Tesla Slumps, Shipping Woes, and Leon's Real Estate Leap

[00:00:00] Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent for recording our News and Earnings episode, like always that will be released on Thursday. Dan, how are you? Are you considering yourself the good luck charm for the Oilers right now?

[00:00:30] Absolutely. I was hoping last week that we'd be talking about 16 in a row and we are. Hopefully, it kind of sucks to get the little all-star break now. Who knows if that'll help them or hurt them,

[00:00:42] but they're going for the record next game. And I actually had a buddy who is so confident that he is flying down to California to go to the Anaheim game where they would have the chance

[00:00:56] to break the record. Okay, okay. And I told them, I'm like, man, they gotta beat Vegas first. I think that's bad luck, I think. But hopefully, they can pull it off. Yeah, that's funny. And I don't know about you and getting back to more the investing world.

[00:01:12] It was a struggle for me in terms of choosing what topping there was a lot of macro stuff we can talk about. There's also earnings are really starting to be back in action, obviously,

[00:01:24] on the US side, the Canada side starting to pick up as well. Did you have that same challenge? Because one topic we aren't going to touch on is what's happening in China. I know there's a

[00:01:34] lot of stuff happening. So probably next couple of weeks we'll try to talk about that. But was that the same thing for you? Yeah, pretty much. I mean, especially on the Canadian side, earnings wise is pretty slow still. But this week is definitely going to start

[00:01:47] rolling in. I think tonight we have what Google, Amazon, Microsoft maybe tonight or maybe tomorrow. I can't remember most of them report after hours. Yeah, there's a few reporting in the big tech

[00:01:58] for sure. I don't know which ones, but yeah, it'll be something to keep an eye on. Well, let's get started. We do have a full slate today. So we'll start off with some Canadian

[00:02:07] content. I think something that everyone is keeping an eye on, at least if you're a homeowner and either you have a variable rate or you're going to be renewing your mortgage in the next couple

[00:02:18] of years. So the Bank of Canada decision last week came up. And of course, to no one's surprise, the Bank of Canada kept its policy rate at 5%. So what's your initial thoughts on that?

[00:02:29] I'm going to do a little bit of a breakdown here, but I'm assuming you weren't surprised No, I think there was a small chance that there would be a cut. But I think they were

[00:02:40] factoring it in as pretty close to zero that they would cut. They would just keep it steady. I mean, it's definitely helping and now they're shifting their mentality towards every single policy meeting they would say, we'll raise again if needed, we'll raise again if needed.

[00:02:58] And now it's kind of shifted to thinking about when to cut, which probably means that unless something happens with inflation now where we see a big spike up, this is probably the top.

[00:03:10] I've noticed mortgage rates have been coming down a bit, I think. So fixed rate mortgages at least and maybe even variables. I'm not exactly sure, but I'm up for renewal in a few years

[00:03:20] and I'm hoping that they're a bit lower when I get there, but not surprising at all. Yeah, and yeah, exactly. So what they were saying the Bank of Canada when they held the press conference was Carolyn Rogers and Tiff, Tiff Maclam, they held a joint press conference, which

[00:03:36] I do applaud them for including Carolyn Rogers because she's more charismatic and way better at explaining things than Tiff Maclam. I don't know why they don't use her more often because she's way better at communicating. So the discussion like you alluded to, they were

[00:03:51] saying that it shifted from whether the policy rate is restrictive enough. So if rates shifted from our rates high enough to how long they need to stay at their current level. Now one of the

[00:04:03] things they said is Canadian economic growth stall in the middle of 2023, pretty obvious if you've been paying attention to this economic growth is expected to be modest in 2024, week in the first half and then picking up later in the year, they expect 2.5% growth in 2025. And that's similar

[00:04:23] to what Ben Tal was saying in an interview with the globe that I summed up last week. So I do encourage people to go back to that episode if you're interested in hearing that. So it does line up

[00:04:35] with that. And they're saying what weak demand upwards pressure on prices should continue to moderate. And their key mandate here is inflation. But of course, I've had people push back on that. But yes, their key mandate may be inflation. But you know, they there's always in the back

[00:04:53] of their mind to like they, they don't want to break the economy as well, right? So it's always kind of that balancing act between inflation and making sure that it comes down and it doesn't impact too much the economy. That's always the fine balance they're trying to do.

[00:05:10] Shelter inflation remains high because of higher mortgage payments, higher rents and higher mortgage costs. And the path back to 2% inflation will be slow and the risk remain. Inflation is expected to stay around 3% over the first half of this year and trend to 2.5% by the end of next year.

[00:05:30] They were very kind of as they were saying this, it was Tiff Macklin saying this, obviously, he was saying that there's still some risk here and they expect to get back to the target

[00:05:41] inflation rate by the end of 2025. We'll see if that happens. Now I don't know if you listen to the press conference, it was funny, but they got asked five times about rate cuts by

[00:05:54] reporters and they make it clear it's always one question per reporter. I don't know if you listened to it. I mean, I just was flabbergasted. Okay, it was just, I mean, after two, clearly they're not answering that question so maybe move on have some other questions prepared.

[00:06:12] So I was a little confused at some of the reporters and the lack of preparation for some of them, not to say the worsome good questions that were asked but the fact that people were

[00:06:21] just asking this time and time again, I find that a bit of a head scratcher and maybe news outlets should rethink who they send to these press conference that actually have a bit more

[00:06:33] deep knowledge on how the Bank of Canada works. And one thing that's really interesting that no one asked a question about is why the Bank of Canada injected $10 billion in the span of

[00:06:44] a few days in the repo market. So the repo market is essentially short for repurchase agreement and it's a tool that's often used between banks but can also use by central banks. And a simplified version example of how it works is let's say you have Royal Bank,

[00:07:01] they need $200 million in cash for their ongoing operation. They have tons of asset but they need a bit more liquidity. So Royal Bank has tons of government of Canada bonds. So it goes to TD

[00:07:12] and says, hey TD, can you lend me some cash? Ask collateral I'll be providing you $200 million worth of Canadian government bonds and you can charge me the overnight rate, which is 5%. So repo means that Royal Bank will be able to repurchase the bank, the bonds back from TD

[00:07:29] at a later date at a slightly higher price, you know, the price that it's worked plus the interest. It's typically done overnight but can also be done in a slightly longer duration.

