The Canadian Investor - 2 Unloved Stocks With Big Dividends

Episode Date: June 5, 2023

In this episode, Simon does a dive into Sleep Country Canada while Braden does one on British American Tobacco. They look at the financials and the businesses and discuss what the future looks like for these two businesses.  Symbols of stocks discussed: ZZZ.TO, BTI Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  TCI meetup registration Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Bélanger. The Canadian Investor Podcast. Welcome into the show. My name is Brayden Dennis. As always, joined by the distinguished gentleman, Simon Bélanger. Are we deep value guys now after after this after today's episode yeah i mean i think that's where a lot of you know the attractiveness in the market in my opinion is happening right now because obviously

it's nice to take a break from ai and maybe the companies we're going to talk about i'm sure they'll mention ai in their conference call at some point. But I've noticed that a lot of companies that are more traditional in nature are starting to have really good valuations. And we're talking about like really good companies too. Yeah. And I would say today, so today we're doing two stock pitches. We're doing one pitch each. would say today so today we're doing two stock pitches we're doing one pitch each and we did not decide hey let's go super deep value it's more just like what are you currently examining right now and i think both of us have come to the realization that just this year alone the the valuation of high quality large caps is kind of running away. Like it's getting a bit like I was trying to add to some of these positions over the course of the next year.

And I just can't do it. Like, it's pretty hard to underwrite Microsoft today, like, to write Microsoft today, like compared to 50% ago, three months ago, you know, like it gets a lot tougher for the math to work out. It's not to say that those ideas won't work out, but I think both of us are looking at more traditional value, but I wouldn't say that these are particularly good or great businesses. I'm not so convinced of that. Yeah, no, no. Obviously, I think just value in general is more attractive. Obviously, you have to be selective in the kind of value that you're investing in. But I think overall, you know, value and good businesses, not necessarily talking about

the ones we'll talk about here. I think they'll outperform growth, at least in the next couple years, two, three years, it might be, you know, short term, maybe the next six months to a year, you know, we might just be, you know, dreading that we didn't invest in NVIDIA when it hit the $1 trillion market cap club. But at the end of the day, I think a lot of those stocks have to their price to perfection, you've said that before, right on there lot of those stocks have to, they're priced to perfection. You've said that before, right? Basically, they have to execute and all expectations have to essentially come true. And if we've learned anything about the pandemic, it doesn't happen. It never happens that way.

That's right. All right. Who wants to go first? All right, let's do this. I'm thinking of a number one and two, and I will, of course, tell you the truth. Tell me, okay, let me pick up the number, and now you do it. If you're right, you go first. Okay, let's do two. Okay, it was one. Okay, you go. Go for it.

All right, I will go first. So I'll do my stock pitch. Simon, please. I don't know if it's so much a pitch but it's definitely a medium dive and please jump in to uh to it at any point here because it's you know it's kind of long we're just doing one pitch each so it should make up half the episode should i give listeners your personal email address so they uh send you a hate email for talking about this? Oh, God, no. Hard no.

And I don't think I've ever gone this route before because this is about as anti-ESG as it gets. So let's preface this before I get people in my DMs here. I am not an investor in tobacco companies or businesses. I'm generally not aligned with their product, or I think the business is going to be significantly better in the next 20 years than it is today. This business does not pass that test, but I want to help you. But I want to help you. I want me to help you work through my thought process and help me in the process of walking through it, of one of probably the most attractive valuations of any large cap company I can find globally. So not just in North American markets, globally. So not just in North American markets, because this is actually a UK business,

British American Tobacco, ticker BATS.L on the London Stock Exchange. And it does have a US listing in US dollars, ticker BTI on the New York Stock Exchange. So BTI is the ticker that I'm typically going to use. I'm typically going to use US dollars unless I say otherwise. So British American Tobacco, now interchangeably, I'm going to refer to as BAT. It's a 72 billion USD market cap company. So this is a massive business. And I asked Finchat to give me a description of the business for y'all because, you know, I don't use Google anymore. Come on. Explain the core business of BAT and how it generates revenue. So it goes, British American Tobacco is a tobacco and nicotine products provider that operates worldwide. The company offers a range of products, vapor, tobacco heating, and oral nicotine products, combustible and traditional oral products.

