Subprime Lending Skyrockets as Cyclical Stocks Face Challenges

[00:00:01] This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets.

[00:00:10] Hosted by Braden Dennis and C. Mobile-Ajay.

[00:00:15] Welcome back to the Canadian Investor podcast. I'm here with Dan Kent. We are back for our Thursday news and earnings.

[00:00:21] There's quite a bit on the dock today, it's a little bit of macro with interest rate cuts and then a few.

[00:00:28] I would say Canadian Darlings in terms of companies that are hitting a snag a little bit. Would you agree with that?

[00:00:37] Yeah, it's kind of like it's the end of earnings season, but there's still plenty of news to talk about and it's probably...

[00:00:44] It looks to be the end of high rates on savings as well. I just got a few notices that...

[00:00:50] Yeah, yeah, my account's getting cut. I would imagine that's going to be coming down even further

[00:00:57] as we move forward. Yeah, I got those same notices. So yeah, it's definitely...

[00:01:02] It's too bad. I did talk with Braden earlier this week on the Monday episode for some options for people looking to park cash.

[00:01:11] Obviously, I encourage people to go back to that episode because I think it varies on a lot of different things, especially what you may want to do for that cash,

[00:01:20] depending whether you're able to lock it in versus not lock it in. There's also longer duration bonds and so on.

[00:01:27] So if people missed that episode, do encourage you to go back to the Monday episode because I just...

[00:01:34] I talk about a lot of different options available. If you want to cash in on those higher rates, but again, also explaining the downsides.

[00:01:41] Yeah, it's... I mean, the US is still there. They haven't cut yet, so they're still higher rates in the US, but it's... it's going to be interesting.

[00:01:48] Yeah, and speaking of cut, that's a good transition here with the Bank of Canada. I think everyone knows at this point that they cut by a 25 basis point.

[00:01:58] It was an interesting... did you have the chance to listen to the press conference or no?

[00:02:04] No, I didn't listen to the press conference.

[00:02:06] Yeah, I mean, I like to be tortured, so I tried to listen to them all, but...

[00:02:11] I mean, it wasn't too bad this time. I'll be honest, there were actually some decent questions overall from reporters.

[00:02:19] And earlier, I would say throughout the years so far, unfortunately a lot of the questions were always like, when the rate cut coming, how big will it be and so on.

[00:02:28] So it was very repetitive and it was also a waste of time because everyone knows what he was going to answer.

[00:02:34] But this one was a bit better. Tiff said that it was reasonable to expect more rate cuts, but as always, that they remain data dependent.

[00:02:42] They said that the economy is in excess supply. I mean, in economist terms, I would say that just means that there isn't enough demand for what is being produced, which is putting downward pressure on prices.

[00:02:54] Or in other words, the economy is slowing and they are well aware of it. They didn't know that shelter and service prices are putting upwards pressure on inflation.

[00:03:04] So that's still something that they're keeping an eye on. They also noted that CPI is expected to continue easing, but it could go higher towards the end of the year because of base effects.

[00:03:17] So this is actually, and then you can vouch for me. This is something I've been very vocal about, especially when it comes to energy prices because people tend to forget that energy prices have been pretty low now for better part of a year.

[00:03:32] So it would say in terms of being quite low, and that's always going to be a risk not just oil, but obviously natural gas as well.

[00:03:41] If there is especially some geopolitical tensions in the Middle East if things escalate, it could put some upward pressure on the price of oil. However, right now, I mean, it's the opposite that's happening.

[00:03:54] I think the market is focusing more on the demand side of oil because they're seeing kind of slowing economy into U.S.

[00:04:04] And I think generally the markets are a bit worried about that.

[00:04:08] Yeah, I mean we have oil that I just looked it up. It's pretty much 65 bucks a barrel, which is down 4.5% today. Natural gas is up quite a bit. Natural gas is re-bounding. I'm pretty sure quite a bit off the lows with.

[00:04:20] Yeah, I mean commodity prices are they're pretty low right now, which is pretty typical in this type of situation.

[00:04:26] Yeah, hey, just keep talking about natural what we got is going up, but it's making me pretty happy with my thermal impression.

[00:04:32] Yeah, but I mean obviously, I think you know my portfolio I've talked about it on the podcast and joined TCI obviously we share it there.

[00:04:40] And that's something I've been pretty bullish for the longer term in terms of just holding really good energy companies. I think that's really important.

[00:04:49] If you on the really good ones that have very low cost and can be profitable even if prices go down, I mean you may may kind of trade sideways shorter medium term but you should be fine longer term.

[00:05:00] Now to continue for the BOC meet the Bank of Canada, there was some really good questions like I ask and one reporter asked if they were concerned about cutting rates.

[00:05:13] And how that could encourage Canadians to take on more debt. And it was really interesting. I encourage people to look at the press conference of their interest in seeing the answer.

[00:05:22] But took a bit of time to answer. And he honestly did not really answer the question he did say that it would help alleviate the dead burden of Canadians like those who have variable mortgages or those who will be renewing their mortgages soon.

[00:05:37] So obviously we've talked about this time and time again if you have a fixed rate mortgage or you're going to be renewing your fixed rate mortgage.

[00:05:45] That's dependent on bond yields and bond yields have actually been coming down for some time now before the Bank of Canada started cutting.

[00:05:54] So in terms of immediate effect if you own you have a mortgage or not renewing, you know anytime soon it really only has an impact on you if you have a variable rate.

[00:06:04] And the issue with those renewing and looking at the fixed rate is like I said it's really the bond yields. So the Bank of Canada doesn't have that much control over that.

[00:06:14] I'll put an asterix, some people may argue that you know they could start quantitative easing and just buying bonds massively and therefore are officially pushed yields down.

[00:06:25] But you know for the time being I think it's a bit harder to say that will happen, but it's a non zero probability.

[00:06:33] And the answer was telling in my opinion because clearly shelter inflation is still a major concern for them and to me it's clear that they're trying to balance easing the pressure that's being put on Canadians that are dead burden by trying to obviously lower interest rates.