[00:07:40] And if you're a bit confused still I know you can get a bit more in the plumbing here. An easy way to look at it is just think about a pawn shop. You give them say a ring to pawn

[00:07:51] and in exchange they give you cash with the option of buying it back at a later date. So it's almost, you know, I think that's the simplest explanation I've heard when someone was asking the question.

[00:08:02] It's a perfect example I think yeah. Yeah. If you need cash for, you don't have liquidity, you need to give an item for cash and they charge you more to buy it back.

[00:08:10] Yeah. Perfect example. Exactly. And just to finish on this because I don't want to get too deep into this but just the fact that this question wasn't asked and again it's a bit worrying that it was

[00:08:22] in that on the first hand but also like what exactly is happening with this. So when central banks intervene in the repo market it's usually because there is a shortage of liquidity. So they'll basically act as the lender. So signs of liquidity shortage is when the overnight rate

[00:08:38] starts going above the target which currently sits at 5% could just be a few basis point like, you know, 3, 4, 5, 6, 7 basis point doesn't have to be a huge increase but it typically is a sign that the market is getting tighter. Liquidity is getting tighter. So, you know, the lenders are

[00:08:57] able to charge a bit more interest and that's not something that the central banks or the Bank of Canada in this instant will want to see. And I know there's a lot of new terms if

[00:09:07] you're kind of new to the podcast. So liquidity is just a fancy word to say it's typically cash or assets that can be quickly sold for cash. So that's something to keep an eye on. I know there are

[00:09:19] some news outlets that started kind of looking at this a couple days ago so we'll have to see whether in the next announcement they'll be asking those questions but I just thought it was

[00:09:31] interesting that they are so zoned in on interest rates and I do wonder sometimes if the reporters are really well versed or at least more than just a basic understanding there. Some

[00:09:42] are to be fair, some are. Clearly a few of them only ever had one question. And once I got asked the first time they were kind of screwed. They had nothing else to ask but yeah it's that I mean

[00:09:54] in terms of inflation especially with the higher mortgage payments, higher rents and I think they view this as probably an easy thing to get down so they're probably going to wait until they see improvements elsewhere and then they know when they cut rates that mortgage payments,

[00:10:09] higher rents, higher mortgage costs should come down which maybe gets them to their target a little bit easier but the one thing is it's so hard to predict. I don't know if you remember

[00:10:19] last year they said that they would get to target. I think it was at the middle of 2024, late 2024 then it gets pushed to 2025. Now it's what is it the end of 25 or I don't know

[00:10:31] it's so hard to predict this type of stuff and I mean even in the pandemic they said it was transitory which I guess it always is in a way but they never expected it to go as high as it was

[00:10:41] so I mean even these policy makers don't really know what's going to happen. That's kind of why it's so hard to devise an investing strategy based on stuff like this but I find a lot of people

[00:10:55] get really obsessed with this type of stuff. Yeah and to be fair we don't know either right there's so many variables that could go into getting inflation back down to the target

[00:11:05] range of 1-3% so keep in mind one of the more obvious one is in my mind that's you know not talked about all that much I think it's really the price of oil. Like price of oil has been

[00:11:19] quite low for now a pretty significant period of time and of course when CPI data inflation data comes out it's always like oh you know it was brought down by the price of oil that's still much

[00:11:31] lower than it was a year ago but I don't know if they're factoring any major kind of oil shocks in that target because if it does happen I have a feeling that the 1-3% target may be pushed back

[00:11:44] even more down the line. That's just my inkling especially with the kind of what's happening in the Middle East and how many large producers are there and how much it could potentially affect supply that's where I do you know I find it a bit of a head scratcher.

[00:12:02] Yeah it's a big element in all of it like you said we've had I don't even know what oil is right now it's like low 70s but if it you know if it spikes again you never know where these numbers could

[00:12:11] sit which is completely unpredictable so like we said like it's so hard to predict it I mean hopefully we can get back to that level because a lot of people are definitely struggling

[00:12:21] still with food mortgage costs all that kind of stuff like the quicker the better in reality. Yeah yeah definitely now we'll enough about macro the bank of Canada will move on to

[00:12:34] the first earnings we'll talk about and it's about Elon and his company do you want to tell us about Tesla earnings? Yeah so Tesla was pretty lackluster again the stock taken an absolute beating over the last month it's down 28% it might have I think it recovered a bit

[00:12:53] after this but it's down 28% while the S&P over that time frame is up two and a half so the stock is now down 31% over the last three years and is underperforming the S&P 500 by a

[00:13:06] whopping 62% if we go to November 2021 highs it's down nearly 54% so when you compare the fourth quarter of this year to last total automotive revenues came in pretty much flat I think they grew one or two

[00:13:22] percent and vehicle deliveries only grew about 2% so its energy and services segment did post some pretty nice growth 10 and 27% respectively but these make up a really small portion of the business only around 14% combined so for this reason Tesla it's it's just taken a pretty big

[00:13:44] thrashing gross margins dipped 612 basis points which would be 6.12% and operating margins have fallen nearly 8% again this is on a quarter over quarter so comparing this quarter to last years on a year-over-year basis the company has saw some pretty reasonable growth auto revenues 15%

[00:14:05] while energy generation and services grew 54% and 37% again they make up a relatively minor chunk of the business and it's it's pretty clear right now that even you know a lot of people say