Now, they have their segments in Europe, the US, Asia, Middle East, Africa. And the US segment has grown at about 8% year over year. And the Europe segment's growing a little slower at about 5.75%. And the quick thing you need to know here is they have a portfolio of brands, basically combustible versus like new age, you know, that new, new addiction, like the vaporizers, the pouches for instead of packing a shoe, you're packing like a pouch, or what these like tobacco heating devices, those businesses are actually growth companies. And the combustible portfolio, like Lucky Strike, And the combustible portfolio, like Lucky Strike, Newports, Natural American Spirits, Camel, like those cigarette companies, are mostly all in secular terminal decline, which is really to no surprise. We look at Altria, we look at British American, we look at Philip Morris.

They disclose how many cigarettes they sell in terms of sticks estimated each year, and it is all in terminal decline. So that is across the board with every single one of these businesses. Any questions so far? No. I mean, I think there's always going to be a base level demand even for the traditional cigarettes, tobacco products. Yeah, I agree, though. I think it's probably going to keep seeing a decline because I'm thinking even like places like Asia. I don't know if it's still thing that really surprised me is the amount of people that were actually smoking. And even in Scandinavia and Europe, when I was in Sweden about 10 years ago, that was really what struck me is the level of people that are actually smoking, which must much higher than here. And at the end of the day, there's going to always be people, I think, using cigarettes. But I think there's going to be a floor at some point what it is i guess if you're looking to invest in those kind of companies you're hoping that it's not too low and that they are able to transition to other kind of cleaner i'll say an air quote products yeah they call it uh their reduced risk portfolio okay So non-combustible, you know, they sell nicotine products. Like nicotine is the product and these are just new ways of consuming it. And you could

argue like, you know, they make an argument in their IR saying like, hey, look, like we are driving, like, you know, we We get labeled as anti-ESG, something you can never touch, but we're the ones really investing in R&D and driving and trying to grow these categories so people can get off combustible tobacco. And whether or not you want to buy into that narrative or not, there are going to just always be people addicted to nicotine

uh in our lifetime and i and our kids in the lifetime like 100 and so those brands are views which is uh the vaporizer it's a very popular them and like jewel or yeah i think jewel i'm familiar with yeah yeah that's owned by altria they bought they bought jewel for a couple billion yeah glow which is like you heat tobacco i actually don't know this segment really well i think it's popular in europe but i i've never really seen this to be honest and then velo which is like the pouch so people you know i remember in hockey in high school like there was a a period of time in high school where it was like a cool thing to do to pack a lip before hockey games and let's pack a lip sorry like like grizzly like um chewing tobacco oh chewing tobacco okay yeah yeah yeah and so now you know all the all the cool kids

are using these pouches instead which is basically like you don't have to like grab the the chew and like throw it in your lip it doesn't like cut like it's not as gross yeah you know it's gross like but it's not as gross um oral cancer mouth cancer whatever it's called cancer mouth cancer dude. Mouth cancer. Dude, this stuff is disgusting. And the pouches are like less disgusting, but it's still gross, like to be fair. I don't think I've ever even had one. I have some buddies that like the pouches and do the vape and the whole thing, but I've never really been drawn to it. So anyways, that's what they're calling their new age portfolio. And this is their transition.

As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed

with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started.

But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host.

That is airbnb.ca forward slash host. So the US listing BTI peaked at around $73 in 2017, had quite the run up until that point, very consistent compounder. And now it has been a consistent slider on the downside. Basically, it just goes down basically every day, like death by a million paper cuts all the way to the mid 30s. And it's basically traded there sideways for a couple of years. Since pre-pandemic 2019, it's basically traded sideways. Now, this whole segment is just very unlike me. One, I'm talking about a business that is in probably terminal decline, not that interesting. And two, I'm talking about the dividend yield right off the bat. But it's an important part of your total

return here. The cash is coming back to shareholders through dividends, hopefully more buybacks, and the fact that the business is actually not shrinking. So you might be losing on cigarette volumes. That's been sliding globally for a long time now. They've kept their market position, but on the macro, it's a tough scene. But here's the thing. Investors have been and are today getting paid handsomely to wait because the stock pays a over 8% dividend yield, which is frankly absurd and generally has you and I running for the exit sign. You can't get me out of there fast enough. And the dividend has actually increased very steadily when paid out in British pounds. It fluctuates a little bit less up into the right

if you look at USD given the currency effects, but they have been growing the payout. So they're paying at about $2.80 a year to the dividend, a 70 cent quarterly div, but generating about 430 in free cashflow. So it's very well covered in terms of free cash flow. And I'm going to put up here. So for those who are now subscribers to join TCI.com, they get the video version here. And you can see free cash flow per share here on the business grow tremendously. It's actually compounded at a compounding annual growth rate of 14% since 1995, from about a penny to $4.30. Big jump here in 2018 when they made an acquisition of a company called Reynolds, I believe. And it's been trailing 12 months at $4.30 in free cash flow.

