The Canadian Investor - Higher Rates are Starting to Impact Canadian Tire
Episode Date: August 17, 2023In this episode of the Canadian Investor Podcast we start by going over Canadian Tire’s earnings release and how higher rates are starting to impact their customer’s spending. We then discuss the ...earnings from WSP Global, Constellation Software and Brookfield Infrastructure Partners. Symbols of stocks discussed: CTC-A.TO, WSP.TO, PYPL, CSU.TO, BIPC.TO 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 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. RBC Consumer Spending TrackerSee omnystudio.com/listener for privacy information.
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The Canadian Investor Podcast. Welcome into the show. My name is Brayden Dennis,
as always joined by the very charming Simon Bélanger. Today is August 15th, and it's been a
while. It has been a full couple episodes since you and I have been on the
mics here. So we talk so much that, bro, full bromance in effect, I miss you.
Yeah, man, it's been a while. I miss you too. I hope you're feeling better and everything's good.
Good now. We're all good. Okay, so we're doing earnings today. You have some CPI,
still talking inflation, still important, but things are changing. And then we're going to
talk about individual companies. We got lots of notes here. So let's see how far we go through
them. There was so much to go over. I actually had notes that I had done in advance when we couldn't record,
and I had to place those notes.
I had to remove them because some more recent and important stuff, in my view, came up.
So I want to make sure we have some good content for the listeners.
Now, like you said, July 2023 Canadian CPI came out this morning as we're recording on Tuesday.
Headline CPI came in higher than expected
at 3.3%. Economists were predicting that it would be close to 3%. Core CPI, which is the measure
that's most followed by the Bank of Canada. So those three metrics were slightly down while one
was flat. So it's remaining pretty sticky there. Month over month increase accelerated
for the headline CPI to 0.6%, which is this one, you have to take note of it because an annualized
it's 7.2%. So that's definitely, that's a big increase compared from May to June, June to July.
So I think this is one that we have to keep an eye on. Food remained elevated at 7.8%
year over year and 0.4% month over month. Shelter costs accelerated once more to 5.1% compared to
4.8% in June. Energy costs was down 8.2% and gasoline was down 12.9% year over year, but they both increased
on a month over month basis.
And we're really starting to see the energy and gas, if base effects slowing down, they're
actually probably the base effects are going to start now going the other way around where
prices were at a very low level going forward.
You know, the more forward we get into the end of this year and next year, and then it
will have the risk of having the opposite impact.
So it was kind of pulling the headline number down.
Now it will most likely just, you know, without making a bad joke, but pour fuel on it and
potentially kind of increase headline CPI.
And the last thing here, I haven't talked much about this one, but
mortgage interest costs rose to 30.6% year over year. Sorry, it rose 30.6% year over year and
was one of the top contributors to inflation. And this will definitely, I'm sure, win on the Bank
of Canada next decision in September.
Unfortunately, there's a lot of conflicting data coming up.
So and I will talk about that when we talk about Canadian Tire, what they had to say.
There's a lot of, you know, on the one hand, inflation seems to be picking back up.
But on the other hand, you're seeing the softening demand of the overall economy.
other hand, you're seeing the softening demand of the overall economy. So these two things are starting to butthead and making it really difficult for central banks or good old TIFF here in Canada.
Yeah. And I think it's interesting what you're going to talk about next. And it's funny how my
brain works where I see this data, we get it so often. And in my mind, I don't really pay attention that closely. But
contrarily, in your next segment, when an individual company, which is very close to this
with their business, my ears perk up very intently. And maybe that's just the way I think. Maybe it's just like I'm more
focused on individual companies versus the broader macro. I'm not sure. Maybe it's more so that
hearing it come from management teams, I trust a little bit more than the talking heads. So let's get to that. But before that, every year there is a overplayed saying that is used
everywhere in financial news. Now it is soft landing or just a landing in general, right?
As you go, ugh. Yeah, the landing's looking rougher and rougher
yeah yeah like how much turbulence is on this landing like we're coming in
into a snowstorm here but every year there's this buzzword remember like right when we were
kind of starting this podcast and into 2020 we're heading into unprecedented times um what was the there was
another one for 21 uh well there was the inflation one uh and then there was the supply chains one
oh yeah supply chain issues supply chain issues i'm just there's all these different eras of buzzwords that you hear from economists and on conference calls.
