Canadian National Railway

Canadian National Railway Comp. (TSX: CNR) is a true backbone of the economy whose team of approximately 24,000 railroaders transports more than CAD 250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods, across a rail network of approximately 20,000 route-miles spanning Canada and mid-America.

Why Should Investors Book Profit?

• Stretched valuation: CNR shares are available at an NTM Price/Cash Flow multiple of 17.6x compared to the industry (Industrial) median of 14.0x. This implies that the shares are overvalued against the industry. The stock is overvalued on multiple valuation parameters. The table below reflects the picture.

• Lower liquidity profile: In Q2 2021, the company's current ratio was 0.93x compared to the industry median of 1.25x. While its Quick ratio was also on the lower side at 0.76x V/s 0.92x. Both these lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Slightly over leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 0.67x, higher than the industry median of 0.55x. Additionally, it’s % LT Debt to Total Capital stood at 35.6% whereas industry median is of 21.5%. These factors imply higher balance sheet risks.
• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~87.51 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

       Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow

Stock recommendation

The company continued to deliver strong operating and financial performance in the second quarter, driven in 13% increase in revenue ton miles (RTMs) year-over-year and volume growth in virtually every business unit, with notable strength. However, the company is having lower current and quick ratio, which could lead to poor liquidity profile. Also, the stock is trading on highly stretched valuation along with slightly higher leverage compared to the industry median. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 159.01 on September 3, 2021. 

AirBoss of America Corp

AirBoss of America Corp (TSX: BOS) is a Canada based manufacturer of rubber-based products for the resource, military, automotive and industrial markets. The group is mainly operating in three segments: Rubber Compounding, Engineered Products and Automotive.

Why Should Investors Book Profit? 

• Higher average collection period: The company is having a higher average Accounts Receivable day of 67.4 days, against an industry median of 59.5 days. A higher average collection period indicates that an organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
• Lower margin profile v/s Industry: In Q2 2021, the Company failed on maintaining its pace and witnessed lower performance across gross margin and EBITDA margin against the industry, which exhibits the pressure on company.
• Negative free cash flows: The company reported negative free cash flow of USD 9.7 million in Q2 2021, compared to USD 13.9 million in the previous corresponding period.
• Stretched valuation: BOS shares are available at NTM EV/EBITDA multiple of 8.4x compared to the industry median of 4.5x. This implies that the shares are highly overvalued against the industry. The stock is overvalued on multiple valuation parameters. The table below reflects the picture.

• Rising net debt: As on June 30, 2021, the company reported net debt of USD 12.8 million against USD (9.7) million on Dec 31, 2021.
• Trading near the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved near to the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the stock may also face resistance at the upper band of the rising trading channel, where it is currently trading.

      Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Recently, the company reported another strong quarter of results and record profitability, despite continuing supply chain challenges related to raw material supply and elevated freight costs. Although it reported negative free cash flow and rise in net debts. Furthermore, the company reported lower margin profile v/s Industry along with higher average accounts receivables day against an industry median, exhibiting the pressure on company and significant balance sheet risk. Additionally, the company is trading at overvalued levels compared to the industry, even the technical indicators point to a possible price correction or consolidation. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 42.11 on September 3, 2021, based on the above rationale and valuation.

Facedrive Inc

Facedrive (TSXV: FD) is a multi-faceted “people-and-planet first” tech ecosystem offering socially responsible services to local communities with a strong commitment to doing business fairly, equitably and sustainably.

Why Should Investors Exit the Stock?

• Corporate Governance Issues: The company is going through corporate governance problems, which has led to a free fall in the stocks prices as thousands of Facedrive shares were dumped by its Co-founder Imran Khan.
• Widening Losses: Despite a strong growth in the topline, the company is not able convert the higher revenue into bottom line, on account of higher operating expenses. For the three months ended June 30, 2021, the company reported revenue at CAD 5.37 million vs CAD 0.125 million reported in a year before period. Despite a significant jump in the topline, net losses accelerated to CAD 7.6 million vs CAD 6.7 million a year before. Hence, higher topline growth leading to loss in the net worth of the company.
• Steep Bearish Technical Indicators: Facedrive shares are hovering in a steep bearish zone, with stock traded well below the crucial support levels of 200-day, 100-day, 50-day and 20-day SMAs. Further, despite recent sharp correction, we are not able to see bottom from the technical standpoint, therefore, it might correct further from the current trading levels.

Technical Price Chart (as on September 03, 2021). Source: REFINTIV, Analysis by Kalkine Group

Stock Recommendation:  The company has been involved in variety of businesses ranging from ride sharing, food delivery and COVID-19 contact tracing and others. At various times over the past two years, these sectors have been hot, or very hot. Facedrive investors were clearly excited by the prospects of a new emerging company within several fast-growing sectors. However, the recent tussle between the key management personnel followed by large share offloading in the market has led to free fall in its share price. Further, the pain deepened when its CEO announced that he is going to step down from the current position. And, it is not sure that how much time it will take to fix these issues. Hence, we recommend a “Sell” rating on stock at the closing price of CAD 2.37 on September 03, 2021.

1-Year Price Chart (as on September 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.