Uncategorized @en-CA

Taiwan Semiconductor (TSM)

In this week’s content analysis, we’ll be discussing Taiwan Semiconductor (NYSE: TSM) Download . The company is the largest dedicated chip producer (with around 54.5% of market share ) with a market value of $194B , in front of its main competitors such as Intel (INTC) and NVIDIA (NVDA). Its high-quality technology products allow the firm to generate solid operating margins of around 40%. The company is most commonly known for the fabrication of the Apple “A Chip” which can be found on all iPhone devices. Taiwan Semiconductor is currently manufacturing the A11 Chip, the newest model, for the iPhone 8, iPhone 8 Plus and iPhone X. The company also holds within its client roster (around 450 in total) some of the world’s most powerful semiconductor companies such as Qualcomm Inc., Nvidia Corp., Media Tek Inc., among others. Given its high level of client diversification, TSM sets itself apart from its competitors.

Recently, the CEO and founder of the company Morris Chang announced his plans to retire from his position as CEO in Jun ’18. Long time Co-CEO of TSM, C.C. Wei, is now to become the sole CEO of the company. Such news could have caused slight uncertainty within the market, however, the stock price on the day the news release increased by 1.85%. This shows how confident are Investors and Clients about the management’s capacity to remain on the strong growth path it’s been for the last couple of years. TSM’s stock has gained 22.3% YTD and has more than doubled in price since Feb ‘14.

Now, taking a deeper insight into the fundamentals, we can see the Intrinsic Value (IV) of the company has presented a bullish tendency over the last 5 years and currently sits at $39.56. Over the last 12 months, TSM’s intrinsic value grew by 32.54%. The stock is currently trading at a slight premium, the P/IV ratio being at 1.02. Even though this multiple doesn’t seem very attractive, it could represent a nice opportunity given how quickly and regularly the intrinsic value has grown in the past.

The return on capital currently stands at 24.5%, which is high. Even more impressive is the fact that it has been extremely stable over the past 5 years, hovering between 23% and 28%. And, there is no sign of slowing down: since 2013, the invested capital has grown at an average rate of 15% per year, and last year’s growth was the highest, at 16.4%. These capital investments have paid off quickly: over the same period, the NOPAT has grown at an average rate of 18% per year, which is even higher than the invested capital growth itself.

Given this very high economic performance and stability, the current Future Growth Value (FGV) premium of 35% seems reasonable: The Current Operating Value (COV) increased by 34.96% in the last 12 months. Therefore, the current premium reflects expectations of the equivalent of +/- 1 year of growth at the same growth rate.

TSM’s total Economic Value Added (EVA) is currently at an all-time high, at $7.8B, and it has grown very linearly in the past 5 years with no large and sudden increase/decrease whatsoever.

From a pure accounting performance perspective, revenues and earnings growth for TSM have also remained strong during the last 5 years. Earnings have grown 82.3% since Jun ‘13 with a yearly average growth rate of 18.58%. On the other hand, revenues increased by 20% over the last 12 months, and the average revenue growth rate has been of 14% during the last 5 years. This was partly due to the high demand of mobile devices, more specifically the iPhone 7. During the 2016 Fiscal Year, Apple sold around 211.88 million devices  from which TSM received around $10 USD per device sold.  The current dividend yield is attractive at 2.95%, and the 5-year average dividend growth rate has been of 30% per year. As a bonus, the current P/E multiple is only of 17.5, way better than the average S&P500 P/E of 25.

In Summary:

– Taiwan Semiconductor is the leader in its industry.

– Analysts project a 11.8% earnings growth in the upcoming year.

– The dividend yield is currently of 2.95%, and the company should continue to increase the dividend in the coming years.

– TSM’s revenue growth and strength is somewhat correlated to the iPhone demand. The newest device release will set the tone for the company’s short-term revenue growth. Apple as a customer for TSM, represents around 10% – 12% of the total yearly sales for the company.

The semiconductor industry is evolving with new industries such as Artificial Intelligence, driverless cars and big data taking a lot of attention. TSM seeks to adapt and penetrate these new industries, given that the smartphone industry hasn’t presented any noteworthy innovations during the last couple of years. Even though smartphone sales continue growing, the growth rates are much smaller: a total of 1.5 billion smartphone devices were sold in 2016, which represents a 5% increase compared to 2015. The growth rate was of 14% in 2015 and 28% in 2014. It is clear that there is a slowdown, and the general consensus is that the smartphone industry has matured. It now seems to be that not only TSM, but the entire industry is focusing on “the next big thing”. We believe Taiwan Semiconductor is bound to benefit from the demand of chips related to AI, which require sophisticated computing. This is what TSM does best.