And worst of all, from the questions from analysts on the conference calls. And I just feel like this
landing one is the new one. And it's getting a little played out. No, I totally agree. And this
one, I mean, I think we have to take note of what Canadian Tire had to say and also put some additional context because it wasn't just Canadian Tire. There's a couple other businesses that recently reported. I won't go over the earnings. I'll just give a quick, quick overview just to finish that up.
It was Canadian Tire for whether people like them or not as a business.
I think most people can agree in Canada. It's quite a good bellwether stock for Canadian retail specifically.
They have all kinds of items from discretionary to non-discretionary.
And they also have a really big financial segment.
A lot of people don't realize that with their credit card.
And that allows them to get some value.
Also, not to mention, it's not just the Canadian Tire brand.
They have other brands underneath there.
Namely, you know, Sport Check.
Helly Hansen is another one.
There's, I think, Mark's Warehouse.
Yeah, Party City.
Mark's Warehouse.
Yeah, yeah.
So it's worth pointing out too that they have a greater pulse on the economy
than just the retail brand of Canadian Tire.
And you just mentioned also the FinTech arm of it as well.
Or maybe that's a-
The credit card business, I would say.
Yeah, the financial business.
Yeah, and they can get some really valuable data.
And just to add to what you just said is the credit card business also gives them insight
on what, you know, cardholders are spending as a whole because people can use those credit
cards outside of Canadian tire stores, right?
So they can get some really valuable data.
And for Contax, they have more than 4 million cards in total
that have been issues and more than 2 million of those have a balance on it. So whether, you know,
it's a small or big balance, that doesn't really matter here. But just to give some context,
like it's not a, you know, a nothing burger. It is some meaningful data that they have and
they are starting to see some, definitely some
trends. And that's why, you know, their quarter, the recent release, the Q2 release, you know,
I think it's worth paying attention. And one of the things that they said is that, and I quote,
Canadian consumers are facing increased financial strain and facing tougher spending decisions.
And that's normal where I think we are at. We've talked
about the lag effects of interest rate increases. And you also have to keep in mind during the
lockdowns, a lot of people just saved money, right? So you didn't have that much to spend on,
you know, people were fighting for certain types of good, but a lot of people were saving a lot
of money. And I think you can make a case that in the
past maybe six months to a year, a lot of consumers have probably been dipping into those savings. And
at some point, these savings are not unlimited. And I think what Canadian Tire is starting to see
is that they're starting to see the repercussions of that. Now, their Canadian tire card holders had a flat spend in Q1, but in Q2,
they saw a decline in spend. Home gas, electronics, and clothing are all declining. Travel, dining,
and grocery experience lower growth rate as a quarter progress. And that's important because
a lot of people are saying that, oh, Air Canada is still doing fine. But even Air Canada, there
are some metrics where you have to keep an eye on and for them they are seeing look it's still growing
but it's not growing as quickly the slowdown in spend was even more noticeable they said after
the bank of canada unpaused and raised rates in june they even went and said that the trend
accelerated at the end of the quarter, which is clearly not good.
And I think it's a big reason why the stock is down about 15% since the earnings release.
They said non-discretionary spend went up 6% at their Canadian tire stores, while discretionary spend was down 3%.
So non-discretionary is basically essentials.
So that is up.
And clearly they're seeing that people are focusing more of their money on what they actually need and the essentials.
Overall revenues were down 3.4%.
Earnings per share was down 28% to $1.76.
And they pulled their guidance.
So they call it financial aspirations.
It was set out in March of 2022 during their investor day
and it was supposed to cover a period between 2022 and 2025.
So they pulled that out.
Before I go on, any things you want to add there?
Have you been hanging out with Mr. Daniel Fauche too much?
Your sentiment is more bearish. You've been hanging out withch too much you uh your sentiment is uh is more bearish you've been hanging out
with daniel too much i've been yeah he's been taking my spot too many times here i mean i'm
sitting in this chair i should have started and i should have said like i hope you're bringing
the positivity because i'll bring the bearishness to this uh But no, obviously I'm just kind of reporting what they said.
Don't shoot the messenger.
No. And if it's a one-off, it's a one-off, but I'll finish and it's not a one-off. I'll just say
that. 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
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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
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Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host.
