The Canadian Investor - Two Stocks on Our Watchlist and Tracking the Right Metrics

Episode Date: September 2, 2024

In this episode of the Canadian Investor Podcast, we dive deep into portfolio management and how to achieve a state of zen when it comes to tracking your investments. Braden shares his personal approach to monitoring the key metrics that matter most for the companies in his portfolio, including how I simplify the process to keep things stress-free. We also explore the pitfalls of investing in companies with high valuations, using Nvidia as a case study to illustrate the risks. Finally, we put the spotlight on two stocks currently on our radar: WSP Global, with its robust growth prospects, and Schneider Electric, a global leader in energy management and automation. Tickers of Stocks & ETF discussed: MA, ASML, ISRG, WSP.TO, SU.PA, NVDA 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 Dan’s Twitter: @stocktrades_ca 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  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. 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 Belanger. The Canadian Investor Podcast. Welcome in to the show. My name is Brayden Dennis. As always, the boys are back in business. As always, joined by Mr. Simon Belanger, the tenacious. Bro, I just turned 29 yesterday.

Yeah. I said to me, I said, what do I do here in my last year of my 30s? I said, start stretching. There's a reason professional athletes hit the age cliff in their early 30s. I think that is sage advice, dude. My hips. It's my hips, dude. Yeah.

That's where it all comes from. Guys like you and me sitting down for work all day. Yeah, I mean, I'll send you some exercises. I know a few hip opening exercises. I have a whole slew of like stretching and mobility. You're seasoned now. Yeah, exactly. Dude, for me, it's all in the hips.

Just like golf. It's all in the hips. Just like golf, it's all in the hips. Dude, we have two great segments today before we do fan favorite podcast recurring segment on the show here, Stocks on Our Radar. So we're each going to go through something and then we're each going to go through a stock that has popped up on our radar for one reason or another, explain what they do, explain what we'd like or need to explore about their future

coming up. And that segment is, of course, sponsored by our friends at EQ Bank. I will kick us off today. It's been a while. I've done this segment on the show a few times now, and it's by design that it comes up often. And that's because I think these types of discussions don't happen enough. There's a lot of information online, a lot of information from this podcast about how to find the next big winner, how to research stocks, how to get excited, how to do research, different ideas of portfolio companies that you might want to take a look at. But there is very little discussion relatively about monitoring, about portfolio management, maintenance, and how to get what I call Zen mode because this took me a long time this took me

years and years to get to confidence where I feel fully zen now what I mean by that is when I don't feel zen in my portfolio it's tracking stuff it feels like feels like when you have an inbox, when you come back from vacation- Yeah, you're losing control. It's almost that, right? Yeah. You come back from vacation and your inbox at work is like an absolute nightmare and disaster, and you feel like you have no idea what's going on. That's the feeling I get when I have no idea what's happening with my portfolio positions. And because of my investing style, I don't have to feel that way that often because I'm buying companies that I believe are going to be great quality through ups and downs. But it's the stack of emails piled hundreds high and drowning to catch up on it and trying to go

read every earnings call or type into each portfolio position on FinChat, like what happened in the earnings call, it's still like anxiety inducing, right? So here's how I keep on top of things. And here's how I simplify it so that I can maximize beach time and minimize stress time, maximize Zen mode. So I'm going to go through my examples of four companies I hold for my portfolio and what I do with a spreadsheet. And of course, there are other factors and industry dynamics I'm looking at, but this is a baseline of a spreadsheet that I keep constantly. One or two things that I'm looking at for each company that I know if these are tracking,

then my investment thesis is playing out. So I'm gonna go through four examples here. First example is MasterCard, company I own. I am just looking to track total transaction volume over time. That's what I'm most interested in seeing because that and its duopoly counterpart or oligopoly counterpart globally is a toll road on transactions via the card network. I know they're going to print like 60% free cashflow margins. And I know that they're going to print like 60% free cashflow margins.

