spreadsheet is not a trivial task: you often have to collect the data directly from a companies annual filings found on SEDAR or Edgar, which takes a considerable amount of time. However, often service providers such as BMO InvestorLine or The Globe and Mail have the most recent few years of data available.

Historical Data from BMO InvestorLine

Historical Data from BMO InvestorLine

Globe and Mail

Historical Data from The Globe and Mail – Globe Investor

To that end, I have created the CART model:

  • Cursory
  • Analysis
  • Research
  • Template

I’ve already covered a few companies using the CART model on Seeking Alpha:

The CART model provides me with a template for doing a high level analysis of a company by importing data from BMO InvestorLine. This high level analysis:

  • Looks at the most recent 5 years of data (vs. a standard analysis of 10 years)
  • Gives a quick view of underlying fundamental data such as:
    • Revenue
    • Balance sheet
    • Earnings and Dividends
  • Provides a quick view of how under or overvalued the stock is

The resulting template then lets me make a decision if I should go forward with a deeper analysis, which usually covers a wider timeframe (e.g. 10 years), and goes into more fundamental comparisons with competitors, a more detailed SWOT analysis, etc. All of this allows me to maximize my time in searching for value dividend payers, to help improve the returns on the overall portfolio.

Onwards and upwards!


Cursory Analysis: Richelieu Hardware Ltd. (RCH.TO)

The following is a brief summary of an analysis note that I posted to Seeking Alpha. The full article may be found at this link.

Richelieu Hardware Ltd. (RCH.TO) was brought to my attention by a colleague when he was searching for stocks that he found that met Peter Lynch’s stock selection criteria. Upon first hearing about Richelieu, it seemed to hit on some of the key levers I look for in a stock:

  • Small/medium capitalization
  • Dividend paying, with increasing payments
  • Canadian based
  • A boring industry
  • Focused on a tangible product/service (e.g. they make/sell things that you can “hug and hold”)

Headquartered in Montreal, Quebec, Richelieu Hardware Ltd. is an importer, distributor, and manufacturer of specialty hardware and related products, focused on the North American Markets. Its primary customers are split amongst retail customers vis-à-vis the residential and commercial woodworking industry, home furnishing and office furniture manufacturers, and hardware and renovation superstores (e.g. Home Depot, Lowes). In performing a cursory analysis of the past five years of Richelieu’s fundamentals, the company has a strong balance sheet, great profitability, and a compelling dividend. However, it is presently overpriced.

A cursory analysis shows that Richelieu appears to be a strong company based on the past five years of fundamentals. Richelieu’s fundamentals have some intriguing characteristics, but based on the most recent fiscal year it is overvalued. Based on this cursory analysis, I would rate this company a hold, pending further analysis into the fundamentals, over a larger window (e.g. 10 years vs. the 5 years used for my cursory analysis). That said, Richelieu certainly deserves a deeper analysis to establish if it is a company which should be placed on long term watch-lists, to purchase on dips.


SNC-Lavalin (SNC.TO) Analysis

A copy of this article originally appeared on Seeking Alpha.

Thesis

With respectable profitability over the past 10 years, and an incredibly strong dividend history, SNC-Lavalin (SNC.TO) would be a worthwhile addition to any dividend growth portfolio. However, its current valuation measured against its price-to-book, and price-to-earnings ratios, as well as when compared to its peers, demonstrates that even with strong dividend performance it is still overvalued. Investors would be better off putting this stock on their watch list, and adding when the price drops below C$40.00.

Background

SNC-Lavalin is a Canadian based engineering firm, which derives its income from six key streams, outlined below.

Collectively, the Mining & Metallurgy, Oil & Gas, Power, Infrastructure & Construction, and Operations & Maintenance, are referred to as the Engineering & Construction segment. Running parallel to this is the Capital Investments segment, which enters long term agreements which use either fixed cost or equity method accounting to record revenue.

Profitability and Stability

Beginning in F2013, SNC started reporting its revenue broken down between engineering revenue and capital investment Revenue. Except for F2009 and F2013, year over year (YoY) revenue growth has been positive, with the most recent year’s revenue coming in at +16% at over $9billion.

The share price has generally trended upwards over the past 10 years, with minor dips in F2008, F2012, and F2014:

The F2008 dip may be attributed to the Kerala Hyderoelectirc Dam Scandal, and the F2012 and F2014 dips may be attributed to the Libya business probe. Of course, this is speculation, but given the negative press it is a plausible explanation, especially since the underlying fundamentals relating to revenue remained consistently strong during that period.