Now, one of the key metrics for Canadian Tire for those to keep an eye on is the past due credit card receivable. These are balance that
are 30 plus day past due. Those rose 35% year over year to $210 million and represent 3.29%
of total loans. It's an increase of 70 basis point compared to last year. It is flat quarter
versus quarter if we look at Q1 of 2023, But it's something definitely if you're interested in the
business, for example, if you think they're just going to be more short term headwinds, something
you still would have to keep a close eye on because that could cause problem for them down the line.
And what's really important here is if people remember, Canadian National Rail also saw a drop
in consumer good freight. and we talked about that
a couple weeks ago and I like I mentioned I don't want to be too pessimistic here but if you add in
Cargojet who recently released their earnings they mentioned that demand was weaker than expected in
their latest quarter they saw a decline in overall revenue Air Canada Cargo same thing they saw a decline in overall revenue. Air Canada Cargo, same thing.
They saw a decline or lower than expected sales for Air Canada Cargo.
So you're starting to see a lot of the same data coming out for at least companies that are very closely tied to retail.
And there was also a report from RBC that came out about five days, five, six days ago, which all had a link to the show notes.
And they essentially mentioned the same thing and also mentioned that overall spend on restaurant,
although it's going up, it's because the higher price and not the amount of visits by consumers.
And they also said that it seems like travel has actually peaked and seems to be definitely slowing down
a little bit, which kind of lines up with what Canadian Tire said as well.
Travel, I mean, that makes sense. It's so much like pulled forward catch-up demand,
but I still like the outlook on it long-term.
Not too depressed now? Yeah. These are all really useful signals that, like I said, when it's coming from an individual
company, both in their financials, in their specific KPIs, in their transcripts from the
earnings calls, and in their guidance, I listen. And so this data I find extremely interesting,
especially when like
something like Canadian Tire, like, you know, they have a good kind of consumer pulse, but they also
have a great pulse because of their financials division. CNR, Air Canada, Cargojet, like just
wonderful signals for the economy that I think are actually more profound than broad macro data.
So thank you for bringing this up.
And now one thing that I'd like to also talk about here is it's okay to be
cautiously optimistic or bearish in the short term, but remain cautiously optimistic for the
long term. And because I think that it's, don't hear what
Simon's not saying, because you know, he is investing very actively for the long term.
I was at an event the other day, and there were a lot of people very concerned about the short term
of the economy, and understandably so. And they said, yeah, I'm not putting any money to work right now. I think the
market's going to crash, blah, blah, blah, blah, blah. You can see me kind of like-
Yeah. Just a second. Let me call Dan or Simone. They'll talk to you.
Yeah. I'm tuning out. I've become like Homer Simpson, fading into the bush. I'm like,
I don't care. And these people that are saying this, I'm like,
dude, you're 26. You're going to be investing for the next 50 years. What do you mean you're
bearish short-term on the economy? That's okay. But you're giving up your dollar cost average strategy because you think that the short term has reasons to be
cautious that is crazy talk that is crazy talk to me um and so i just want to kind of like
yin and yang that discussion a little yeah and even these even if we enter let's say we enter
a recession let's say like it's you know a. It's not barely won. It's not a
depression, but it's... Well, it would definitely... Weak of a consumer.
Yeah, exactly. I mean, it can still provide some wonderful opportunities to invest in businesses.
And I think that's what people have to remember. However, you also have to make sure the business
is in good financial situation. If they are impacted short to medium
term, they are able to survive and thrive after the headwinds are done. And some businesses will
just won't miss a beat too. So you just have to be very careful because we saw in 2021, for example,
or in 2020, I mean, you could, you know, you could basically put money in
in I was going to use that I was going to swear, but I won't face drive, face drive, or basically
anything, right? You could put money into anything, and you'd make a profit. And we're in a very
different situation. And I think it will create some opportunities, but there are also going to
be some pitfalls.
And you have to make sure you have conviction, you understand the business as well.
And if you're overwhelmed by that, then consider maybe an index fund because then it'll give you some broad exposure.
It will automatically diversify you and you can rest well at night without worrying about individual holdings that you have.
Yeah. And look, being uninvested because being cautious on the short term is mathematically a gigantic
mistake if you're a long-term investor because you need to be invested in the days that have
huge wins, market days that perform really well.
