Meta’s Historic Jump and Metro Increases its Dividend

[00:00:00] This is the Canadian Investor, where you take control of your own portfolio and gain the

[00:00:06] confidence you need to succeed in the markets.

[00:00:10] Hosted by Braden Dennis and Simone Belanger.

[00:00:15] Welcome back to the Canadian Investor Podcast.

[00:00:17] I'm here with Dan Kent.

[00:00:19] We're back for a news and earnings episode.

[00:00:21] And finally, earnings are really kicking in.

[00:00:24] We even have a decent amount of Canadian names as well. coming in I know we've been saying it for a little bit but we do have some Canadian content here before we get going so when are your Oilers playing is that we're recording this on Tuesday is it tonight they're going at the record for the record tonight yeah against Vegas or is it yeah Vegas and then they go against the Ducks to beat it if they okay so tie it tonight and then the next

[00:01:42] game if they they made they win it okay okay yeah it's gonna be nervous I'm and date of maximum employment, whatever that means, and price stability. So it is something that they have to juggle. They said that they will keep looking at data to decide whether or not they should be using monetary policy. But clearly the market got a bit surprised by, you know, the statement. I think the market, well, the market was definitely pricing in a lot of rate cuts this year.

[00:03:04] They still are, but they're shifting the five-year Canadian bond went from 3.38% to 3.63% when I did my notes yesterday it's a bit lower now I think

[00:04:20] it's 3.6% now it's the average there? I think it just hit over

[00:05:43] 700,000 okay, okay. Yeah it a 50% more than 50% chance that it'll be like, yeah, 125 basis points or lower by the time the year ends. So it'll be really interesting whether that actually comes true or not. So they're still pricing it a lot of rate cuts. I don't know, it's hard to interpret that for the joint TCI, you'll see the Fed

[00:07:03] watch the odds right now. You know, I find it. Pretty straightforward. Yeah, so I'll start off for a quick one here for earnings, just some Canadian content before we get into big tech. So Metro, the grocer, reported Q1 2024. Revenues were up 6.5% to just shy of $5 billion. Food same store sales were up 6.1%.

[00:08:22] Pharmacy same store sales were up 3.9% and they were led by prescription drugs, which

[00:08:26] increased 6.6%. It's yeah, I'm not an expert when it comes to that stuff But I always get fascinated and obviously all the different colds are like they're all there's so many different viruses that will cause colds and Depending on which virus it is. I've noticed Sometimes same thing all get it worse than my wife or vice versa So I'll barely have anything and she'll be sick for like a week and it's just interesting how different immune system

[00:09:44] React differently fight it on goes to show that it did have a bit of an impact here. They generated 85 million in free cash flow, which was a 27% decline from last year. Free cash flow can be highly variable on a quarterly basis, so definitely again take

[00:11:03] this with a grain of salt. I would say they do have let me check. I think food basics. Is that what met? Yeah, I think it could be I think it is food basic and I'm pretty sure it's super say on the Quebec on the Quebec side So I'm just checking here. Yeah. Yeah, exactly. So spicy and food basics are owned by Metro. Yeah

[00:12:20] Yeah, it's it's I think a lot of you know

[00:12:23] Grocers with like discount, you know, if you, even spanning that out to longer, but it's gonna be interesting. I find the grocers are best to just compare the three of them together. Like you look at Metro, Empire, Loblaws, that's gonna give you a really good idea of just the overall situation. No, yeah, exactly, I totally agree with you there.

[00:13:44] Whether you're just starting your investing journey

[00:13:46] or you've been investing for years, Now I think that's enough for Metro. We do have a full slate here. So we'll move on to the first of the big tech earnings. So meta, so what happened with them? It must have been good because their stock jumped what, like 25%? I think they closed 20% up. So they posted really strong earnings.

[00:15:00] So they beat street estimates on pretty much all fronts.

[00:15:02] Earnings per share were about 10% higher than expected.

[00:16:07] it kind of has been so their metaverse VR they call it reality labs revenue isn't really performing all that well so it increased by 4x from 2020 to 2022 but this last year it reported a 12.2%

[00:16:16] decline in revenue to close out 2023. I don't know if you know this off the top of your head. It would be, this would be the employees is 67,000. So this is 22% lower than last year. And I think this would have to be the largest decline out of big tech. Like I don't know of any of these other companies have laid off 22% of their staff.

[00:17:42] Yeah, I think you might be right.