[00:14:19] Tesla is a lot more than an automobile company but for right now it's very much an automobile company because the reason this company is struggling so hard is because of its auto segment which is I think 82 or 83% of total total revenues on the year-over-year free cash flows dipped 42%

[00:14:38] on the year despite Kpex capital expenditures only increasing 24% it's pretty clear the company is being hit pretty hard on multiple levels for one just a general slowdown I mean Tesla's were crazy popular in the pandemic when there was a lot of money around these vehicles are very expensive

[00:14:58] the kind of that EV narrative was a lot bigger than now it's really slowed down the adoption of EV vehicles you know people can't afford them right now and as a result they're pretty much

[00:15:10] having to cut prices I'm not even sure how many times they've cut price it it has to be two or three times now they've had to cut prices down to try to make the vehicles more attractive

[00:15:19] and I mean I think even Musk came out now and well this was probably a year ago but he said you know like when when interest rates were at 0% there was almost no financing costs when purchasing a Tesla

[00:15:31] now you factor that in people are going to you know to get that same payment they're going to be paying like 30% less for the vehicle or something like that so it's it's a pretty big

[00:15:42] factor and this is highlighted by the fact that year-over-year margins are down more than 7.5% and to put this into a little bit more context it had gross margins of 25.6% in 2022 so

[00:15:56] in terms of its total gross margins like as a percentage of what it had in in 2022 they're down about 30% on a full year comparison the numbers don't look too bad but quarterly results especially

[00:16:07] over the last quarters kind of show some pretty big issues in terms of the company especially relative to its valuation it's it's pretty hard to justify you know multiples the company is trading at especially when you look at the other auto producers which are are nowhere even close

[00:16:25] and that's exactly why it's underperformed for for quite some time now and they even said that its vehicle growth rate may be notably lower than the growth rate achieved in 2023 so it grew vehicle sales by 15% in 2023 they expect it to be notably lower like to me that means

[00:16:43] maybe 5% I don't know quite a big quite a big cut I mean in my eyes they state that the energy and storage business should outpace the automotive business in 2024 in terms of revenue growth but

[00:16:55] again that segment makes up and actually I said 14% before apparently it's 7.3% of revenue so or that's that's actually just their energy storage they also have the services business but regardless they're really small portions and I mean just straight up in my opinion I don't know

[00:17:14] how the company is really all that attractive right now it's it's trading at 150 times it's trailing free cash flows which with no you know major signs of growing that cash flow like at least in the next few years just because of the struggles they expect from the

[00:17:30] from the auto market and I think that's why it's taken you know it's down down huge especially like out of all the you know big tech big tech magnificent seven it's it's the worst by by

[00:17:41] quite a wide margin yeah and I mean you're right for these so for people to give a bit more context here so the total automotive revenue for looking at just the past quarter so that's

[00:17:55] about 21.5 billion roughly and then you're looking at the rest of the revenue being about 3.5 billion so it's still predominantly automotive driven and totally agree with you there and I think it's going to be it's going to be challenging for a lot of companies especially with higher

[00:18:16] rates and that's something I'll be talking with Brayden on the Monday episode is I pulled out some stats I think it was from can't remember the source but basically at least in Canada three quarters of people buy cars either on financing or they lease them so that higher

[00:18:35] interest rate they have to pay makes a big big difference when you think that most people still buy cars on credit when they buy them whether it's new or used use its similar figures although

[00:18:47] obviously you're not leasing it when they're used but it's still more than half of people I do it for on credit for used cars as well yeah and it's a huge cost to pay right now I don't even know what

[00:18:58] I haven't financed the vehicle for quite a while I don't know what the interest rate would be on a new vehicle I know you can still get pretty low but I would imagine like five plus percent

[00:19:07] which I mean is pretty big and especially when you get into the used vehicle market it's probably even bigger so I mean the one thing the one thing about Tesla is Elon Musk is is like openly

[00:19:19] blunt about this type of stuff too like he does not shy away from saying that they are going to struggle in the next while and he's pretty much stated that I mean their margins that's a huge

[00:19:29] dip in margins and I think it's mostly due to just trying to cut the prices and I don't know what even what a Tesla was worth you know back in the pandemic it had to be a hundred thousand

[00:19:39] dollars for one of these things they're crazy expensive and and now like people just they just can't afford them so yeah yeah I think you're right depending I think on the model I think the

[00:19:48] the cheapest model was probably cheaper than that maybe in the like I don't know I've never been that interested to buy a car from them just not that they're not ice car it's just I don't

[00:19:59] think the infrastructure is really there to make it a seamless experience right now and we've talked about that before but yeah I think it's going to be definitely a challenging year especially with EVs they're really expensive at some point too you have all these government incentives like

[00:20:14] at some point I mean you're gonna have to dial down those incentives so it's going to be interesting well how it goes for them going forward yeah and I was just looking up the I was trying to look

[00:20:25] up the estimates for they still like they're still pretty bullish on Tesla like in terms of earnings growth they still think they'll grow earnings by 30 40 percent over the next you know

[00:20:34] a year or so but I don't know it's tough it's tough right now to see any you know like short term upside in the company but who knows we'll see where it goes it wasn't it wasn't a very good

[00:20:47] quarter that's for sure I mean they're down yeah like I said nearly nearly 30 on the month so that was fairly obvious yeah and but to be fair too for Tesla and for those of my own the stock

[00:20:59] it's always been a very volatile stock yeah so this is not out of the ordinary whether it goes way up or way down so it's just something that's part for the course so if you do like the company

[00:21:10] still you know take that in mind if you take a position and I think we've discussed this before Braden and I you as well position sizing matters a lot so if you want to position in something

[00:21:22] but you know you're afraid of the volatility but you still want to get some exposure maybe size it accordingly maybe just do that position that's like one or two percent so it doesn't wreck your portfolio if it goes sideways and you can handle the volatility that's always

