Tag: earnings recap

Columns, Earnings Recap

Earnings Check-In: $CVEO – Cash Flow Will Prove Itself
Reading Time: 4 minutes

My original thesis on CVEO stock was pretty simple:

  • This is a business that has been impacted both by a commodity downturn and COVID (hit occupancy).
  • With where things are, I think their earnings should improve over time
  • I also think the US will likely improve as we still are underinvesting back in O&G and E&Ps are only disciplined for so long…. but that’s just upside
  • I think where commodity prices are at this point will also mean producers will eventually be willing to commit to new projects and that will drive demand for CVEO’s lodging and hospitality services.
  • CVEO’s balance sheet is in great shape, limited BK risk, and generating solid FCF

However! You don’t need to bank on much. You just need to think things won’t get too worse given the company generates good FCF. And there was evidence things would at least level out.

I was pleased to see CVEO report Q2’21 EBITDA in-line with estimates ($32MM), generated good FCF again (~$14MM) which all went to pay down debt. The company is 2.0x levered now.

How are things moving from a trajectory standpoint? Sorry I’m ripping a bunch of comments from the call:

We are encouraged by the decline in COVID-19 cases in Canada and hope this trend allows our customers to continue to normalized operations.

The British Columbia health order, which temporarily limited occupancy at all industrial projects in the province, including our Sitka lodge, was lifted late in the second quarter. Now that, that order has been lifted, we have seen an uplift in occupancy as our customer works to catch up on their project time line. These expectations are in line with the EBITDA guidance that we are maintaining from the last quarter. Yes, we’ve seen much better turnaround activity.

Second quarter was in line with expectations despite the fact that we had one customer push some of their activity from Q2 to Q3. But it appears that that activity will come through. But turnaround activity in Canada is clearly much improved year-over-year.

For the full year, we’re still expecting Canadian billed rooms to be approximately 2.3 million billed rooms, a little over that compared to 2.1 million billed rooms last year. That improvement is both operational as well as better turnaround activity over year. Going into the third quarter, we’ve seen better occupancy for most of the second quarter, we averaged about 5,000 Canadian guests a day, and now we’re averaging a little bit over 6,000. So things are improving, but certainly not to where we were pre-pandemic.

In Australia, we anticipate that the prolonged travel restrictions related to the COVID-19 pandemic will continue to pressure our performance in the region with increased labor costs anticipated to be a factor that we can continue to — that will continue to impact our margins.

The outlook for metallurgical coal markets in Australia for 2021 has continued to be impacted by the Chinese trade policy. So increased interest in Australian met coal outside of China has built some of the negative impacts.

Ok so Australia still has a lot of caution… however, if China wants to help dampen commodity prices, like it is trying to do, then they probably want to end a silly trade dispute.

We expect a supportive commodity price environment to remain for the rest of the year with met coal currently trading above $200 per ton. The met coal prices are at much healthier levels than we had last provided revenue and EBITDA guidance.

We have chosen not to increase our expectations for the back half of the year for the Australian segment. Our customers continue to be hesitant to increase activity in light of the lingering China-Australia trade dispute.

Our current guidance does not assume a material improvement or degradation in the Australian-Chinese trade dispute, nor does it assume a material improvement or degradation in labor costs.

It seems like they are being very conservative with Australia assumptions. Perhaps 2022 will be better…

Importantly, they increased the FCF guide again… now $68MM at mid-point. So even though shares have moved up, we’re still talking about a 22% FCF yield on CVEO stock.

I kind of hate it when people say, “look I get the pitch, but what is the catalyst??”

You can imagine a scenario where the company has basically no debt and if the FCF yield is still this high… well, companies have a way of solving that problem. That is the catalyst.

Here’s what they said on the call about a buyback – quite a change in tune from just all debt reduction commentary:

Stephen Michael Ferazani Sidoti & Company, LLC – Research Analyst

Great. Great. If I could just get one more in. You noted lower CapEx now expected. You’re down to 2x leverage, sounds like reasonable free cash flow this year. Any other thoughts on uses of cash given that leverage is probably down to an area you’re comfortable with?