So essentially the story here, Simone, is can they navigate their business transformation into what they literally call, quote unquote, a better tomorrow? Like, dude, this is so cheesy. Like they couldn't have come up with a better name than a better tomorrow, whatever. So that's what they're calling it. Yeah. And maybe I wanted to add something when you talked about the dividends, I pulled the info on Stratosphere and the last 10 years, total returns, which include the dividend, it's the difference between being break-even and negative 5% compound annual growth rate in terms of return. So that's how big of an impact the dividend has made if you own this stock.

Yeah, you're right. It's basically flat if you include the div. You've lost money on the share price. Yeah, 2017, the stock's never – it fell in 2019 and basically has traded sideways. It's basically the exact same price that it was in January of 2019 today. Now, if they can navigate this transition, you probably do pretty well with this stock for the reasons that I'm going to suggest here. They know cigarettes kill you, and they know the

volumes are decreasing on the macro, and they know people will be smoking less globally in the future. This is a secular trend that's against them, and they're self-aware enough to address that in their investor relations website. So we'll give them that. So here we go. What they say is cigarette volume sticks has decreased from 694 billion to 605 because this is, yeah, this is a million. So that's 694 billion to 605 billion. So it's actually only decreased in their cigarette volume of sales by less than 2% year over year, in their cigarette volume of sales by less than 2% year over year, which is not that bad. But of course, they know this trend is here to stay. So they're betting on the growth of this non-combustible nicotine, vaporizers, and particularly modern oral tobacco, aka those pouches. This is here what they break out in their KPIs of number of customers they estimate that are using the non-combustible products. That's the vape, it's the heated

tobacco, and the oral tobacco has gone from about 8 million to 22.5 million users of their product that they estimate. And so that's VIEWS, GLOW, and VLO. Those on an actual business fundamentals segment, the pouches that has gone, like sale of actual pouches has gone from basically zero to 4 billion in units just since 2016. The vapor product, so that's the views product, which was probably an acquisition that they tucked in, has grown at 55% compound annual growth rate since 2016. So in terms of pods has gone from 43 million to 612 million pods sold. And the heated tobacco in terms of units has gone from 2 billion to 24 billion in that same time period. So like dramatic growth. And you can see here, Simon, like this is a chart that doesn't look like a business that's trading like it's left for dead.

Is that fair to assume? Yeah, yeah, I think that's pretty fair to assume. I love how they have like the name is modern oral sales. It's all very strategic in the name. Yeah, exactly. Yeah. Yeah. It's the, wait, what is their transformation called?

A better tomorrow. It's the, wait, what is their transformation called? A better tomorrow. It's so lame. Okay. So last part here is I'm going to talk about the valuation, which is obviously a critical piece here and the bear cases. So the rough bull case for people who own British American tobacco and Altria and Philip Morris for that matter, is they're trading like they're left for dead when the reality is that they're actually not really in secular decline in aggregate. Yes, the cigarette volumes are losing a single digit percent per year. Look at the business in aggregate, revenue, earnings per share, free cash flow is actually growing. Not to mention they're going to pay out this huge dividend and buy back lots of stock. The stock trades today at 6.9 times earnings

and 6.8 times trailing free cash flow. It's way, way down on 10-year historical multiples. Sell-side analyst consensus has that earnings per share is expected to grow at 8% year over year for the next five years. That's not small. It's like a few percentage points below Costco, right? Like it's not, the fundamentals of the business are not deteriorating. In fact, it's heavily, heavily profitable and they have some segments of the business that are growing extremely, extremely rapidly. Not to mention, I think that their rate that they're selling cigarettes less and less every year is a lot lower than Altria, for example. So their brands have remained consistent. Now, the bull case here is obviously that you get some multiple expansion.

I'm going to talk about that in a second. I think it's a stupid thesis, but you of course think when something's trading at 6.8 times free cash flow, and the business is not in material decline that you have some upside here you know you have like the business can grow you're going to get lots of the you're going to get lots of cash return to shareholders and you're going to have the twin engines of multiple expansion right like that's what people are are betting on here all right simone um anything to add before i get to the bear cases? I mean, yeah, the multiple expansion is a bit of a reach, especially, you know, right now

where there's so much emphasis on, you know, responsible investing. And I'm trying to use responsible because ESG, there's definitely been some weird stuff going on in that space and companies trying to use that more as a marketing ploy than actually doing sustainable things for their business.