One other financial stability figure to review is the current ratio. Typically, one would hope to see a current ratio of at least 1.50 (i.e. current assets more than covers current liabilities). As of the most recent fiscal year, the current ratio is 1.02 when comparing net current assets to net current liabilities. However, this number quickly climbs to 1.54 once you consider the ratio of short term assets to short term debt (i.e. vs. aggregate short-term liabilities). This is illustrated in the below chart, which breaks down short-term liabilities into its components of debt vs. de-facto liabilities.

Condensed Balance Sheet

Condensed Balance Sheet

Dividend

Dividends are an interesting metric when compared to share price. Provided the dividend payout ratio (i.e. the portion earnings paid to dividends) remains low, and the dividend remains consistent or increasing, a drop in a company’s share price often represents a buying opportunity. It is for this reason that I feel dividends can be observed separately from share price: whereas share price represents capital appreciation, dividends represent (immediate) realized gains to shareholders. That said, over the past 10 years, SNC’s dividend has risen from $0.23 in F2005 to $1.01 in F2015, representing a 14.40% compounded annual growth rate of dividends.

Overall, the dividend payout ratio has been consistently below 50% since F2010, and prior to that, it was consistently below 40%. Overall this indicates that there is still plenty of room for SNC to continue to raise dividends, even in the face of revenue headwinds.

Valuation

SNC’s current valuation is where it falls short in my view, based on the following:

  • Trailing-twelve-months (“TTM”) EPS of 2.03/share
  • Book value of $25.03 based on the most recent fiscal quarter results
  • Current share price of $56.52 (as of February 3, 2017)

Given these numbers, the stock has a price-to-earnings of 27.8, and a price-to-book of 2.2, yielding a Graham number (i.e. P/E × P/BV) of 60.8. SNC’s meaningful peers (Aecon (ARE.TO), Bird Construction (BDT.TO)) have an average P/E × P/BV of 25.0 for the most recent fiscal year, illustrating that SNC’s Graham number is more than twice that of its peers.

What this translates to, is that SNC is trading at much more than it should be at this time, when compared to EPS and/or book value. At the current TTM trailing EPS and book value, I would expect to see a price of no more than $33.81, if we have an upper limit of 22.5 for our Graham number. This puts SNC’s current price at roughly 1.7× what it should be, based on TTM EPS and book value based on the most recent quarterly results. This isn’t quite as bad as the Graham number multiple compared to peers (SNC’s 60.8 is 2.4× that of the peer average at 25.0), but it is still considerable.

Closing Remarks

Fundamentally, I like SNC. Its historical performance, even amidst two scandals, is stellar, and its dividend growth is spectacular. However, the valuation concerns me; as much as I don’t mind paying an “okay price for a good company”, at the current valuation it is no longer “okay”, just “bad”. I would consider buying on dips, and will re-review after the F2016 results are out to see where the valuation sits vis-a-vis its updated fundamentals.

Notes

All figures are reported in Canadian dollars.


The Great Pension Experiment Part III: One Year Review

This is part 3 of a 3 part series I have entitled "The Great Pension Experiment", which details my analysis on what to do with a defined benefit pension plan payout. The first two parts may be found here: Part I, Part II.

It has been one year since I started off on The Great Pension Experiment. I feel that this is a useful experiment because it leverages real world results in a closed environment. Because the funds are in a LIRA, I am unable to add or withdrawal funds, so any losses must be recouped “internally” by better investments.

In Part II I made the claim that, based on the Assertive Couch Potato Portfolio, over a 25 year time horizon I would be able to grow the portfolio to a point where I would be able to generate over $600/month in passive income, assuming a 4.00% yield. It has been 12 months since that claim, so lets see how we’ve done after one year.

When the portfolio was first opened, I set it up with a blend of 25% fixed income, 25% Canadian Equities, and 50% of non-Canadian Equities:


Ticker Num Shares Weight
Cash $22.50 cash 0.035%
VCN.TO 600 25.204%
VXC.TO 1065 49.741%
VAB.TO 633 25.020%

Originally I had intended on re-balancing the portfolio semi-annually (i.e. every six months), and in retrospect, this was a stupid idea. Cash was building up in the portfolio slowly, but sitting there idle until I had a chance to re-balance. Due to the already high number of shares, any dividends and/or distributions from the holdings would be in excess of the current price of those shares. Because of this, I should have been using synthetic drips right from the start! Accordingly, in September 2016 I set up my brokerage to re-invest any dividends received directly into additional shares. This ensures that money is not sitting idle, and because the investments are via synthetic drip, I receive additional shares commission free.

