Conor Flynn, CEO, Kimco Realty Corporation
The Wall Street Transcript interviewed Kimco Realty Corporation (NYSE:KIM) CEO Conor Flynn last month for its annual Real Estate and REIT report.
In the same report, Kimco was selected as a top pick in the real estate sector by both Mizuho analyst Haendel Emmanuel St. Juste and Compass Point analyst Floris van Dijkum.
Mr. Flynn was named Chief Executive Officer of Kimco Realty Corporation and appointed to the company’s board of directors in January 2016. He joined Kimco in 2003 as an asset manager and has held a variety of senior leadership roles within the company, including that of President, Chief Operating Officer, Chief Investment Officer and President, Western Region.
Mr. Flynn holds a bachelor of arts degree in economics from Yale University and a master’s degree in Real Estate Development from Columbia University.
He began the interview with an introduction to the company.
“Kimco’s strategy is formulated around our focus on grocery-anchored and mixed-use assets. Our primary portfolio is focused on the first-ring suburbs of major metropolitan markets, where we provide essential goods and services through our grocery-anchored assets.
Typically our asset is anchored by the dominant grocer, whether it be a traditional like an Albertsons or a Kroger or a Stop and Shop or an Ahold Delhaize, or a specialty grocer like a Whole Foods, Trader Joe’s, or a strong regional player like a Publix or an H-E-B, depending on where you are in the country.
We try to focus on driving everyday goods and services, and then having a merchandising mix that also drives traffic at different points of the day. So, think about your coffee and your bagel shop in the morning, think about your quick service restaurants or fast food for lunch, as well as the grocery store, obviously, driving multiple trips a week.
And then we also mix in what some people refer to as ‘treasure hunter’ concepts like T.J. Maxx, Marshall’s, HomeGoods, HomeSense, Sierra Trading Post, Burlington, Ross. Those are called treasure hunters because the merchandise moves fast and it’s discounted and you’ll see one item and it won’t be there the next time.
So we have a mix of goods and services that keep people coming back time and time again, and it’s not aspirational spending, it’s local. That’s something that we focus on, that we deliver essential goods and services where people are fulfilling their needs, not their wants, and that is something that I think has stood the test of time, whether in good markets or bad markets.”
Mr. Flynn went on to discuss the strategy behind the company’s recent focus on building apartments.
“Our real estate is typically anchored by a grocery store with a big field of parking, and that’s where we’ve used our platform to unlock the highest and best use of our real estate. A lot of that parking area has become upside in terms of value creation for us, because we look at what we can do in the future with that land.
And really, that’s where we’ve started to entitle apartments and multifamily units across the portfolio, where we see a lot of density surrounding our asset. So many times we refer to what we own as the hole in the donut — everything has gone vertical around us, and we’re sitting with a single-story building with a big field of parking. That’s what allows us to look at the future and say, wow, there’s a lot of unlocked potential in our portfolio.
We’ve set a goal to get to 12,000 apartment units, either built or entitled, by 2025. We just crested 10,000, so we’re well on our way, and continuing to look at how to unlock the value that’s in a lot of these wonderful assets we own.”
He notes that the competitive landscape favors retail landlords right now.
“From the fundamental side of it, I would say our supply and demand balance is very strong right now for our sector. Commercial real estate as a whole is going through a pretty seismic cycle versus other sectors.
But for retail, you’re seeing it hit historic lows in terms of vacancy rates and new development supply. And because of very limited new supply, the pricing power that we have on the retail side is a testament, I think, to where retail has come from and where it’s evolved to.
Whether it’s the onset of e-commerce and what that was going to do to brick-and-mortar retail, or the pandemic and having government shutdowns. Through all of that, you’ve come to a point now where vacancies are at all-time lows, you’ve got pricing power on the landlord side, virtually no new development — so supply and demand is very strongly in favor of high-quality real estate owners.
We’re seeing that in our operational metrics, as our occupancy is hitting all-time highs and our leasing spreads on backfilling Bed Bath & Beyond boxes were north of 40% rent spreads versus what they were paying previously. You’re seeing a lot of green shoots of continuing power in terms of the retail landscape.
That being said, it is very challenging to find buying opportunities in this market because there’s a bit of a bid/ask spread between buyer and seller. What we’ve found is we’ve been successful over the past few years doing larger public portfolios, because, in essence, we’re able to buy at a discount due to a limited buyer pool.
That allows us to use our stock as currency by applying an exchange ratio. That allows us to price better than what we can find in the open market.”
Mr. Flynn points to Kimco’s SNO pipeline as an indicator of cash growth going forward.
“When you look at what is on the horizon for us going into next year, we have a significant number of leases that have been executed but haven’t yet commenced paying rent as the spaces are being built out. We refer to this as our ‘signed but not open,’ or SNO pipeline. That is a visible indicator of future cash flow growth.
That’s what gets us really excited, because the signed but not open pipeline is significant for Kimco, totaling $57 million at year end, and again, it gives us a view into the near future.
Cash flows are growing. The portfolio is in really strong shape right now from an occupancy standpoint, but the cash flows and the free cash flow after paying dividends is growing.
That’s what gives us the ability to raise our dividend like we just did in the fourth quarter, and gives us confidence going into what could maybe be a soft economic landing. It wasn’t long ago people were anticipating a recession, right? There is still very much a chance that could happen this year.
But when you look at our portfolio, and you look at the balance sheet where we finished at the end of 2023 with the lowest leverage the company’s had, the most liquidity the company’s had, and with the occupancy where it is and going in the future, our signed but not open pipeline really is showcasing the amount of cash flow that’s going to be coming online — it gets us super excited that we have the ingredients for growth for investors to be really interested in the Kimco story.”
Read the complete interview with Kimco Realty Corporation (NYSE:KIM) CEO Conor Flynn exclusively in The Wall Street Transcript.
Floris van Dijkum, Managing Director and Senior Research Analyst, Compass Point Research & Trading
In a recent interview with The Wall Street Transcript, Compass Point Research & Trading Analyst Floris van Dijkum offered recommendations across REIT subsectors, with the exception of office.
Mr. van Dijkum is a Managing Director and Senior Research Analyst at Compass Point. He joined Compass Point in June 2019, bringing 30+ years of real estate investment, research and banking experience.
Prior to joining Compass Point, he started the REIT research effort at Boenning & Scattergood. Before that, he started the global REIT investment platform at BlackRock, where he served as COO and was responsible for a quarter of the U.S. portfolio.
Mr. van Dijkum began the interview with a discussion of valuations in the REIT sector today.
“Based on consensus estimates, the overall REIT sector trades at a 1.9% discount to NAV, and based on earnings, REITs trade at 17.5 times 2024 FFO. That FFO multiple has increased marginally over the past month as investors have gotten more comfortable on the U.S. economic outlook. REITs on average deliver a 4% dividend yield.
However, not all sectors are valued equally. The property sectors that I cover are currently valued well below the overall REIT sector average. In particular, the retail sectors of malls and shopping centers trade at 28% and 24% discounted multiples, while hotels trade at a 45% lower multiple, despite the fundamentals for these sectors being probably the best they’ve been in nearly a decade.”
He was negative, however, on the fundamentals in the office sector.
“Office will be a challenged sector for the medium term, in our opinion. We currently have no ‘buy’ recommendations in the office space.
In the office sector, post-COVID, the work-from-home concept has really impacted office demand. McKinsey has published a study that expects 18% to 25% lower office usage as more work is done from home. Office usage, according to Kastle Systems, which tracks swipes at buildings, is 50% of what it was pre-COVID. Some markets are getting back to 60% to 70%, but in most national office markets, on average, office usage is still significantly down.
