Full episode: Market Call for Thursday, October 15, 2020
James Telfser, partner and portfolio manager at Aventine Asset Counsel
Focus: North American stocks
The tug-of-war between the bond and equity markets continues. Similarly, investors are split as to whether we are in the early stages of reflation or whether markets are stuck in a deflationary loop. The eventual outcome of these debates will impact all asset classes, from currencies, to treasuries, to hard assets. Central banks are on record stating that interest rates will remain near the lower bound for the foreseeable future and that there is a willingness to let inflation run above target. We believe this will continue to support risk assets in the near-term, leading us to remain constructive on equity markets through Q4 albeit with elevated volatility and lower average volume. The absolute level of corporate debt remains a concern; however, its composition is increasingly of longer duration and lower yield. In this environment, we remain invested and active, yet focused on top line and dividend growth.
ATS Automation Tooling Systems (ATA TSX)
ATS is a custom engineer and producer of automated manufacturing systems. Current trends towards robotics and automation across all industries make this a stock with significant tailwinds. We have been impressed with ATS from an operational and management team perspective, as current CEO Andrew Hider has refocused the organization on driving shareholder value. Their backlog is very strong and we have been impressed with the recent life science wins and higher margins. We believe that recurring revenue is going to increase over the next few years through support services, further stabilizing their operations and increasing margins. This along with their appetite for acquisitions should improve the valuation multiple which is current at a significant discount to peers at 10 times expected EV/EBITDA.
Otis Worldwide (OTIS NYSE)
Based in Farmington, Connecticut, Otis is the world's largest manufacturer of vertical transportation systems, principally focusing on elevators, moving walkways and escalators. Otis is one of a select few companies through which to participate in this market globally. The market is dominated by four main players: Schindler, Kone, Otis and Thyssen Krupp. The Otis Elevator Company was acquired by United Technologies in 1976 and was spun off as an independent company 44 years later. Otis is the most geographically diversified of the elevator and escalator manufacturers, with a solid footprint in high-growth emerging markets. This diversification will be disproportionately rewarded by continued modernization of its end markets. Furthermore, Otis will benefit in the near term from office towers and residential buildings reformatting their elevator systems to better manage social distancing and new work patterns. The company has a record backlog, the majority of which is focused on the recurring, high-margin maintenance and repair segment. Otis generates sector-high free cash flow conversion and has an attractive debt profile with net leverage under 2.5 times. It trades at a 25 per cent discount to peers on P/E, EV/EBITDA and P/CF.
Sangoma Technologies (STC TSXV)
Sangoma Technologies provides unified communications solutions targeting small-to-medium-sized business, enterprises and telecom providers. Through organic growth and acquisitions, Sangoma has seen their revenue increase to an estimated $131 million in 2020 compared to just $57.4 million in 2018. Earnings have grown from $6.8 million to over $21 million over this period. The success is driven by their shift to cloud-based solutions, which come with a much higher recurring revenue profile. Higher margin recurring revenue just recently exceeded 50 per cent of their sales. We believe the valuation remains very attractive at these levels at 12 times EBITDA and 2 times sales given the consistency in organic growth (a 12 per cent average over last four years). Sangoma was able to raise $80.5 million at $2.30 per share during this challenging period; this capital could be used to further transform the company through M&A.
PAST PICKS: OCT. 15, 2019
Akumin (AKU-U TSX)
- Then: $3.65
- Now: $4.37
- Return: 20%
- Total Return: 20%
GDI Integrated Facility Services (GDI TSX)
- Then: $28.77
- Now: $37.94
- Return: 32%
- Total Return: 32%
Emera (EMA TSX)
- Then: $56.70
- Now: $55.69
- Return: -2%
- Total Return: 3%
Total Return Average: 18%