Valuentum Exclusive Analysis for the Discerning Investor

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Image Shown: We cover several earnings reports in this article across several sectors and industries to provide an overview of how corporates performed during the early stages of the ongoing coronavirus (‘COVID-19’) pandemic.

In alphabetical order by ticker: ACB, CSPR, FSM, HI, LYFT, WEN

By Callum Turcan

Aurora Cannabis

On May 14, Aurora Cannabis Inc (ACB) reported earnings for the third quarter of its fiscal 2020 (period ended March 31, 2020) that beat consensus revenue estimates but missed consensus bottom-line estimates. Shares surged May 15 as its cash flow position improved, and management noted the goal is to put Aurora Cannabis in a position to generate positive adjusted EBITDA (a heavily adjusted non-GAAP metric) by the first quarter of fiscal 2021. The plan is to pursue meaningful capital-expenditure and SG&A reductions in the coming quarters, though we caution that in general the marijuana space is lagely uninvestable given the lack of clarity on the trajectory of the market as a whole due to legal, prohibition, and regulatory issues. Constellation Brands (STZ) may be the most conservative way to gain exposure to marijuana in a broadly-diversified portfolio, if that may be of interest. We're steering clear, however.

Casper Sleep

One of several companies attempting to disrupt the mattress industry, Casper Sleep Inc (CSPR) reported first-quarter 2020 earnings on May 12 that beat consensus top-line estimates and missed consensus bottom-line estimates. Casper went public earlier this year, and while its stock price has improved considerably since its March 2020 lows, shares of CSPR are still down materially since the IPO. Direct-to-consumer revenues were up almost 13% year-over-year and its GAAP net sales jumped over 26% year-over-year last quarter. However, Casper’s GAAP net loss roughly doubled year-over-year due to rising operating expenses. At the end of its first quarter, Casper had $116 million in cash and cash equivalents on hand and no debt on the books, which will help cover its cash flow outspend in the medium-term.

Fortuna Silver Mines

On May 14, Fortuna Silver Mines Inc (FSM) reported first-quarter 2020 earnings that missed consensus estimates on both the top- and bottom-lines. However, shares of FSM shifted higher since the report as of this writing as its cash flow position improved materially due to rising net operating cash flows. Fortuna Silver Mines’ primary producing assets include the Caylloma silver mine in Peru the San Jose silver-gold mine in Mexico. Additionally, Fortuna Silver Mines is developing the Lindero Project in Argentina, which is a gold mining endeavor.

Management is targeting “aggressive” reductions in Fortuna Silver Mines’ expenditures this year, a move that is expected to save $23 million in 2020 by cutting corporate executive compensation, “opex and expenses” and trimming capital expenditure expectations. The goal is to gradually resume construction operations at the Lindero Project, which was ~94% complete at the end of March 31, 2020.

Hillenbrand

On May 6, industrial company Hillenbrand Inc (HI) reported earnings for the second quarter of its fiscal 2020 (period ended March 31, 2020) that beat both consensus top- and bottom-line estimates. Hillenbrand manufacturers positive displacement pumps, pinch and check valves, bulk materials handling systems, and more under its various businesses. Shares of HI have shifted higher since the report, as of this writing, as the company’s GAAP revenues jumped higher by almost 40% year-over-year last fiscal quarter though impairment charges resulted in its GAAP operating income turning negative.

We caution that the firm’s net-debt-to-adjusted-EBITDA ratio stood at 3.5x at the end of its last fiscal quarter, meaning there’s a lot of leverage on the books due to Hillenbrand buying Milacron in November 2019 through a deal valued at $1.9 billion (Milacron was billed as “ a global leader in highly engineered and customized systems in plastic technology and processing”). Deleveraging remains a key priority for management going forward.