As companies realize they need less office space, they’re going to lease less space. If you look at the U.S. office market, the availability of office space in the country is around 20% — and we think this availability rate is going to go higher.
A lot of companies are currently leasing space they don’t use, so when those leases expire, they’re going to take approximately 20% less space. We think 20% is a good benchmark for what the space reduction needs are going to be going forward for companies.”
In contrast, Mr. van Dijkum was bullish on the mall sector.
“I remain completely out of consensus, and I have been for a couple of years, in that I am a bull on the mall sector. Malls are the best performing REIT segment over the last three years. They outperformed the REIT Index every single year, and have the best total return over the last three years.
Our mall owners still continue to screen incredibly attractively, because they’re undervalued, and part of that is because the national media has been slow to recognize that the A mall business, we think, is one of the best real estate sectors around.
There continues to be negative supply growth, and coming out of COVID, the retailers realized they actually need to operate in store. As retailers seek space where they achieve some of their highest sales productivity, they have leased space and are continuing to lease space in the mall.
The demand for space in the malls — and it’s not just the A-rated malls, it’s also the B-rated malls, but the A malls are seeing a disproportionate amount of demand — means that landlords have pricing power. Occupancy rates continue to trend higher, and we think they can go back to prior peak levels and beyond.
However, we are not there yet. Moreover, rent spreads are double-digit and will probably continue to trend higher going forward, as well.
Couple that with the fact that the mall business has 3% annual fixed rent bumps in all of the lease contracts, it means you’re going to see some very strong NOI growth over the next two to three years, well beyond the 3% cruising speed.
We think malls, A-rated malls in particular, are going to grow by 4% to 5% a year for the next couple of years. And actually, we see no signs of that ending, because there’s less mall space in the country every year.
The luxury brands are expanding outside of their coastal major market focus to throughout the U.S. Luxury brands tend to only operate in two locations, street retail in urban settings and the A malls, and so the A malls are huge beneficiaries.
We’ve written that 5% of Simon’s (NYSE:SPG) shop space in its mall portfolio is taken up by luxury, and that’s going to grow to up to 10%. And it exceeds 20% in 25 of Simon’s best malls.
Luxury tenant sales productivity is multiples of other retailer sales. The average A mall sales are about $700 a foot in our mall database; an A mall is any mall that has tenant sales over $500 a square foot. Open air shopping center sales are, we estimate, around $250 per square foot. So, the average mall sales are nearly three times the average open air sales.
So, from a retailer’s perspective, your sales tend to be much better operating in an A mall than in a typical open air center. And then look at luxury — luxury average sales are north of $1,500, oftentimes north of $2,000 a square foot.
What does that mean for mall landlords? That means that with an occupancy cost of 10% to 12%, mall owners can charge triple-digit rents. Simon’s average rents are $55 a square foot, but luxury is going to pay $150 to $200 per square foot in the mall, so a landlord essentially triples the typical rent.
Of course, only a select number of malls in the U.S. are suitable for these tenants, with Simon owning 40 and Macerich (NYSE:MAC) owning 12, based on our estimates.
We published an analysis on what the impact is should luxury do just 25% of its potential expansion in Simon’s and Macerich’s portfolios, and the numbers are significant. We have estimated that Simon’s total NOI — over $5.5 billion per year — could increase by 9%, and Macerich’s NOI could increase by 14%. Macerich is a smaller portfolio, so it’s more impactful for Macerich than it is for Simon.
These are massive numbers that are not being reflected in the current valuations. The mall sector trades at 12.4 times 2024 FFO, and 11.9 times based on 2025 FFO, and the REIT sector trades at 17.5 times.
The underlying earnings growth in the mall sector is massive, even though the headline earnings growth this year is going to be low because of refinancing of maturing debt. And, by the way, higher interest costs is an issue that the whole REIT sector is dealing with. The average REIT growth in terms of FFO per share is 2.5%. We believe the mall valuation discrepancy screens very attractive.”
You can learn about Mr. van Dijkum’s other top real estate picks by reading the entire 4,303 word interview in The Wall Street Transcript.
Jennifer Chang
Recently, Jennifer Chang, a Portfolio Manager at Schafer Cullen Capital Management, joined the firm’s founder and CEO Jim Cullen to discuss their High Dividend Equity Strategy. Chang pointed to some attractive opportunities including Medtronic (NYSE:MDT) and Siemens (OTCMKTS:SIEGY).
In the interview, Ms. Chang explained that in a typical equity income strategy, oftentimes you’re concentrated in some of the bond proxy, low beta defensive sectors, but they have a very balanced portfolio with exposure to all 11 sectors of the market.
“We have exposure to REITs and utilities, but our largest exposure from an absolute basis is financials. And so, within financials, we own a good number of the large cap banks and high-quality insurance companies.
We have high exposure to industrials because within industrials we see a lot of long-term secular tailwinds, like globalization and decarbonization, that will benefit a lot of our companies.”
Ms. Chang went on to discuss medical device company Medtronic.
“The first one I want to highlight is Medtronic (NYSE:MDT). It’s one of the largest medical devices companies. They have businesses in cardiovascular, neuroscience, surgical and diabetes therapies. And it trades at a very attractive valuation, 16 times 2024 earnings with a 3.2% dividend yield. The stock is off about 35% from its 2021 highs.
A couple of industry issues are impacting medical devices. The first is that across the board, there is a negative sentiment on medical devices from the impact of GLP-1 weight loss drugs. The thinking is that those drugs will potentially negatively impact medical device demand.
A lot of the analysts and experts that we talk to don’t necessarily see it that way. There’s still a lot of unmet need that medical device companies will address. And with a general population that is slimmer, that actually increases the population that is able to go through a lot of these elective procedures.
A couple of years ago, the company had some quality issues in their diabetes manufacturing units, but that has since been resolved. And overall, management is very optimistic about their growth. They’re projecting top line growth annually for the next couple of years of around 5%.
And we think the medical device business generally has a very high barrier to entry and is an attractive industry for a couple of reasons. First, you don’t have the patent cliff issues that reside within a lot of the pharmaceutical companies. And the other is that the medical device business is generally under the radar from a lot of political targeting and health care reform concerns, especially from politicians targeting kind of big pharma in election years.”
Next, she discussed Siemens and why she finds it attractive right now.
“Siemens (OTCMKTS:SIEGY) is another company that we own in the portfolio. It’s a German industrial conglomerate and it’s benefiting from long tail secular trends in digitization, automation and decarbonization.
The company has been pioneering the industrial Internet of Things with their digital twin and next generation automation equipment. And they’ve also developed a lot of cloud applications to reduce the carbon footprint of supply chains for their customers.
The stock trades at around 16 times 2024 earnings with a 3% dividend yield. And when you look at peers in the U.S. and Europe, Siemens is actually trading at a five to 10 multiple point discount to many of them.
The company now generates greater than 10% free cash flow margins. They’ve closed that gap versus global peers through a series of portfolio divestitures and business unit restructuring that has improved its free cash flow profile, yet it still trades at a considerable discount to peers.
And lastly, the two largest segments are leveraged to strong top line growth and margin improvement over time.
First and foremost, digital industries is the business unit which is a leading automation equipment and software provider. They have significant scale in program logic controls, and it’s underpinned by a large installed base of equipment.
The company has invested in a full suite of software solutions, and it now generates about EUR5 billion in revenue. And they should realize the benefit from Software as a Service — SaaS — transition. This SaaS transition will improve margins over time.