So I think, you know, that's a bit of a reach overall. Aside from that, yeah, that's kind of my biggest thoughts is I think it could perform pretty well even without that going in the future. And I think it's also important to remember too, we talked a lot about high dividend yields and how we try to, you know, it's usually a red flag. And I think there's two big buckets for me in terms of high dividend yields. And high, I'm saying like kind of high compared to similar industries. So obviously, you know, if you have a repaying 5% or 6%, that's pretty standard, that's nothing unusual. But high dividend yields, I find there's kind of two buckets.

It's either a business that is in decline, and there's some clearly, you know, existential threats of either, you know, the business going out of business or cutting the dividend significantly. Either, you know, the business going out of business or cutting the dividend significantly. And then you have the other bucket, which I think British American tobacco is in, is you have whole sectors that just investors don't like as a whole. And I think it's this one is a mix. It's a mix of investors probably thinking the whole industry is in decline versus also people just not wanting to touch anything that has to do with tobacco. And I think we're seeing that in other sectors, obviously, like office real estate right now. It's like toxic to a lot of people, even though depending on the type of assets you're looking at, it's actually not as bad as people might think.

as bad as people might think. That's right. And it's so in the bucket of like red flag, is this a value trap? No one's getting excited about something like that, right? It's just so out of favor from basically all capital allocators at scale, right? And so there's no real catalyst for this thing to re-rate. And I agree with you, but I actually did some math on the actual share price. You're getting it almost 9% dividend yield on the stock today, which is kind of absurd. All right. So the bear case, and by the way, I usually would be like a 9% dividend yield. They must be over free cashflow. It is so covered. It's ridiculous. Like it's very covered. That's how cheap the stock is. All right. So bear case number one, I have five things written here. Number one is the

transition while it's working now stops working. It's still pretty early in terms of does views have a lot of brand and market? The transition they're betting on right now is not a diversified set of brands. The cigarette conglomerates have all these different cigarette brands underneath them, just like the beer brands do, so that if one's underperforming or goes out of favor, out of style, they have 30 other brands in Anheuser-Busch that will hold their weight. That's not the case with their new transition. They're really betting on just three brands here. That's not the case with their new transition is they're really betting on just like three brands here. So that's risky. Number two is always regulatory risk when it comes to nicotine and tobacco. Look how much it's already affected this industry for good reason, right?

Like trying to protect consumers. Number three is the debt load has grown significantly since that i i think had to do with that acquisition just based on timing but i don't know i'd have to look into it the debt load has grown to about 40 billion in net debt set to mature in the next few years depending on which trench you're you know you have severe impact to the bottom line uh you know headwinds in terms of earnings per share growth, just based on interest expense when this debt comes up. Number four is the bet that investors, we just talked about this, the bet that investors have made here is that the multiple should expand. But I think you have to be absolutely out of your mind to actually believe that.

Like, I don't personally, and I think that you can do extremely well on the stock still. If it does happen, you make a lot of money on the stock, right? If this re-rates to even 10X free cash flow, you make an insanely good IRR. And it's still not expensive there, right? So, it's not going to all of a sudden start trading at 25 times earnings. There's no world where that happens. So, just keep in mind about where this thing could be right to. Although a small multiple expansion could be possible. That's right. But I think it shouldn't be your 5%, 10% expansion of multiple. I don't think that's out of, you know, that could be pretty reasonable. But beyond that, I think it starts being a bit more of a stretch.

That's right. More so like if that happens, you kill it with this stock. Oh, yeah. But taper expectations on like where this thing could actually re-rate to because there's no catalyst. There really isn't anything getting large capital allocators excited about nicotine today. And number five is a risk about what I call investing from a spreadsheet. And that is, okay, I think it can grow earnings per share 8% year over year. I think it could re-rate 10 times free cashflow. You're getting paid to wait this 9% dividend yield. Say they deploy about

5% of free cashflow on buying back the stock. You come up with the best implied expected return, probably in the entire stock market for anything over maybe 10 billion in market cap. Like I mean that. And that is a risk in itself, thinking that those things are all just going to happen, like investing from a spreadsheet when a stock is this cheap, because typically it's cheap for a reason. It doesn't mean that the market's right. But investing, what I call investing from a spreadsheet, I think is typically a loser's game. I've been pretty clear about this, about all my investment theses that have required so many inputs to go right.