And I know that they're going to have pretty steady take rates unless there's huge regulatory intervention. So I'm good with just tracking that number. ASML, their backlog and total units sold. Look, this is a business where they're selling a number of units that I can easily keep track of. In 2018, that number was 387. In the trailing 12 months, it was 570. In terms of net bookings, I just want to track if bookings are performing well, and this is largely a cyclical macro type of number. Intuitive Surgical, their installed base. This is the amount of robotic systems that are out in the world. That number has gone from under 5,000 in 2018 to over 9,000 now as of their most recent quarter.

And this is the base that they are going to generate revenue and instrument recurring revenue on. Number four, and a company that is going to come up again later in this podcast, WSP Global. I want to track two things, their service backlog, so that's their customers filling their books with work they're going to complete in the future, and organic growth since they buy a lot of companies. One or two things for each of these businesses allows me to look at a one pager, allows me to extract those numbers quickly from the platform I'm using and know that I'm tracking well. And it also gives me the ability to take a hard look in the mirror if it's not meeting my expectations. And so I think this is super, super important for self-directed investors to have some sort of system. This is my system. It doesn't have to be your system, but have some

sort of system to reach what I believe is Zen mode because you don't make good decisions when you have that stack of emails piled up in the inbox. Yeah. And I think it's a good system for you. And I think it's important for people to remember if they do have time to dig into more of the earnings calls, the data, more specific data for even any of the names that you own, right? Some of the names that might overlap that they own as well. I mean, I've been pretty vocal about that. There's a reason why I've reduced the number amount of holdings is for me, it was becoming harder to stay on top of it. So that's why I'm supplementing it with index funds and ETFs. And that just made sense for me. But if

someone, maybe they pick and choose a little bit of what you said, but also they still like to listen to every earnings call, that's fine. I think at the end of the day, it's all about time commitment. Exactly. And establishing some sort of baseline. Those things you mentioned are all things that I like to do every quarter as well. But some sort of baseline that, you know, you can commit to and just have some sort of process there. It feels good. And maintaining this database, like it's really quite easy. You know, it's one or two lineups. You know when people say like if you can't explain something simply, you don't understand it well enough?

Yeah. Yeah. Simply, you don't understand it well enough. Yeah, yeah. That's how I feel about an investment thesis or a KPI that you want to track or a handful of them that you want to track for each company. You should be able to distill it down to like, if this tracks, I'm good.

You know, like the thesis is playing out. Of course, there are things outside of your control at the macro level that are going to be random and sporadic. That's the world we live in. It's organized chaos. But a lot of those things are certainly kind of out of your control. And as an investor, I want to focus on the things that I can track and I can be in my control. Yeah.

No, I think that's… Or at least are knowable. Yeah, exactly. I think that's great. And I think it's just being strategic, right? Like you're trying to focus the time you have to be as efficient as possible. And that's what works best. And I think at the end of the day, I've said it before, I'll say it again, you just have to be honest with yourself in terms of no matter how much you love investing in terms of how much time you have to commit and then build a strategy around that. Yeah, absolutely. and then build a strategy around that.

Yeah, absolutely. 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. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're

building and people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, Bloss in the app store and I'll see you there.

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, what's up next? Yeah, so I entitled this segment, The Problem with Evaluations, although it is using NVIDIA as the kind of case study here. Not a long case study, but I think it was, it's very relevant because obviously we're recording that and NVIDIA actually reported yesterday evening. So today, the stock,

when I last look, I think it was down around, it's been down between 2% and 4% for most of the day. Oh, it's close to down 5% now. And the reason I wanted to talk about that is, first of all, if you look at the quarter, I don't know what you thought, but I thought it was a phenomenal quarter, like at first glance, at the very least. What's not to like? It's unbelievable, right? Yeah. I also can't believe how much cash it's spitting off. It's unbelievable. The pricing power, like you're selling hardware at 80% gross margins. It's like double LVMH. It's like double Ferrari. It's unbelievable.

Yeah, and it won't be like I'll do this a bit as a quick earnings recap, but like you said, I mean, it was a very good quarter. I just want to give some context because people might just see the not look at the earnings release or not look at the results and say, OK, they must have had a bad quarter. It's down 5 percent. That's actually pretty as far from the truth as you could get. They had a phenomenal quarter. So they were guiding for revenues to be in the range of twenty27.4 to $28.6 billion. Revenues actually came in at $30 billion, which was 5% better than they had guided. And when they do guide, they actually give a number and then they say plus or minus 2%.