The second business unit that is showing a lot of promise is their smart infrastructure unit and their medium voltage business, which is seeing strong demand from data center, U.S. manufacturing reshoring and smart building solutions.
And then within that, the electrification subsegment also continues to be a growth engine, especially from Europe, because they have a greater required plan for energy transition.”
Read about more recommendations from Portfolio Manager Jennifer Chang in the complete interview, exclusively in The Wall Street Transcript.
Selman Akyol, Managing Director, Energy & Power, Stifel,
Archrock (NYSE:AROC) is a top pick from the award winning Stifel natural gas midstream securities expert.
Selman Akyol is a Managing Director in the Energy & Power sector at Stifel, covering Energy Infrastructure-MLPs.
He joined the company in 1999. Mr. Akyol’s past accolades include ranking #1 and #2 in earnings estimates for multiple Financial Times/StarMine Awards and The Wall Street Journal’s Best on the Street Survey Awards.
He has been an analyst for more than 30 years, and was previously an analyst at Johnson Research & Capital, a staff accountant at Edison Brothers Stores, and an account executive at PaineWebber.
Mr. Akyol earned an MBA from the University of Missouri-Columbia.
His recommendation for Archrock (NYSE:AROC) is based on fundamentals of the sector and the specifics of the compression specialist.
“Depending on where you look, the year to date as of December 20th or so was about 17%; one year was 20%; and two year was 52%, and of course two years ago you had a very favorable starting point for valuations, given COVID and everything we endured back then, so no surprise that you saw that.
What’s interesting to us is, despite the improvement in prices, we would tell you valuations have not changed significantly.
Currently, looking at it on a market-cap-weighted basis — and this is really across our coverage — you’re trading at about 8.7 times on a forward basis, and that would compare to a six-month average of 8.8, and 8.9 times for 12 months, and a 9 times multiple for 24 months, which is really flat relative to the 36-month and 60-month average.
So, despite improvement in prices, we haven’t really seen improvement in valuations.
Clearly driving that is EBITDA continues to move up over those time periods.
But the other part that’s significant to that is leverage has moved down fairly dramatically, certainly since 2020, with most below the 4 times metric now and best in class in and around the 3s.
As I said, you’ve seen prices improve, you’ve seen valuations be flat, and you’ve seen leverage come down, so we still think midstream infrastructure is a very attractive place to be.”
Archrock (NYSE:AROC) is not the only pick from the Stifel expert but it is the most enthusiastic pick.
“Our picks include Williams (NYSE:WMB). We like Targa (NYSE:TRGP).
We do think that the Street is not focused enough on the compression industry.
We see a longer runway there, and we continue to like the compression segment of the value chain an awful lot. Archrock (NYSE:AROC) is our top pick within that.
We’re seeing bottlenecks on the supply side.
We’re seeing contracts extend; you’re seeing three- to five-year contracting; you’re seeing contracts with inflation adjusters.
The equipment market is very tight, so pricing power continues to accrue to the compression providers, and we think we’ll see that continue and continue to see their revenue metrics ratchet up through 2024. Everyone is already sold out for 2024, so any discussions now are really focused on 2025.
You’re seeing long lead times on critical components — engines, caterpillars, it’s 50 to 60 weeks, which keeps supply in check. And then you also have companies wanting to live within cash flows, which limits the amount of capital they’re willing to invest, so that also helps keep a lid on supply.
So you have continued growth within the Permian, natural gas is certainly a byproduct of the growth in crude oil, and in order to move it, to process it, you need compression, and equipment is very tight in that segment right now.”
Archrock (NYSE:AROC) exemplifies a theme that belongs entirely to this midstream sector.
“A theme that started several years ago and is important to investors is the whole idea of living within cash flows and returning cash to holders.
And so, you’re looking for reconfirmation of that.
You’re looking for capex budgets that will be funded internally.
You’re looking for distribution or dividend growth.
And you’re looking for buybacks.
We see a lot that gets done on the opportunistic side, or characterized as opportunistic.
Our preference would be to see something more with goalposts put in the ground — we intend to acquire so much in X number of dollars, and see that over a multi-year period — as opposed to saying, we will engage in repurchases on an opportunistic basis.
To me, that’s first and foremost in terms of what we’re really looking for: continuation of the financial discipline that we’ve seen within this industry, continuing to have balance sheets maintained and improved, and then return of cash to unitholders or shareholders.”
Underpinning all these values is a rather robust view of the supply and demand for oil in the United States.
Noah Barrett, CFA, is a Research Analyst at Janus Henderson Investors and lead on the firm’s Energy & Utilities Sector Research team.
He was vice president with Institutional Capital LLC specializing in analysis and stock recommendations for the energy and transportation sectors.
He received a degree in economics from Boston College.
He also received an MBA with concentrations in finance, accounting, and economics from the University of Chicago, Booth School of Business.
He also completed the General Course at the London School of Economics.
A recent interview with Mr. Barrett further supports the Archrock (NYSE:AROC) and other midstream oil and gas sector valuations.
“I think one thing when talking about upstream companies, it’s always helpful to start with the macro and a quick overview of what we’re looking at on oil demand and oil supply, because for upstream companies, the price of oil or natural gas is a direct input into their financial statements and ultimately their earnings power and profitability.
So, for oil demand, maybe we can start there.
The outlook for oil demand in 2024 is uncertain.
I would say this isn’t a new dynamic; every year, the outlook for oil demand can be a bit murky.
But I think what’s interesting is that the range of expectations from the various forecasting agencies we look at seems to be wider than usual.
So, on the low end, you have the IEA, they’re expecting 1.1 million barrels a day of oil demand growth in 2024 versus 2023.
They just recently revised that upwards.
So, prior to or a month or two ago, they were even lower.
They were below 1 million barrels a day of oil demand growth.
And then on the high end, you have OPEC, they’re forecasting 2.25 million barrels a day of oil demand growth in 2024.
So looking at the low end and the high end, it’s a pretty big gulf.
If we ended the year at the low end of the range, certainly that would be viewed as a weak demand year.
I think the OPEC outlook seems aggressively optimistic.
But if we were to come in closer to the OPEC number, that would signal that oil demand is to be a lot healthier than expected and would put meaningful upward pressure on prices.
And then the last thing I would say on demand, I think consensus seems to be around demand growth of, call it 1.4 million barrels a day.
I think if we came in at that number, that would be viewed as a pretty healthy market and would be supportive of oil prices at or above current levels.
Switching to the oil supply side, the other half of the equation — this should be easier to model, but there are still a lot of surprises that pop up and change the outlook here.
I think it’s always helpful to break down the components of supply into three buckets.
You have the U.S., you have OPEC, and the rest of the world.
For the U.S., supply growth in 2023 is going to end up over 1 million barrels a day, which was well above expectations at the beginning of 2023.
I think what’s interesting is that if you look at a rig count chart, we’ve seen steady declines in the rig count over the course of 2023.
And that would seemingly suggest that U.S. supply should be falling, not growing.
But there are several factors that explain this interesting phenomenon.
It’s important to consider that the average rig has gotten a lot more efficient at drilling a horizontal well.
So the correlation between the rig count and production has broken down over time.
There is also a timing lag. When you drop a rig, you may not actually see an impact on production for two to three quarters out in the future.
Another factor is the frac spread count, which tracks completion activity. This has been a bit more stable. The rig count reflects wells drilled, but the frac spread count reflects completed wells and ultimately production.
So if the frac spread count has been a bit more stable, that would indicate that we should expect production, all things equal, to be fairly stable and potentially growing as continued production and completion efficiencies flow through the system.