The list that it works out is a pretty short list. It's not a non-existent list, but it's a pretty short list. And so that's what I consider one of the risks here. Yeah. And for the multiple expenses, just double clicking on that, I think people have to remember too that a lot of funds won't be allowed to purchase a company like British American Tobacco because of an ESG mandate that the fund might have. And you're talking about institutional investors here. So a lot of potential demand is actually not there. So you're definitely

you have more limited demand than you would have even, you know, if people who are in these funds would be open to it. The fund, you know, usually whether they have strict ESG criteria or ESG considerations, well, that's typically a stock that will be kind of screened out, even if it's a fund that's looking to have a pretty broad portfolio. I was speaking with a Toronto analyst about this name because he's the one that kind of like told me like, this thing probably doesn't work from here. But if you are investing from a spreadsheet, this is probably the highest implied RR I've ever seen. And so I was like, okay, I'll check it out. And he said to me that his fund actually could never buy the stock because the main listing is the UK and they only buy main listing US and Canadian securities. Oh, really?

Okay. Yes. And he said that many of the large pension funds are arbitrarily constrained out of this because it's a UK listing. Oh. It's actually an 80. BTI is an 80R. Yeah. Yeah.

I mean, I'm pretty familiar with pension funds. And for the ones I'm familiar with, it would be the opposite. It wouldn't be where it's listed. It would be more the ESG factors. Oh, totally, totally. That's usually what would prevent them from buying a name like that or even a fund that would have a pretty decent allocation to a name like that. Totally, totally. I'm just saying this adds to the long list of constraints

that large money can't really get in it. No, that's good. Even though it's $72 billion in market cap. Yeah, and I mean, look, to each their own, right? I don't think it's definitely an interesting name. I'll just say that for people who are interested, but obviously know what you're getting yourself into. I think that's probably the smartest thing there. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have

been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with

strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away.

Find a co-host at airbnb.ca forward slash host that is airbnb.ca forward slash host all right let's do it you are up next yeah so i'm up next it's a name that i've actually we've talked briefly on the podcast i think it was a news uh type of news update so the name is sleep country canada it has why buy a mattress anywhere else exactly and honestly like they they get style points for the ticker which says zzz.to i think that's uh that's a pretty good ticker for them and i'll try to give a brief history on them and then uh similar to you a breakdown of the numbers where I think it's heading based on the information I found. So Sleep Country was founded in 1994 by Christine Maggie, Stephen Gunn and Gordon Lowndes. They launched the first four location in Vancouver. By 1996,

the chain had expanded to Toronto and had 19 new stores. And according to their latest annual report, they now have a total of 289 stores in Canada, pretty much across every province from what I can see. But the majority of them obviously are in the major Canadian population, well, major provinces in terms of population. So you have Ontario, Quebec, BC and Alberta. And looking at their CEO, his name is Stuart Schaefer, who has been in the role since April of 2021. And I do like to look at Glassdoor just to see what employees think about their CEO. And, you know, overall, I think it's kind of average compared to what I've seen. So they give the business 3.9 stars out of five. So

that's, you know, almost 80% here. They would 68% of them would recommend it to a friend and 73% approve of the CEO. So I think it's it's reasonable for definitely a commission based business if you're working there for the most part, at least if you're selling the actual mattresses in their stores. Now, if you don't live in Canada, obviously, you might not be familiar with them, but they're a mattress retailer. And I think it's one of the bigger ones in Canada. I'm trying to think of other ones. And they do own a lot of different brands too that I'll go over here. So other brands that they own or recently bought. So in 2018, they bought Andy. And just a few months ago, we talked about that on one of our

releases. They bought Casper Canada. They also completed the acquisition of Silk and Snow on January 1st of this year, which is another direct to consumer sleep brand. I wasn't familiar with this one, but just looking at the site, it seems to be branded as a more ESG-friendly direct-to-consumer mattress retailer. What does that even mean? I think they tried to have more sustainable materials that they use as source from, I guess, places where it's, you know, socially responsible. That's kind of the sense I got from looking at the website.

They had consent from the birds' feathers before they took it out. Yeah, and they also own brands. So if you live in Quebec, you may be familiar with Dormez-vous. And they also own Hush. So there's a few other brands that they own. Vu and they also own Hush. So there's a few other brands that they own but you know just to show that it's not just the Sleep Country Canada stores that you might see in your city. It's a lot more extensive than that. So it's still a small cap company market cap of just around 900 million trading very cheaply this one as well. So it has a p of nine and has a price to free cash flow of six so that's

