Rinse and Repeat With These Long-Term Winners

Posted by Ryan Irvine

on Tuesday, 17 July 2018 11:25

In April of this year I put together an Inside Edge Column titled, “If It Ain't Broke, Don't Fix It.”. Hardly a revolutionary idea, but the two stocks we recommended sticking with at the time had already been standout long-term performers in KeyStone’s Canadian Growth Stock Portfolio with one up over 4,300% and the other returning over 650%.

Naturally, with gains such as this the question of whether it is time to sell becoms top of mind for most investors.

Generally, our decision on whether it is time to sell, buy or continue to hold does not depend on where we came from, it is dependent on where the business of the stock is now and where it is headed. This is essentially how the market values any stock long-term.

For an individual portfolio, if a stock has increased 300, 500 or 1,000% plus (a first world problem to have), and now occupies 25% or greater of your entire equity portfolio (for example) it may be prudent to trim the position from a risk balancing perspective. But the question to sell, buy or continue to hold as stock focuses on the current fundamentals.

The two stocks I wrote about in April, if you are interested or happen to own either, were Boyd Group Income Fund (BYD.UN:TSX) and Enghouse Systems Limited (ENGH:TSX). Both long-term winners in our Focus BUY Portfolio and both were recently upgraded once again to BUYs.

It is often difficult for investors to wrap their heads around a New BUY recommendation on a stock at $100.00 that was bought originally at $2.30. This has been the case with Boyd Group Income Fund (BYD.UN:TSX) as we have re-recommended it over 25 times since its original recommendation just under 10-years ago. Each time we are asked if selling would be more appropriate, given the gains. We were asked with the stock at $5.00, $10.00, $25.00, $50.00 and on up to where we upgraded the stock to a BUY again this year as it crested $100.00 in February-March.

As long as the business continues to grow and trades at relatively reasonable valuations we see no reason not to continue buying a great company. This is where we left the stories in April, with upgrades on both Boyd and Enghouse to BUYs with the stocks trading in the $105.00 and $65.00 range respectively.

Since this time, I am happy to report that both companies have released solid quarterly growth (particularly ENGH) and their respective share prices have continued to hit year highs. Boyd has seen its shares climb 17% since April and 22% year-to-date. Enghouse for its part has gained 23% since April and 30% year-to-date in 2018.

Boyd Group Income Fund (BYD.UN:TSX)

Recent Price: $122.22

First off, what does Boyd do? The business is simple, Boyd is one of the largest operators of non-franchised collision repair centres in North America. The company currently operates locations in five Canadian provinces under the trade names Boyd Autobody & Glass and Assured Automotive, as well as in 22 U.S. states under the trade name Gerber Collision & Glass. Boyd uses newly acquired brand names during a transition period until acquired locations have been rebranded. The company is also a major retail auto glass operator in the U.S. with locations across 31 U.S. states under the trade names Gerber Collision & Glass, Glass America, Auto Glass Services, Auto Glass Authority and Autoglassonly.com. Boyd also operates Gerber National Claims Services (GNCS), which offers glass, emergency roadside and first notice of loss services with approximately 5,500 affiliated glass provider locations and approximately 4,600 affiliated emergency roadside services providers throughout the U.S.

Boyd which was originally recommended in November 2008, when the Fund’s units traded at $2.30. Below is an excerpt from our most recent client update on the stock with it trading at $110.00.

Q1 2018 Highlights

×         Sales increased by 19.6% to $453.3 million from $378.9 million in 2017, including same-store sales increases of 4.0%.

×         Adjusted EBITDA increased 28.5% to $42.1 million compared with $32.8 million in 2017, representing approximately a 0.60% or 60 basis point improvement in adjusted EBITDA margin.

×         Adjusted net earnings increased 50.0% to $20.9 million compared with $13.9 million in 2017 and adjusted net earnings per unit increased 37.7% to $1.062 compared with $0.771 in 2017.

×         Added 11 locations.

×         Currency negatively impacted same-store sales by $16.1 million, adjusted EBITDA by approximately $1.4 million, adjusted net earnings by approximately $0.7 million, and adjusted earnings per unit by approximately $0.036.

×         U.S. corporate tax expense reduced by approximately $2.7 million as U.S. tax rates decreased from approximately 39% to 26%.

Subsequent to Quarter End

×         Added five locations, including two intake centers.


2017 was a challenging year for Boyd as the company faced significant headwinds including mild and dry winter weather followed by business interruption from severe summer hurricane storms, an unfavorable currency environment and an ongoing technician shortage, which particularly impacted same-store sales growth in the fourth quarter. Despite continued headwinds, particularly in regard to the ongoing technician shortage, the company beat estimates in Q1 2018 producing strong results, growing adjusted EBITDA by 28.5%.