And one last thing that is worth considering is that in 2023, U.S. supply growth was optically boosted by a flip in the DOE adjustment data.
Over the past five years, in our opinion, the DOE was underestimating U.S. supply fairly consistently, by 400,000 to 500,000 barrels a day.
As part of their methodology, there’s typically an adjustment factor in their data.
And in 2023, we saw that adjustment factor flip and it went from positive to negative.
So this doesn’t mean that the U.S. is producing more or less oil in absolute terms, but it does mean that when you’re comparing supply data across periods, there’s distortion in the number.
Putting it all together, what do we think for 2024?
I would expect the pace of U.S. production growth to moderate.
We’ll see some continued efficiency gains, but assuming the rig count and the frac spread count are static at current levels, I think something in the 300,000 to maybe 500,000 barrels a day of year over year supply growth is a reasonable assumption.
Moving over to OPEC supply, their market share has eroded, spare capacity has moved higher, and the bulk of the cuts have been borne by Saudi Arabia.
I do think there’s a valid question over how much they want to continue to prop up the oil price while ceding market share and letting others, particularly the U.S., bring supply into the market.
I don’t think we have any unique insight into Saudi policy, but our view is that they will actively manage supply to keep Brent prices above $70 a barrel, with the full understanding that in the near term, oil prices could drop below $70.
But I think they would like to consistently see Brent oil prices above $70 a barrel.
And so, we feel comfortable with OPEC policy and OPEC cohesion.
And then the last bucket would be non-OPEC, non-U.S. production.
We’ll get some supply additions from Canada, Brazil, and Guyana in 2024.
But these are all well telegraphed and fairly easy to predict.
Putting all the balances together, we have U.S. supply growth of 300,000 to 500,000 barrels a day, maybe 800,000 to 900,000 barrels a day of non-OPEC, non-U.S. supply, that would suggest that if OPEC keeps supply flat, that roughly balances the market.
If we see OPEC take incremental barrels out of the market, that probably puts upward pressure on the oil price.
If they decide to bring some barrels back into the market and try and maintain a certain level of market share, that probably puts some downward pressure on the oil price.
Overall, I think that leads to an expectation that Brent oil prices are range bound in 2024, oscillating between $70 a barrel and $90 a barrel.
And I think we’ll see a lot of volatility within that range.
But that’s our expectation for oil prices.
And ultimately for upstream energy companies, that $70 to $90 a barrel price range is fairly healthy.
I think that’s an OK price for most producers.’
Archrock (NYSE:AROC) as well as other midstream sector companies would seem to be poised to benefit the most from this supply/demand dynamic in 2024. Get all the top picks and more analysis from reading all the interviews in the new Oil & Gas sector report, exclusively in the Wall Street Transcript.
Mike Vinokur, Portfolio Manager, MV Wealth Partners
Cenovus (NYSE:CVE) is a top pick from Mike Vinokur, CFA, CMT, CFP, and portfolio manager at MV Wealth Partners.
Mr. Vinokur has been a discretionary portfolio manager since 2006 and has extensive experience in analyzing equities, bonds, preferred shares, real estate investment trusts and alternative investments.
Mr. Vinokur also teaches Economics and Portfolio Management in the MBA/CFA program as an adjunct professor at the Goodman Institute for Investment Management, part of Concordia University’s John Molson School of Business.
His enthusiasm for Cenovus (NYSE:CVE) comes from a strict value background.
“…You need to have a very strict set of buy rules, set of sell rules, a risk-management discipline, and a discipline to realize when you are wrong.
Which I believe is very hard to do because, as I always tell clients, “Why would I buy something if I thought I was wrong?”
In other words, every time we make a new purchase, we inevitably think we’re going to be right.
But the reality of it is that we know there’s a certain percentage of the time where we are going to have to admit that our thesis was wrong or our valuation was wrong, or our evaluation of management’s ability was wrong.
And the question is, I guess, what are the sets of rules and factors that one can use to come to those conclusions sooner rather than later in order to exit a position and move on to the next idea?
And I think that being a value manager, we have those rules and factors in place.
We also are very concerned about the compound annual growth rate, and what I mean by that is one can buy a security and have a double or a triple, but the question is, how long did it take that double or triple to occur?
Because if that double or triple took 20 years to occur, the compounded annual growth rate is really not very enticing.
And so one has to be very cognizant of the fact that time is an investor’s most valuable asset, but that time needs to be used in an accretive fashion so that one is not stuck in a security that in hindsight, yes, made a good return, but over the years was really not better than the return of a bond or a GIC or a CD or something like that.
I guess to conclude that thought, timing is of the essence.
Though we’re not day traders and we’re not necessarily trying to time the market, we are cognizant of timing of our entries, and of how long our positions are held on the books until they’re sold and an actual gain or loss is triggered.
And on that note, I guess I would say that I am one of approximately 400 people in the world that hold both the CFA and the CMT — chartered market technician — designation.
And so, in our practice, we are value investors at heart, but we do use technical analysis and seasonal analysis to help us manage risk in our portfolios and to try and better time our entry and our exit points.”
The overall positive economic factors also favor his Cenovus (NYSE:CVE) pick.
“I keep asking myself, is it possible that this period now 2022, 2023, would have happened, COVID or no COVID, in that you have a much bigger slice of the population that due to their wealth, has spending inelasticity regardless of the economic environment?
I’m looking at people going on cruises.
I’m looking at people traveling.
I’m hearing stories about parents and grandparents giving their children/grandchildren money.
There is a transfer of wealth going on, and I believe it’s happening before people are dying.
They want to give it to whoever it is while they’re alive.
And at the margin, this cohort of the demographic in North America and maybe in Europe has the wealth where 5% inflation, 10% inflation just doesn’t faze them anymore because they’ve come to the conclusion that they only have so many more years to live.
They’ve built up their wealth and they’re going to spend it.
And so, getting that new car or remodeling the house or buying another property or traveling or getting furniture or think of any other high-ticket, high-value item, this cohort could potentially keep on spending into the next slowdown and could actually buttress the economic cycle that otherwise may have had to unfold.”
The Cenovus (NYSE:CVE) call is from an undervalued sector as well as an undervalued company.
“We think that the Canadian energy space is extremely well run for the most part, especially in the companies that we own of course, but from a valuation perspective is extremely inexpensive given the robust cash flows that we see and the extremely strong balance sheets.
It is amazing to me when I listen to the management teams of these companies, how they have learned their lesson from previous bubbles and how they are bound and determined to not repeat those mistakes no matter where the price of oil goes in the short term and how there is so much cash flow being returned to shareholders today either through dividends or buybacks that it is unbelievable.
And one of the companies that we think is a tremendous “pound the table” buy is Cenovus (NYSE:CVE).
Cenovus is an integrated oil and gas company.
They have properties in Canada, but they also own refineries in the U.S. and Canada.
And so they have both sides of the spectrum.
They may not have a lot of midstream assets, but they have the refining assets and they have the upstream assets.
And their upstream assets are, for the most part, very long-life assets because they’re oil sands.
And this is a company that also made a very big acquisition from ConocoPhillips about two years ago.
They took on a lot of debt, and they have been very rigorous and judicious about paying that debt down, about not extending themselves.
But now they’re in the catbird seat and in fact, if you look at the last presentation, by Q1 of 2024, they should be in a position to return between 75% and 100% of free cash flow to shareholders.
And that is just a monumental amount.
We’ve done some calculations, and if the price doesn’t move up, they will be able to buy back the whole company in four or five years, which is a pretty amazing thing when you think about that, because that also means that the free cash flow yield to the shareholder is extremely high right now.