Look at the math.
Maybe I'll do a segment on that.
What happens if you're uninvested in the best five days of the year is a negative return. The
market could be up 15% year to date, and you were uninvested during the five best days of the year,
you could have a negative return. And so that's really important to mention because
let's talk about the guys who remain unmentioned at the conference I was at two weeks ago.
Bearish, selling stocks, 20 years old, bearish, whatever. The S&P is up almost 17%.
What about the TSX composite?
Year to date, okay, up three.
So massively kind of trailing that big tech allocation.
Give it six if you include dividends or something.
Yeah, yeah.
Let's include the total yield on
the divvies from oil and banking. But you see where I'm getting at, right? Oh, yeah.
And I think too, right now, I think there's some really good opportunities for people too.
If you don't want to be 100% invested, I mean, it's not an all or nothing, right? You can be,
if you're more comfortable
keeping a little bit of cash on the sideline or a bit more, I mean, at least it's yielding
something more than the official CPI print. So you're getting real returns on cash. And if you
want to have that and pounce on opportunities. So you can't say, you know, going back two,
three, four years where you could park money in cash, well, you'd
be losing on it right now. You're gaining a little bit, probably not that much, and depends what your
cost of living is at the end of the day. But you do have different options that are available to you
and doesn't have to be an all or nothing. You know, you can keep 10% in cash if you prefer
to have that dry powder to be ready to invest.
I mean, you're getting 5, 5.5% on your cash right now if you place in the right places.
Something you said on your last segment, which is some companies will survive and thrive.
And those are two characteristics that come to mind of a company I'm going to talk about right now, which is WSP Global.
come to mind of a company I'm going to talk about right now, which is WSP Global. So here is a Canadian stock that I bought in roughly 2018, mid 2018, and has performed incredibly and is
performing incredibly today. The business is doing exceptionally well. I feel like I talk about it a
decent amount on the podcast, but really not probably enough given this is a fairly
large position for me. And I haven't been adding more, but it's because it just keeps performing,
right? And that's the old paradox that investors always have. So WSB is a global engineering firm,
but they are based in Canada and trade just exclusively on the TSX. Their main five business segments are
transportation and infrastructure, property and buildings, earth and environment, power and energy,
and industry revenue. And so you can see they're very diversified in their services and what they
do. The largest segments are around property, buildings, infrastructure, and earth environment.
So very typical civil engineering firm.
They've historically grown around mid-single digits organically, but they do a lot of M&A.
They do tons of acquisitions on a global basis, North America, Europe, Asia, all over the place.
North America, Europe, Asia, all over the place. And they've done a really good job of rolling up these services in this very highly fragmented world of engineering. So in their latest quarter,
they had a nice 9.3% organic growth number. Their service backlog grew 25%. This is work to be done that they're going to be billing in the future.
That is a whopping $14.3 billion in backlog.
Total revenue grew 28.7%.
So nearly 30% on the top line being sustained, which he keeps accelerating a little bit.
And 31.5% growth in operating income. So margins are expanding, growing extremely fast,
9.3% organic growth. These are best in class numbers for this business, which is later in
its maturity stages. So that's pretty interesting. Some acquisitions are really paying off with some key players in the
earth and environment segment. I remember last year they bought Wood, which is a very well-known
environmental consulting firm. The year before that, they bought Golder, which is probably
the de facto engineering for earth and environment in North America, at least,
engineering firm. I think they bought that for bought that for two or 3 billion at the time. And I have graphed here, which you have on
the screen here for the wonderful people watching on join DCI.com. The two segments of public sector
versus private sector revenue, you can see how much they're, well, both of them have grown at a, you know, double digit
clip. But look at the private sector revs really grow now for the first time above the public
sector. So public sector being jobs for government, and private sector being winning jobs for
businesses. And so that's been a huge, huge growth engine for them over the
past five-ish, six-ish years, and primarily due to acquisition. This stock's also doing well
because they increased guidance. So they're raising guidance on revenue, EBITDA and organic growth for the end of the year. So survive and thrive.
You know, among tough consumer environment,
the built environment has still lots of legs here.
Yeah, no, I think WSP is,
I wish I would have invested in it when you did.
But it's interesting. Because you and I have been, especially at the time when we started this podcast,
you and I were extremely bullish on infrastructure in general,
especially with such low rates at the time.