Lyft

On May 6, Lyft Inc (LYFT) reported first-quarter 2020 earnings that beat both top- and bottom-line estimates. Shares of LYFT initially surged after the report. Most importantly, Lyft communicated to investors that its losses were narrowing and its revenues were still growing, though it will be a bumpy next couple of quarters due to stay-at-home orders and other contained measures. Lyft’s GAAP net losses narrowed from $1.1 billion in the first quarter of 2019 to $0.4 billion in the first quarter of 2020, while its GAAP revenues grew by 23% during this period, reaching almost $1.0 billion. Part of the reason Lyft’s net loss shrank was due to sharply lower R&D expenses, a product of sharply lower stock-based compensation expenses attributed to that line-item as Lyft went public late in the first quarter of 2019.

Lyft retained ample amounts of cash on hand at the end of the last quarter, including $0.6 billion in cash and cash equivalents and $2.1 billion in short-term investments (along with $1.5 billion in restricted cash and cash equivalents and restricted short-term investments combined) versus less than $0.1 billion in total debt (inclusive of short-term debt). While the ride-sharing firm has ample funds for now, there’s still a lot of work to do before Lyft becomes consistently profitable. Management communicated during Lyft’s latest quarterly conference call that the goal is to reduce the company’s fixed costs by $0.3 billion on an annualized basis by the fourth quarter of this year, and that comes on top of Lyft lowering its capital expenditure expectations for 2020 (from $0.4 billion previously down to $0.15 billion currently).

Wendy’s

On May 6, The Wendy’s Company (WEN) reported first-quarter results for fiscal 2020 (period ended March 29, 2020) that saw its top-line miss consensus estimates and its bottom-line match consensus estimates. Additionally, Wendy’s cut its quarterly dividend down to $0.05 per share from $0.12 per share to conserve cash flow, and part of that strategy included suspending all share repurchases. Furthermore, Wendy’s is targeting $30 million in cost savings in 2020 as it relates to capital expenditure expectations and “non-people related general & administrative expenses” which will help improve its cost structure during these harrowing times. Wendy’s also fully drew down its Variable Funding Senior Secured Notes revolving financing facility to enhance its liquidity position.

As the pandemic spread across the globe, Wendy’s same-store sales in the US tanked starting in late March and the firm posted double-digit same-store sales declines on a weekly basis through mid-April, before that decline started to moderate in late April onward. Internationally, Wendy’s same-store sales performance was weak in the fiscal first quarter and was downright terrible in the first half of the fiscal second quarter, due to the negative impact the pandemic is having on its operations. Things are starting to improve, with 99% of its US locations and 75% of its international locations operating as of early-May, though we caution Wendy’s isn’t out of the woods yet. Supply chain problems as it relates to protein products (such as beef) are emerging due to the shutdown of packing facilities and slaughterhouses in the US due to COVID-19. Shares of WEN are up marginally since the report, as of this writing.

Concluding Thoughts

Reducing expenses, generating efficiency gains, and ultimately improving the cost structure of corporates appears to be a key theme during the first-quarter 2020 earnings cycle. Management teams across the board are hunkering down and preparing for the pain to continue as global economic activity is expected to grind to a halt in the second quarter of 2020, before recovering somewhat due in part to massive fiscal and monetary stimulus measures that were launched to offset the negative impact COVID-19 is having on economic activity.

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Personal Services Industry – BFAM HRB HI RGS SBH SCI ULTA WW

Restaurants: Fast Food & Coffee/Snacks Industry – ARCO DPZ DNKN JACK MCD PZZA SBUX WEN YUM

Restaurants: Fast Casual & Full Service Industry – BJRI EAT CAKE CMG CBRL DRI DENN DIN RRGB RUTH TXRH

Diversified Mining Industry – BHP FCX NEM RIO SCCO VALE WPM

Related: ACB, CSPR, LYFT, UBER, GLD, SLV

Marijuana stocks: TLRY, CGC, APHA, CRON

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Callum Turcan does not own shares in any of the securities mentioned above. Cracker Barrel Old Country Store Inc (CBRL) and Newmont Corporation (NEM) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.