I am very much in favor of ESG, but I don’t think that the world, as we know it today, and as we enjoy it today, can make this energy transformation in the next three to five years.
I am in the camp that it’s going to take a lot longer, and I believe that, unfortunately, individual and institutional investors alike have thrown out their energy securities way back when, never to return.
And these energy securities form a very small percentage of the S&P 500, a bigger percentage of the TSX for sure.
But from a valuation perspective and from a robustness perspective, I think the next three to five years could be extremely exciting because we have just not invested enough in new resources.
And while the demand for oil and gas may not be as robust as it once was in terms of net new demand, we also think that net new supply will not be so easy to come by.
And therefore, we are in the camp that the price of oil, and perhaps natural gas, will be much higher than it is today for longer, and that these organizations are going to tremendously benefit from these robust balance sheets, being able to shower their shareholders with lots of dividends and lots of share buybacks.”
Cenovus (NYSE:CVE) is not the only top pick from Mike Vinokur. Get all his top picks and more from reading the entire 4,212 word interview, exclusively in the Wall Street Transcript.
Phillips S. Baker, Jr., Hecla Mining Company (NYSE:HL) CEO and President
Hecla Mining Company (NYSE:HL) has a long history of producing both gold and silver from its owned and operated properties.
Phillips S. Baker, Jr. has been a Director of Hecla Mining Company (NYSE:HL) since 2001, its Chief Executive Officer since May 2003, and has served as its President since November 2001.
He served as Hecla’s Chief Financial Officer from May 2001 to June 2003; Chief Operating Officer from November 2001 to May 2003; and Vice President from May 2001 to November 2001.
Mr. Baker has also served as a Director of QEP Resources, Inc. since May 2010, as well as serving as a Director for Questar Corporation from February 2004 through June 2010
Mr. Baker describes the investing high points for the Hecla Mining Company (NYSE:HL).
“I think the starting point is the fact that the company started as a silver producer, going all the way back to the very beginning.
The original mine was the Hecla mine, and that morphed into the Star-Morning mine.
Interestingly enough, those operations are within about a mile and a half of our Lucky Friday mine that has been operating now for 81 years this year.
I think the fact that we have continued to be a silver miner is probably one of the key things to know about Hecla and our history.
And as a result of that, and in addition to those properties, probably the most significant property in our history is a mine in Alaska called Greens Creek.
That mine started in 1987, so this is the 36th year for that mine, and we’ve been involved with it since the very beginning.
We weren’t originally the operator; one of the key milestones in our history was in 2008, we acquired the portion of Greens Creek that we didn’t own, which was 70%, from Rio Tinto, and we’ve been the operator ever since.
That mine has generated close to $2 billion of free cash flow over the last 25 years or so, and the future of it looks similar to the past.
So that’s been huge for us.
Then if you go forward to 2013, we acquired the gold asset that we have in Quebec, Casa Berardi.
That’s been a really good asset for us from the standpoint that it’s a gold asset, and it’s a gold asset that produces a dore rather than a concentrate.
The other mines we have produce concentrates, which means we are subject to the concentrate market.
So, the cost of producing the final product will vary.
It’s been good to have that dore-producing asset, and it’s been good that it’s a gold asset because it takes a little bit of the volatility out that we have with silver, and sometimes gold outperforms silver.
So, those are some of the key things, and the most recent is Keno Hill — that was an acquisition that we just recently made.”
Hecla Mining Company (NYSE:HL) operates a number of different mines, each with its unique economics and engineering.
“Greens Creek, the mine in Alaska, is the largest silver mine in the U.S.
It’s the 11th largest in the world. It produces roughly 10 million ounces of silver, which is kind of surprising that the 11th largest would only be 10 million ounces, but silver is hard to find and develop and mine, surprisingly.
It’s not in as many places as other metals might be, which is something that I didn’t realize when I first started working for the company.
But it is the 11th largest.
Certainly, of the primary silver mines, it’s probably the lowest cost, and it’s the lowest cost because of the amount of these other metals that it produces; they’re a byproduct to the silver.
And it’s been, as I mentioned, a great cash flow generator.
It has a mine life in front of it in excess of 10 years.
Of course, it’s had a mine life somewhere in excess of seven years since 1987, so it has replaced reserves consistently over the course of the last 35 years.
You don’t know what the extent of an underground mine life is, what its final life will be, for some time.
Do I expect it to operate for another 35 years?
It’s certainly possible.
But it’s clearly going to operate longer than the next decade.
We’re in the process of putting in the permitting requirements for a tailings facility that will take us well beyond our existing reserve life.
We’re highly confident that we’ll discover more and continue to see this mine operate into the future.
So that’s Greens Creek.
I mentioned Lucky Friday, that has had such a long history.
Lucky Friday in the past, on average, produced about 2.5 million ounces.
We’ve developed a new mining method that we recently received a patent for that will allow this mine to operate at a 5 million ounce per year clip, certainly over the next decade, and maybe two, and that really changes the economics of this mine.”
For a company with over 80 years of history, it’s interesting that Hecla Mining Company (NYSE:HL) is now entering a growth phase.
“We’ll end up producing an order of magnitude of around 14 million ounces of silver production. With that, it will put us in a position to maybe as much as 18 million ounces next year, and the year after maybe as much as 20 million ounces. So, nice growth.
In fact, I suspect that we’re the fastest growing established silver miner in the world. A company that doesn’t have any production, of course they’re growing faster, but for a company that’s in production, we’re probably the fastest growing…
Should I also talk about the exploration properties?
Because we have another 11 exploration and development properties, and we’re trying as best we can to advance those.
Sometimes they get more money, and some years they get less, to try to advance them.
But almost every one of these are in known mining districts with a strong history of production, and we’ve got large land packages and the prospectivity is extraordinary.
So we will continue to try to drive those.
One of the projects that we have which is closer to development is something called the Libby Exploration Project.
It’s also been known as Montanore.
We’ve renamed it Libby Exploration because we’re only getting permits to do the exploration with the infill drilling that we need to do in order to move this from a resource to reserves.
But this is part of a package of properties that represent about 3 billion pounds of copper and 300 million ounces of silver — so the third largest undeveloped copper asset in the U.S., and again, more silver in those deposits than what we have in our other existing operations.”
Get the complete investment picture of Hecla Mining Company (NYSE:HL) by reading the entire interview with CEO Phillips S. Baker, Jr. , exclusively in the Wall Street Transcript.
Dr. Randy Mills, CEO and co-founder, Elutia Inc. (NASDAQ:ELUT)
Dr. Randy Mills is co-founder of Elutia (NASDAQ: ELUT) and has served as CEO since June 2022.
Dr. Mills is an internationally recognized expert in regenerative medicine who led three companies through IPO, creating more than $1 billion in shareholder value.
He ran some of the nation’s most respected medical institutions, including the $5.5 billion California Institute for Regenerative Medicine and Be The Match.
He also serves as a Command Pilot for Angel Flight, transporting patients in remote locations to treatment facilities.
Dr. Mills holds a Ph.D. in Pharmaceutical Science and a B.S. in Microbiology from the University of Florida and completed an internship in Clinical Pathology at Shands Hospital at the University of Florida.
The CEO of Elutia (NASDAQ: ELUT) has a specific plan and the experience to execute upon it.
“I have a Ph.D. in drug discovery and development from the University of Florida.
More specifically, my research was centered on the creation of drug-eluting biologic constructs to address infections in orthopedic surgery.