Blog post written by Diego Sanchez (intern), under supervision of Jean-Didier L.

Here is a more detailed comparative analysis of Taiwan Semiconductor and its peers, where for each indicator “1” = First relative position and “6” = Last relative position.

Kroger – September ’17 update

In today’s content analysis, we are revisiting Kroger (KR), which we analyzed a little over a year ago. Since the last article, Kroger’s stock price lost about 40% of its value. Much of the market’s reaction can be explained by the deal announced earlier this year between Amazon (AMZN) and Whole Foods Market (-30% since then). The biggest fear is that Amazon and Whole Foods will put a LOT of pressure on prices which could hurt Kroger’s margins and market share. Given Kroger’s proximity with its customers thanks to its 2,800 stores across the United States, we do not see Amazon and Whole Foods replace America’s second largest grocer anytime soon. And as far as pricing fears, a recent survey notes that the average prices in Whole Foods stores are still 50% higher than those in Kroger and Wal-Mart. (Link to the article)

Kroger’s Price/Intrinsic Value ratio (0.43) has never been so low in at least 5 years. Even when adjusting the forecasts in the intrinsic value calculator to project a very pessimistic scenario, we still have an IV hovering around $25, which represents a 25% upside potential. The NOPAT has slightly decreased on a trailing 12 months basis, but the analysts’ earnings growth forecasts are generally positive or neutral, so we can expect the NOPAT to stabilize or bounce back in the coming quarters. Some help could come from Kroger’s latest initiative, Kitchen 1883, which will open a first location later this year. Kitchen 1883 will be sit-down lunch, dinner and weekend brunch restaurants to attract customers on services and experiences. 

The Future Growth Value, currently of -18%, also tells us the company is trading at a discount, while the Current Operating Value is still increasing. Kroger’s P/E Ratio of 12.5 and P/BV Ratio of 1.6 are also very conservative compared to its peers.

Kroger’s long-term EVA trend is slightly positive, close to horizontal, which is very normal for a mature company within a defensive sector.  Dividend investors will appreciate the fact that the yield is currently at a 5-year high, around 2.5%, and the dividend growth rate is also very appealing. The average growth rate has been of 13% per year over the past 5 years, and there’s plenty of room for more increases; the payout ratio is only of 30%, and the free cash-flows are very strong. Share buybacks are also common with Kroger; the company bought back an average of 5% per year of its outstanding shares over the past 5 years. 

For value and dividend investors, Kroger could be an interesting investment opportunity at these levels. It’s market share of 9% is the second largest after Wal-Mart, and Amazon/Whole Foods still need to do a lot of work to steal Krogers’ customers. 

In summary: 

The second largest U.S. grocer is currently trading at low multiples and a forward p/e of 10.5.

The company’s fundamentals are strong and are not expected to collapse.

The 40% price drop over the past year is mainly due to the fear of Amazon and Whole Foods Market. We believe this could be an overreaction. 

The dividend yield is currently “high”, the company has been increasing its dividend and will probably continue to do so given its financial strength and free cash-flows.

Patience is required – the Amazophobia has proven difficult to overturn. 

Blog post written by Diego Sanchez (intern), under supervision of Jean-Didier L. 

Exco Technologies (XTC)

In today’s content analysis, we discuss about Exco Technologies (XTC), a Canadian mid cap that operates in three main segments: Extrusion Tooling, automobile, and die-cast.  Download

Its SPscore of 73% is the second best on the Canadian market, and almost all the indicators we consider in our evaluation process are positive.  The return on capital is high, at 15.1%, and the long-term trend is positive. The NOPAT has also been growing at an impressive pace of 25% per year in the past 5 years, so is the invested capital, which shows how well management can identify the best investment opportunities for shareholders.

As for valuation, the stock is currently trading well below its intrinsic value, at a 0.53 P/IV ratio, reflecting a potential upside of close to 90%. The discount is even more interesting considering that it’s the largest observed over the past 5 years. The intrinsic value is also increasing very steadily since early 2015. The Future Growth Value (FGV) of -33% tells us the enterprise value is smaller than the current operating value, even though the latter is growing nicely. Other more traditional ratios also suggest the multiples are very conservative: the price-to-earnings is at 9.7, and the price-to-book is at 1.57.