And I didn't foresee them raising really.
So bullish on the Brookfield infrastructure,
the asset management business.
And then here's this TSX only listed leader
in infrastructure services in the world.
One of the largest engineering firms in the entire world.
Now they're bigger than AECOM.
So is there a bigger
they probably need to uh uh give an assist to us and say lavalin who shot themselves in the
shot yeah yeah exactly they had uh i would say they had the leadership position maybe a decade
ago and then they just especially in energy and power especially there yes yeah they they were everywhere and then all
those scandals happened and they're just a shell of themselves i haven't looked at it since they
have any in quite some time to be honest and i mean they're lucky that they have such tight ties
with the canadian deuterium uranium technology which is canadian uh nuclear power technology okay like they have
like actual patents on like canadian reactors they actually uh performed quite well in the last
year yeah yeah and definitely i mean it's gone up and down but uh if you look one year out i mean
it's almost uh like not quite doubled but pretty close. Yeah. Yeah.
They were going sideways for a long time.
That stock chart is so disastrous.
Oh, my God.
Let me spell it.
Yeah.
And I will be clear.
The last year, if you zoom out more, it's a bit more of a roller coaster.
Yeah.
No, they're lucky because they have deep ties with nuclear. And so they
have kind of a base backlog that's pretty hard to disrupt. But yeah, so here's W... Hey,
it's not too late to get on the train. I think it's actually pretty fairly valued here today.
Yeah. 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 Quest
Trade'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. Now we'll move on to a non-business or non-earnings
update. So it's pretty big news. Did you hear about that?
PayPal launching a stable coin called PY or PYUSD as a lot of people call it.
Yeah, I saw that. I heard people chattering about this and more so transcripts from the
earnings call about this, but I'm a complete noob here. So you let me know.
Yeah, I know. It'll be'll be quick so last week news came out
that paypal was launching its own stable coin um it's i would say it's the first kind of major
company to launch one since facebook had their libra or whatever what was it i think it was
libra yeah and that that got canon libra originally was supposed to be tied to a basket of currencies.
It wasn't just a stable coin with a US dollar, which is the case here.
And a stable coin is essentially just a cryptocurrency that's tied to value of a fiat currency. So either Canadian dollar, US dollar.
I mean, there's not really.
I think there's some small, very, you know, unknown Canadian ones.
But the main ones are USD in US dollars.
So there's stablecoin.
People may have heard of USDT or USDC, for example.
So the stablecoin will be fully reserved by using bank deposits, short-term treasury, and other liquid cash instruments.
At least at the beginning, it will only be available
to US customers. It's a token that is based on the Ethereum blockchain. It's based on ERC20,
which means that it will be compatible with the Ethereum ecosystem from the start.
Customers will be able to transfer it from PayPal to Ethereum Wallet person to person,
will be able to convert to other crypto on PayPal's platform and will be redeemable on a one to one basis with the US dollar.
It will be incorporated to PayPal's checkout process.
They are partnering with Paxos, which provides regulated blockchain infrastructure and will be regulated in New York state.
and will be regulated in New York State.
They'll be issuing monthly reserve attestations, and it is centralized, meaning that PayPal will be able to do things like
revert transactions and freeze funds.
And what's really interesting here is that PayPal has over 400 million users.
So I think clearly at the beginning, I think it may take some time
where users really start adopting it.
But, you know if
you have you're looking at this and then the announcement that blackrock is applied for a
bitcoin etf a few months ago um it's hard not to have my little tinfoil hat here because you have
traditional finance really coming in to the crypto space after the slew of fraud scams that were going on.
You have FTX, Celsius, and all the other frauds or scams that people got in the actual crypto space that wasn't really well regulated. And it does give me the impression right now that regulated traditional
finance companies are starting to kind of swoop in and try and grab that market share.