I was a founder or CEO of three public companies, starting with a company called RTI Surgical, a company I helped start with Jamie Grooms at U.F., and was ultimately sold to a private equity firm for $440 million.
After 10 years of growing RTI, I went on to Osiris Therapeutics as CEO, took them public, and led a team that really created a commercial revolution in the use of biologics in orthopedics and wound care.
Osiris was eventually sold to Smith & Nephew for $660 million.
And so that was the first 20 years of my career.
From there, I went into public service and ran some of the country’s most-respected medical institutions, including the California Institute for Regenerative Medicine, or CIRM, and Be The Match, an organization that handles all bone marrow transplantation in the United States.
And it was during that time that I co-founded Elutia with Kevin Rakin.
I came in as CEO last year, mostly because we saw an opportunity to create another revolution in the industry, by returning to where I started my career with drug-eluting biologics.
And I think this is our biggest opportunity yet…
I believe in pretty serious market discipline.
We won’t take our [Elutia (NASDAQ: ELUT)] technology into a market where we don’t see it offering a pretty clear and obvious value proposition, to either the patient, the physician, or the payor.
In the case of CanGarooRM, Medtronic has actually done a beautiful job of demonstrating the market demand for a drug-eluting envelope in the pacemaker and internal defibrillator space.
We estimate that they have about $300 million in sales of their antibiotic-eluting pouch.
They’re the only company with an antibiotic-eluting pouch on the market right now in the space.
But their pouch is made of a synthetic polymer that dissolves and degrades in the body over time.
Our data demonstrates that if you make that pouch out of a natural biologic material instead, it will remodel into the patient’s own healthy tissue.
That leads to less scar tissue being formed around the device.
It makes things like pacemaker change-outs easier for the patient and the physician.
We also have a lot of market data that shows that while physicians like the idea of using an antibiotic pouch, for the remodeling benefits I mentioned, they would much rather use a pouch made from a biological material versus one made from a synthetic material that dissolves in the body.
We view this market dynamic as highly advantageous for us.
There are currently only four primary players in the pacemaker industry.
Medtronic has about 35% of that market and offers its own antibiotic envelope.
We think the addressable market for antibiotic-eluting envelopes is about $600 million in the U.S. alone with the majority of that untapped.
We plan to introduce CanGarooRM into this market, not as a follow-on or as a me-too, but as a superior product.
We estimate that we will essentially have the remaining 65% of the U.S. market as white space without any direct competition.”
The CEO of Elutia (NASDAQ: ELUT) emphasizes the superiority of his company’s proprietary technology over that of Medtronics (NYSE:MED).
“Our proprietary biomaterials have three key advantages.
First, they’re excellent at device stabilization.
For example, with a pacemaker being placed into someone’s chest wall, oftentimes that pacemaker will migrate down the patient’s chest as a result of gravity and motion, and that can actually cause tension and pull on the leads and actually dislodge them from where they’re supposed to be making contact in the heart.
And that can lead to device failure.
The first thing that these biomatrices are able to do is help stabilize devices.
Whether that be a pacemaker or whether that be a breast implant, patients in either case are at risk of suffering from complications of device migration, and our products can prevent that.
The second has to do with the anti-inflammatory properties of using a biological material versus a synthetic.
Reducing inflammation ultimately leads to less fibrosis or scar tissue formation.
Again, whether it’s a pacemaker or it’s a breast implant, pathologic fibrosis can actually have pretty serious consequences for the patient.
In breast reconstruction, this leads to something called capsular contracture, which oftentimes will require an additional surgery to explant the device.
There’s also capsular formation around the pacemaker, which makes change-out of the pacemaker very difficult and increases the chance of infection.
So, reducing inflammation and fibrosis is the second key benefit.
The third is preventing device erosion.
If you’ve ever seen an older patient with a pacemaker that has really thin skin, where the pacemaker rubs up against the patient’s skin, they actually have a pretty significant chance of eroding through and being expelled.
Putting a natural biological pouch around these devices helps decrease the chance of erosion and significantly increases patient comfort.”
Elutia (NASDAQ: ELUT) has some important near term milestones.
“Our R&D teams have been developing this drug-eluting technology for some time now.
The CanGarooRM line for pacemaker protection is by far our most advanced.
In fact, we actually have a drug-eluting version of it on the market in Europe and have had that since 2021.
In the U.S. though, we will file for market clearance of CanGarooRM with the FDA this quarter and we hope to have that review complete and have a favorable decision within the first half of 2024.
Approval of CanGarooRM — and it’s named RM because it slowly releases the powerful antibiotics rifampin and minocycline — would give us a launch of what we would expect to be our first blockbuster product, with sales reaching potentially into the hundreds of millions of dollars.
Behind that, we have SimpliDermRM for use in breast reconstruction.
I think it’s probably worth pointing out that both of these drug-eluting versions are actually being built on the back of already successful products that are on the market and generating sales of over $25 million annually and are growing without the drug-eluting version in excess of 20%.
We really see this as a good-to-great story.”
Read the complete interview with Dr. Randy Mills, co-founder and CEO of Elutia (NASDAQ: ELUT), exclusively in the Wall Street Transcript.
Alex Letko, portfolio manager and partner at Letko, Brosseau & Associates
Alex Letko, CFA, is a portfolio manager and partner at Letko, Brosseau & Associates Inc.
Prior to joining the firm in 2018, he worked in equity research at Barclays in New York, where he covered the oil and gas industry from 2015 to 2018.
Previously, he was an associate with the economic research team at Evercore ISI in New York (2013–2015).
He is a graduate of Columbia Business School University where he received an MBA, University College Dublin, where he received a master’s degree in economics, and McGill University, where he also received an economics degree.
Alex Letko largely endorses Sabesp (NYSE:SBS), a Brazilian based company.
“One of those companies is Sabesp (NYSE:SBS).
They’re about the third largest sanitation company in the world by revenue and account for about 30% of investments in basic sanitation in Brazil. So we’re talking about water treatment, sewage treatment, and similar services.
They operate as part of a regulated asset base framework where your revenues and your profits are visible over the next several years until the next rate base increase.
As such, there’s visibility in terms of earnings growth, providing long term upside, as well as sustainability of earnings through the cycle, providing downside protection.
Brazil has tremendously lagged behind the rest of the world in providing basic water treatment services, and so the government has made this area a major priority.
A company like Sabesp (NYSE:SBS) will benefit from that policy thrust and thus plays a very important role in bringing what are essential services that we may take for granted in the developed world to the people of Brazil.
We think the company can grow their earnings around 18% per year between 2023 to 2027, while currently offering a 2.5% yield and trading at just 10x p/e.
So this is a great example of an opportunity in emerging markets where you can purchase growth, quality, sustainability of earnings, and a good dividend for an incredibly reasonable valuation.
Really, if you take a step back, we like to think of emerging markets as an area where there are huge unmet needs. Needs such as basic sanitation services, clean energy needs, access to affordable health care, etc.
And there are companies that are working to address those unmet needs. It therefore stands to reason that given the scale of these needs, the market opportunities for these companies are enormous.
From an investing perspective, chances are that if you cast a very wide net and construct your portfolio from the bottom up with high-quality companies that have good growth prospects, you will naturally pick up companies that are addressing these needs — because that’s where the opportunities lie.
And so those are the companies investors can expect to find in our EM portfolio — companies like Sabesp (NYSE:SBS).”
Sabesp (NYSE:SBS) is not the only top pick identified by Alex Letko in this interview. A China based drug distributor also earns his accolades.