[00:17:45] Oh, look, I know now going to pay a 50 cent quarterly dividend. that probably has a little something to do with it. I mean, I'm just guessing here. Yeah, it's. Yeah, maybe they're trying to, they know their business is kinda, there's like maturity to it. Even though it's still growing, maybe they kinda figure out there's a good base of free cash flow and profits that will,

[00:20:23] there's a floor that they're comfortable with with paying a dividend and kinda basing on that.

[00:20:26] That would probably be my% gain, a gain for sure, but 20% was just pretty crazy to me. I mean, personally, from my personal standpoint,

[00:21:42] I've never owned Meta just from a moral perspective.

[00:21:45] Like the business just has always't know why. Yeah, the name escaped me, but everyone knows the least charismatic person in the world, at least in Canada, and when he was asked, like in person, I think to, Weston, had to apologize. I think there was something about like higher food prices

[00:23:01] or he was given a story and he just like did not want

[00:23:04] to even entertain that.

[00:23:06] I'm trying to remember, I'll look a bit more at the quarterly. I'll be comparing some numbers on a sequential basis. So Q3 versus Q4. And some I'll look the year over year.

[00:24:20] I'm trying to give as much context as I can.

[00:24:23] I do own it full disclosure, but at the same time I think there's some positive. context there is 1.1 million square foot that is generating interest from clients about 60% so 6-0 of that is currently under negotiation with the restortization and losses on sales of assets to their net income and then subtracting any gains on sales of assets and interest income. Now AFFO is similar

[00:27:04] but takes into account maintenance costs rent per occupied square foot which is a very you know an important metric to focus on for a company like this was up 4.3% over a year and up 1.3% versus Q3. Overall I mean they are faring very well when those have all performed much better than the downtown Class B and for the suburban I would assume it's because it's probably closer to where people live in general so even the Class B is performing better there and the vacancy rate is 17% here for Class A downtown and Allied is around the 13 12 13

[00:29:40] percent mark so clearly they are doing much better than the market and the last

[00:29:45] thing I wanted to chat about and then you start to have to use what is currently available. And I think that will kind of provide a little bit of tailwind for companies like Iolite. So it'll be interesting to keep an eye on. I mean, from my perspective, I'm still happy with my investment. I clearly, I've said it from the beginning, there's a lot of uncertainty ahead in this

[00:31:01] space.

[00:31:02] So it's an investment you should make A and class B, like occupancy-wise, you're talking like seven, eight percent. So that's, yeah, exactly. That's a meaningful difference. Yeah. And just to put some context here, because not everyone's seeing the chart is that, you know, you had like in 2019 and just before the start of the pandemic class B office real estate.

[00:32:21] So downtown was around, I would say kind of ballpark, like 12% vacancy rate.

[00:33:25] even suburban class in class B if a significant portion of their employees actually live in suburban areas. Yeah it's gonna be interesting moving forward

[00:33:30] to see how but like I think they're doing quite well all things considered

[00:33:34] like their their payout ratios are in you know I think from an adjusted basis

[00:33:39] they're in like the 80% range I believe which always something that was highly likely to happen. And for investors that were surprised by that, I mean, they probably were living under a rock. Like I don't know, like you clearly have not paying attention what's been happening in this space if you thought that there wasn't at least a decent potential of the, the asset value to be written down a

[00:35:03] little bit.

[00:35:04] Yeah. And that's the one dangerous thing. I still like it. I mean, it's a small position of my portfolio, and I think that's something for people to just remind themselves. If you're taking maybe a riskier position, you can always allocate accordingly to mitigate

[00:36:21] the risk.

[00:36:25] Whether you're just starting your investing journey or you've been investing for years, But I think that's enough for Allied. We'll move on to big tech number two here with Amazon's earnings. Yeah, so they reported pretty solid earnings. They topped expectations on all fronts. And just of note, like the year that Amazon has had, so Amazon has beat Wall Street expectations

[00:37:41] by pretty significant amounts for a straight year now.

[00:37:44] So in the first quarter of 2023,

[00:37:47] earnings came in free cashflow. And although the company's retail segment still continues to generate high single digit growth,

[00:39:00] one of the main drivers for the revenue growth

[00:39:02] and particularly margin expansion has been the growth

[00:39:05] in its ad services segment And on Black Friday, they sold Amazon stated, they never really released like hard dollar numbers, but they said that they sold more than one billion items. So more than one billion items were purchased on Black Friday with the United States accounting for about half of this.

