Gravitas: Technology's 2nd Act

August 11, 2023 | Michael Newton


The Newton Group Insights

Over the last 30 days, US Big Tech names – except TSLA – have seen upward earnings revisions for the current quarter and next year. Clearly, Wall Street analysts mostly liked what they saw in these companies’ Q2 earnings reports, especially for AMZN which is the standout in terms of improved investor sentiment over the past month. Even without AMZN, as a group they’ve seen an average earnings upward revision of +4.6% and +3.8% for the current quarter and next year respectively, which is much better than the S&P 500. GOOG, AMZN and META are in the green in July and August. Conversely, AAPL, MSFT and TSLA have spotty earnings revisions and are all down in July and August. Whether or not US Big Tech can drive the S&P higher from here will come down to further upside earnings revisions and better expected 2024 earnings growth than the broader US equity market. Their largely positive earnings momentum after just reporting Q2 results is therefore an encouraging fundamental signal. At the moment Apple and Microsoft are oversold - and are starting to look attractive for new money.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Berkshire Hathaway (BRK.B-US) The conglomerate comfortably beat consensus expectations with $10.04 billion of operating profit. In Q2 2023, Berkshire's balance sheet size topped $1 trillion for the first in history. Warren Buffett's Berkshire Hathaway generated revenues of approximately $92.5 billion. Also, Berkshire reported a massive $147.5 billion cash pile, approximately $17 billion higher than the $130.5 billion reported a year prior. Investing in Berkshire Hathaway continues to offer investors an exciting opportunity to gain exposure to a diversified portfolio of well-managed businesses, led by Warren Buffett's prudent investment approach. And shares do not pay a dividend - a feature, not a bug, for long term investors that want to avoid paying taxes. Owned in Core and US Portfolio.

(+) Disney (DIS-US) Shares of the media giant gained after the company said it would raise the price on its ad-free streaming tier in October and that it would crack down on password sharing. Disney reported a 7.4% decline in subscriber count last quarter, however. It also recorded $2.65 billion in one-time charges and impairments, dragging the company to a rare quarterly net loss. Owned in US Portfolio.

(-) Granite Real Estate Investment Trust (GRT.UN-T) The industrial, warehouse and logistics focused REIT reported Q2 results that were a bit soft. We continue to like the name at these levels supported by its strong balance sheet, healthy occupancy, and robust growth plan. Shares yield 4.33%. Owned in Cash Flow Portfolio.

(+) Hydro One (H-T) delivered a modest beat relative to consensus expectations which is effectively the best-case scenario for a utility company. In short, H remains a great option for dividend-oriented investors given its 3.3% yield and 6% dividend growth rate through 2027. However, it’s important to acknowledge that valuation is elevated relative to its 5-year average and relative to peers. Owned in Cash Flow Portfolio.

(+) Killam Apartment REIT (KMP.UN-T) This Halifax-based REIT delivered robust results for Q2-F23 with funds from operations (FFO) of $0.30 per unit, up 5% YoY and marginally ahead of our expectations. Killam is well-positioned to benefit from the current crunch in the housing supply through robust rental growth in its rent-control-free buildings along with earnings contribution from its development pipeline, which is expected to add ~600 housing units over the next two years. Yield 3.82%. Owned in Cash Flow Portfolio.

(++) Eli Lilly (LLY-US) Shares rocketed after beating Q2 revenue and earnings estimates and increasing its 2023 guidance; also new data from competitor Novo Nordisk’s weight loss drug was also promising for Eli Lilly’s obesity drug. Some research suggests Mounjaro may be even more effective at reducing weight than Novo Nordisk's Wegovy and Ozempic. Owned in US Portfolio.

(++) Novo Nordisk (NVO-US) Shares surged after data showed the drugmakers' obesity treatment Wegovy cut the risk of heart attack or stroke by 20%. Also bodes well for Lilly's Mounjaro to see the same cardiovascular benefits. Nordisk's Wegovy and Ozempic continue to impress. Owned in Opportunity Portfolio.

(+) Restaurant Brands International (QSR-T) The restaurant conglomerate delivered a top and bottom-line beat relative to consensus expectations. Comparable sales were solid across all core franchises with a particular emphasis on Tim Horton’s (+11.4% vs street at +6.5%) and Burger King (+10.2% vs street at +5.3%). Unit growth also was steady on a sequential basis, coming in at ~4.1%. Overall, a solid print for QSR but we would note that Tim Horton’s EBITDA came in ~2% below the street. We believe this is likely driven by the drag from higher raw material and labour costs from the supply chain business. Other than that, we believe investors will be pleased with the quarterly results. QSR comes with an above average dividend yield and a more attractive FCF yield relative to highly franchisee peers such as YUM and MCD. We would continue to own/buy the stock at current levels. Owned in Core Portfolio.