[00:06:51] But they're also very cognizant of how it could potentially stimulate the housing market. They're not sure they've they've mentioned this risk now for a better part of this year that you know they're very aware and they definitely have a night on the housing market, whether you know it will stimulate or not it's hard to say I mean lower rates sure it will make you like the you know boring costs cheaper.

[00:07:20] But at the same time if people are losing their jobs right like you can buy home if you don't have a job. So it's going to be interesting what happens in that space, but I think it's clearly a concern for them and something they definitely want to balance.

[00:07:32] Yeah, and it's interesting to see like we did our Canadian bank overview over the last few weeks and just like you know the Canadian arms of the businesses doing so well like over the last while which kind of leads one to believe that maybe you know declining or eight is spurring more people.

[00:07:49] More Canadians to take on debt. I mean I can't remember it was go easy that had crazy crazy growth in its in its heloc products which would be floating rate for the most part so you know you could get you would get pretty much instant relief and that regard if they were to continue cutting rates which could be something that you know people would access.

[00:08:11] You know immediately rather than like you said you know a fixed rate mortgage is you know it's not going to impact you until down the line but I mean it's very interesting to see I do believe there in you know a bit of a rock and a hard place so shelter inflation is one of the key drivers now.

[00:08:27] So you decrease rates because inflation in most areas is coming down to a normalized level but you know in doing so do you reignite the housing market and and fuel more.

[00:08:38] You know shelter inflation and you know rent mortgage just things like that, but I think rate cuts are pretty much a necessity now we're sitting at.

[00:08:46] So outside of like a very short stint during the COVID-19 pandemic we're sitting at you know the highest levels of unemployment since 2017.

[00:08:54] I mean credit card balance is going up discretionary spend is pretty much collapsing we'll go over that with BRP's earnings like it's crazy to see like the shift there but.

[00:09:07] I mean it looks like they're bank of Canada you know they made the right decision to start cutting you know earlier when they did because it doesn't look very good right now.

[00:09:16] No exactly and towards the end of this show I'll be going over firm holdings which is a by now pay a later earnings also talk a little bit about go easy like you mentioned in propell which are two sub prime lenders propell is mostly into US but does have a Canadian arm.

[00:09:31] And spoiler alert they have seen businesses booming yeah and without going into too much detail when businesses booming for sub prime lenders it's usually kind of a sign of things to come that's because you have those you know people with.

[00:09:50] Not as good credits or can't get financing with traditional financial institution that are turning there and that's usually a sign that people are getting more desperate because the interest rates are.

[00:10:01] They're doing not good to say the least so I think yeah go ahead well especially when we look at when I went over go easy earnings they reported the highest level of credit rating they've ever had among their borrowers which.

[00:10:14] Like is a good thing but it also kind of shows you that you know more people with higher levels of credit or having to tap into the.

[00:10:22] The sub prime market which I don't really think is a good thing.

[00:10:25] They probably have too much debt. Yes. Hold they're still able to pay for it but the banks don't want to lend to them any exactly their turning to them that would be my solution and I guess for the last thing I'll say so obviously we talked about the bank Canada mostly so here I'm showing the CME Fed watch tool great tool to watch we've been looking at it for.

[00:10:46] Probably years now at the Canadian investor podcast and then the Fed there's the market is pricing a whole lot of rate cuts for the Fed so the next meeting here it's good there's a.

[00:10:58] It's pretty much been like that for several weeks now so around two thirds of a chance for 25 basis point cut for the Fed and about one third for 50 basis points and then if you go all the way to December so the last meeting of the year it's basically a 50 50 chance that rates will be either.

[00:11:17] Four percent or four point two five percent so the market is expecting some rate cuts so it's kind of funny when you do the mad because there's only three meetings left to the year including the upcoming one in September so.

[00:11:30] If the market is pricing it that many rate cuts there's going to be a 50 basis point where we cut in there somewhere so maybe it's not September and I've been pretty vocal that I did nothing they would start cutting in September mostly because of the geopolitical situation but at this point I mean.

[00:11:49] The jobs numbers were not good they were revised down for the previous Monday also had a massive revision I think they revised 800 thousand down for.

[00:12:00] I can't remember which quarter it was but there was a massive revision done earlier this summer as well so I think the job numbers are really starting to turn to US and the political risk at this point I think it's fair to say that.

[00:12:20] I think the Trump will probably find a way to spin this as a dance.

[00:12:44] I think it's a very important thing to do is to be concerned about that but it's interesting just to look at the odds and I will mention that the markets have been incredibly wrong about rate cuts so.

[00:12:54] I think we have talked about it earlier this year they were anticipating a rate cut in March right so more bit or bit or bit later they were a bit early on that yeah.

[00:13:09] Now they're pretty much predicting not a guarantee but what is it a 92% chance that we go cut cut cut the next three meetings if it's only 25 basis points yeah.

[00:13:20] I think it's almost a guarantee that there is going to be three cuts and a road just the size of the cuts and yes point yeah.

[00:13:32] I think it's enough about macro let's switch over here dance so animatasy on kushita and there's seven in I which is the owner of seven 11 so they made an offer to buy the Japanese company got rejected so what's the development there.

[00:13:50] Yeah so they made a pretty big offer to buy seven and I hold things which again is they own seven 11 but they also own like supermarkets and they have some financial institutions as well.

[00:14:05] I didn't know that I knew they owned like some grocery stores and things like that but I didn't know they had a financial arm but apparently they do so they made an offer.

[00:14:14] Kushita had pretty much made a takeover offer for 42 billion US dollars which would be effectively 80% of kushita market cap right now so seven I and I'll probably just refer to them as seven 11 I don't know I'm just used to saying seven 11 they rejected the deal saying the price was nowhere close to what they'd want.

[00:14:35] In the event of a takeover and I mean this would make sense to me you know pretty typical negotiation process like.

[00:14:43] If I got an initial offer even if it was probably pretty close I would probably say it's nowhere close you know in order to try to maximize that you know shareholder value like.