you know that's in a similar territory to what you were talking about earlier with i think it was around there what right with british american tobacco in terms of the multiple? Yeah, exactly. Yeah, it was just under 7. It was 6.9 times earnings. Yeah, and I have a graphic here on Stratosphere. And really what it's showing, it's just over the last five years. So just to help people visualize a bit more. But essentially, the price to earnings and the price to free cash flow, it's pretty close to, you know, the lowest it's been in the last five years. So it just gives you an idea looking at the trailing 12 months that this company is pretty cheap when looking at least at those two metrics. Now, they generated $928

million in revenue in 2022. Revenues have increased at least 10% clip, well, at a 10% clip over the last three and five years on a compound annual growth rate. Net income was 110 million last year, and earnings have increased 14% in the last five years and 27% over the last three years. They generated 146 million in free cash flow last year. So they're very profitable. It's free cash flow per share as quadrupled since 2014, but it's been essentially flat since 2020. So something to keep an eye on here. And margins actually look quite decent. They've been increasing over the past little bit. So gross margins were 30% in 2018, and now they're 36% in 2022. Their operating margins are up about 70 basis point during that same time period.

So it's actually pretty good considering what's been happening and the margin reductions that we've seen in the past couple of years with all the supply chain issues. And the return on invested capital in the last five years has been between 12% and 19% and averaging around 16%. So, you know, overall, I mean, what are your thoughts? Like pretty, pretty decent looking metrics as a whole, right? It's one of those businesses where it was so unloved because the direct to consumer names came in and you have this like kind of legacy retailer in Canada specializing in just matches, which by the way, I think is a good category. It's something people need to keep buying, you know, maybe on average every five-ish years, whatever it is.

I think we talked about this on another episode recently. So for that, that makes it a pretty good category. The one thing that I think that I like is maybe other than Endy, but when they bought this Casper deal, for example, they were pretty patient about like, these companies are going to run out of money. And when they do, when the VC subsidy ends, it's going to be back to business for us. It's going to be back to high margins with kind of the only game in town. From a competitive landscape perspective i'm not surprised to see margins keep expanding because they've been patient and kind of eaten up

anything that gets in their way yeah no and that's a great point because i remember like four or five years ago i mean casper advert casper advertisements and i'm thinking about that one because that was the most obvious one it was everywhere like they were spending money left right and center and when i think about mattresses in a box i still think about that name first so i think they really i think they paid around 20 million for it if i yeah if i remember correctly and you know they probably raised over 100 million yeah and if you think about it they probably got a ton of free publicity because casper spent so heavily and now they subsidized by vcs and then they swoop in at 20 so i i mean it looks like they're allocating capital in a pretty smart way.

Obviously, the mattress in a box craze is not what it used to. I'm sure it got a bump during the pandemic and then kind of slowed down again. Casper's raised $340 million. $20 million for the Canadian business. Yes, keep in mind that's the whole entity and they just ripped out the Canadian version. Well, even if you allocate, let's the whole entity and they just ripped out the Canadian version. But yeah. Yeah.

Well, even if you allocate, you know, let's say 10% to Canada, because usually what? Canada is 10% of the US. I mean, you can still make a case they got a pretty good deal out of it. Dude, one time I went on the subway and the entire TTC was Casper. Like they bought every single spot in the whole train. Some smart spending, right? Like. Maybe they get a deal if you buy in bulk. At what point did VCs say, oh man, what have we done here?

But to get back, I was going to touch on that more at the end. But generally, people, so I was looking at the Sleep Foundation, so sleepfoundation.org. And under normal conditions have like back issues like I do, something like that, it could be sooner. Like personally, I try to change it four to five years because if I push it more than that, I do find as a whole that, you know, I don't sleep as well at night. So I figured, you know, because you mentioned it, it was just a little insight here. Now, to get back to some of the numbers here, as of March 31st, they had $45 million in cash on the balance sheet and $139 million in long-term debt. Like I mentioned, they're heavily free cash flow positive, so I don't think that's a major issue. They pay a quarterly dividend of $0.237 per share,

which they recently increased by 10%. And over the last five years, the dividend has grown at a compound annual growth rate of 5%. However, the dividend currently yields 3.64%. And it's really easy to make the case that they have room to grow it since they only pay 20% of free cash flow towards the dividend. That's what they did last year. So there's definitely some room to grow. Obviously not as high as in terms of starting yield as British American tobacco, but still nothing to sneeze at,