That said, as of October 2016 (one year), the portfolio sits at:

Ticker Num Shares Weight
Cash $106.88 cash 0.156%
VCN.TO 603 26.351%
VXC.TO 1109 49.224%
VAB.TO 634 24.270%

For the year ending October 31, 2016, I received $1,485.24 in dividends/distributions ($123.77/month). The portfolio as a whole has grown from an initial investment of $64,723.32 in cash to $68,468.29, which represents a 5.648% total return. This is actually pretty impressive, since the first half of the fiscal year (From November 2015-April 2016), the portfolio was in negative territory:

Period Ending Open NAV Close NAV Return % TTM Return %
2015-11-30 $64,723.32 $64,489.47 (0.361%) (0.361%)
2015-12-31 $64,489.47 $64,460.13 (0.045%) (0.407%)
2016-01-31 $64,460.13 $63,015.30 (2.241%) (2.639%)
2016-02-29 $63,015.30 $61,782.64 (1.956%) (4.543%)
2016-03-31 $61,782.64 $63,695.25 3.096% (1.588%)
2016-04-30 $63,695.25 $63,523.47 (0.270%) (1.854%)
2016-05-31 $63,523.47 $65,380.00 2.923% 1.015%
2016-06-30 $65,380.00 $65,168.21 (0.324%) 0.687%
2016-07-31 $65,168.21 $67,560.62 3.671% 4.384%
2016-08-31 $67,560.62 $67,887.23 0.483% 4.888%
2016-09-30 $67,887.23 $68,275.76 0.572% 5.489%
2016-10-31 $68,275.76 $68,468.29 0.151% 5.648%

I had bought into the portfolio at a peak in 2015, and the market had a clawback shortly after. As a result, the portfolio lost money for the first six months. I did take the opportunity during that period to top off the VXC shares whilst I had some excess cash from distributions, which in retrospect was a wise choice. Buying when the market is in a downturn helps to dollar cost average down, ultimately increasing future returns.

The portfolio is more or less at the target weighting if you round to the nearest whole number, and because of this I see no need to buy or sell additional shares at this time. Hypothetically, if the portfolio were to keep this pace for another 24 years, even at a 5.000% return we would generate approximately $736/month in passive income. So based on simple extrapolation (i.e. assuming constant returns for the next 24 years), we are right on track.

That said, I am going to ignore the portfolio for another six months, and will revisit in May of 2017 to see if any rebalancing is required. Until then, the next update will not be until December 2017. Here’s hoping that the portfolio continues to provide excellent returns at that time.

Onwards and upwards!


Exco Technologies Ltd. (XTC.TO) Analysis – F2016 Update

I last reviewed Exco Technologies earlier this year, and at the time had recommended them as a buy. Exco recently announced their audited financial results for the 2016 Fiscal Year, so now is a good time to update the analysis to see if this recommendation holds.

Let’s take a look at the aggregate recommendation criteria:

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 2.03 1.50 YES
Earnings Stability Number of most recent years of positive EPS 6.00 3.00 YES
Earnings Stability Number of consecutive years of negative EPS 2.00 1.00 NO
Dividend Growth Compound Annual Dividend Growth 16.57% 2.00% YES
Share Price Growth Compound Annual Share Price Growth 10.59% 3.00% YES
EPS Growth Compound Annual EPS Growth 35.25% 3.00% YES
Moderate P/E Ratio P/E 10.81 15.00 YES
Moderate P/BV Ratio P/BV 1.84 1.50
Moderate P/E*P/BV Ratio P/E × P/BV 19.93 22.50

We can review the EPS, dividend, and free cash flow metrics first, since these speak to some of the fundamental cash flow attributes of the firm:

10 year Dividend, EPS, and Free Cash Flow per Share Growth

Compound annual dividend growth for the trailing 10 years has increased from 14.88% in F2015 to 16.57% in F2016, which was accompanied by an increase in the quarterly dividend to $0.07/quarter earlier this year. EPS compound annual growth has dropped a little: in F2016 the growth is now 31.23%, down from 33.03%, using F2007 as a base year. This does not concern me, as growth is still on an upward trajectory, and as you can see from the data, free cash flow per share is growing at a healthy pace.

As an aside: in F2015 when calculating CAGR of EPS growth I used a reference year of F2005, which gave me a CAGR of 12.32% between F2005 and F2015. However, because F2006 had a negative EPS, this makes comparables difficult. For comparison purposes. I have used a CAGR from F2007-F2015 vs F2007-F2016 when comparing EPS growth rates.