[00:14:54] Who knows how far away they truly are on this type on this price I mean they pretty much say that it's nowhere close but yeah I who knows.

[00:15:06] And Kushita seems pretty adamant to get this done like initially the offer was rejected and you know they weren't interested in negotiating even further but there was an article released yesterday that says Kushita is.

[00:15:19] Highly confident further discussions would lead to the ability to find more value for seven I shareholders so I mean if we read between the lines here this is pretty much saying Kushita is probably willing to pay more.

[00:15:33] For this and just to give you an idea how truly mass of this would be so Kushita currently operates 16,800 stores so a successful deal with seven 11 would add around 86,000 more stores to its network.

[00:15:49] That don't stop at gas stations but you know like I said supermarkets I knew that element but even financial service operators which I don't know much about that end of the business.

[00:15:59] And I made a few posts on this including just an overall YouTube video with my thoughts and I feel you know there may be just biting off a bit more they can chew then they can chew here.

[00:16:10] The company CEO stated that it could comfortably double its leverage ratio and not impact their credit rating if we consider the fact that the company has around 13 billion in long term debt on the balance sheet you can already tell right away.

[00:16:21] A ton of this is going to be funded via equity which is obviously you know share issue and to say they couldn't fund all of this through debt but I do believe that maybe they're trying to keep it on a friendly level and attempt to maybe keep seven I in you know as a large partner so maybe there's not as much debt equity that needs to be issued to make it happen.

[00:16:42] And I mean the acquisition could be an amazing one for Kushtar if everything goes right but I mean if you make the assumption that the deal is probably going to come in higher.

[00:16:52] You're probably talking like nearly doubling the size of Kushtar's overall business from a market cap perspective and I mean there's been a few of these offers just right off the top of my head that I can think of.

[00:17:03] The company that's been working for Canadian companies that have done something like this like Savaria they made a huge acquisition of handi care during the pandemic which is like Savara is like a.

[00:17:14] Accessibility type company we'll chairs wheelchair accessible vans stair lifts all that type of stuff so they bought handy care which is a European company similar business operation that effectively doubled the size of the company so for Savaria worked out very well.

[00:17:31] But it can also you know end up being kind of a disaster open text they made a huge acquisition of micro focus same thing during the peak of the pandemic as of right now it has not worked out very well at all interest costs have pretty much balloon earnings are taking a hit.

[00:17:48] It's not really working all out all that well and at the time you know open text as a market cap of around 11 billion and you know you're spending six billion on an acquisition I mean it's material.

[00:18:00] And then tell us international purchase willow tree they pay quite a bit of money for the company in a pandemic environment and again it just hasn't worked out all that well at all high interest expenses you know it's tell us international's gotten absolutely thrashed since its IPO but yeah I'm in.

[00:18:18] It just it seemed you know Kushtard is very good at making small to medium type acquisitions you know 300 stores here 1000 stores there emerging them into the fold I'm really.

[00:18:28] Not sure this right now if this would be the best time to go out and probably spend you know 50 billion plus US dollars to do this but.

[00:18:38] I did take quite a lot of heat for suggesting that you know they might have might be biting off more than they can chew here a lot of people want this deal to go through.

[00:18:47] Yeah, I mean I don't know why you're getting a lot of heat because I agree with you I mean look people are kind of saying oh they have this amazing track record I've seen what people are saying like they have amazing track record they'll be able to you know just roll it in like find some efficiencies blah blah blah blah.

[00:19:06] And unlike to me it's it's just a big risk and especially right now so they came out with their Q1 2020 five earnings and look it wasn't good it's not being good for a little bit.

[00:19:20] We were talking about this before we started recording the reality is people a lot of people are struggling financially so if you're going to fill up your car at a gas station where there's a convening in store.

[00:19:31] You'll probably thinking twice about buying that snack or that bag of chips whatever it is that's overpriced because it's had to convene store you'll probably hold off and you'll end up you know buying it at Costco or law blas or whatever the.

[00:19:47] And that's been it's clear in their results here told revenues they didn't increase five point one percent but when you start out looking at same store merchandise revenue that decrease 1.1% the US 2.1% in Europe and 3.9% in Canada and they mentioned this because.

[00:20:07] Essentially there's challenging economic conditions and obviously it's not that surprising like I just mentioned and fuel volumes were also down so they also said that this is a result of consumer watching your spend so I guess people are not traveling as much especially for the summer months which tend to be.

[00:20:25] A lot of people traveling going places I mean we rented a cottage a couple hours away but I mean I'm sure some people pulled back because obviously that's an easy expense that you can actually cut out and margins were also under pressure during the quarter for both merchandise and fuel.

[00:20:43] And earnings per share decrease 2.4% to 83 cents a share now I honestly agree with you and don't get me wrong like Alimata Sound Custol as a fantastic track record.

[00:20:55] I'm not going to dispute that I mean if you're looking and you can go pretty far back but if you're looking back the last 10 years I mean it's crushed the S.N. P 500 it's up for total returns Alimata Sound Custol is a 349% the S.N. P 500 is up to 126%.