So that's why I gave that range here. And that's a 122% increase year over year and a 15% increase versus the previous quarter. They also beat analyst expectations, which were higher than their own guidance on that front. They are expecting gross margins to be in the mid 70s in terms of percentage versus 76.4% for analyst expectations. I wanted to mention that because that was kind of pinpointed at potentially one of the things that resulted in the stock being down today. They are guiding for revenues of $32.5 billion for Q3, which would be a 8.3% increase versus the previous or this current quarter and 80% year over year. And they've also approved an additional 50 billion dollars worth of buyback.

So, you know, I tell someone this and most people would say, OK, this stock will definitely be up on the day because it's been a phenomenal quarter. They beat expectation. They even beat their guidance and they beat analysts expectation. Well, that's not what happened. And I'm sure Dan and I will chat a little bit about it this Thursday when we do the news and earnings. But the reason I wanted to mention that is that's the problem with high valuations is it just becomes so difficult to establish whether, you know, what's priced in at this point. And to be investing, and obviously it's one day, maybe, you know, a week, a month, a quarter, a year from now,

the stock just goes on a rip and it just, you know, goes up 25, 30%. I don't know, but I think it's really important for people to take note of this because I think people will sometimes try to bet that it will pop on earnings or whatever the case is. But when a company is trading at such high valuations, it's just very difficult to establish what's already baked in the price and what the company actually has to do in the next quarter, year, five years to be able to grow into that valuation. Yeah, I mean, it's happiness equals expectations minus results. I believe that to be true for life and for investing, right? You have expectations so, so high and you deliver something so wonderful. And it's like when you go to the movies,

this blockbuster is so hyped up. You're so excited. And the movie was fantastic, but you walk out of there disappointed. That's what happens in the market. Yeah. Oh, yeah. I mean, it's, yeah, it's crazy.

And like, I'll ask you another question. Like, what would happen if they came in slightly below their guidance? Yeah. You have something priced to perfection. And maybe it's the big question. I mean, this is never a discussion about NVIDIA. But the question is, how long is the build-out going to go for?

That's the money to be made or lost on NVIDIA stock. And I think that there's still a lot of upside here. And I can't believe I'm saying this. If the build-out goes just two or three years longer than people expect, then you have huge, huge amounts of cash that's going to be spun off that analysts are projecting right now today. But to your point around valuations is you have something priced to perfection like you did with ALS. I would say most software stocks through 2021, if not all, were priced that you're going to have this pulled forward growth that you saw post-COVID continue for five plus years.

And it continued for like 18 months tops. And then it was like, oh shit, like this thing's priced like I have my growth projections out five years and it slowed down to like 2018 levels in 18 months, the math doesn't work, right? And so this is just a math equation and valuation and reality is gravity. You can jump off the ground, you can leave earth for a little bit, but gravity will always bring you back to reality. Yeah. And when it's trading too at such high valuations like it is now and i'll just throw a couple of items that i think are not talked a whole lot i've been pretty vocal you know that about the taiwan risk right nvidia pretty much all of their trips are produced in taiwan maybe a tiny portion

are outside but i would say probably 90 plus are produced in Taiwan. So that is a risk there. Who knows what will happen? So far, I think it's been calmer than a lot of people expected, especially since the Taiwanese election was earlier this year, and that was supposed to be definitely an inflection point. But you also have, you know, I think the elephant that we're not talking about next door about the US election, Trump has been very vocal about tariffs. And Trump is I think we can probably most people can agree that he is probably more on the protectionism side when it comes to the economy. Well, you know, what prevents Trump from deciding to put some even more intense restrictions on where these most advanced AI chips are shipped? Maybe he puts even more restrictions on China.