[00:21:37] and I don't think it's talked enough position sizing it's such an important tool to kind of manage the risk within your portfolio yep absolutely I agree on that I don't like I'm

[00:21:48] not I'm not like totally beating up on Tesla but just like oh when we look at this quarter it doesn't look you know short to mid term it might have some issues in terms of sales and stuff like

[00:21:59] that and they've they've pretty much stated as much but I think it's still you know a pretty good company when you think of you know a long-term investment in you know the adoption to EV all that kind of

[00:22:09] stuff yeah yeah definitely so now we'll move on again a little bit of macro and I think this one is really something to keep an eye on especially as we were talking about inflation

[00:22:20] earlier so the impact of shipping issues on the economy so I did some research for this I think it's really interesting so the Drui world container index WCI it actually tracks eight major trade routes

[00:22:36] and the cost associated with those trade routes and I was curious to see what the cost is and for those who are on joint TCI you'll be able to see that the costs have simply

[00:22:47] been on a essentially it's a hockey stick trajectory to say the least so whether you're looking at the worldwide costs amalgamated as a whole or looking at different trade routes

[00:23:00] the costs have gone way up for sure there are certain trade routes that it's gone up a bit less and I'll explain why because it is impacted by what's going on in the red sea but definitely

[00:23:11] something to keep an eye on in terms of inflation because there could be some inflationary pressures because of this now since Houthis in Yemen started targeting cargo ships through the red sea shipping costs have almost doubled according to the index with the sharpest increases seen for goods

[00:23:28] heading from Asia to Europe because they have to go through the red sea and the only other alternative is much more costly the impact is not as high in North America but there is still a

[00:23:40] pretty significant impact as the cost for shipping goods is overall higher now attacks on container ships have continues as news of British tanker the British tanker was actually hit by Houthi missiles last week and more and more shipping companies are choosing not to go through the red

[00:23:59] sea will which will definitely put some more pressure on costs and that's because the red sea and the Suez Canal is a much more efficient way to ship goods from Asia to Europe the alternative route

[00:24:11] is through the Cape of Good Hope which essentially for those who want to visualize a little bit it just means that the ship have to go all the way around Africa instead of bypassing through the

[00:24:22] Middle East so it does increase the cost and going through the red sea takes approximately 25 days where going around the Cape of Good Hope takes 34 days so that's a difference of nine days or 36

[00:24:35] percent longer so clearly there is additional costs that'll be much higher than that you have to pay your cruise longer there is more fuel required there's all these different additional costs and to make things worse now a severe drought has been happening around the Panama Canal and is

[00:24:54] forcing them to reduce traffic that goes through the canal and if this goes on for a while it's going to increase shipping costs for goods that are coming from Asia to the east coast of North America

[00:25:05] that's because those ships typically will go through the Panama the Panama Canal having trouble with that word today but I'll blame that on lack of sleep and being French but the good news in

[00:25:19] all of this is I think I don't know what you think Dan but I think it might be good for railways at least in Canada because the lodging behind this is these ships may opt to go more on the west coast

[00:25:31] of North America instead of going through the Panama Canal and have those ships those goods shipped by rail so overall though I think this is not great it's something to keep an eye on

[00:25:43] it may I suspect there's going to be a lag effect here so we may not see the inflation related to this just now but it over time I think we will be seeing more and more you know inflation

[00:25:56] due to these higher costs yeah I didn't even I didn't even consider the the railway thing that is pretty interesting I know I was I was reading up on the Panama Canal and I believe they said

[00:26:08] they're gonna cut shipments by like 36% because of the drought they said at first they had estimated that it'll cost them 200 million but now they're up to like 700 million dollars so I mean ultimately

[00:26:22] it's not uh it's not really a good not good overall for inflation I think uh wasn't it the was it the Suez or the Panama Canal where that boat got stuck that was the Suez yeah oh yeah

[00:26:35] yeah I think yeah well I think that might have been last year I don't know everything just blends in and they had that yeah they had the the track hoe there like trying to dig out that big boat

[00:26:45] that pitcher oh my god that was hilarious yeah yeah I mean it's a tricky situation like shipping I mean having a job in the shipping industry especially going through here is pretty dangerous

[00:26:56] right now I've watched a few of those videos where they like hijacked those boats it's pretty crazy but ultimately hopefully they get that resolved over the short term because obviously you're saying what I can't remember what you said like 30 yeah 36 longer I think I budget was like an

[00:27:11] extra 3700 miles or something extra to go around Africa to make this work so not good lots of turmoil going on right now for sure yeah and the cost associated with 36 longer it's way more than

[00:27:24] 36% when you think about it right when I was saying it's not just the additional time is the additional money you're paying your crews it's the additional gas so the companies have to make

[00:27:34] you know have to pay for all that stuff and if they decide to go through I can just imagine this is just an educated or uneducated guess that insurance costs are going through the roof

[00:27:46] or either that or insurance companies are starting to not want to ensure these boats so that would be another thing so something to keep an eye on and I'm sure that's something the central banks are keeping an eye on as well because it could definitely be inflationary when

[00:28:03] it comes to goods yep definitely now we'll move on to I saw this story yesterday and yeah I mean maybe I'm sure Dan and Nick on the Canadian real estate investor podcast will

[00:28:15] talk about this but you want to tell us about Leon's furniture or Leon as I like to call it it's definitely called yeah it's definitely called Leon's I just like to say Leo they're

[00:28:26] gonna be starting to build homes yeah so it's a little way I think a lot of people don't even realize that Leon's is publicly traded but they are publicly traded on the TSX so they had a

[00:28:38] 16.2 hectare parcel of land and all they kind of said that it was historically been reserved for employment use so I don't really know what that would mean it's hard to tell they didn't