[00:21:13] And you have the T.S. X 60 that's up 104% so it's clearly done something right here but at the same time I'm with you they're trying to buy a bigger player

[00:21:25] They're clearly one this transaction to happen. I'm not sure exactly what's motivating that but I have a suspicion that it could be kind of you know

[00:21:35] lackluster results for lack a better word but at the end of the day that's a result of the economy and I think if I was an I'm not that sound Custol I'd continue the strategy of

[00:21:46] trying to buy smaller players because the reality is people you know these smaller players will probably be feeling the pinch even more so

[00:21:55] than a large company like Alimata Sound Custol or 7 and 11 so why not take advantage of that give them an exit strategy and

[00:22:05] probably get a good deal on those transactions sure they might not move the needle as much but you'll probably get way better return on your investment by doing that. I just I just don't understand that

[00:22:19] You know how why they want this deal to go through so badly

[00:22:25] The retract record all be honest means nothing like when you're looking at you know making they've made substantial acquisitions over the years as well

[00:22:33] But you're looking at something that's completely another level here. Yeah, you're effectively doubling the size of the company

[00:22:42] It's it's definitely a notable acquisition rather than you know the typical you know add a few gas stations here and there

[00:22:49] The market is it's so fragmented like that's why they can do they could constantly do this right like buy those smaller you know smaller companies 250 stores or their buy like the convenience store arm off some company

[00:23:02] You know a thousand gas stations or whatever it may be yeah and they did this in

[00:23:08] was 2021 they tried to buy carry for which is it was like a French grocer

[00:23:16] Yeah, yeah, and it was grocery stores and everybody that one kind of puzzled everybody like more than this because at least seven I is a

[00:23:25] Gas state like their convenience stores like custards bread and butter, but that that grocery store

[00:23:31] You know bid and you know they bid a bunch of money on that. I remember the stock absolutely bombed after that because people were kind of like what are they doing here

[00:23:39] But this kind of seems like a you know what are they doing here because they just like I'll say it. Yeah, what are they doing yeah

[00:23:48] It kind of should be dead in the water because like seven I just pretty much said no not even entertaining it at that price and their and custard keeps going

[00:23:56] You know like okay well if you won't entertain it at that price again you read between the lines

[00:24:00] It looks like they're willing to pay a bit more here or possibly you know try to make something work out

[00:24:05] And which like don't get me wrong it could they could buy this everything could go right they could integrate the 711 gas which I do believe

[00:24:12] Kirstard does have higher margins

[00:24:16] Then seven I like if they technically do buy all these you know they they they add the efficiencies in it could work out really really well

[00:24:25] But you don't just double this effective size of your company

[00:24:29] In terms of an acquisition would not there be huge levels of risk as well. Yeah, and then there's also the regulatory portion

[00:24:36] I think I read that they were probably divest parts of the business to make sure it would go through

[00:24:42] But again, there's no guarantee it would go through and the

[00:24:45] On its at this point it feels like seven and I would only sell if Kushal overpaid

[00:24:50] Yeah, and if Kushal over pays how good of an investment can it be that's a question

[00:24:56] So be I mean, I'm sure there's going to be more development next week. So we'll have to keep an eye on that

[00:25:01] But in the name of time let's move on here and go over another Canadian

[00:25:07] I would say a Canadian darling to some extent that's also been struggling quite a bit

[00:25:13] So do you want to go over BRP earnings?

[00:25:15] Yeah, so BRP which is pretty much bombardier recreational which has no affiliation with bombardier

[00:25:24] They they kind of do but they separated out. I believe it was like probably 20 some 25 years ago

[00:25:30] So there are separate entity and they pretty much make recreational vehicles

[00:25:35] They're struggling quite a bit over the last while here

[00:25:39] Revenue came in at 1.84 billion, which is a 33% decline from last year

[00:25:44] And earnings per share of 61 cents fell by $2.60 over the same time frame

[00:25:51] So there's a big slow down here full disclosure

[00:25:54] I do own a position in BRP. I believe it's a outstanding company

[00:25:59] I mean cyclical stocks will be cyclical and the company is just currently taking a pretty big

[00:26:05] Beating on large scale reduction in discretionary spending, especially in particular segments of the business

[00:26:11] So the company's ATV inside by side business seems to be holding up a little better than its other

[00:26:20] Or down by single digits and the company is just continuing to capture overall market share in these areas

[00:26:26] I mean they continue to capture market share everywhere

[00:26:29] But these areas of the business are holding up quite well

[00:26:34] And I'm not exactly sure why that would be

[00:26:37] I mean maybe it's because ATVs inside by side can be used for non recreational purposes

[00:26:43] I don't know maybe that would be part of their power support revenue

[00:26:46] Yeah, yeah, yeah, which I have here

[00:26:49] Obviously that's also declining but not as much as I've had

[00:26:52] Not as bad for me, yeah

[00:26:53] Yeah, the marine side of the business it's much smaller than power sports

[00:26:58] But it is no doubt struggling

[00:26:59] So I believe the marine end of the business is down 30% year over year

[00:27:05] So yeah sales are down in the high 30% range for pontoons

[00:27:09] And high 20% range for personal water crafts

[00:27:12] And personal water crafts would be like cdus things like that

[00:27:15] Like and I believe only like maybe single or W's boats things like that

[00:27:20] But I mean the struggles in many segments resulted in a 71% decline in earnings per share

[00:27:28] And a year over your basis 86% decline in free cash flow

[00:27:32] And you know this is despite the company reducing capital expenditures by around 20% on a year over your basis

[00:27:38] So being honest, there really wasn't anything at all

[00:27:41] I could point out on the quarter that was a positive accept for the fact that they're continuing to gain market share in North America

[00:27:47] Which should bold well for when when discretionary spending returns

[00:27:51] And I mean the thing about it is it's like not really anything the company is doing operationally

[00:27:57] It's like it's unavoidable what's happening right now is unavoidable

[00:28:00] Which is kind of why I think you know the stock is definitely getting hit

[00:28:04] But it's not getting like you would figure with the results it's posting it would be getting obliterated

[00:28:09] I mean you're talking you know massive declines and you know reduction in guidance

[00:28:13] Which I'll talk about in a sec but yeah, it's nothing the company. It's completely out of the country

[00:28:19] It's good troll

[00:28:20] They're probably also having some of their dealers they must have to put some pretty substantial discount

[00:28:27] Because I'm assuming they overproduce that's usually how it's working overproduce

[00:28:33] And then you know there is excess inventory you got a discount some older models that you still have in stock

[00:28:39] I mean it's nothing again. It's obviously I'm pretty familiar like I mountain bike people know on this podcast

[00:28:44] I've been listening and biking industry have seen the exact same thing they overproduce because

[00:28:50] The man was through the roof during the pandemic

[00:28:53] Because everything was locked down everyone and their brother and sister wanted to buy a bike