Maybe they even put restrictions on other countries that are purchasing these types of chips right now. So I'm just saying that these are potential wildcard that there's all these expectations that are built in in the valuation of Nvidia right now. And things could take a really sharp turn, you know, six months, a year, two years down the line. Just forget about the old AI buildup. It could just be, for example, a geopolitical turn that has a massive impact because it's such a strategic asset to countries like the US. So I just wanted to mention this. I mean, obviously, we're talking more about NVIDIA, but you can think about, you said software companies, right? SAS in 2021, the valuations were really stretched. But I think it's just important to remember that when you have valuation that are just that high, on the short term, but also the

longer term, you have to start asking short term, but also the longer term, you have to start asking the question, like what's already priced in? But almost 19 billion of operating profit. Yeah. Oh yeah. It's crazy. And that 50 billion buyback switch, that one I question, I was chatting with, texting with Dan and I'm like, why would they like buy back 50 billion? Honestly, like why not just issue a special dividend at that point? I just think the valuation is so high. It's hard to make a case that these...

I mean, it could happen, but I think it's definitely a bit riskier in terms of thinking they'll grow within that valuation. Whereas, why not just pay your shareholders and let them do what they want with that money? But, I mean, that's me at i'm looking at the insider i'm like i'm trying to see what jensen's doing with his own i think he's sold a bunch recently yeah yeah i think that's what i saw because that's always what i want to look at if they're doing buybacks at that price because the executives will be like at that price because the executives will be like, they'll guide for growth.

But if they're like, guys, I actually think that these, I think 50% of data center revenue is coming from three customers, right? Yeah, something like that. The big cloud providers. So I wonder if they're like, I can see this happening for years and years out for than the market does right now. We'll buy back stock,

but he's selling 240,000 shares every few days. And these big providers too, they have the resources to kind of decide like, you know what, like why don't we start looking at potentially making some of our own chips, even if they're not as good at long term i mean it'll be worthwhile for us like i'm not saying it would happen necessarily but they do

have the resources if they really wanted to to start entering that or at least you know look at other solutions that are more cost effective jensen course, this is insider data from Finchat. You go to the ownership tab for the company and then you go to trades. And of course, there's always a broader story to be told about insider transactions, but just objectively surface level here, Jensen's offloading about a million shares every couple of weeks. He's doing okay. he's doing okay he's doing 30 million dollars every couple days on the open market mark uh stevens who's one of the executives he did sold 156k with the shares the the executive vp of operations sold a million bucks or no 13 million bucks with the shares 104 million from mark stevens on uh late july even if they believe they still believe in the future prospects of the company they'd be stupid not to sell some of their

stake to at least hedge a little bit and diversify so i i would say like like you were saying like i think i wouldn't put too much talk into that. No pun intended. No, they should. I mean, the market cap's $3 trillion. If you've grinded your whole way to this business, worked there as long as Jensen has at the helm, it's like, if I'm not going to line my pockets at $3 trillion, when am I? You get a complete free pass.

It's more of a comment around the stock buy back versus insider moves yeah exactly but uh no i think and it's just a good reminder i just wanted to say that i think this is especially true for obviously high-flying stocks like nvidia for the most part when you have a company that that meets is uh its forecasts or goes on the higher end of its range when they do some guidance and they release results. They'll tend to do quite well, assuming that they don't offer guidance going forward. That is really bad. But, you know, at the end of the day, when the valuations are high, who knows where it goes?

So I think it was just I decided to do that segment because I saw the results and then I saw the reaction of the market and I was kind of scratching my head a little bit. Congrats to people who listen to this podcast who have been long the stock. Oh, yeah. Congrats. Well done. Well done. Hey, I own it through my index funds. So that's how I.

Yeah, there you go. Yeah, exactly. No, seriously, well done. I mean, this is the most wild growth of a particular segment, aka the data center build out. Right place, right time. The demand for their hoppers and people building out these obscene amounts of super clusters and data centers. It's like, wow, good for you guys. 78% gross margins on H100s. Unbelievable. Pretty good. Yeah.