[00:28:49] really expand on it but what they plan to do is take that parcel of land and build they want to build over 4,000 homes so the parcel is in Toronto I didn't get the exact location they did say

[00:29:02] where it was but I actually forgot to write I forgot to write it down here I was going to mention where it was and maybe you'd be able to tell if it was like a hotbed or what in

[00:29:11] Toronto but they're currently in discussions with the city to get permitting in place and what they plan to do is build also a flagship store at the heart of the development so they're going to build 4,000 homes and I would imagine their strategy here is to build that

[00:29:27] flagship furniture store to furnish these 4,000 homes so yeah it seems like a pretty good idea discount as long as you buy all the furniture and appliances from us yeah exactly the Len was probably never going to be used as a cash generating asset and the fact that's going

[00:29:46] to be able to build over 4,000 homes in pretty much Canada's real estate hotbed should allow it to unlock like I don't know to me like massive value from this this tiny parcel

[00:29:57] of land well I guess not tiny 4,000 homes is quite a bit of homes the company says it owns 236 million dollars of unencumbered real estate on its balance sheet and it feels like its real

[00:30:08] estate portfolio is not reflected in its share price at all and due to this like do this news the share shot the share price went up 10% that's not really that surprising they took

[00:30:20] I don't even know what it was used for but before and are going to expand it into this huge neighborhood it's you know overall like Leon's in general like when you think of this

[00:30:30] company it doesn't really seem all that interesting but it has been and I was actually surprised a 15 bagger since the mid 1990s so it's outperform the S&P it's returned 16 almost 1600% since the

[00:30:45] mid 90s I mean this is probably not a company I would ever really look to own like just a furniture company just without cyclical it would be but there's no doubt that it it's done quite

[00:30:57] well oh and you have you have returns even you have returns even before returns yeah so it would have started here in early 1990 so January 1990 and the total return so including the dividend would have been 3466 percent or 11.1 percent annually so you would have outperformed

[00:31:21] the S&P 500 I believe at that rate annually so hey I mean they haven't been doing as well in recent years so if you go back to the last 10 years and you're looking at 7.7 percent annually

[00:31:35] and 110 percent return which is still not bad probably in line with the TSX I would think about that but probably pretty close yeah yeah I didn't realize it was publicly traded either so yeah it's one of those like there's that and what's another one oh sleep country

[00:31:50] like a lot of people sleep country yeah that one I knew yeah these like tiny but not really tiny oh yeah ZZZ yeah yeah but yeah like these tiny like Canadian pretty much Canadian only

[00:32:05] furniture stores you don't really think are that big to be publicly traded but they actually are I just thought it was kind of interesting that they're venturing into home building

[00:32:14] yeah I mean the only way I can think of that making sense is if the land is clearly like undervalued by shareholders or investors and I think that's what they mean yeah because and

[00:32:26] that's what you said so if not I mean it's difficult to see how it would make sense I mean building homes is not an easy business building costs have gone up you know it's it probably is a bit tricky to

[00:32:40] even price homes right now so if you pre-sell these uh I don't know if they're gonna be doing single family home row houses uh semi-detached mix okay yeah but even then it's a bit difficult

[00:32:53] to probably value these homes I'm sure they'll get some expertise some good builders to to help them out with that but uh I mean it'll be interesting I would not have expected that at all yeah that's

[00:33:07] kind of what I took from it too and they mentioned how much real estate they have on their balance sheet and how it's not being reflected in its share price to me this seems like a move to

[00:33:17] you know maybe bring some of that value out and we'll see how it goes it'll be interesting I mean it's Toronto there's going to be demand for the homes for sure so yeah this feels like

[00:33:29] there always will be in Toronto but now we'll we'll stick in Canada for the next one some more earnings uh Canadian National Railway Q4 and full year so all amounts are in Canadian dollars here

[00:33:40] and I'll mostly talk about the full year um numbers so revenues were down 2 to 16.8 billion that's a decrease of 279 million or 2 percent operating income was down 4 to 6.6 billion the operating ratio increased 80 basis point to 60.8 percent now if you're not familiar with operating

[00:34:02] ratio it's not great to see an increase because this is the opposite of operating margin so lower is better here net income increased 10 to 5.6 billion earnings per share increased 15 to $8.53 that's because of discrepancies because they've been buying back shares pretty aggressively

[00:34:23] returning capital back to shareholders they generated 3.8 percent in free cash flow that's a 9 decrease now in terms of railway specific metrics car velocity increased 4 percent this is

[00:34:37] simply how many miles a car moves a day a car is just like you know these like kind of single units if you'd like there's all different kind of names but they use car velocity here train length was up 1

[00:34:48] percent revenue ton miles was up 2 percent and this is a measure of how revenue how much revenue they make per volume of freight transported so again this is good that it's going up it increased

[00:35:02] dividend they said they would be increasing the dividend 7 percent and they would also have a new buyback authorization of up to 32 million shares until January 2025 so clearly just returning more capital to shareholders which they've been doing pretty aggressively since tracy

[00:35:22] robinson has taken over and that the buckle of an attempt to purchase kansas city southern from the prison jacqueroe boliv was the previous CEO and i mean yeah i've talked about it before

[00:35:37] and just like i do not understand what they were thinking or what they were smoking when they thought this was a good idea and it would actually get approved it ended up costing them about a

[00:35:47] billion if i remember correctly there was like a breakup fee yeah and that they had to pay and shortly thereafter he left the company so yeah so that's kind of the gist of it the last thing

[00:36:00] i'll mention is tracy robinson on the call said they remain there remain some questions on where the economy is heading but they expect continued improvement as the year progresses and again that's in line with what we were talking about earlier with a bank of canada and also bantal

[00:36:15] when i was uh you know giving an overview of his interview with a global mail and because of improved efficiencies and the economy slowly improving they expect earning per share to grow