especially when you're looking at a business that has a lot of room to potentially grow that dividend. And speaking of returning capital to shareholders, they're also buying back shares. The share count is not massively down, but it's still down 3% over the last five years. And they've recently announced that they would be looking to repurchase up to 10% of their outstanding shares as of March 7. The authorization is good for a period of 12 months. is good for a period of 12 months. And just, I know we talk about this a lot, but just so people remember, when you see a company announcing an authorization to, whether it's a percentage, like I just mentioned, or, you know, it's a dollar figure, it's just an authorization. It does not mean that they'll actually do it. So always keeping that in mind is important. And in terms of returns, they've had a compound annual growth rate of 8.0 or annual returns of 8.7% over the last 10 years. If we're looking at the total returns, which is pretty good, definitely in line, I think,

with the TSX or pretty close to it. But the stock has been struggling over the last five years. it. But the stock has been struggling over the last five years. It's showed a negative total return of 1.4% per year. Anything you wanted to add that there before I talk to you about the growth and competition, then close this mini deep dive? Nope, nothing to add here. Okay, so here in terms of growth, from what I could see, it seems like their growth is both strategic acquisition, like we just discussed with Casper, for example, and then opening new stores and renovating older stores. So in 2023, they are looking to open a minimum of six new stores and renovate between 20 and 30 existing stores. Of course, like I said, another tailwind here is just the fact that over time you'll need to change your mattress. So the market is never really that saturated

because there is a turnover here. But of course, there's some limits to the growth. And even if they wanted to expand in the US, there is a lot of competition in the US and it's not an easy market to go and establish yourself as a Canadian player. So definitely the growth here is probably where they might struggle a little bit. I'm not saying they won't grow at all, but you're not going to see like 20% a year or anything like that. And the last thing about growth last year was a rough end of the year. So Q4, they saw their sales decline by 10% compared to the previous year. Although they finished the year slightly in the positive in terms of sale for the overall year. And Q1 of 2023, it was flat year over year.

But there is some seasonality to their sales, but it's not major seasonality. It's all in the 20%, but it does vary a little bit depending on the time of the year. Now the competition, as people might expect, there is tons of competition in the mattress space. You have big furniture stores, large retailers like a Walmart, Costco, for example, department stores that are all competing with them. There's also competition for mattresses in a box that competes against Casper and Endy. So names like Lisa, Recore, Polysleep and more. So there's quite a few names in Canada still for that. And, you know, my overall take here is I

don't think it's a bad business. Clearly, they know what they're doing as a mattress retailer, and it seems like they're being smart with the allocation of their capital. I didn't listen to the call. I went through some parts of their most recent annual statement. The impression I do get is, like we said, they're being strategic. And if they can't do acquisitions or it's too expensive, I think they'll just be looking to return capital to shareholders if they find that it's good value. And, you know, it's not hard to make a case that it's a cheap stock with it being trading at a P of nine and price to free cash flow of six. And like I mentioned, that's pretty much at the lowest level they've been over the last five years.

So definitely, you know, an interesting name. I'm not sure if it's something I would own personally. But for people looking for value, it is a name worth investigating, I think. Listening to some conference call, making your own opinion on it. And definitely having a bold, bare case going forward. And just assigning some probability outcomes to each outcome as well. I like that you prefaced expectations here. And I think that that's the common theme of both of these pitches is it's capped. There are certainly lots of things to

think about, but that's why the stocks trade at less than 10 times zero. That's why you have a greater than 10% free cashflow yield. That's why if everything looked gravy, then it wouldn't be trading at these prices. And I think that that's fair to say. Now, with Canada, the two other common theme here is it's two businesses that look like they're not growing and trading really cheap, but are actually not shrinking and have a lot of positive fundamentals going for them. And Canada is growing the population faster than any G20 country today. And that's a trend I expect to continue with all the immigration. And that's something that you can kind of bet on here,

is if you're betting on a Canadian tire, you're betting on a sleep country, is you have category leaders in their certain space in retail, good spaces, and you're kind of betting on the growth of canada here which you know statistically seems like probably the right thing to do yeah you actually beat me to it as you know you started talking i was like oh yeah like i want to mention this too but yeah definitely the population growth and people move here you know they'll need to buy a mattress.