The economic performance is also good and getting even better. The EVA is extremely stable, its growth rate being very linear and predictable. It confirms the company can create more and more wealth for its shareholders over time thanks to wise capital deployment.

XTC’s accounting performance is also solid. The revenues have been growing at a fast pace over the past 5 years, just like the earnings per share. The company regularly increases its dividend, at an average rate of 16% per year. The dividend yield of 2.8% is also appealing, especially for a mid cap and knowing it’s not at risk. The payout is below 25%, which is very conservative, and the company generates positive free cash-flows. The balance sheet is robust, and leverage is low with a Debt/Equity ratio of 13%.

William Sonoma (WSM)

In today’s content analysis, we discuss about Williams-Sonoma (WSM), a multichannel retailer specialized in high-end products for the home.  Download

After trading at high premiums during almost five years, WSM’s stock fell under its intrinsic value at the end of 2016. The return on capital has always been very stable, around 15%, and the NOPAT is still growing along with the invested capital.

As for valuation, today’s P/IV ratio of 0.86 indicates a potential price appreciation of around 17% and is at its most attracting level in 5 years. The Future Growth Value (FGV) premium of 9% is very acceptable when considering the Current Operating Value (COV) growth over the last 5 years. The COV has been growing at an average pace of 16.5% per year, a higher number than the expected growth rate imbedded in the current FGV premium.

The EVA has also been growing at a very stable and linear pace since January 2013, demonstrating the management’s capacity in allocating intelligently its capital to increase the wealth generated for its shareholders.

The accounting performance is also solid. The revenues keep increasing, although at a lower rate than before. The free cash flows are and have always been high and positive, which allows the management to continually increase the dividends, buyback shares (around 2.7% of shares outstanding per year) and invest in its capital, all this without issuing debt.


Foot Locker (FL)

Dans l’analyse de contenu d’aujourd’hui, nous discutons de la compagnie Foot Locker (FL), qui a annoncé ses résultats du 3e trimestre vendredi dernier. FL se retrouve présentement parmi les meilleures opportunités d’achat aux États-Unis dans le secteur de la consommation discrétionnaire.  Download

Grâce aux derniers résultats, la valeur intrinsèque est passée de 89.50$ à 97$, soit une hausse d’environ 8.5%. Ceci a été causé par une amélioration de la performance économique, le rendement sur capital étant aujourd’hui à son niveau le plus élevé en 5 ans. Au cours des 5 dernières années, Foot Locker n’a jamais cessé d’investir dans son capital, et ces investissements ont toujours eu un effet bénéfique sur le NOPAT. L’EVA total généré par l’entreprise ne cesse également de monter depuis janvier 2015.

Les multiples auxquels se négocient les actions de FL sont également attrayants. Le ratio P/VI est de 0.75, reflétant un potentiel d’appréciation de plus de 30%. Cet écart entre le prix et la valeur intrinsèque est le plus élevé observé pour ce titre lors des 5 dernières années. La valeur de croissance future (FGV) de 7% nous indique elle aussi que le prix actuel de l’action est plus-que-raisonnable. Cette prime de 7% est faible lorsque l’on considère que la valeur des opérations courantes (COV) a augmenté à des taux beaucoup plus élevés (15% lors des 12 derniers mois) lors des 3 dernières années.

La performance comptable présente aussi tous les attributs que nous recherchons. Les revenus, les profits d’opération et le bénéfice par action augmentent constamment à chaque année. En plus, la compagnie augmente régulièrement son dividende. Le taux de croissance annuel moyen a été de 11% par année lors des 5 dernières années. Foot Locker dégage des free cash-flow positifs, et c’est d’ailleurs ce qui lui a permis de racheter environ 3% par année de ses actions en circulation tout en réduisant sa dette long terme.

XPO Logistics Inc. (XPO)

In today’s content analysis, we discuss XPO Logistics Inc. (NYSE: XPO), one of the 10 largest global logistics companies based in the US. Even though XPO is considerably smaller than some of the leaders in the industry such as FedEx or UPS, they have been in full growth mode in the past couple of years, increasing their revenues from $150M in 2011 to an expected revenue of $15.5B for the full year 2016. This represents an annualized growth rate of 192% per year over the past 5 years.  Download

Continuing with the economic performance, XPO’s performance spread and EPI have constantly increased in the last 3 years. Even though they’re not that high (0.8% and 1.11 respectively), the improving trend is definitely positive. The EVA went from negative to positive in 2014 and hasn’t stopped increasing since then.