[00:28:59] Whether it was road or mountain bike there was you know shortages

[00:29:03] They started producing a whole lot to me demand and then everything started reopening demand fell off a cliff

[00:29:10] And now I mean if you're looking for a bike now's the time to buy one. I'll just say that and that's usually how it works because now companies are adjusting

[00:29:17] And then the cycle kind of will restart eventually where the companies will not be producing enough

[00:29:24] The man will start picking back up and then you get into that cycle again

[00:29:28] Yeah, exactly we saw the exact same thing with eritia

[00:29:31] They loaded up on a ton of inventory and that would have been 2022

[00:29:36] And then you know rates started going up spending started slowing they ended up with a ton of excess inventory

[00:29:42] And then you got to mark that inventory down it kills your margins

[00:29:46] It, you know kills your sales overall and then you like these companies always go through you know peaks and trout

[00:29:51] Like it's just gonna happen. I mean there's nothing the company could do

[00:29:55] And I mean the one the one thing is go to their guidance

[00:30:01] So when we go back to the final quarter of fiscal 2024 so right now this company is currently in the second quarter of its fiscal 2025 year

[00:30:11] They kind of they're like forward all the cent entire year. It's pretty confusing for a lot of people

[00:30:16] But they they would have closed out fiscal 2024 three quarters ago

[00:30:20] So they issued guidance back then which for the most part their year round products and power sports products would see a 5% reduction in sales

[00:30:31] So that's kind of what they ballpark

[00:30:33] They projected 9.5 billion in revenue on the high end

[00:30:36] 1.47 billion in EBITDA and eight dollars 25 cents in earnings per share

[00:30:42] So through the next three quarters the company has slashed its guidance every single quarter

[00:30:48] At typically the last two quarters it's been like tiny amounts however in this most recent quarter

[00:30:54] It just caught guidance massively so

[00:30:57] Revenue was now expected to come in at eight billion on the high end versus what did I say 9.5

[00:31:04] At the end of 2024 EBITDA in the 940 million dollar range compared to 1.47 billion

[00:31:11] So you're looking at a more than 33% decline there and earnings per share at three dollars 25 cents

[00:31:18] versus eight dollars 25 cents so you're you know this is a 61% decline in earnings guidance over the course of nine months

[00:31:26] They got a poll guidance

[00:31:28] Yeah, exactly like we were talking about that because the revenue guidance I looked through the earnings report

[00:31:34] And if you take out you know when they issued guidance for fiscal year 2025 because you can't you know

[00:31:41] You can't cut guidance when you issue it. So if you take out that one

[00:31:45] It's actually four quarters in a row that they cut revenue guidance going back to fiscal year 2024

[00:31:51] So it's not good and I totally agree with you at this point. I don't think the market would blame them

[00:31:57] Look there's so much uncertainty about the economy and clearly it's a cyclical business just you know cut the guidance say look

[00:32:04] I given the you know economic environment

[00:32:07] It's just too difficult for us to issue guidance right now when things are better or something like

[00:32:12] The market may kind of not like it for you know a couple weeks or something, but I think it would definitely help over just you know every single quarter

[00:32:21] Cutting yeah like this this just kind of shows you that they have absolutely no idea how bad it's going to get

[00:32:28] I mean when you're

[00:32:30] When you're taking it down every single quarter. I mean you may as well just pull it the market probably would not react very well

[00:32:37] But the market also won't react very well if say you know next quarter. You decide to slash it yet again

[00:32:44] I can't remember the I think it was actually Canada goose that ended up pulling guidance once like the pandemic hit and

[00:32:52] The stock did take quite a big beating, but it also like they had no idea what you know what was going to happen moving forward

[00:33:00] So just yank the guidance and you know just until you get some sort of stabilization

[00:33:05] And you can say hey now we can you know accurately predict instead of you know what looks like to be completely guessing right now

[00:33:12] Yeah, exactly I think there was a few airlines to during the pandemic for rightfully sell

[00:33:18] Yeah, they just didn't know but I think that's the right thing to do is

[00:33:22] Unfortunately when you don't know and you just it might be better just to buy the bullet and pull the guidance

[00:33:28] But look I think I'm with you and you have to keep in mind these cyclical business like this is

[00:33:35] You know if it's a business that interests you this one now should be the time that you have it on your radar because it's you know

[00:33:42] It's obviously experiencing a pullback probably not as much as I would expect it then you mentioned that as well

[00:33:48] But it is definitely these are the kind of businesses you want to be buying when there's some pretty strong head winds and the p looks high

[00:33:57] Especially, you know if you're looking at a backwards looking p it may look high because you know the price is still

[00:34:04] You know, it's still somewhat elevated but the earnings are declining pretty quickly

[00:34:08] So you have to keep that in mind even the 4p may look high compared to especially if things are you know going downwards

[00:34:16] But it's I know it's a bit counterintuitive but a high p is typically when you'll want to buy

[00:34:22] Yes, because when the p is low it's because usually like they're kind of mid-late cycle and things are still growing pretty rapidly

[00:34:31] Yeah, with cyclical stocks. I mean that obviously it's not an absolute guarantee

[00:34:36] But the time to buy them is when the pe is high and the time to sell them is when the pe is low

[00:34:44] Because obviously, you know, BRP is now going to report a huge decline in earnings. It's going to artificially

[00:34:52] It's going to inflate the price to earnings huge

[00:34:54] Yeah, which you know kind of shows you they're at the bottom of a cycle right like earnings or declining prices still a little bit higher

[00:35:03] So pe goes higher

[00:35:05] But then when the price to earnings is really low you've got high earnings high price

[00:35:10] You know they could be you know entering into what we're seeing right now, which is a clear downtrend

[00:35:15] Yeah, the E is declining faster than the exactly

[00:35:17] Which is like it's the complete when when you think about it's complete opposite of what many would believe

[00:35:24] They would believe that a high pe is an overvalued company but with cyclical companies it it's very difficult to ever gauge them off