All right. Let's move on to stocks on our watch list presented by our friends, EQ Bank. You and I both have one here. And I have a Canadian stock that I've actually owned for years and years, which is uncommon to show up in this segment. Usually I'm turning over some new stone, trying to flip over some new leafs with some new ideas that I've never heard of. But this one has just been sitting in my portfolio, riding high. I don't know if you've seen the chart on WSP Global. I know it's done well. I haven't looked at it in a few months, so I'm assuming it just continued. The chart is unbelievable. And that's not why I hold names, but it is sure nice to look at. Well, the one I'll talk about is not Canadian. We have not talked about it on the podcast,

and it has performed quite well as well. Nice. So the reason it's on my radar today as a shareholder of something to potentially add to, because look, I haven't added to it, I think since 2018, but I've never sold a share. I've just let it ride. It's on my radar again, because I was just looking through the global acquisition targets that they have been talking about and that they've been buying. So earlier in their history, like when I was a shareholder, this was the list of their acquisitions of that year. Canada, Canada, Canada, Canada, Canada, Sweden, Finland, UK, Canada, Canada, Canada, Canada.

Okay, that was the acquisition targets. A lot in Quebec, a fair bit in Ontario as they build out this multidisciplinary engineering firm. And the Canadas of Europe with Sweden and Finland. Okay. Exactly, the Canadas of Europe. This is their last 10-ish. Spain, US, Finland, Canada, Australia, Switzerland, US again, UK, Australia, Canada, USA, USA, USA,

Switzerland. So the mix in their execution strategy of, look, hey, we did a lot of North American acquisitions as we bolstered out this multidisciplinary firm in North America. But we got targets all around the world, folks. And when they say that, I'm like, okay, I'm interested. When they execute on it, I'm financially very interested. And so I like roll-ups when they're done by really smart capital allocators, which I believe that they are. But I like when they have opportunities outside of North America. It's why I've been, I've praised Canadian stocks like Waste Connections and Dollarama, because look, I get it. What Waste Connections has done and what they're going to continue to

be able to do in North America with rolling up garbage collection, fantastic. But I want exposure to potentially 50,000, 60,000 targets, not 300, 400 targets. That's a materially different runway. And so I'm very interested in what they've opened up here around the world as WSP Global in the name Global has suggested. So that's number one. And number two, their organic revenue growth has far, far surpassed my expectations. With these types of companies, you can kind of expect anywhere from zero to 4% inflation hikes in organic growth over time. And yes, of course, you're going to see a bit of inflationary price growth in these numbers, but overall it has persisted for years way beyond my expectations, even before we saw a lot of inflation in the global economy.

Where organic net revenue growth has been over 8% for many, many quarters in a row, 12%, 9%. Of course, there was some contraction when things were shut down in 2020, but not too bad. And the backlog's grown from 8 billion to 14.7 billion just since December 2019 ending quarter. So the growth, the opportunities globally and the organic growth have far surpassed my expectations. I like to reward winners. I think it deserves another look here. Yeah. I mean, I mostly listened to you to know about that company. It's also an area I think that you understand a bit better than I do, but definitely wished I would have bought it when you

brought it to my attention a while back. It's fairly easy to understand in the fact that it's a services conglomerate, like a Accenture, like a CGI, but specifically for civil engineering applications. That's fair. Yeah. I just don't understand the civil engineering part. I used to know a little bit better in my days of static mechanics. I just don't understand the civil engineering part. I used to know a little bit better in my days of static mechanics and fluid dynamics.

But hey, I understand it enough. And I think that it's a fairly easy business to understand in terms of the numbers and the financials. That's good. 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. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked.

The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment

ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. 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. Speaking of businesses that I don't fully understand just yet, Schneider Electric is the one on my watch list. It's a company I've heard of before. I'm sure you have, right, Schneider Electric? Definitely. Yeah. So for those not familiar, it's just a global company that specializes in energy management and automation solutions. Their primary focus is on making energy safer, more reliable, efficient, and sustainable for a wide range of industries. That includes buildings, data center, infrastructure, specifically also electrical grid infrastructure, and industrial sectors. It is a company that's listed in Paris Stock Exchange,