The other reason I am not concerned about a minor drop in EPS growth is the dividend payout ratio:

10 Year Dividend Payout Ratio vs EPS and FCFPS

In F2016, the dividend payout ratio against EPS and free cash flow per share was 24.13% and 26.80% respectively. F2015 had a payout ratio against EPS of 23.86%, and a payout ratio against free cash flow per share of 45.78%. Even though the payout against EPS has gone up in F2016 (because the dividend rose faster (17.39% year over year) than EPS (16.10% year over year)), at 24.13% there is still ample room for dividend increases in the long run. In other words: I am not concerned about the dividend being impacted in the foreseeable future.

I remain neutral on my views of overall profitability strength:

10 Year Profitiability Strength

Revenue has been going up year over year, however the growth in that revenue has dipped somewhat in F2016 (YoY growth in F2015 was 35.31%, while it was only 18.20% in F2016). Profit margins have remained consistently above 8.00%, which is a positive sign: Exco has managed to keep profit margins above this support level for the past three years. But, with the acquisition of AFX (discussed below), I expect revenue growth to match or exceed F2016 by this time next year.

From a valuation perspective, the company is still relatively cheap:

Graham Number as of 2016

The Graham number is sitting at a very healthy 19.93, which is below our threshold of 22.50. If you recall, when I analyzed the company based on F2015 financials the Graham number was 37.87, but at the time of my review it was sitting at 13.72 based on forward EPS at the time. So it has gone up relative to my last valuation, but is still cheap in my eyes. In fact, I doubled my position earlier this week when there was a dip to the low $10.00/share range.

Reviewing the annual report, the company came in under the consensus F2016 EPS: actual EPS was 1.12, vs. a mean forward estimate of 1.14. However, even at 1.12, this was a 16.10% increase over the previous year. Exco completed the acquisition earlier this year of AFX Industries LLC which added significantly to its revenue streams on a go forward basis, to the tune of 11.40% for their consolidated sales revenue for the year. This acquisition also saw the overall debt load of the firm go up: net debt went from $21million in F2015 to $110million in F2016, $100million of which was related to the acquisition. Overall however, I feel that this is a positive story for Exco since it has already added to their overall sales revenue.

Two other points to consider for Exco are the currency exchange rate, as well as the effects of president-elect Donald Trump. A weakening Canadian dollar has been very favourable for Exco:

Over the year, the US dollar averaged 7% higher ($1.32 versus $1.24) against the Canadian dollar contributing $15.2 million in sales to the current year. Similarly, the Euro averaged 5% higher ($1.46 versus $1.41) against the Canadian dollar contributing $5.7 million to sales.

Source: 2016 Annual Report

With regards to the president-elect, if he does go through with moving more jobs into the US and/or increasing duties (or completely eliminating NAFTA), I am not sure what this will do to Exco exports from Canada to the US: as the US is a key trading partner, there may be a material impact on the quantity and dollar value of goods shipping from Canada to the US. That said, Exco is making serious movements in other parts of the world:

  • AFX is a key supplier to BMW, giving them access to European markets
  • Operations in Thailand are giving them a launchpad to better penetrate the Asian market

Activities such as this lessen my worry about impacts of the president-elect at this point: even if there are material changes to NAFTA, with Exco’s Canadian customers, and access to other markets such as Europe and Asia, will mitigate any effects.

With the above in mind, I maintain my recommendation of buy for Exco Technologies Ltd.

Disclosure: Long XTC.TO as of December 9, 2016.


Ryder System Inc. (R.N) Analysis

Summary

Ryder Systems Inc. (R.N) is a solid dividend performer, but has weak cashflow and a neutral balance sheet due to its business model. Nonetheless, when measured against EPS and overall revenue fundamentals, the comapny seems solid. With strong dividend performance, and revenue fundamentals, I rate this a Buy.

Background

Ryder System, Inc. (Ryder) is a provider of transportation and supply chain management solutions, with operations in three key business segments:

  • Fleet Management Solutions (FMS). Their FMS offering is “comprised of longer-term full service leasing and contract maintenance services; shorter-term commercial truck rental; flexible maintenance services; and value-added fleet support services such as insurance, vehicle administration and fuel services.” Moreover, Ryder makes use of old inventory (trucks, tractors, and trailers) through sales network, providing old inventory for sale through their used vehicle sales program.
  • Dedicated Transportation Solutions (DTS). The DTS unit provides a dedicated transportation solution vis-a-vis full service leases with drivers, additional services (such as scheduling, safety, and regulatory compliance), and equipment, maintenance, and general administrative services.
  • Supply Chain Solutions (SCS). SCS provides supply chain management and general logistics services.