[00:36:26] by 10 in 2024 so overall i mean not a great year and quarter i would say fine they were i mean not a big surprise is what i would say i think most people were expecting that earlier in the

[00:36:41] year they had kind of slower business because of all the forest fires that we saw in canada as well but kind of what was expected i think from my view and then it'll be interesting how it trends in

[00:36:55] 2024 yeah it's not not all that surprising especially like railways are going to be cyclical to a certain extent they're going to slow down when the economy slows down the earnings guidance is actually pretty good because i remember like at one point they were pretty much saying earnings

[00:37:10] would be flat or or maybe grow in the mid single digits which would have pretty much been from buybacks probably yes 32 million shares is about five percent of their outstanding so i mean

[00:37:24] half of that is probably coming just directly from the buybacks but clearly they've seen a bit brighter outlook in terms of buybacks they do buy back a ton of shares so they've bought back 20

[00:37:36] 22 and a half percent of shares outstanding over the last 10 years so that's yeah that's quite a bit yeah and it's not obviously a sexy business and cp is a little bit different you can make a case that

[00:37:47] cp may have a bit more growth ahead because of that at kansas city southern but they also you know took on a lot of debt to make that acquisition so i think it's give or take i personally don't

[00:37:57] think you can go wrong with any of the two railways at the end of the day's governments are very you know the regulatory kind of situation around railways makes their moat extremely sustainable and very difficult for any competitors to come in whether it's just regulation and

[00:38:17] thinking of building a new railway right think about it if you wanted to build a new railway across canada you'd have to essentially get approval from the federal government but all

[00:38:26] the various provinces and then add in the cost of what it would actually cost to do that and the sheer investment i'm not saying it's impossible but i'm just gonna say it's probably a below

[00:38:38] one percent probability that would ever happen at least in i feel like in our lifetime yeah it's much the same as the as the telecom companies here in canada i mean the infrastructure and the

[00:38:49] government regulations makes it almost impossible for like major competition to step in so yeah the only different is they don't have to constantly upgrade their uh their 5g or 6g network which billions and billions of dollars yeah they're it's a little less in that regard although i mean

[00:39:07] the railways are probably i mean they do probably require a ton of maintenance especially with uh ties and all that kind of stuff but yeah i think they were saying their um their capex is gonna be

[00:39:18] around 3.4 billion for this year if i remember correctly just going on memory so yeah you're completely right like it's not it's definitely capital intensive i think that's close to tell tell us well yeah tell us is around that amount so yeah these businesses they're not cheap to operate

[00:39:34] the only difference is they generate way more cash flow than the telecoms which yes i'm gonna take every day but i think i think that's enough for the canadian railways you want to talk to us about

[00:39:45] archer daniel's midland accounting issues i mean i wasn't really aware of this company all that much so maybe uh i think that's a bit of a learning opportunity for me as well oh i'm

[00:39:56] surprised at enola that they're a huge uh pretty much food processor like crop type company they went bonkers during the pandemic just because of the prices of commodities but they're one of the

[00:40:07] largest name but i don't really follow them all that much yeah yeah they're kind of a like a blue chip type food processing company uh grower things like that so they're one of the

[00:40:18] largest grain merchandisers in the world uh they run a nutrition end of the business where they focus on you know nutrition elements of human and animal products and that's actually where the issues are arising so they absolutely plummeted last week so they fell from pretty much right away

[00:40:36] from 69 dollars a share to 51 so more than 26 percent and that's a pretty big move for this company so pretty much their nutrition segment there was an accounting probe so the company immediately came out they suspended their cfo slash their earnings outlook

[00:40:53] and pretty much stated that the probe was the reason so there's obviously issues here they're also delaying their fourth quarter earnings an annual report because of this which typically scares the hell out of investors i mean there was so much that happened here i mean

[00:41:06] the suspension the earnings outlook they delay their earnings they delay their annual report and they've spent a lot of time and a lot of money to expand the nutrition end of its business

[00:41:17] in an effort to you know diversify itself away from you know strictly crop elements things like that and it's this is a pretty interesting thing and i actually learned this yesterday so archer

[00:41:28] daniels has been in hot water in the past they were accused of fixing prices in the 1990s and it was such a huge issue that they actually made a movie out of it with matt daemon it's

[00:41:38] called the informant that is apparently on the archer daniel scandal in the 90s where they were accused of fixing prices i haven't watched it i might now but yeah it's uh yeah i had no idea about

[00:41:51] that yeah i feel like i saw this movie a long time ago but oh my god i would not have been able before this to tell you like what it was about at my like yeah that's i feel like it's been a while

[00:42:03] yeah yeah so they've i mean they've already you know the company's already under some pressure prior to this because of the slowdown in revenues coming out of the pandemic so for it to take you know 25

[00:42:15] percent additional is kind of a gut punch but i mean any probes or acquisitions accusations of misrepresented earnings is no doubt going to cause a stock to plummet i mean we have to remember the market values companies based on these earnings so as soon as they're in question

[00:42:31] people tend to bail the 25 dip is quite extensive especially considering its nutrition segment which is the one that's under question makes up only around 10 of the business but i think there's kind of an element of trust here and considering the company has been involved in this type of

[00:42:48] stuff before investors have an even shorter leash so the debate among many investors right now is whether or not the company is a buy expected earnings are supposed to be just shy of 6 for 2024

[00:43:02] so i think right now it's trading at around 54 so we're talking like it looks pretty cheap but with the earnings in question who really knows what the case could be i mean i personally

[00:43:13] wouldn't touch it until the acquisitions are cleared up and i was actually burnt on a hydrogen play i think it was a quabec company not too long ago during the pandemic for pretty much the exact

[00:43:25] same reason i don't know if you know about this company's abec they were called so they were like a renewable gas hydrogen just so they were posting all this growth like really strong numbers

[00:43:36] and then it came out that they were pretty much fabricating all of it so they were uh you know misleading people with their financial statements they were booking revenues that they shouldn't have which which resulted in way better numbers and actually existed