“Sinopharm (OTCMKTS:SHTDY) is the number one drug distributor in China, with about 20% of the market. They’re also the number one drug retailer.
This company speaks to a large unmet need — access to high quality consumer health care products and services.
And so, in a country that probably still has ground to make up in terms of access to certain health care services, there’s clearly tremendous growth potential there.
That is reflected in Sinofarm’s numbers. We think revenue and EPS can continue to grow at over 10% per year. But this is not reflected in valuation, as they pay a very strong 5% dividend and trade at around 6x p/e.
The two examples of companies that I just gave you [Sabesp (NYSE:SBS) and Sinopharm (OTCMKTS:SHTDY)] are very representative of those that we have in the portfolio.
We’re looking for high-quality businesses with moats in their industries and good growth prospects. At the same time, we’re value investors, so we only pay reasonable valuations for those attributes.
Because we’re getting companies with exposure to growth, our portfolio has tremendous leverage to the upside over the long term.
But thanks to the emphasis on high quality, sustainability of earnings through the cycle, and reasonable valuations, our portfolio also offers terrific downside protection amid periods of market volatility.
This has allowed us to significantly outperform the index over a long period of time.
… it’s very important not to paint these markets in broad brushstrokes. It’s very important to understand at an industry and company level what is going on.
We have a team of 22 analysts which is divided across industry lines.
So someone covering the retail sector in Canada will also cover the retail sectors in Brazil and China, etc. that makes our analysts experts in their domains and gives them a global perspective when assessing the impact of something like onshoring.
This allows them to see that that’s something that will impact some geographies more than others, and that certain emerging markets may even be able to benefit.
In the end, you must be knowledgeable about the individual industry on a global level and you have to do the work. That is what we try to do.”
Get more of these top picks from Alex Letko and his team and learn more about the stock picking process by reading the entire interview, exclusively in the Wall Street Transcript.
Sean Dunlop, CFA, equity analyst, Morningstar Research
Domino’s Pizza (NYSE:DPZ) and Papa John’s (NASDAQ:PZZA) are two of the largest pizza restaurant brands in America.
The pandemic created chaos in the convenience food segment and now the stage is set for the winners and losers to be sorted out.
Sean Dunlop, CFA, is an equity analyst on the consumer team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.
He covers restaurants and e-commerce stocks.
His detailed analysis uncovers the value difference between Domino’s Pizza (NYSE:DPZ) and Papa John’s (NASDAQ:PZZA).
Before joining Morningstar in 2020, Dunlop worked with All Nations Sports Academy, a small nonprofit in the Houston area.
Dunlop holds a bachelor’s degree in business economics and Spanish from Wheaton College.
The background to Sean Dunlop’s Domino’s Pizza (NYSE:DPZ) vs. Papa John’s (NASDAQ:PZZA) pick originates the in restaurant apocalypse in the COVID 19 pandemic.
“It’s certainly been an interesting couple of years to be a restaurant analyst.
Rewind to March 2020, and it was effectively impossible to set foot in a restaurant dining room.
So we saw unprecedented levels of comparable store sales declines and a lot of companies that were reporting bankruptcy.
From a small business perspective, you had a lot of independent restaurants that were tapping PPP loans to stay afloat.
We probably lost somewhere between 10% and 15% of restaurant industry capacity by units.
It was a really brutal time for the industry, as it was for a lot of other industries and for consumers in general.
Since then, we’ve seen a furious rebound.
In 2021, we saw a lot of pent-up demand and revenge spending driving pretty much a full recovery in sales.
A lot of companies like Domino’s Pizza (NYSE:DPZ) were posting crazy comparable store sales figures in the mid-teens, and restaurants were posting commensurately higher operating profit margins despite a lot of brewing inflationary pressure in things like restaurant equipment, labor and food costs.
Fast forward to 2022, and we saw the costs catch up to and exceed outsized industry sales growth.
Restaurant multiples compressed, and the industry sold off hard.
Now, I would say we are somewhere in between.
Sales growth looks strong as you stack it back to pre-COVID, to 2019 levels.
Restaurant profitability has mostly, but not fully, recovered.
And while consumers continue to spend healthily, there are increasingly some concerns about price sensitivity and declining industry traffic, which remains quite a bit lower than pre-pandemic.”
So which is the stock to buy, Domino’s Pizza (NYSE:DPZ) vs. Papa John’s (NASDAQ:PZZA)?
“It’s a good question.
I would say it depends on where you’re standing.
For a lot of the large publicly traded restaurants, online ordering has been largely incremental, and it has increased the number of transactions that a store can service, given that you don’t actually have to seat those customers.
In some ways, those orders have been responsible, as you think about the delivery channel specifically, for the lion’s share of industry growth, and call it the burger category, or call it pizza or wings.
They do tend to be incremental.
They do also tend to be higher cost.
The net effect is probably positive.
But maybe not as positive as people would think.
The downside is that the size of the proverbial pie is relatively fixed.
So if you’ve got companies like Chipotle (NYSE:CMG) that now see 40% to 45% of sales come through digital channels, or companies like Yum! Brands (NYSE:YUM), which owns KFC, Taco Bell, and Pizza Hut, which is now generating 45% of system wide sales through those digital channels, those sales are coming from somewhere else.
And we have mentioned that industry traffic is down.
The number of occasions served by the restaurant industry are down relative to pre-pandemic.
In many cases, that means that smaller operators who are typically paying higher commission costs and who may be a little bit more reluctant to hop on a DoorDash or Uber Eats or Grubhub, are bearing those costs disproportionately.
So it’s a nuanced question, it depends on where you’re standing, but for the largest operators, it tends to be a net positive.”
The final answer between Domino’s Pizza (NYSE:DPZ) vs. Papa John’s (NASDAQ:PZZA) is Domino’s Pizza (NYSE:DPZ).
“I would point out that Domino’s Pizza (NYSE:DPZ) has had a particularly interesting narrative, as you look back to COVID.
They saw some of the best comparable store sales growth in the company’s history strung together.
At one point, I believe, more than 10 years of positive comparable store sales growth in the United States and more than 100 quarters of positive comparable store sales growth in international markets since the firm’s 2009 turnaround up until sort of late 2021 or early 2022, when the narrative reversed.
Obviously, pizza lent itself very well to a lockdown scenario where it could be contactless, where consumers were already pretty familiar with ordering that category through digital channels.
So, brands like Domino’s Pizza (NYSE:DPZ) and Papa John’s (NASDAQ:PZZA) benefited disproportionately.
As those volumes started to normalize, as consumers could go back to dining and restaurants, as we’ve seen sort of downtown traffic normalize, Domino’s Pizza (NYSE:DPZ) sold off very hard from a peak in the neighborhood of $560 per share to a trough in the neighborhood of $288 or $290.
And then, as the firm inked its first ever development agreement with Uber Eats, with a delivery aggregator, shares shot back up and are trading kind of in that $370, $380 range, pretty close to our fair value estimate. So that’s been an interesting narrative.
We do for the first time see some value in the publicly traded companies that we cover. Starbucks, McDonald’s and Yum! Brands are particularly attractive.
They trade at about 12%, 10%, and 10% discounts to our intrinsic valuations respectively. But there are interesting idiosyncratic concerns to consider for each.
McDonald’s, for instance, is navigating a period of pretty outsized turmoil with its franchisees, particularly in light of a recent California agreement that’s going to see hourly wages tick up to $20 per hour in that market.
Yum! Brands is having to navigate sort of a domestic turnaround of its Pizza Hut and KFC businesses.
