Stocks’ details

Spin Master Corp.

Spin Master to gain from new growth avenues: Spin Master (TO: TOY) is leading global children's entertainment company. The company creates, designs, licenses and markets a diversified portfolio of toys, games, and entertainment products.

Negatives priced in Spin Master stock: Spin Master stock has fallen by ~24% so far this year. The selling pressure stemmed from the company guidance cut as well as weak sentiments across the global markets. Earlier this year, Spin Market lowered its full-year gross product sales and EBITDA guidance, which didn’t sit well with the investors. Citing industry-wide softness, operational challenges, and the shortened holiday season in the US, Spin Master reduced its 2019 outlook. Although, the company expects gross product sales to decline ~1% (flat ex FX movement) for the full year (earlier guidance was low-single-digit growth); but it is still better than the expected industry decline of 2% to 4%. Consequently, Spin Master now expects adjusted EBITDA margin to be 14% in 2019. The expected decline in gross product sales, increase in warehousing and distribution costs, and higher promotional spending in the fourth quarter is likely to take a toll on the margins. While operational hiccups could pose challenges, but the significant decline in the stock price indicates that the negatives are already priced in, and the downside seems capped.

First Nine Month’s Gross Product Sales (Source: Company Reports)

Growth catalysts: As toy sales soften a bit, Spin Master partnered with Paramount and Nickelodeon to take its popular PAW Patrol franchise to the big screen. The film, slated to release in theatres in August 2021, marks a significant step for Spin Master to expand its iconic entertainment properties. The company stated that the PAW Patrol movie is the first among the number of films in the works by Spin Master's Entertainment division. Besides, the company also partnered with Netflix and announced a new CG animated series Mighty Express slated to be aired worldwide starting September 2020. We believe the strategic expansion in its iconic portfolio of brands is likely to support growth for Spin Master in the long-term.

P/E Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock is quoting at CAD 30.14 with a market capitalization of CAD 3.1 billion. Currently, the stock is trading close to its 52-week low of CAD 29.64. Though near-term challenges discussed above could limit the upside, but the stock looks attractively priced at the current levels. Further, new growth avenues are likely to strengthen Spin Master’s prospects in the long run. We have valued the stock using relative valuation method, i.e., P/E based approach. For this, we have taken peers like Great Canadian Gaming Corp (TO: GC), Hasbro Inc (O: HAS), and Mattel Inc (O: MAT), and arrived at a target price with an upside in high teens (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of CAD 30.14, down ~1.9% on 26 February 2020 market close.

1-Year daily price chart (as on February 26, 2020). Source: Thomson Reuters

Bombardier, Inc

Bombardier stock gets beaten down: Shares of the world’s leading business aviation giant, Bombardier (TO: BBD.B), is under pressure as the company announced the sale of its transportation division to Alstom, earlier this month. Bombardier stock has fallen by about 39% so far this year and is trading nearly 61% lower from its 52-week high of CAD 3.03.

What irked the markets: Cash strapped Bombardier is looking to deleverage its balance sheet as it has a mountain of debt to be paid in the coming years. With the sale of the transportation division, Bombardier plans to fortify its balance sheet and pay off debt. Further, the company plans to focus on the core aviation business and exit from underperforming ones. However, the risk associated with the sole aviation business triggered the selling pressure in the stock. Investors are wary about how the company will thrive with only the aviation business as the transportation division generated a large chunk of its total revenues.

What’s on the horizon: The recent decline in Bombardier stock makes it attractive on the valuation front. However, the bigger question remains on how the business will fare the business jet division, which is highly cyclical. We believe with the portfolio restructuring initiatives, growth could accelerate, and margins are likely to expand as the company exits underperforming businesses. However, with significant debt in its balance sheet and lack of visibility for future performances, we would like to remain on the sidelines.

Q4FY19 Financial Highlights for the Period ended 31 December 2019: Bombardier failed to impress with its fourth-quarter performance. Bombardier posted revenues of US$ 4.2 billion, as compared to US$ 4.3 billion in the prior-year period. 4Q19 adjusted EBITDA slumped ~83% year-over-year to US$ 63 million compared to US$ 370 million in the prior-year period. Bombardier reported an adjusted loss of 10 cents per share compared to earnings of 5 cents per share in the prior-year period. 

4Q19 Financial Highlights (Source: Company Reports)

Cash Flow Details: At the end of the quarter, the company’s cash balance stood at US$ 2.6 billion. Adjusted debt at the end of the period amounted to US$ 9.7 billion. The company generated free cash flow of US$ 952 million compared to US$ 1.04 billion in the prior-year period.

Stock Recommendation: BBD.B is currently trading close to its 52-week low of CAD 1.11. On the valuation front, the BBD.B looks attractive, given the recent plunge in the stock. Reshaping of the portfolio and acceleration of Global 7500 deliveries are likely to help drive revenues for Bombardier in 2020. Further, the company expects margins to expand in 2020, which is encouraging. However, the company’s adjusted debt to adjusted EBITDA ratio remains alarmingly high at 10.9x. The company mulls to use the proceeds from the sale of transportation business to accelerate the deleveraging of the balance sheet. However, we place a “Watch” stance on the stock as we would seek more visibility on the viability of the sole aviation business. The stock was trading at CAD 1.18, down ~1.7% on 26 February 2020 market close with a market capitalization of CAD 2.8 billion.

1-Year daily price chart (as on February 26, 2020). Source: Thomson Reuters

Lassonde Industries Inc

Lassonde remains well-positioned to ride the growth wave: Lassonde Industries (TO: LAS.A) manufactures and sells various fruit juices and beverages globally. Besides, through its specialty food products division, the company offers several sauces and broths. Also, the company imports and markets selected wines.

Near-term headwinds dragged the stock down: Shares of Lassonde Industries took a fair amount of beating in the recent past. The stock is down about 12% so far this year and has decreased by ~31% from its 52-week high of CAD 199.33. Industry-wide weakness in juices and drinks, heightened competitive environment, and operational hiccups took a toll on its stock price. Besides, higher manufacturing overhead costs further pressured margins, in turn, its stock.

What to expect: Barring near-term headwinds, Lassonde Industries is poised to benefit from the sustained momentum in its specialty products division. Sales at the company’s specialties segment have grown at a CAGR of 14.2% over the past five years. Meanwhile, the segment’s EBITDA has marked tremendous growth (28.7%) during the same period. With the company’s investment in production capacity and continued demand, the specialty segment’s growth is likely to accelerate. Further, Lassonde Industries could benefit from the acquisition of Old Orchard Brands and Sun-Rype Products. Integration of Old Orchard Brands could optimize the company’s manufacturing process, which is grappling with higher transportation costs. Meanwhile, the acquisition will help the company to expand its product offerings and provides an additional avenue for growth in the concentrate/frozen juice market. Also, the addition of Old Orchard Brands helped the company to win a contract with a major client.

First Nine Month’s Financial Highlights (Source: Company Reports)

P/E Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock is quoting at CAD 137.03 with a market capitalization of CAD 955.6 million. Currently, the stock is trading close to its 52-week low of CAD 132.95. We believe selling price adjustments could help offset the unfavorable impact of higher manufacturing overhead costs and soft volumes. Meanwhile, growth in private label products is likely to supplement growth. We have valued the stock using relative valuation method, i.e., P/E based approach. For this, we have taken a target P/E multiple of 13.7x and arrived at a target price with an upside of lower double-digit (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of CAD 137.03, down 0.7% on 26 February 2020 market close. 

1-Year daily price chart (as on February 26, 2020). Source: Thomson Reuters

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.