[00:40:21] They said this was their highest volume holiday season ever.

[00:40:25] On a quarter over quarter basis,

[00:40:26] net sales of 170 billion now a little bit for last year.

[00:41:41] I mean, it's still some massive numbers here.

[00:41:43] So you still have, you know,, just easier. And I also get additional exposure to those other smaller companies. Clearly there's gonna be a bit less upside, but that's fine. Not have to stay on top of those companies as often. But I did think, I owned it, I bought it in 2022

[00:43:05] because they had to build big pullback look at the full year revenues here, just because we don't do it that often. So I think it'll be useful for people. So for the year revenues were up 43% to 12.6 billion now. I think it's important to keep in mind that the Kansas City Southern Acquisition closed in April of 2023. And the result look fantastic here,

[00:44:20] but again, you're comparing against 2022

[00:44:22] where that business was not part of CP.

[00:44:26] So I think we have to take this with a grain of salt, while they expect to spend 2.75 billion on capital expenditures. Keith Creel, who is the CEO, is very excited in 2024 with what the year has in store for Canadian Pacific. Most of the segments years as they find the stock attractive or not versus raising the dividend. It's pretty interesting. It seems like CN Rail and CP are like two, they kind of

[00:47:02] seem like two separate businesses right now in the rails. Yeah. Based on one of the questions they had, it seems like it'll be

[00:48:21] kind of a mix of both, I think probably coming cause they have like a five

[00:48:25] year plan, something like that. equal weighted CNR and CP. Yeah. Just because I think they both have such, such wide rail networks. And it's such a concentrated market as well. There's not that many players, they have very strong modes, I think you'll get more growth with CP, but probably obviously they'll get more

[00:49:40] capital returns to shareholders. I wouldn't be surprised'm kind of curious here. It might even be more. Yeah, it's more. Yeah, so they are outperforming the index a little bit.

[00:51:01] So you know, there's something to say with. I'll just equal weight, couple of percentage points in my portfolio, CNR and CP, and just let them ride. You know, maybe one I'll perform slightly better than the other. I mean, I think you can go wrong with doing a basket approach. And again, to me, it's not too much focus on the Canadian economy, both of them.

[00:52:21] They have so much of the railway in the US,

[00:52:24] and then obviously into Mexico for CP. was up more than 50% over the last year heading into the quarter. So I mean, I think even like a marginally soft quarter might result in, you know, some people wanting to take profits. They grew revenue by 10% and increased earnings per share by 27% on a year-over-year basis. So they seem to be firing on all cylinders and pretty much every single one of its business segments. So they had

[00:53:42] a pretty stagnant year last year when it comes to YouTube things, so it made $175 billion in ad revenue, that's more than the size of Royal Bank, just its ad revenue. So the fact it can grow at a double digit pace is pretty amazing, but I think the main issue right now, I think with Google is a lot of investors look at Microsoft who is

[00:55:00] growing its cloud business at a similar pace, but it makes up a much larger chunk of overall

[00:55:06] revenue. So it will have to ramp up its cloud-based growth to impress investors, especially when you see a company like Microsoft doing the things that it's doing. And I guess another comment on the state of ad revenue, and this is a bit anecdotal, but

[00:56:20] we do deal with some pretty large ad networks at stock trades.

[00:56:24] Although our ad revenue is much higher than they were in still the fear of, you know, Google search being replaced by AI. I don't know, I feel like I'm still using Google as much as I used to. I use chat GPT, but oftentimes it's more as a kind of an assistant for like writing, summarizing stuff and things like that.

[00:57:40] I find it's really useful for that. But even if you do the high expectations, when you have such a high valuation, I mean, we saw what happened in 2021, obviously, I'm sorry, in 2022, following 2021, obviously, there were interest rates, you know, pressures as well, it wasn't the free money environment like we had seen, but I think it's something to keep in mind for people that, you know,

[00:59:03] see these companies as blue chip and very less attractive. I guess it's you

[01:00:23] know it's gonna be cyclical as well, but overall, I think that was a good episode. Finally, earnings is kicking in. Anything you want to add before we sign off, Dan? No, that's it. Thanks for listening, everybody. See you next week. Yeah, yeah. Thanks, everyone, for listening. If you haven't done so, we really appreciate if you can give us a review on Apple Podcasts,

[01:01:42] give us a five-star rating on Spotify.