(~) Sonos (SONO-US) Shares initially popped after beating analysts’ expectations in its latest quarterly results but traded lower throughout the day. The wireless speaker maker reported a loss of 18 cents per share on revenue of $373 million for its fiscal third quarter. Sonos also raised its full-year EBITDA guidance. Owned in Opportunity Portfolio.

(~) SmartCentres REIT (SRU.UN-T) delivered funds from operations (FFO) of $0.55 per unit for Q2-F23, up 11% YoY and marginally below estimates. SRU's financing costs rose 19% YoY as its fixed-rate debt rolled over to higher interest rates. Moreover, SRU's variable-rate debt comprises ~17% of its total debt, owing to its overweight exposure to development initiatives, and contributed to the rise in its cost of debt. I will holding off on allocating new capital to SRU units until its FFO per unit growth can support higher distributions. We expect that to happen when either interest rates decline or the bulk of its development pipeline is complete. Yield 7.41%. Owned in Cash Flow Portfolio.

(+) TransDigm (TDG-US) One of my favourite long term holdings that is little known to most investors. They reported strong results this week. Q3 Non-GAAP EPS of $7.25 beats by $0.85. Revenue of $1.74B (+24.3% Y/Y) beats by $50M. TransDigm Group operates as a holding company with a clear, consistent strategy: acquire businesses that supply proprietary aircraft components with high aftermarket content. TransDigm’s businesses manufacture and sell replacement parts for aircraft, like ignition systems, pumps, actuators, flight controls, and cabin equipment, among other things. Since TransDigm is the only provider of many of their products, the company has significant pricing power. The firm also operates with a high degree of financial leverage to amplify operating results. This strategy works because potential competing spare parts would have to be licensed by the Federal Aviation Administration to be identical to the original product. Since TransDigm’s designs are proprietary, it is challenging for would-be competitors to prove that their design is identical, and because the parts generally do not cost much compared with the value of the overall aircraft, competitors don't bother trying to replicate them. These barriers to entry allows TransDigm to extract value from regulator-required maintenance and enables the firm to aggressively price its spare parts. TransDigm had its IPO in 2006, after 13 years of private ownership, and it still uses classic private equity strategies of creating value. With air travel rebounding, these shares are following suit. Owned in Core Portfolio.

(-) The Trade Desk (TTD-US) traded lower following its Q2 report. The cloud-based online advertising-buying platform has been performing well despite the industry facing difficult macro headwinds. As such, we had concerns heading into this report. Advertisers tend to pull back when there are macro headwinds. The stock is 90% YTD so a pullback was likely. Advertisers have become more deliberate with their spend, but they have increasingly gravitated to TTD's platform because marketers have learned that data-driven precision can bring a sense of certainty to their advertising efforts. That has helped TTD significantly outperform the digital advertising industry over the past few quarters. Owned in Opportunity Portfolio.

(+) Wynn Resorts (WYNN-US) gained after exceeding expectations for its second quarter on the top and bottom lines. The casino operator posted adjusted earnings of 91 cents per share on revenue of $1.6 billion. Owned in Opportunity Portfolio.

Weekend Reading

Canadian mortgage rates pause climb, but will the calm last? Borrowing costs have ridden an uptrend since May, but none of Canada’s leading nationally-advertised mortgage rates went up this week. That’s the good news. GLOBE & MAIL

How to rest well Taking a break isn’t lazy – learning to recharge is a skill that will allow you to enjoy a more creative, sustainable life. PSYCHE

Taiwan Semiconductor Is Becoming the Global Chipmaker It Didn’t Aspire to Be From humble roots in Taiwan, the tech giant is on track to have factories across the globe. BLOOMBERG

The World’s Largest Landowners Did you know that King Charles III and The British Royal Family own 90% of the land in Canada? MADISON TRUST

Even When the Stock Market Goes Up it Still Goes Down Even in the really good years, there’s a decent chance you’ll have to live through a correction along the way. WEALTH OF COMMONSENSE

Charts for the Beach 2023 Each year Richard Bernstein Advisors highlights five of their favorite charts the think consensus is currently overlooking. RB ADVISORS

Don't make your investments based on who is in the White House. Are Republicans or Democrats Better for the Stock Market? RETIREMENT RESEARCHER


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