[00:35:31] You know like a straight-up price to earnings valuation just because earnings fluctuates so much

[00:35:37] Yeah exactly

[00:35:39] So I know I think that was a great overview anything else to add or we'll go on to the marvelous world of some prime lending

[00:35:45] No, that's it. Let's get into the prime lending. Yeah, so I mean I said some prime lending for those not familiar with the term

[00:35:54] I think I would encourage you to go and watch the big short

[00:35:58] I believe Margo Robbie has a great scene where it's basically it means you know, hopefully we we won't get banned by it

[00:36:07] Means shit that's what it is. Subprime means shit. So basically I think that's a bit excessive obviously

[00:36:13] It's funny in the movie, but subprime is typically for people who can get financing elsewhere and a firm holdings

[00:36:19] It's probably not

[00:36:22] Classified as a subprime lender. I'm gonna go ahead and say that's what they are because they're a buy now pay later

[00:36:28] And the reason why I'm saying that is because the New York Fed had a very interesting

[00:36:33] Study that they did they did a survey pretty extensive one. They actually did several

[00:36:39] But I'll put the link in the show notes. I actually talked about that would break in a couple months back

[00:36:45] It would publish in February and

[00:36:48] What they found with buy now pay later is that well first of all buy now pay later

[00:36:53] There's a couple different ways they make money

[00:36:55] So they can make money on merchant fees for offering services

[00:36:58] The reasoning is that the merchant might not make the sell without the user using buy now pay later

[00:37:04] So fees are actually as high as 5 to 6% for the merchant

[00:37:08] There is interest on loan. So there are loans offered by buy now pay later services on a longer term

[00:37:14] And then there's the late fees if you do service don't pay their foreign installment on time

[00:37:19] They can be charged late fees

[00:37:21] But most people know them more as you know by now pay later

[00:37:25] You buy it now and you have like 4 equal installment without any interest

[00:37:29] So that's usually what people know them as now

[00:37:33] To be fair during that study one of the things is that they found financial fragile households are more likely to be repeat user

[00:37:42] Vices financially stable households

[00:37:44] They were also more likely to use BNPL so buy now pay later for smaller everyday purchases

[00:37:50] Whereas stable households were more likely to use it for larger purchases to avoid paying interest

[00:37:56] And financially fragile households are more likely to make small and medium purchases that they could not otherwise afford

[00:38:05] If they did not use that

[00:38:06] So just some context here when I say I see them more as a sub prime lender

[00:38:12] That's the reason because I'm not just basing that on you know what the temperature is outside

[00:38:19] It's actually the New York Fed had some very interesting data on that before I get started any comments there

[00:38:25] No, I mean it makes complete sense

[00:38:27] I've even seen these where you can buy now pay later like you know on a pizza

[00:38:33] It's yeah

[00:38:34] It's pretty large

[00:38:35] Yeah

[00:38:35] I mean I could see if they give you interest free like on larger purchases

[00:38:39] I mean it makes complete sense if you're disciplined enough to

[00:38:43] Actually

[00:38:44] But the money in it like interest is bearing account

[00:38:46] Exactly and then you know actually make those payments they do that for a lot of you know like electronics companies

[00:38:53] You know you can sign up for a 90 day interest free period where you don't have to make any payments and everything

[00:38:58] And you know they're pretty much banking on people or a year or something

[00:39:02] Yeah

[00:39:02] And then

[00:39:04] And then people for it

[00:39:05] And then the interest rate is like 20%

[00:39:07] Exactly

[00:39:08] One to kick in

[00:39:09] Yeah, like they don't issue these these setups

[00:39:12] You know they're making money they're pretty much planning on you

[00:39:16] You know forgetting and then you get hit with an extremely high APR loan that you know you were

[00:39:22] You got interest free for a year sure, but now you're paying 20% on on your television

[00:39:28] But yet

[00:39:29] I mean it's definitely something that you know lower quality

[00:39:33] You know higher risk borrowers are going to use which is very similar to the sub-prime market

[00:39:38] Exactly

[00:39:39] So revenues were up 48% over year to 659 million

[00:39:44] They posted a loss of 45 million, but it's the lowest loss they've posted since going public

[00:39:50] Freecastle almost double versus last year to 31 million

[00:39:53] Now gross merchandise volume that one was pretty interesting

[00:39:57] So it was a 31% to 7.2 billion for the quarter

[00:40:03] And if you're looking here at the full year because that was also their fourth quarter

[00:40:08] The growth is just insane

[00:40:11] So since 2019 so prior to going public they've grown the gross merchandise volume

[00:40:17] So that's just a sum of the total goods that are purchased using that

[00:40:22] So it's not like you know, it's not the revenue anything like that

[00:40:25] It's just a volume

[00:40:26] But it's grown at a compounded annual growth rate of 58%

[00:40:31] And it's grown even if you kind of look at the last like say since 2022

[00:40:36] I still grown at 31% so and that's when interest rates started to go up

[00:40:42] So there's a lot of people still using this

[00:40:44] And I don't think it's about to stop anytime soon

[00:40:47] So this is this is a little bit alarming just to look at

[00:40:52] If you're thinking about the economy in general

[00:40:54] Is that a lot of people are resulting to this

[00:40:57] And it doesn't seem like it's going to be stopping anytime now

[00:41:00] Active consumers were up 19% to 18.6%

[00:41:04] Sorry to 18.6 million and what's interesting there is

[00:41:09] That New York Fed survey I was talking about

[00:41:11] I remember them saying that the biggest obstacle for using

[00:41:15] Binal pay later was using it once

[00:41:19] So keep that in mind when you see

[00:41:22] The consumers that are up 19% it means that there is a likelihood of repeat