Bradley J. Dodson Civeo Corporation – CEO, President & Director

It’s getting there. I think for our business, our target is to get to 1.5x levered. That being said, to your point, capital allocation decisions, have a little bit more freedom now and we will be assessing whether or not a share repurchase program is prudent, but that is on the to-do list for Q3.

I just really like the right tail on CVEO stock… I certainly make no bets on where commodities will go. But I am at least aware of where they are and where we likely are in the cycle (we’ve had a good 5 years of a downturn, now things have turned up). The stock is a 22% yield on pretty conservative numbers with the US also not contributing at all.

Lastly, you’ll recall part of the thesis was about a “forced seller.” I felt like his indiscriminate selling was pushing the stock down despite positive trajectory in the business. Isn’t it funny how his last reported sale was April 9th and now CVEO stock is moving higher?

Columns

Earnings Check-in: $MAS quality still underappreciated
Reading Time: 2 minutes

Masco stock continues to reflect too much cautiousness. Should this company traded at such a discount to the market?

As a reminder, Masco owns Behr paint (exclusive to Home Depot) as well as other brands like Kilz. The company reported Q2’21 numbers, which were good and raised guidance, but the stock hasn’t reacted as much as I’d hope.

Q2’21 EPS was $1.14 vs. consensus $1.03 and they raised EPS to $3.70 vs. consensus at $3.63

That’s a “modest raise” so why was I expecting a stronger reaction? I got the sense that Masco stock was becoming a consensus short. This stems from the company’s exposure to DIY vs. DIFM (do it for me). Sherwin is a play on DIFM whereas Masco stock is DIY.

Masco’s paint did decline 5% on a +8% comp, so things are normalizing.

But not all Masco does though. Masco is the owner of Delta, the faucet and plumbing brand and that’s ~60% of LTM sales. This fact is often overlooked in my view and its easy to relegate Masco just to “Behr paint.”  Plumbing sales were +53% and +31% on a two-year stack.

So there was caution on DIY and there was also caution on raw material inflation. PPG reported earlier and highlighted that inflation and supply shortages would hurt earnings expectations. Masco has inflation headwinds, but it actually said it was have price / cost neutral by year end and they had margin expansion from volume gains.

Where does Masco stock sit now?

Masco stock currently trades at 10.5x 2022 EBITDA and 15x EPS. However, they are currently doing about $850MM in FCF and they have $750MM in cash and nothing drawn on a $1BN revolver (so plenty of liquidity).

At the current market cap of $15BN, they could easily buy back 10% of the stock over the next 12-18 months. They repurchased $875MM in the TTM, so its not crazy to think they keep on plugging away at this. This very much reminds me of my Autozone call…

Also, its important to remember from a valuation standpoint, Masco’s ROIC is insane. Take a look:

 

Columns, Earnings Recap

Earnings Check-In $ABM
Reading Time: 2 minutes

In my prior ABM post on June 2nd, I made the call the ABM was sandbagging guidance and they would likely beat and raise. Part of that thesis was (i) the company’s sales were still down, but likely going to improve significantly and (ii) its margins would be much higher than they forecasted and (iii) since we already had Q1, it gave us lots of clues for the rest of the year.

Lo and Behold:

Per the conference call:

Enhanced Clean, our proprietary and trusted protocol for cleaning and disinfecting spaces was an important contributor to our second quarter results as well.

…our clients in both the office and manufacturing markets indicate they plan to continue to incorporate disinfection into their cleaning protocols as they prepare for the return of staff and workers to their offices and industrial facilities. In fact, given the heightened concerns around pandemic risk and greater awareness of public health issues in general, we expect these specialized services to remain in demand and to become part of our client contracts.