Starbucks is dealing with increasing competitive pressure in the quickly growing Chinese specialty coffee market and also navigating what’s been a pretty turbulent geopolitical and economic environment in that region, although I think investors tend to overestimate the actual contribution of China to Starbucks’ consolidated operations, it’s really only about 10% of total sales today and a smaller component of profitability.
So, it’s a tricky question to answer, but that’s kind of what’s happening in the restaurant space right now.”
Get the complete picture on Domino’s Pizza (NYSE:DPZ) as well as a range of other restaurant stocks by reading the entire interview, exclusively in the Wall Street Transcript.
Scott Fortune, Managing Director, Senior Research Analyst at ROTH MKM,
Canopy Growth (NASDAQ:CGC) and Tilray (NASDAQ:TLRY) are the picks of most of the top Cannabis Stock equity analysts and portfolio managers.
Scott Fortune is a Managing Director, Senior Research Analyst at ROTH MKM, specializing in AgTech and the Consumer Health and Wellness sector.
He brings 20 years of experience as an analyst and portfolio manager to his role.
Prior to joining ROTH MKM, he served as an Analyst and Portfolio Manager at Magee Thomson Investment Partners, where he covered micro, small, and large-cap funds.
He also gained experience at Duncan Hurst Capital Management.
Prior to his finance career, Mr. Fortune was Captain of the 1992 USA Volleyball Olympic Team and competed in three Olympics.
Mr. Fortune holds a B.A. in Economics from Stanford University and an MBA from the University of San Diego.
“To put it in perspective, little did we think that when we started coverage in early 2018 and were part of the early Tilray (NASDAQ:TLRY) IPO, that over five years later, there would be no U.S. federal cannabis policy reform movement.
But we believe this is still a U.S. state legalization story until eventual full U.S. legalization and a mature $100 billion legal cannabis industry similar to alcohol comes about.
The cannabis sector is a global industry with many different subsectors, but for now, the focus includes the U.S. multi-state operators, which are called MSOs, cannabis ancillary companies, which include equipment and service suppliers, products and distributors, CannaTech, what we call canna technology, canna specialty finance and REIT firms and specialty retail firms.
There’s also the Canadian LPs, which include mainly global cannabis companies, and hemp-derived CBD and cannabinoid medical pharma companies, as all part of the subsectors that we include in our coverage.
And while many of the names and the coverage can be listed on U.S. exchanges, U.S. plant-touching operators, retailers and growers still trade on secondary exchanges of the CSE and the OTC, limiting meaningful access to institutional capital going forward right now.
Currently, our coverage consists of cannabis companies with market caps primarily below the $750 million market cap level. But a lot of focus is on the top MSOs in the U.S. and the Canadian LPs, whose market caps are well above the $1 billion level.”
Cannabis stocks are waiting for the regulatory changes that will unleash their true potential.
“From a historical perspective, until this September, it has been an extremely challenging environment for the cannabis industry overall. In fact, over the past two and a half years — we keep marking the days — 931 days — since February 2021 highs. The industry’s challenges have been primarily due to regulations, onerous taxes, and pricing compression.
During the first half of 2023, shares in all segments within cannabis were off on average about 20%-plus, while compared to the S&P, it was up 17% and the Russell 2000 up 8% in the first half of 2023. There were a few cannabis names up in the first half, but primarily most were off significantly.
And there are some that have done well in the year, including names we don’t cover, like Glass House Brands (OTCMKTS:GLASF), which is a leading California greenhouse grower, and the multi-state operator TerrAscend (OTCMKTS:TSNDF) has had its recent shares uplisted on the Toronto Stock Exchange.
But overall, it’s been a difficult first half 2023, and that is following on the 2022 performance and returns, which saw the average cannabis stocks off about 65%.
From a historical perspective, this newly legal emerging industry of U.S. cannabis started in 2014. But it wasn’t really until 2018 when Canada legalized adult-use and more U.S. states began to add medical cannabis programs. And now, currently, there are 23 U.S. states that have converted to adult-use legal states.
Unfortunately, stock performance and returns to date in the industry have been dictated by legislation movement, regulatory easing, and strategic M&A, which all have been slow to occur.
We saw a significant run-up in the space in 2018 after Constellation Brands (NYSE:STZ) invested $5 billion with Canadian LP Canopy Growth (NASDAQ:CGC), and ahead of the adult-use legalization sales in Canada.
So, in fall of 2018, stock performance was very positive, but these have all been met with some news events driven by slow regulatory rollouts and oversupply fundamentals.
The next momentum, sentiment, and share appreciation we saw came in mid-2020 up until February 2021, when the Democrats took control of the executive and Congress branches.
Investors expected U.S. legalization, or at least reform of cannabis policy, to move forward. But that hasn’t happened and we’ve been stuck.
So the status quo on federal policy change has remained in place and challenging fundamentals driven by these slow state rollouts and price compression has resulted basically in an 80% drawdown for public cannabis stocks since the highs in early February 2021.
But the long-term catalysts for the industry remain in place, and that brings us to today’s new U.S. cannabis regulatory environment.”
Jason Wilson, Cannabis Research and Banking Expert, ETF Managers Group
Jason Wilson is a Cannabis Research and Banking Expert at ETF Managers Group, LLC.
With over 15 years of experience in the asset management, finance and structured product space, Mr. Wilson has a track record of bringing hard-to-access asset classes to market.
He has held leadership and senior positions at several leading financial institutions.
Most recently, Mr. Wilson was Senior Vice President at INFOR Financial Inc.
INFOR is a leading boutique investment bank based in Toronto, Canada, that has worked in connection with a number of companies in the legal cannabis industry, including acting as adviser to Canopy Growth (NASDAQ:CGC) in connection with entering into its strategic relationship with Constellation Brands (NYSE:STZ).
He also worked at the investment banking divisions of Société Générale, France’s third-largest bank, and at CIBC, one of the five largest banks in Canada.
While at Société Générale and CIBC, Mr. Wilson provided asset managers and financial institutions with various capital raising, financing and risk mitigation solutions and strategies.
Mr. Wilson has an LLB from the University of Western Ontario.
Prior to completing his university studies, Mr. Wilson was a member of the Canadian Forces and is a recipient of the Gulf of Kuwait Medal, awarded for his engagement in direct combat during the Gulf War in 1991.
“Canada is the home of the global cannabis players.
And because it’s federally legal in Canada and those companies tend to operate in other legal markets in Europe, they’re able to list not just on the Toronto Stock Exchange, but they’re also able to cross-list on NASDAQ or the NYSE.
So from a visibility perspective, companies like Canopy Growth (NASDAQ:CGC), Tilray (NASDAQ:TLRY), Cronos (NASDAQ:CRON), etc., these companies have a relatively public profile.
They’ve also tended to receive investment from institutional investors, including alcohol beverage companies and tobacco companies that are looking to get into the cannabis space.
But from a pure market opportunity, and where we’re seeing the most cannabis-related revenue, it’s in the U.S. So even though cannabis is federally illegal in the United States, it’s by far the largest individual cannabis market.
And over 75% of the U.S. population is living in states where cannabis is legal at a state level, so there’s significant revenues being generated in the U.S.
So notwithstanding the legalities of it, the largest cannabis companies are domiciled in the U.S.
It just happens to be that they don’t trade on primary exchanges.
They trade over-the-counter in the U.S. because they’re listed on a tertiary exchange in Canada, the Canadian Securities Exchange.
And they have limited access to banking.
So if you look at an individual market, the largest opportunity is in the U.S. market.”
Get more detail on the cannabis stock sector by reading the complete interviews, exclusively in the Wall Street Transcript.