[00:41:29] Oh, it's just coming in

[00:41:31] I was confused by what I meant at first

[00:41:33] But yeah, so like yeah, the biggest hurdle is using it once

[00:41:36] But then after that you're likely to use it again to use it again

[00:41:40] Which makes it exactly that

[00:41:42] Yeah, makes sense

[00:41:43] And the number of merchant offering the services

[00:41:45] Also grew 19% the transaction

[00:41:48] Peractive customer was up 22%

[00:41:51] So definitely everything seems to be up and up here

[00:41:56] The linkancy rates were also up

[00:41:59] Not great that's something it's hard to know

[00:42:03] Because these the Binal pay later space is pretty new

[00:42:06] But we the only thing we can really compare is those sub prime companies

[00:42:10] But 30 plus days the linkancy was up 30 basis point to 2.4%

[00:42:15] That's over year 60 day plus was up 30 basis point to 1.5%

[00:42:21] And 90 plus days was up 10%

[00:42:23] 10 basis point to 0.6%

[00:42:26] So clearly I mean they are getting the money within that period

[00:42:29] That's what my you know, I assume from those numbers but still something to keep an eye on

[00:42:35] If you're interested in this business

[00:42:37] And in terms of guidance they are forecasting gross

[00:42:40] A merchandise volume GMV to grow at a whopping 26% next year

[00:42:45] To 33.5 billion so it is

[00:42:50] It's I mean it is something to keep in mind

[00:42:54] I mean to me I think it just shows whether it's you know consumers getting more comfortable with these services

[00:43:03] Or it's probably yeah, consumers getting more comfortable with these services

[00:43:07] Like that survey said once they use it once they're more app to use it again afterwards

[00:43:12] But it's probably a combination of that and people trying to make ends meet by using these services

[00:43:17] So that's kind of my sense my best guess

[00:43:20] Before I continue here and I talk about you know what we're seeing in Canada a little bit on the sub prime anything you wanted to add

[00:43:29] No, I mean it seems like pretty interesting business model

[00:43:32] So pretty much these guys pay out the retailer and they assume all the risk I would imagine of the loan

[00:43:37] Yeah, I think they resell some of the loans

[00:43:40] Okay, but they do have some of the loans on the book as well

[00:43:44] But yeah, they pay the retailers people can also for firm holdings

[00:43:48] They cannot I think there's also a card that you can purchase and essentially like I guess a little bit like a credit card and some sort

[00:43:56] I mean it's funny because there is all these products and they're almost like just a repackage of what's already available

[00:44:03] Yeah, but so those are kind of the things and also there is the yeah I guess there is loans interest loan

[00:44:09] So they have like when you look at their earnings they'll have the actual numbers

[00:44:13] And then excluding Peloton

[00:44:17] Because they do a lot of the Peloton financing

[00:44:20] So so they kind of give both numbers just to so people get a little more context here

[00:44:26] Yeah, and I've started noticing this I've started noticing this with my credit card as well

[00:44:32] Like I have a CIPC like Costco card and when I log into the statements there's like particular transactions

[00:44:37] Where I can split into like four different payments interest really

[00:44:41] Yeah, but it's only particular it's not everything. It would be like you know every tenth transaction

[00:44:47] There's that there'll be a particular transaction where I'm able to if I wanted to

[00:44:52] Cut it into four and I believe it's interest free for a first certain amount of period

[00:44:57] But yeah, I would never use it, but it's definitely this is a very fast growing segment of financial lending

[00:45:06] I guess you would say yeah

[00:45:08] And there's probably going to be some regulatory kind of movement in the next couple years too

[00:45:14] Because it's kind of a graze on right now. We don't know like exactly how much money there is tied up there

[00:45:20] When you look at all the companies not all of them are publicly traded one, you know

[00:45:24] I think square owns after pay if I remember correctly

[00:45:28] So there's different different companies as well something to keep an eye on

[00:45:33] Now if we look at during this so since March 2022 GMV has increased at an annual rate of 31%

[00:45:44] I think I mentioned that earlier, but during the same time

[00:45:48] If you look at go easy financial, their gross loans have increased 34% at an annual rate

[00:45:54] So that is you know the numbers of an actual subprime lender and propel holdings

[00:45:59] Which is another subprime lender listed on the TSA as seen its loan receivable increase a whopping 41%

[00:46:06] You over year now propel is I think around like 89% it is US in the business so their business

[00:46:13] But if you look at their financial statements they do break it down between their different arms

[00:46:19] So their Canadian arm actually has seen their loan receivable go from 11 million to 21 million

[00:46:26] So almost double in the span of six months which is pretty crazy

[00:46:30] I mean obviously it's a small base so you have to keep that in mind

[00:46:33] But the products are offering there actually lines of credits

[00:46:37] And the interest rate starts at 19.99% and goes up to I believe 46.9% if I remember correctly

[00:46:46] And assuming there's a regulatory thing in place for the 46.9 where they can't go over 47%

[00:46:55] I'm gonna assume that and it's only offered in a 3 Canadian provinces

[00:46:59] I don't have them off hand but it just gives you an idea that there is more and more demands for these type of loans right now even in Canada

[00:47:07] Oh yeah like if you look at I've followed these two companies quite a bit over the last while

[00:47:12] And if you look at the two best performing well two of the top four best performing stocks on the TSA index over the last 12 18 months

[00:47:20] It's propell and it's go easy and I mean they're just they're exploding in popularity

[00:47:27] Like a lot of Canadian financial institutions haven't really done all that well

[00:47:31] Except these you know the sub prime lenders over the last bit

[00:47:34] And I know like propell is a very interesting company

[00:47:37] But it's one I've never really like decided to own just because I have no idea how the US sub prime market

[00:47:42] I don't know any sort of regulatory information on that

[00:47:46] I mean I probably take the time eventually to dive into it, but I know they do they do like AI underwriting

[00:47:53] Which is supposed to eventually you know completely remove any sort of human error when it comes to underwriting

[00:47:59] Which who knows I have my yeah my doubts. I mean especially since there are only 12 years old as a business

[00:48:06] So they haven't seen any like look 12 years from today

[00:48:10] That was right that was what three four years out of the great financial crisis

[00:48:16] Or at least a couple years so clearly you know, I hope they have their AI models well trained because and I hope they are factoring that in

[00:48:24] Because I think that is definitely a big risk for these companies

[00:48:28] And I think their Canadian arm for propell things

[00:48:32] So it's for a credit dot CA

[00:48:34] So it is yeah 19.99% to 46.9

[00:48:39] The biggest risk for these companies and I think you said it right they've performed so well is that if you look back at history

[00:48:46] When sub prime really takes off and you know they see their loans kind of grow the origination

[00:48:54] And the loans they have on their books really grow which is good right?