so under the ticker SE. And you can also buy it over the counter in North America under ticker SBGSF. It may be a bit difficult for some to buy the actual kind of Patty listed shares. I think the Paris listing is is su by the way uh oh yeah you're right it's su yeah it is su sorry about that so it is su because i had put pa but i'm like no that's the symbol for well it's because these european companies they always have like schneider electric se is the name of the that's right so you're right it's su i listed on the package exchange and then again you can buy it over the counter as well. Over the counter is fine when it's you see that pretty often, right? For

companies that are listed in Europe, they may not have a listing in North America on one of the main exchanges. They'll have it over the counter, whereas obviously over the counter pink sheets can be riskier if you're looking at a company that's solely listed there. That's where it gets a bit trickier because then there's oftentimes not that much liquidity. You know, it could be also companies that are just smaller that don't want to get listed. So you just have to keep that in mind. Doesn't mean that it's listed on OTC, that it is necessarily risky. It's not, you know, it's not just apples and oranges or just one kind of company. So I just wanted to mention that. So Schneider Electric could benefit, well, or should

benefit from structural trends going forward, like the expansion of the electrical grid and continued automation, like I mentioned. It's a business that I'm still definitely learning. Like I said, I've started to read up on it. It is something that's a little bit outside of my circle of competence in terms of the technological aspect of it. But I still think I understand the general idea around it. So some of the examples of products that they produce are transformers, switchboards, power meters, cooling racks for data centers. They have a slew of different options for industrial automation. I was like browsing on their site as well. They'll implement and install those solutions.

They'll offer modernization services for those kind of companies that would have like older systems in place. They can operate them or manage them or even support the maintenance of them. So, and the last last thing they do have some training available in terms of the actual number. That's where it gets really interesting. First of all, it's not going to be like a super high growth company. It's a pretty mature company, but I think it's a very interesting play. We talked about data centers, for example, like they could be a beneficiary of that because one thing that we've talked about,

and if you've been reading a bit more on data centers, is we're going to need a whole lot of power to power those data centers. And Schneider Electric can definitely be a company that will benefit from that. building automation and what I'll just call electrical engineering companies are going to catch a bid here if they haven't already. It looks like they all have already. The backlog has grown from, I was just, while you were talking, the backlog has grown from $6 billion to $15.4 billion in just five years. Yeah. That's-

Oh, it's actually 19.2 when i read their um their most recent sorry statement because i think you're talking about just one of their segments just yeah just the energy management backlog yeah that's what i figured the industrial automation segment does not grow nearly as fast but uh yeah no i i when you mentioned that i kind of knew what you were looking at so that's why why. So the market cap, like I said, it's not a small company, 127 billion in euro. They had sales of 36 billion in the trailing 12 months. Sales have grown at 6% on an annual basis over the last five years. The energy management segment represents about 80% of their business, while automation is 20%.

So clearly, again, here, you know, energy management is the biggest part of their business while automation is 20%. So clearly, again, here, you know, energy management is the biggest part of their business. They had a backlog, like you mentioned, of well, 15 for the energy management and then 19.2 total for at the end of 2023. Net income was 3.9 billion over the last 12 months and has grown at 11 percent on an annual basis over the last five years. They generated tons of free cash flow over five billion over the last 12 months and free cash flow has grown at seven percent per year again over the last five years and free cash flow per share has grown at the same pace here over the last five year at seven percent, which, you know, you can probably figure out that the share count

has stayed pretty stable. It has, so they haven't barely moved. It increased at 0.36% over that same time span. And in terms of gross margins and operating margin, that's where I think it gets really interesting. Those margins have actually steadily increased over the last however long you want to look. But for Joint TCI viewers here, you'll see that these margins are steadily increasing over the last 10 years, five years, whatever time frame you're looking at. The only ones that are a bit lumpier and that's pretty normal is the free cash flow margin. But you're looking at gross margins of around 42%. You're looking at operating margins of around like 16, closing in on 17%. And the most recent free cash flow margins are around like 13.9%. But that's probably a bit more on the high end. You probably should expect around 11%, 12% here for them. So that is pretty impressive from that standpoint.