Yeah, this is fascinating. Maybe I'm just so lost when it comes to things being built on the
Ethereum blockchain. Can you give me like that? Explain like like i'm five maybe that might be even generous
explain like i'm three like what what paypal is doing here well i mean i it's probably as good as
um i'm not sure to be honest they're they're end game here obviously the settlements will are
happening extremely quickly so i think that's one of the main advantage with
a stable coin is you have almost instant settlement. And within their platform,
at least exchanging values, if I use their PiUSD and you're a merchant and you accept that,
they were saying, I believe that there's going to be zero fees on that. So there is somewhat of an
incentive for merchants to be accepting that
and i mean it does allow them to potentially open up some other businesses in the future that would
be you know whether they're interacting with other stable coins um like usdc is uh the biggest
regulated one if you'd like yeah i think that's my best guess um i'm not sure what the end game
is for them but um yeah that's as much i can say i'm not an expert in this field whatsoever either
so i would love to go in the technical detail but the reason why they chose the ethereum blockchain
is because the developer base uh is there so people can talk about all these other kind of you know blockchains the issue with the other
blockchain is that there's not as much developers using it and familiar with i think it's solidicity
or solicity as the language uh the coding language for ethereum so that was um their main reason for
using the ethereum blockchain an underrated network effect of any technology
is developer ecosystem. It truly becomes a network effect because you got to know the languages which
other people are using so that if there's opportunities to work on it, you know the
language. Or if you're looking for a job, you're not going to go learn a language that
is not in demand. And so real deep network effects build on top of developer ecosystems.
So this is interesting.
I guess we'll just watch with our tinfoil hats that touch the ceiling.
Yeah, exactly.
Yeah, I mean, you take note and obviously PayPal also announced a new CEO.
I didn't have that in my notes but uh i think
he's from um intuit if i remember correctly oh okay yeah it was the former cfo or i forget i
think he had their um maybe their quickbooks division the small business if i remember
correctly anyways i read that wasn't part of my. So sorry if we don't have some actual names here.
It was just, yeah, it just came top of my mind.
PayPal's new CEO has a big turnaround job.
Intuitive executive Alex Criss with two S's on the end of Criss.
How exotic.
Very cool.
All right.
Well, we'll watch.
Tinfoil hat crinkling on the ceiling at the moment.
Constellation Software. cool. All right. Well, we'll watch tinfoil hat crinkling on the ceiling at the moment.
Constellation Software, I'm going to keep this really quick because the results are boring and beautiful as per usual. The two KPIs I'm going to focus on are
revenue and organic growth. And then I'm going to talk about the two acquisitions that are pending
because I think these are the most important updates. So 26% top line growth,
5% organics. You can see how much those acquisitions really contribute to their growth.
I have a revenue by segment on a quarterly basis there on the chart that you can see there
from beautifulfinchat.io. And so is that a nice looking chart? Would you say this is quarterly, by the way,
that's not annual growth. That is quarterly growth. Yeah, it's nice. Nice little chart for
sure. Smooth line up and to the right. Okay, so Empower and Optimal Blue. These are two different
businesses that are pending acquisitions. So Empower and Optimal Blue are two businesses that are pending acquisitions. So Empower and Optimal Blue are two businesses
that were owned by Black Knight and ICE, Intercontinental Exchange, the owner and
operator of the New York Stock Exchange and a couple other business units, are trying to buy
slash merge with Black Knight, which is primarily in the loan business, like a lot of
like loan origination software. And Empower and Optimal Blue are two software businesses,
software as a service businesses that sit in there. Now, a sticking point with the deal was
they had to sell Empower for the, you know, we're in a pretty like tough, large acquisition regime.
Simon, would you agree?
Like, it's pretty like every single acquisition has faced a lot of scrutiny.
Is that a fair assumption?
Yeah.
Yeah, I would say so.
I mean, definitely since the Biden administration took over, it's definitely they've put increased scrutiny.
they've put increased scrutiny and to be honest whether you're talking about the u let's just talk about the u.s here because they're always obviously that the most important regulatory body
when it comes to that kind of stuff they definitely you know both sides of the aisle
can have issues with um i would say big tech in general anti-monopolistic anti-monopolitics exactly so i think uh yeah not surprising to be
so they're like okay we'll we'll solve this business the uh lucky buyer of it was
consolation software because they you know they're they're at the table for every acquisition of
software companies and then they say okay the ft FTC basically says, there's a lawsuit against
this acquisition. You guys have to sell this optimal blue loan origination software. And
Constellation's like, well, we're already buying your other business. Can we buy this too?
And I think it was sold for 1.8 billion in 2020. Constellation's buying it for 700 million,
only 200 million in cash with the remaining 500 million with seller financing. So two years later, I think like 35% growth later, they're buying it for half the price and with seller financing.