Analysis

Fundamentals

Ryder’s cash flow is terrible, and their current ratio does not meet the minimum threshold I look for of 1.50; their F2015 Current Ratio is 0.65. Moreover, the firm carries a lot of debt, evidenced by their overall financial strength, below. Overall Total Liabilities to Equity, and Net Debt to Equity, are exceedingly greater than 1.00. I differentiate between Total Liabilities and Net Debt, the former including all liabilities on the balance sheet, such as debt, leases, accounts payable, etc., and the latter being pure debt, e.g. debt owed to creditors. On the flip-side of this, Debt to Tangible Assets is consistently less than 1.00, which means that overall the tangible assets exceed total debt; in a sell-off situation, according to the balance sheet, Ryder would still be in an okay position (albeit barely).

Financial Strength

Financial Strength

This weak financial condition had me worried at first, but when you peel back the layers it is not as bad as it seems. For one, the current ratio has spiked in F2015 due to a large amount of long term debt coming due. Second, the nature of the business is that Ryder has long term liabilities vis-a-vis long term leases with suppliers. They take the products from long term leases, and in turn lease those products back to their customers. This is important: they are rotating debt to pay for long term revenue generating property, plant, and equipment (PPE), AKA trucks, tractors, and trailers. Moreover, revenue generating PPE are classified under capital leases; this makes sense, as it reduces the risk of Ryder owning the equipment outright. Within this context, the high debt levels are not concerning, as it is one of their core operating strategies: capital leases, which they then lease out through their various business segments, and finally sell through their FMS used vehicle sales program.

Reviewing key operating metrics, if we look forward from the last financial crisis, revenue, gross, operating, and net profit margins have all been on an upward trend:

Revenue, ROE, and Margins

Revenue, ROE, and Margins

This is reassuring: increasing revenue and increasing margins means that top line income is going up, and bottom line income is going up faster vis-a-vis increased margins. From a dividend perspective, this means that EPS as a whole is going up as well. All things being equal, even with a consistent dividend payout ratio, if EPS is rising, the dividend rises with it. But more on that in the dividend analysis below.

If we look at our key criteria, six out of seven tests pass:

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 0.65 1.50 NO
Earnings Stability Number of most recent years of positive EPS 10.00 3.00 YES
Earnings Stability Number of consecutive years of negative EPS 1.00 YES
Dividend Growth Compound Annual Dividend Growth 0.08 0.02 YES
Share Price Growth Compound Annual Share Price Growth 0.03 0.03 YES
EPS Growth Compound Annual EPS Growth 0.06 0.03 YES
Moderate P/E Ratio P/E 9.84 15.00 YES
Moderate P/BV Ratio P/BV 1.51 1.50
Moderate P/E*P/BV Ratio P/E * P/BV 14.86 22.50

Dividends

Ryder’s dividend has been stellar. While it yields a relatively low 2.68% based on the Oct 3, 2016, market price of $65.58, its compound annual dividend growth rate is 8.44% since F2005. Moreover, the payout ratio based on EPS has been consistently under 40%, breaking that limit only during the financial crisis when EPS was significantly hit due to a drop in revenue during that period.

Dividend, Earnings, and Free Cash Flow per Share

Dividend, Earnings, and Free Cash Flow per Share

Dividend Payout Ratio vs EPS, Dividend Payout Ratio vs FCFS

Dividend Payout Ratio vs EPS, Dividend Payout Ratio vs FCFS

I would normally be concerned that the free cash flow is "wavy", but taken into context against their business model, and how they operate, this does not concern me for Ryder. In this case, the measurement against EPS is appropriate.

Valuation

10 year share price

Ryder 10 Year Share Price ending F2015

Share price is the weakest of our seven criteria metrics, eking out a measly 3.01% over our threshold of 3.00%. The biggest drop has been F2014-F2015, which coincides with the valuation returning to normal levels: in F2014 the P/E × P/BV was a staggering 60, but in F015 it has dropped to the sub-20 level.

P/E, P/BV, and P/E × &P/BV

Graham Number for R.N

As of October 3, 2016, using a mean consensus F2016 EPS estimate of $5.97, the valuation gives us a Graham number of 20.067, indicating that the company is undervalued at the moment.

R.N valuation as of Oct 3 2016
Current Price $65.58
Current Dividend $1.76
Mean Forward EPS $5.97
Dividend Yield 2.68%
Forward P/E 10.98
Historic mean P/BV 1.83
P/E × P/BV 20.067

Closing Thoughts

I like companies such as Ryder, mainly because I love big machinery, and easy to understand companies. One could look at Ryder and say that there is a significant amount of financial engineering to balance leases, etc., but it works in their favour. When I have some free cash, I will likely pick up some shares of this company in the near future.