Obviously, you can buy it used, but I think most people prefer not having a used mattress. I think, you know, I guess if you don't have a choice and the budget doesn't allow it. But I think one thing that Sleep Country does well is they have a lot of different price options. So it's not just super expensive mattresses. Some of their mattress in a box are pretty affordable, I would think. So there's a lot of, you know, different spectrum and for a lot of different budgets. And that could definitely be a tailwind for them is that population growth going forward. You know, I don't want to sound like a realtor trying to justify that home prices

will be going up because of population growth. Because I've heard that more than once. And I've seen it on Twitter. But it is a catalyst that could definitely benefit a company like Sleep Country Canada. Buy buy a mattress anywhere else. There's a um one block south of me and i think there's like a running store do they own a running room by chance i don't know i don't think so i mean it wasn't in there i doubt family owned company okay yeah there's a running room in there like they share they probably share the space yeah yeah but i know like we have a couple of them somewhat close to our place and uh i've i've ordered a mattress in a box before so um we're probably a year or two away from changing our mattress so maybe they'll get

some of my business who knows there's a nice part of the market here that like you always want something if you're a retailer that like there's a reason to come in person and trying mattresses is certainly one of them dude um this is the linkedin of the owner of the running room jason stanton this uh you know of course very athletic studly guy here but he's on a bike yeah i was gonna say it's oops owner running room and he's cycling on his linkedin picture oh it's better than being on a couch with a beer and a cigarette he's on his sleep country mattress smoking uh british american tobacco no like that just something looks off here but uh you know good for him he could probably run faster and bike

farther than i ever will so good for him uh simone that's it that's that's good that's a full episode we did one pitch each both unloved value names because let's be honest i mean if it's not tech and it's not ai and it's not uh you know a sexy large cap right now not to mention with the amount of flows going into etfs it's just bidding up large caps more and more like they have that constant support built in. Yeah, it was kind of nice to take a break from AI, I'll be honest. Like as interesting as it is, it feels like, you know, we've talked about it a lot. And even if we don't want to, there's, you know, Nvidia comes out and has a blowout quarter and then reaches a trillion dollar market cap.

It's hard, you know, it's like, you know, an accident when you're driving. You can't really not talk about it or look at it like you definitely have to discuss. But I think it was good because there are two names where we haven't really talked about on the podcast. So at least can provide people some ideas and some of the things we actually look at when we're looking at names. It's not by any means the whole thing. It was just, I would say, a medium to shallow dive, but I think it's a start for people who might be interested in the name.

I think one important takeaway, if you're listening to this pod, is the overarching theme that we're looking for here, if we are looking at like potentially undervalued stocks, trying to try to buy a decent or good business at a wonderful price is when the narrative is that it's dead or not growing or like a cigar butt, no pun intended here with British American tobacco. And it's actually not like when, when you actually do the research and look at the, the underlying fundamentals, the story is very different than the narrative. That's where something's interesting to me. You

know, if there's a really, really cheap business and it's trading like seven times earnings and revenue is on a comp annual growth rate of like minus 10% a year and probably is a terminal zero, that's a value trap and just asking for capital destruction. But I don't think that's the case with these two names. And I think that that's the key distinction here, right? Is that they're trading like they're left for dead, but they're not. Yeah. And I guess, you know, the last thing about AI, and I don't know about you, is, you know, I've learned my lesson from 2020, 2021 is, you know, when it's apparent that there's

euphoria in the market, definitely now, you know, it's apparent that there's euphoria in the market um definitely now you know it was an Einstein obviously it was very obvious whether you're looking at tech or crypto you know there was you know it was crazy what's going on in the markets but now what I'm seeing kind of reminds me of that how people are just you know making these crazy bull case. And I think it just creates opportunity because people are just so focused on AI. They, you know, we talked about two names, but there's tons of other companies that are not necessarily on love. It's just people are forgetting almost about them because they're hypnotized by AI and the potential. And, you know, my honest opinion is we're just in the early innings and winners that we might think are winning right now may be completely different in five to ten

years from now yeah and momentum on these names it's a hell of a drug like it's a real thing so uh no doubt all right thanks so much for listening to the pod. If you want to support the show, get our monthly portfolio updates that comes out the day this podcast is released. Our monthly portfolio updates will be available that morning. I'll finish it that morning because it'll be June 1st. That gives you access to me and Simone's actual portfolio percentages to the actual names we hold. In addition to seeing this podcast video format, because we do share a lot of charts during our research when we're navigating certain data visualizations and different features on Stratosphere.

That's very typical for us to kind of share our screen. So that is at joinTCI.com it's only nine dollars canadian last plug is are there tickets left for the meetup yet still i think there's a couple i haven't checked but made not a lot because we've been getting a lot of notifications of people yeah and some people are buying too because they're probably bringing their significant other um okay there's there are some tickets left as of right now um and so don't be that guy who misses out and then asks me later so that is in the show they're still being added to the show notes right simone yeah yeah Yeah. Yeah. So beautiful. It's an event bright link. So there you go. It comes with food and drink. Three hours. Going to be a good time. All right. We'll see you in a few days. Take care. Bye bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or

assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.