Seller financing is beautiful. It's like a 30-year note or something ridiculous.
So, is the business performing as well than it was or better than it was in 2020 or?
So, they had a – since rate hikes, there's been less loan originations,
but it's not like the business has like fallen off a cliff or anything.
Okay.
imaginations but it's not like the business has like fallen off a cliff right okay like that the business is expected to do i think roughly 250 million in ebitda this year okay yeah so
they're buying it for around seven times ebitda and and and it was previously bought for like 25
ish i think um those numbers are just estimates because it's a private company so or it's a it's not private
it's a company with inside of black knight that's not disclosed uh so they've now dropped this
lawsuit the u.s uh august 7th u.s federal trade commission uh told the federal court it wanted to
drop its lawsuit against the 11.7 proposed acquisition of data vendor Black Knight
by New York Stock Exchange owner Intercontinental Exchange as the sides try to negotiate and close
this deal. So now they're like, okay, we've done what you've said. And the FTC is saying, okay,
good. And so that gives you a lot of confidence as a Constellation software shareholder that these deals of Empower and Optimal Blue are going to close because they are dependent on the acquisition of Black Knight by ICE.
Sorry if this is a little bit confusing, but I'm trying to make it as quick, trying to make it as easy as I can.
it as easy as I can. Here's a quote from, dude, if you're a consolation software shareholder and you do not know the 10th man blog, it's called the 10th man. Just search it up on Google.
It's a Substack blog. The 10th, like 10, the number 10th man. He has the best write-ups on
this business in the world. I am convinced of
it. And he wrote something very fascinating here. I don't know what the Empower details look like,
but my educated guess would put it at an EV to sales multiple of around one times. So they're
paying one time sales to buy Empower. That's par for the course for large vertical market software.
While Empower looks like a good transaction,
I find the Optimal Blue deal way more interesting. From the 10,000 foot view,
it looks like Constellation is taking this business at gunpoint.
I just thought that was quite fascinating. And it's funny, right? You have this rare situation where management team is incentivized to sell this asset to
make this deal go through and Constellation's picking up a great asset.
Which is probably the worst timing for them to sell that asset when you think about it.
Because you made a point right like people anyone
you don't have to be in the mortgage industry to know and the u.s is the same you know origination
and anything related mortgage is way down compared right now compared to 2020 and compared to 2021
and probably even compared to 2022 so obviously you're going to be able to get a premium on the business. And then
you add that any potential buyer that would need financing to buy this, they're looking at higher
financing costs if they need financing from financial institutions. So it's kind of the
perfect storm for the consolation side, but a bit of a head scratcher for the sellers because they
are, you know, it's the- It's kind of a distressed seller.
Yeah, exactly.
It's almost a worse environment to be selling that kind of asset.
And, you know, maybe that part of the business won't do super well in the next year or two,
but at some point, rates will go down and mortgages will pick back up,
and then Constellation will look like they made genius of a deal.
And it's still a SaaS business business so it's a subscription business right
so it's not like their cash flows fall off a cliff just because there's less i'm sure it'll
be impacted a bit but yeah like you said it'll probably pick way back up in the future yeah
super funny uh you have like it's the same with anything right you have this just i wouldn't call
them a distress seller but they're like a force seller. And that's your opportunity, right?
Yeah.
Yeah.
And that leads us to my next earnings here, Brookfield Infrastructure Partners that release their Q2 earnings. where they have this capital recycle program where they essentially take assets that are more mature,
that they optimize, that they don't necessarily see long term as part of their asset mix,
and they'll sell them, use the proceeds to buy something else that they find undervalued,
and then they kind of do that over and over again.
And one thing that they've been mentioning over the last few quarters is that there's still strong demand for their asset, but it is taking a bit longer to close deals because of higher financing costs and less potential buyers. So I think it's something to keep note. Now, the stock was down close to 5% after the earnings release. Not sure why,
because overall, I thought the quarter was pretty good, to be honest. Funds from operation was up
8% for the quarter, in part because of acquisitions that were completed, organic growth, and tariff
increases due to inflation indexation. And that's what's really fantastic about Brookfield's business. And that's why it's
one of my largest holdings, BIP specifically, because I just love their infrastructure
portfolio and how they are able to essentially increase their rates with indexation based on
inflation. So utilities FFO was up 19% to 224 million. Organic growth of 10%.