….school districts have accelerated the return to in-person learning. Our conversations with school district professionals and educational institutions indicate that with the full-time return to school expected this fall, cleaning and disinfecting will be a priority throughout the school year

Recall, this is high margin work for ABM. I don’t think it will last forever, but like my previous posts on Dollar General and Big Lots, ABM has more cash than ever. Typically they redeploy that cash in acquisitions. So we now have a free option. Oh yeah, they also straight up alluded to that in the call:

Additionally, we continue to explore acquisition opportunities where as a strategic buyer, we would be able to drive meaningful revenue and operating synergies.

Last thing I’ll say on the margin front is to call out their Technical Solutions segment. This is their highest margin segment and guess what?

And then the last thing, and you mentioned it is, technical solutions, we have a backlog of over $250 million in business, our strongest ever.

…And so we’re excited about that to actually turn the work.

So I think you’re going to see revenues go up in the second half. You’re going to see disinfection strong. You’ll see, again, the mitigation on the labor side, but you’re also going to see ATFs sure enough as well. So I think we feel really good about that. And we’ll see where it goes into ’22 as we get closer to that. And again, November 1 starts our ’22. And I think that’s still going to be at the time where people are returning to work. And so I think we’ll have a good start to ’22 as well

Sounds to me like everything is going well.

Bottom line: I think there’s even more upside to the EPS guide, frankly. There are some puts and takes, but I continue to like the outlook.

Again, a lot of my commentary was on mgmt sandbagging, but at $50, we have a ~10% FCF yield stock, ex cash, for something that isn’t overly levered and a relatively good business.

Columns, Earnings Recap

Earnings Check-Ups $BIG
Reading Time: 2 minutes

Big Lots reported a monster quarter. It’s been awhile since I wrote about it back in December, and the stock is up nicely, so I wanted to quickly review the quarter and talk about the thing I think is most important for Big Lots going forward.

Comps were +11.3% vs. consensus +6.7%, margins beat on both gross margins and operating margins… and EPS beat coming in at $2.62 vs. consensus at $1.72. Q2 guidance was also ahead of consensus.

So, not much to be upset about. Here are some other tidbits from the press release:

  • Furniture business, which I highlighted as a killer move (almost prescient coming into COVID), is “continuing its rapid progress toward becoming an established $1 billion brand”
    • Broyhill brand drove $225MM in sales alone this Q – not bad for an asset they paid $15.8MM for!
    • Seasonal category also comped +51%, driven by outdoor furniture
  • Food & consumables comped down hard, at -15%, but that’s expected as we lap the COVID stock-piling bump from last year
  • They now have 21 million rewards members, adding 2 million in Q1.
    • This goes back to my point when I wrote up BIG – the market is implying BIG will give back all of its gained customers, but at the time was saying software was going to retain all of its customers and not slow down in growth.
    • Is that really fair? Sure, retail isn’t that sticky, but all of the customers gone?
  • Next Q, they think Y/Y comps will be down low double-digits, but that’s +20% on a two-year stack
  • Share count is down 8% Y/Y as the Big Lots has been buying back stock
  • BIG now has $613MM in cash and $32MM in debt

So here’s what I still like about Big Lots: That cash opens significant optionality. If the reason why you didn’t own retail before is that they couldn’t keep up with Amazon, does this huge cash influx not help narrow the gap? Do you ignore that they are clearly pivoting the stores to be anchored by things like branded furniture, which historically customers want to touch and feel? Do you ignore that they are expanded same-day delivery or buy online, pick up in store?

On that note, management said on the call: “Our recent omnichannel initiatives to remove purchase and fulfillment friction such as buy online, pick up in store, curbside pickup, ship from store and same-day delivery with Instacart and pickup have been very successful and drove around 60% of our demand fulfillment.”

They have 27% of their market cap in cash, almost no debt, and as a reminder from my original post, a lot of store leases expirations coming up which can allow them to pivot locations if they wanted. 

As a reminder, BIG typically has $50MM of cash on hand, so they now have over 10x that amount…

With BIG trading around ~$65/share, you’re buying the company for 7.6x earnings, ex-cash. Not bad for one that actually earns a decent return on capital / equity.