[00:48:59] It means that you know from a business perspective they're getting more and more money more interest on these loans

[00:49:04] But then again it's also a sign that there is more and more consumers that are resulting to these loans

[00:49:11] And I mentioned 19.99% up to 47%

[00:49:15] I mean you have to be pretty desperate to go for these loan for a line of credits

[00:49:20] Like let's be honest like I mean either your desperate or you can't get approved to a big bang

[00:49:25] But either way you're kind of between a rock and a hard place

[00:49:28] So if you're resulting to that I mean it's safe to assume that you're probably not in a great financial situation to begin with

[00:49:35] You probably have income coming in but at the same time you know you're probably having trouble making ends meet as it is

[00:49:43] So if we're going into an economic downturn you can people can probably start doing the math here

[00:49:48] Is that in solvents sees will probably or the link wind sees will probably start rising pretty rapidly

[00:49:55] And the next year or two and it's probably a sign that we're going into a recession

[00:50:00] I mean if you look at all the recessions most of the time like this happens

[00:50:05] There is a sharp rise in subprime lending and then the recession happens not too long after that

[00:50:11] Yeah pretty much I mean nobody willingly accesses the subprime market

[00:50:16] Like it's usually a result of them not being able to access better loans

[00:50:21] You know better capital

[00:50:22] I mean the one thing I'll say about go easy is they have been put through the ringer through you know

[00:50:27] They've been through the dot com bubble they've been through the financial crisis the COVID-19 pandemic

[00:50:32] And they've come out of it not unscathed but they've they've returned you know they've put up very strong results

[00:50:38] Whereas propell hasn't really been around they haven't really had to take that you know big financial shock yet

[00:50:45] So I like the COVID-19 pandemic which really didn't turn out to be all that big of an issue for many of these companies anyway

[00:50:52] So I mean that's a big added element of it as well

[00:50:55] But yeah, it's just it's crazy growth in these markets and go easy the link wind sees have been going up

[00:51:02] I know they trended around they target nine to 10 percent

[00:51:05] And I believe over the last year they've gone from 8.5 to you know 9.2 or 9.3 and they keep ticking up

[00:51:11] So it'll be interesting to see you know what happens if they do get close to that 10 you know 10 percent target which would be their upper range of what they would view as comfortable for the link wind sees

[00:51:22] Yeah, charge off rates. Charge off rates. Okay. Yeah and here I have like the returns so go easy

[00:51:28] Yeah, that's a name I would probably consider if I was looking that's made but not right now

[00:51:33] The time to buy these is when the economy rolls over and when these delinquencies rates really start going up because now they're trading

[00:51:41] I mean at pretty high valuations and keep in mind for those joined TCI this is only up until 2016 this chart

[00:51:48] I just wanted to show what happens when there is a downturn

[00:51:53] So you can clearly see here that the company is doing you know posting the stock is doing quite well

[00:52:00] Up till pretty much like mid late 2008 and then it just takes a massive haircut

[00:52:08] I'm just gonna say like probably takes at least 50 percent haircut there

[00:52:12] So I just wanted to show that because

[00:52:15] Yes, subprime lender that's going to be

[00:52:18] You're you're going to have to deal with that if you want to hold it long term

[00:52:22] Or you can be opportunistic and when you enter that, you know that big drop in stock price because delinquency start raising

[00:52:30] Rising then it could be a good opportunity to start into it and like you said I think

[00:52:36] Go easy the thing it has going for it is has has been in the business for a long time

[00:52:40] It has seen recessions so they're probably well prepared with what's coming whereas

[00:52:45] Propel holdings. I'm not so sure even a firm holdings. I don't know how well they will be prepared

[00:52:52] So something to keep in mind because you're yeah, you're not dealing with the best credit quality. That's for sure

[00:52:59] No, you're dealing with better quality consumers now in terms of credit

[00:53:04] But that's just more so because they're having to tap into the subprime market because of how crazy cost of living everything here in Canada is just

[00:53:12] Getting a bit outrageous. Yeah, especially if you go to the convenience store

[00:53:18] Yeah, exactly nine bucks for a bag of burritos

[00:53:22] Yeah, I think this somebody think I mentioned it. I went to I think it was a circle case

[00:53:27] So any Matheson, Gustave there it was on Canada today so nothing else was open

[00:53:32] I go in for to get my daughter a drumstick yeah those ice cream cone

[00:53:37] I think it was like five fifty something like I couldn't believe it's ridiculous. I was like yeah, I still bought it because obviously

[00:53:43] She wasn't too happy and needed something to sue there a little bit but

[00:53:48] Having gone back since yeah, there's

[00:53:52] Convenience is getting very expensive

[00:53:55] Yeah, that's why they call him convenience stores, but when money gets tight the convenience is not worth it

[00:54:02] Yeah, no exactly well. I think that's it for today

[00:54:06] I think it was was a fun episode between macro and I guess cyclical businesses

[00:54:10] It was good to to look at that. I'm sure we'll you know we'll be back with more news about

[00:54:17] Admitation push-tall it sounds like that's not it's not over. That's not over. You know exactly

[00:54:22] So appreciate you listening. You can look me out at Fiat on their score iceberg on Twitter slash X

[00:54:30] And then at stock trades underscore CA on there as well. So thanks for listening and we'll see you next week

[00:54:39] The Canadian investor podcast should not be construed as investment or financial advice

[00:54:44] The host and guest featured may own securities or assets discussed on this podcast

[00:54:50] Always do your own due diligence or consult with a financial professional before making any financial or investment decisions