And of course, the rest was because of indexation.
Transport FFO was flat at 200 million, well, 199.
Exclusing their divestitures, FFO was up 5%.
Midstream was down 5.2%, 261 million.
That was in part due to delays of one of their large complexes that will
be coming online in Alberta and slightly softer demand. Midstream would be pipelines, for example.
So when they bought Interpipeline, that's a big chunk of their mid-street portfolio now.
And data centers were up 20% in terms of FFO to $72 million. They had two recent acquisitions that
helped them pull those results upwards. And they've exceeded their annual deployment target
in capital asset recycling, like I was implying earlier on. They're on track to do $1.9 billion
in asset sales this year. They commented that the demand, like I said, is there for their asset
sale, but deals are taking longer to close because potential buyers have less access to capital.
And the acquired the two data centers they acquired, one in Europe and one in North America.
It actually helps them diversify their data center assets because they had previously only had assets in South America, India and Australia when it came to data centers. So overall, I think a
really good quarter for Brookfield. It's one of the reasons I have a big weight in my portfolio
for infrastructure through Brookfield is because I think whatever happens with the economy,
short of a financial collapse, which I don't think we'll have. But, you know, I guess it's
a non-zero chance. Short of that, I think Brookfield Infrastructure Partner will just be
chugging along. I mean, they may have a bit more trouble selling assets, like they said,
but overall, I think the results should be, you know, just steady, steady growing. You know,
it's not going to be exciting, but it's just going to be steady as she goes.
Yeah, like utilities, transportation, midstream, data infra.
These are a lot of like very steady cash flows, a lot of regulated returns, especially in utilities.
You talked about it, the returns being indexed.
regulated returns, especially in utilities. You talked about it, the returns being indexed.
Like you mentioned, if there's a downturn, that's actually when this business thrives.
They have been very opportunistic. I'd say the entire Brookfield mothership has been when they see assets trading at a deep discount remember when pipelines were
oh yeah no one remember when no one liked pipelines what did they buy inter pipeline
for like a bag of hockey pucks well they paid a premium baseball yeah i remember they made an
offer got rejected then they came back made a higher offer but i think they held the pretty
substantial yeah stake in him they already had a pretty big stake, yeah.
Yeah, and the reality is, I don't know if it's going to change. Maybe if we have,
you know, we see political changes in the US or Canada in the next election cycle,
that's possible. But right now, it's very hard to build pipelines, extremely hard.
And the consumption for whether it's natural gas or whether it's
oil in the world, it's not really showing signs of slowing down. And, you know, it will eventually.
But the reality is that, you know, if the demand stays up there and a lot of the older pipelines
may need to be decommissioned or at least have some heavy maintenance work.
I think it's a pretty good asset to be holding.
So I think it was a pretty smart move by Brookfield.
I mean, I've said it before, but I'll say it again.
I think it was a smart move for them.
I know the pipeline business less than the utility business when it comes to electricity utility or a water utility.
But when they have big CapEx expenditures like that, it goes into their rate case,
and you actually want to have huge CapEx hits, basically. And I'm not sure if the pipeline
business is the same where it's regulated like that. But if you have a huge capex like upgrade year on your
utility you build that into your rate case and you get paid for it and so uh that's a beautiful thing
uh when it comes to the utility business i don't know if pipelines work like that i want i
we should we should get a pipeline uh expert on here on the call. Yeah. No, that's sad. I think they have somewhat, you know, I think it's probably varied, but I'm not 100% sure.
I think they probably have some long-term contracts.
Because they're not selling into like independent electricity system operators like a pipeline is not doing that.
So, anyways, maybe some research for us to look at and
and do on the pod have a guess that would be great yeah yeah yeah yeah exactly good stuff simone we
have some more stuff but let's leave it for next week we got uh you know this is always a million
a lot of stuff happened in the last like 10 days like i thought i had my notes for one week and my notes said and literally i
was like oh i won't have to do too many notes for this one i ended up like redoing half of it because
there was some really important news that came up well we got more to talk about these news roundups
are every single thursday um and and we're here to we're here to hang out with you.
So come on, hang out.
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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.