Anything you want to mention here on the margins before I finish up? No, nothing on the margins. Just a quick comment about these types of companies. The Only challenge I have with them is the SKUs and products that they sell is so expansive that it's really, really difficult to understand the business in terms of where they have key advantages over competitors or why people are choosing Snyder over someone else in certain verticals. people are choosing Snyder over someone else in certain verticals. And there's so many different products that you have to kind of figure out which ones you think are important to the thesis moving forward. And if you can try to figure out where the flagship product demand, where's the flagship demand coming from right now? Is it the data centers? Is it something else? Is it a build out of photovoltaic systems? Those are the things I'd want to really understand. Yeah. And that's a great point because even with those two big segments that I mentioned, so you have, you know, energy management and automation. I mean, that's a big bucket right there. That's a big bucket of solution. Like I

was just browsing on the website trying to understand. And that's a great point. Like that's why I was saying like a company that I don't know super well, because I did find that there was a lot of information and something I'll have to research more and more to probably identify maybe some key, like maybe a handful of like key products that are really some growth vectors for them going forward because they do have a whole lot and if you're not specialized in this kind of you know sector with your job for example it may be a bit more difficult and that's where i stand so there's still some more research and that's why it's on my watch list in terms of the debt i mean they

have seven billion in net debt however it, it's really manageable. They have an EBITDA ratio, a net debt to EBITDA ratio of 1.6. So that's essentially just how much EBITDA would it take, how many years would it take in terms of EBITDA to repay that debt. So it would be 1.6 years. So very manageable. It's nothing out of the ordinary. Interest expense, though, has jumped $164 million from $164 million to $423 in 2023, which is likely because they, I would have to say they probably refinance a big chunk of their debt would be my guess. It could have been variable debt, but based on the timing, it's probably just a refinancing that happened. I mean, they can pay that. They're more than able to pay that. So it's

not a big issue, but definitely something I want to understand the reason for that by looking at their financial statement, the footnotes. I know if you're interested in this company, it'll be pretty easy to figure out if you look at those footnotes. They do pay a dividend that's currently yielding 1.5%. The dividend is about 40% of free cash flow they generate currently. So more than sustainable here, not an issue. And it's always been a relatively low payout ratio for their dividend. It has grown 8% over the last five years on an annual basis. So for those dividend investors that like growing dividends, this is definitely a company that grows its dividend. Although I would caution people to keep in mind that they publish in euros. I'm sure they get revenues around the

world. So obviously currency will affect some of their revenues based on that. But the dividend is paid in euro. So keep that in mind as the euro fluctuates compared to the Canadian dollar. You know, it will probably not be exactly the same as the potential dividend increase that they would give. So keep that in mind. And the company has just like it's just crushed, to be honest, in terms of the total return. So the last five years, they had total returns of 242% versus 106% for the S&P 500. So for a company that's as mature as them, I mean, still growing for sure.

So people looking here, they'll see the difference between the two. But I mean, the returns over the two. But I mean, the returns over the last five years, really, really impressive. So don't know if it'll continue. And in terms of valuation, it's definitely not on the cheap side, I would say. So they currently have a P ratio of about 25 on a forward looking basis and for price of free cash flow of 27 on the higher side i would say historically if you can get this company trading around like in the low 20s for each of these ratios you're probably you know getting a decent valuation a decent deal but right now it's probably more of a kind of wait and see, wait

till the valuation gets a bit better. That's the way I would approach it if I knew the company better and everything checks out. But yeah, the valuation is a little bit high here. I'm just looking at their slide from the latest Q2 key innovation on products for the year. on products for the year. The Altivar starter, the EcoPact, the MasterPact-y MTZ, the Airset, and then a bunch of different software products. It gives me two thoughts. One, I like that there's a combination between hardware and software happening here that really strengthens the stickiness of the revenue without question uh and then my second thought here is to get confidence in this company phone you know use a use a lifeline uh whose line is it anyway stuff not whose line is it anyway who wants to be a millionaire oh yeah style

call a friend do you have an electrical engineer friend? Do you have a electrician friend? Yeah. Commercial electrician friend who can talk you through why these products over the competition to try to get some of their insights, right? Like that's what I would do with these types of names is don't be afraid to ask people who are in the industry. Don't always just talk to investors. Talk to people who are boots on the ground don't always just talk to investors. Talk to people who are boots

on the ground with these types of things. Yeah, it could be boots on the ground with like Hydro Ontario, Hydro Quebec. Those are likely customers of Schneider Electric. And even if they just do the installation, they'll probably be able to provide some good insights, how good their products is, if there's any competitors and stuff like that yeah it looks like they're growing fast in india right now that is that's interesting it says it says uh high growth double digits just i'm summarizing from their transcript in india and that number is growing probably the fastest of any other segment, even though they don't break it out in their segments. They've hinted at that in the transcripts.