[00:43:51] and then when they revised when they eventually got caught and had to revise it downward it was it was pretty nasty and they ended up just going bankrupt they just straight up went bankrupt yeah

[00:44:02] it was a pretty crazy story and they were posting they were posting big growth i mean and then they they had to come out and they said you know some of the some of the revenues we've booked

[00:44:10] are actually not going to be coming in and it was like holy you've got to be kidding me and it ended up being a lot worse than even initially expected and the company just it ended up folding

[00:44:20] so uh i mean i learned my lesson from that and again i think as you mentioned you know with tesla with the position sizing like it was such a speculative company for me it was less than 1%

[00:44:30] of my portfolio i think even like 0.5 so it was like it sucked obviously but it was a non-issue in the grand scheme of my portfolio so um i mean on that end like archer daniels is way

[00:44:43] bigger than that i don't think they're going to go bankrupt it's a very small portion of their business but this is just an example of you know the dangers of you know accounting issues with

[00:44:52] some of these companies and the fact that like you know these there is always risk with you know publicly traded stocks things like this can happen with with any sort of company i mean

[00:45:01] archer daniels i think is a 50 billion dollar company or at least they were before the dip so this type of stuff doesn't just happen in uh small caps micro caps things like that

[00:45:11] yeah i mean it's 30 billion so it's uh it's lost a little bit of uh little bit of market cap since then but i mean yeah i think we've seen these kind of accounting issues in the past where

[00:45:23] there's so many different outcomes that can happen we saw what happened with canopy in canada with their bio steel segment yeah exactly you know bio steel went from being like the the one shining star within their portfolio to basically being the company or the segment

[00:45:39] that was dragging down the company and its pretend it's path for profit profitability i don't know it's hard to say yeah and like you said it's really hard to say where it's gonna go

[00:45:50] it could an investigation could reveal even more things that went wrong here so i totally agree with you that when you see this kind of stuff i think some people may get the urge to be

[00:46:01] like oh you know brush it off and it's a great opportunity to buy but there's a lot of example that say that that show that sometimes it's just the tip of the iceberg that comes out and there's

[00:46:13] even more weird or weird stuff or shenanigans happening when uh auditors start going through that yeah and that's probably why you see a 25 dip on you know a probe into 10 of the business as people

[00:46:27] might think you know if they dig even further like who knows what they're gonna uncover and i mean i'm pretty sure archer daniels is a dividend king so it's raised dividends for 50 years i could

[00:46:39] be wrong on that 50 plus years but it's a it's an old company it's got a lot of history so for something to happen like this to a company of this size uh kind of has this reputation is actually

[00:46:51] it's pretty surprising especially with like the immediate the immediate suspension of their cfo you know they immediately come out slash its earnings outlook so it's probably not going to be good you don't know the end result of it ultimately but if they did that all that so

[00:47:06] fast like clearly there there's issues there even if it's a small portion of the business yeah and they may be just trying to kind of rip the band-aid off too right just basically

[00:47:15] we're not providing any guidance or is that what they said like no guidance and we're just reevaluating thing or just slashed it no i think they did slash it give me a sec i would

[00:47:25] have to look it up but okay i'm pretty sure they still issued guidance but they they cut it okay they cut it so they're probably trying to be as conservative as possible as they kind of find out

[00:47:36] more stuff but yeah something to keep an eye on we'll try to we'll move on here to a different company much larger company probably 10 times larger than market cap so this company i'm

[00:47:48] talking about here is asml the dutch company q4 and full years results now if you're new to the podcast here is a quick overview asml because it you know they make some pretty complicated stuff

[00:48:02] so this is just high level the sml is a company that plays a crucial role in the production of semiconductor chips which are just a fancy way of saying like kind of computer chip which

[00:48:13] go in pretty much everything like computers smartphones and much more and more cars you know think about anything that's kind of remotely electronic there's probably some kind of semiconductor chip in and even your refrigerator the company specializes in creating machines called lithography

[00:48:31] systems now asml's main business revolves around making machines that are essential in the chip making process these machines use a technique called lithography to create extremely small and intricate patterns on a surface of semiconductor wafers so it's just a critical

[00:48:50] part of those semiconductors there is only a handful of companies or not even i think there's like three or four that have like actually build these machines and asml is the only one that

[00:49:01] builds extreme ultraviolet machines so euv and they also have a kind of less advanced duv which is deep ultraviolet machines that they build and ship those machines there's also some other companies that build those but again it's an oligopoly here there's only a handful so these are really

[00:49:21] advanced and just a technical know-how to be able to build these machines is quite something now the numbers here all the numbers are in euros and i think asml before i go on with the numbers

[00:49:33] it's probably one of the most important companies that everyday people don't know about you know if you ask anyone on the street like do you know what asml is probably nine out of ten will say

[00:49:46] they've never heard of it and how important it is i think it's quite often misunderstood by a lot of people yeah i mean even i'm not too i don't really know about the company that much i

[00:49:59] mean i've heard of them i've never really looked too in-depth on them i mean a lot of this technology is probably just over and above what people are kind of willing to dig into but

[00:50:10] i mean i mean i personally you know i know generally how the machines work obviously going into it and fully understanding from A to Z basically you would need a phd in not computer science but probably a phd in lithography or something like that if that's

[00:50:29] such a thing so it's extremely complex but these machines the most advanced one they cost over 200 million dollars per machine so this is how expensive these machines are now revenues and profit came in above expectation for q4 which send the stock up when earnings were

[00:50:48] released i think they was up high single digits for the full year revenues increased 30.2% to 27.6 billion at the beginning of 2023 their guidance was that revenue would be up 25% for the year and

[00:51:03] they tend to do that so they tend to be a bit more conservative when they issue guidance revenues were up 12.5% for the quarter and compared to last year so year over year for the quarter