This overall performance improvement positively affected the intrinsic value, which now sits above the stock price for the first time. With the stock trading around $34.00 and the intrinsic value sitting around $65.00, the potential upside is of more than 90%. The future growth value sends the same message; for the first time, the market price doesn’t reflect the full company’s value.

While issuing more shares and generating negative free cash-flows is usually seen as bad, it is not the case for XPO. The company has been growing tremendously over the past years and still has major growth plans in the books; the best way to reward investors is to invest all the cash they have available to fuel their growth.

XPO Logistics has been named the fastest-growing company in Fortune 500. Here is an overview of their recent growth activities. XPO made the acquisition of Con-way Inc. on 2015, which made them the second largest provider of less-than-truckload (LTL) services in North America, and helped them expand their global contract logistics platform. Other acquisitions by XPO include the ones of Norbert Dentressangle SA, Bridge Terminal Transport Services, Inc., and UX Specialized Logistics.

XPO Logistics Inc. (NYSE: XPO) is 1 of the 8 stocks featured in the article “How major U.S. delivery companies stack up for investors” that we wrote for The Globe and Mail.

This blog post has been written by Sebastian Carrillo, intern, under Jean-Didier Lapointe’s supervision.

Wells Fargo (WFC)

Dans l’analyse de contenu d’aujourd’hui, nous discutons d’un sujet plutôt délicat : le scandale entourant Wells Fargo & Co (WFC), une des plus grandes banques des États-Unis. Wells Fargo a été accusé de pratiques de ventes illégales, incluant l’ouverture de 2 millions de comptes fictifs. Certains employés auraient également créé des fausses adresses courriel pour enrôler des clients à leur insu, ou bien pour créer des clients fictifs, pour atteindre leurs quotas. Wells Fargo n’a pas admis ni réfuté les allégations mais a accepté de payer une amende de 185M$USD et de rendre une ordonnance de consentement. 5,300 employés ont par le fait même été congédiés. 

Depuis l’ouverture des marchés du lundi 20 septembre, moment où le scandale a atteint un sommet médiatique, les actions de WFC ont perdu environ 2.1%, alors que l’indice Dow Jones US Financials n’a presque pas bougé. Lorsqu’une compagnie est confrontée à un scandale de la sorte, il est important pour les investisseurs d’être en mesure d’évaluer le ratio rendement-risque pour prendre la meilleure décision. Malgré que plusieurs facteurs externes et imprévisibles puissent affecter positivement ou négativement l’action de WFC dans les prochains jours, voici quelques observations purement basées sur l’analyse des données historiques.

Puisqu’aucune donnée fondamentale n’a changé depuis le dernier rapport trimestriel, le SPscore reste élevé, à 69%. Notons qu’uniquement basé sur les informations publiques disponibles aujourd’hui, le fondamental de WFC ne devrait pas être significativement affecté. La valeur intrinsèque a une belle tendance haussière à long terme, et suite à la chute du prix de l’action depuis le début septembre, elle se retrouve perchée au-dessus de l’action, aux alentours de 54$. L’écart entre la valeur intrinsèque et le prix s’est accentué, et il indique aujourd’hui un escompte d’environ 20%. Cet écart est d’autant plus intéressant puisque le ratio P/VI moyen 5 ans s’élève à 1.02, soit une surévaluation de 2%. La valeur de croissance future (FGV) expose la même anomalie par rapport aux multiples passés : elle est de -1.7% (escompte), alors que la moyenne 5 ans s’élève à 14% (prime). 

Pour ceux capables de tolérer la volatilité et les risques à court terme tout en étant assuré que le scandale n’aura pas d’impact significatif sur les résultats et la réputation de la banque à long terme, il apparaît mathématiquement logique de commencer à bâtir une position sur le titre. Par contre, pour ceux voulant minimiser les risques de pertes à court terme, il serait plus prudent d’attendre un dénouement définitif et d’acheter le titre seulement lorsqu’il reprendra une tendance haussière, même si cela implique probablement de manquer la hausse initiale. 

Cette lettre d’information a été écrite par Sebastian Carrillo, stagiaire McGill, sous la supervision de Jean-Didier Lapointe