That is a geography with overwhelming demand for electrical infrastructure. Yeah. Yeah, I mean, yeah, India, definitely. I think that's a really good point. I'm not surprised that they would mention that on the call. I think it was just some crazy stat. I've brought this up before. There was like a 25-year period where you went from low 80% to nearly 100% electricity access in India in like a 25-year period.

Yeah. I think you mentioned it before, but it is something. And obviously- even if I'm sure they'll have to do when you build out the grid so quickly like that, I'm sure they're going to have to do a bunch of improvements too in the near future as well. Exactly. So it's an interesting play, especially if they're growing quickly in India. It could be a good way for people to get some exposure to that Indian growth story with a company that's not overly risky, to be honest. Obviously, valuation aside, you'll have to hope that the growth continues at a reasonable pace. I think mid to high single digits is

probably reasonable to expect, but if they do that, they should be good for probably the foreseeable future. Global infrastructure, and in this case, global electrical infrastructure is a fantastic way to play emergent market growth without having to buy emerging market stocks. And even in North America and Europe, right? Like the growth and just, we've mentioned it, right? Like the demand for data centers,

like we're going to have to upgrade our electrical grid pretty substantially in the next decade. I don't think there's any way around it. And I asked Finchat, what are the major end markets that are driving the growth on Schneider? And it said one data center and networking. Interesting, large data centers and enterprise data centers including ai uh use cases strong demand and great great infrastructure

electrical waste and wastewater transportation sectors again this is all good this is all stuff we want to know i just want to to talk to networking engineers and electrical engineers. Yeah. I'll shoot out a tweet on X or Twitter, whatever, and I'm sure I'll have a few followers that are familiar with the business just because of their jobs. So I think I'll do that, and maybe I can report back. Before we wrap up today, I just saw this before I hopped on with you.

Before we wrap up today, I just saw this before I hopped on with you. Speaking of X, Twitter, Brazil has shut down SpaceX operations and Starlink frozen assets, financial assets in Brazil in retaliation for X's stance on brazilian government officials on the x platform so if they've just said okay x you don't have a presence in brazil like with financial assets but your ceo founder of the other company does and we're gonna freeze unbelievable Supreme Court in Brazil in the last few hours what are they accusing X of doing let's be honest of Elon Musk doing at that point if they're going after SpaceX it's clearly because they have that's it's an Elon thing it's an Elon thing. It's an Elon thing for sure, yeah. Because they threatened to ban X in the country. Supreme Court judge says platform faces ban unless Musk names legal representative within 24 hours. And then as a result, an action of this,

they've gone after his other company, which is SpaceX, because they have financial assets in Brazil. This is breaking right now, so I don't know all the details, but this is absurd. This is crazy. Okay, because apparently there was a court order that he was saying he wouldn't follow, but I'm not quite sure. So we'll have to read more on it. But that's interesting, to say the least. Oh, man. It's like, you know, I don't have anything for you to come after you in this country, but you have this other company that operates here.

Take a hike, wow that's i don't know what the legal precedence of being able to do that even is i have no idea well yeah and i'm not i don't i'm not super familiar with how the legal system works in brazil either right so we're kind of used to a system of law you know law and order in can, in the US, Western Europe, but Brazil, I'm not quite sure exactly how robust it is. So I think it's something I need to read up on a little bit for sure. I'm definitely skeptical. Thanks for listening, folks.

We really appreciate you listening to the podcast here. We're here Mondays and Thursdays. This coming Thursday, so this podcast comes out on Labor Day. That's scary. Summer's already over. Labor Day. And the Thursday live will be FinChat V4

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