[00:51:16] and 8.4% compared to q3 of 2023 so on a sequential basis they recognize revenue on 53 EUV systems so their most advanced system and 396 duv system the the ones that are a bit less advanced 42%

[00:51:32] of the systems sales came from EUV and the rest from duv so it clearly shows here that EUV systems are significantly more expensive because it's still a small portion of wall to revenue recognize

[00:51:49] in terms of units yet it's almost half of the total sales net income was up 39% on a full year basis to 7.8 billion EPS was up 41% and they generated 3.2 billion in free cash flow which was less than

[00:52:06] half of last year so something to keep in mind and what I was kind of curious is I wanted to see how it looked like in terms of the regions to where they ship these machines and what's

[00:52:19] interesting is the Chinese shipment has actually increased I have a little graphic here for a joint tci listeners and I'll explain it for those who are just listening on audio so the top one would be

[00:52:32] the 2023 result and the bottom one 2022 and what's really interesting here is that 29% of the units were actually shipped to China compared to 14% last year and for those who are following the

[00:52:47] news maybe a little bit confused here because the US has been putting more and more sanctions on China and obviously this company is in the Netherlands but also the Dutch government has been putting some restrictions in place but what's happening here is they're shipping their less advanced

[00:53:04] machines to China so they were able and every time there is a new kind of regulation in place from the US you know asml tends to make sure that they follow it but just you know just just on the

[00:53:18] limit so they they're pretty good at that I've noticed that they they're doing that so they're still shipping quite a bit of units to China but again the most advanced ones are not being shipped

[00:53:28] to China and then in terms of guidance they expect revenues to be flat in 2024 and gross margins to be slightly lower than the 51.3% that it was in 2023 so I think they're just being a bit conservative

[00:53:43] here they're just trying because these are very expensive machines like I said they still have loads of back orders and you know backlog I forgot to put the amount of backlogs but I think it's

[00:53:53] around the 20 billion mark something like that so but they they take time to build then ship so it's oftentimes these companies that are producing semiconductors like a Taiwan semiconductor a Samsung for example they buy these in advance with anticipation of future demand coming yeah it's

[00:54:11] interesting to see China like double pretty much in shipping but Taiwan went down 12% which is kind of it's kind of interesting yeah yeah but it's still the units right so it's not the most

[00:54:24] advanced one so that's why it's like skews a little bit yeah the most advanced ones are not being shipped to China yeah yeah because of regulations yeah exactly and probably just to finish on this so the more advanced they are the smaller they can essentially the nanometer

[00:54:41] that they can do on these wayfares the smaller it can be and the most powerful the chips can be so the more transistors you can actually put on these wafers so that's the logic behind it

[00:54:53] and they're usually also more power efficient but again it's not a perfect process so when these machine are shipped out for the first time oftentimes it does take some time for the companies

[00:55:03] to start producing the new smaller chips because early on in the process they have a too high and I don't remember the exact term but basically a discard rate where you know the 70% of the

[00:55:17] chips produced are good and then 30% are not good so you want to get that in the 90% if not more because it's never going to be exactly the same every single chip but you

[00:55:27] want to get it to a point where it's high enough where the chips are you know 95% or even higher in terms of I don't know the term but usability or the intent that that they're used for

[00:55:41] yeah it seems like a pretty interesting I'll have to look into it like I said I knew I knew of them but I didn't really I didn't really know I mean semiconductor companies are just exploding over the last while like even if you look back to 2016 they had 7.6

[00:55:56] billion in revenue and now they got 30 billion as of the end of 2023 they've just skyrocketed especially 2022 to 2023 they pretty much increase their revenue by 30 some percent and now they're guiding to well I mean what were they guiding for 25%

[00:56:14] flats over for yeah so revenue for this year and I forgot but I'm going on memory here so revenue for this year will be a little really flat that's what they're guiding for but again I wouldn't be

[00:56:25] surprised if they have a bit higher revenue I think they're just being conservative there yeah yeah and these companies like these companies aren't small either this is what a 350 billion dollar company so they're growing at they're growing at a pretty pretty crazy pace yeah they're

[00:56:40] I think it's one of the largest well I know it's one of the largest companies in Europe I mean it's 314 billion euros in market cap yeah it's it's going to be interesting to see you know the growth

[00:56:52] of all these companies moving forward but I'm gonna have to dig into them a bit more yeah good book for people wanting to learn about the semiconductor industry and the history behind

[00:57:01] it chip wars is a really good one so that's where I started learning a lot about it so highly recommend it you'll understand a bit more about the whole process and probably

[00:57:11] want to dig even further but again it's it's not easy to understand I had to listen I got the audio book I listened to it twice because there are certain parts I was like okay I need to re-listen

[00:57:24] like essentially like Google and look up certain terms and certain like concepts at the same time as I was listening to to try and get a decent understanding and then I eventually started a

[00:57:35] position in asml oh so you own it I didn't know that yeah yeah I do want it yeah nice yeah yeah it's been it's done pretty well it's done pretty well it's done all right yeah yeah yeah exactly

[00:57:48] but no I think this is uh this is it for the episode today I think it was a great one thanks for those who are tuning in we've had some great numbers on these earnings and news

[00:57:58] recently so definitely appreciate that if you can take the time if you haven't done so give us a five-star review on Apple podcast with some nice comments we always like it or Spotify and you can follow us on twitter at cdn underscore investing I'm fiat underscore

[00:58:15] iceberg and then stock trades underscore ca okay perfect I will one day one of those days I'll know it by heart but it is in the description so thanks a lot for listening and we'll see you

[00:58:28] next week yep thanks for listening everybody the Canadian investor podcast should not be taken as investment or financial advice braden and simon may own securities or assets mentioned on this podcast always make sure to do your own research and do diligence before making investment or financial decisions