Management reiterated that the company continues to be on track and have a high level of confidence in achieving its long- term goal of doubling business by 2020 compared to 2015, on a constant currency basis.

Despite the continuing headwinds of the industry-wide shortage of technicians, Boyd returned to respectable levels of same-store sales growth in Q1. Management attributed this to a combination of being up against weak 2017 same-store sales comparatives as a result of a mild and dry winter, modest growth in the company’s technician capacity (potentially due to the U.S. initiatives, but it remains early) and an increased component of parts sales in Boyd’s sales mix. The company continues to work to address the shortage with a number of initiatives, including the recently announced bene t enhancements for U.S. employees, and while management believe that these initiatives will prove successful in the long term, Boyd will continue to be challenged by technician capacity in the near term. This may be particularly acute quarter-over- quarter in Q2, where Boyd is up against much stronger 2017 same-store sales comparatives.

Having said this, in terms of continued growth, management continues to see many opportunities to add new locations and see the conditions driving continued consolidation and market share gain opportunities intensifying. Boyd is well positioned to take advantage of these opportunities.

We expect Boyd will continue to face headwinds from the lower value of the U.S. dollar relative to the Canadian dollar in comparison to Q2 2017 and from the technician shortage, but the long-term growth prospects remain strong. Being a larger player in an ever-changing technical environment, Boyd has been able to invest in both new equipment and technologically advance people through these challenges where others have not – this may set it apart long term.  e company’s shares have been volatile of late; jumping from the $100 level to just under $112, and then dropping brie y to the $103 range before jumping again on the strong Q1 results. We expect this to continue in a jittery market and we see value in the company’s shares at the lower end of the range. On any further price surges, the company could potentially use its premium share price to raise a bit of capital and pay down debt. Given the strong earnings growth projected in both 2018 and 2019 we are once comfortable buying Boyd at the lower end of the range stated above in the near term and maintain our rating to BUY (Half Position) for new clients. Again, our long-term rating remains at BUY with the stock in our Focus BUY Portfolio for those clients looking to hold for between 2-4 years.


Enghouse Systems Limited (ENGH:TSX)

Current Price: $80.38

Enghouse was recommended in February of 2011, with the company’s shares trading at $8.35. For a good part of the last 8 years, Enghouse has been a company we would not hesitate to buy on dips as it is cashed-up, produces very strong cash flow, is a dividend grower and is very prudently managed. After a somewhat challenging year for its Interactive Management business, the company recently released strong Q1 2018 annual results.


Enghouse develops enterprise so ware solutions for a number of vertical markets. The company separates its operations into two business segments: the Interactive Management Group and the Asset Management Group. The Interactive Management Group specializes in customer interaction software and services that are designed to enhance customer service, increase efficiency and manage customer communications across the enterprise. Core technologies include contact center, attendant console, interactive voice response, dialers, agent performance optimization and analytics that support any telephony environment, deployed on-premise or in the cloud. Its customers include insurance companies, banks and utilities as well as high technology, health care and hospitality companies. The Asset Management Group provides a portfolio of products to telecom service providers, utilities and the oil and gas industry. Its products include Operations Support Systems (OSS), Business Support Systems (BSS), Mobile Value Added Services (VAS) solutions as well as data conversion services.  e Asset Management Group also provides fleet routing, dispatch, scheduling, communications and emergency control center solutions for the transportation, first responders, distribution and security sectors.


Total revenue for the quarter was $85.2 million compared to $79.5 million in the prior year’s second quarter, a 7.1% increase over the prior year and includes license revenue of $24.7 million in the quarter compared to $23.8 million in the prior year’s second quarter. The increase is attributable to contributions from acquisitions and a stronger Pound Sterling and Euro. The positive impact of foreign exchange on revenue in the current quarter compared to the prior year is estimated at $2.2 million as calculated by applying the change in the average exchange rates from 2017 to 2018 to the company’s foreign currency denominated revenue. Hosted services and maintenance revenue was $43.9 million compared to $39.9 million in the prior year’s second quarter, an increase of 10.1%. This includes maintenance revenue of $36.7 million compared to $33.8 million in the prior year’s second quarter and reflects incremental maintenance revenue from license sales in the past fiscal year as well as contributions from acquired operations. Hosted services revenue was $7.3 million in the quarter compared to $6.1 million last year and reflects incremental contributions primarily from acquired operations.

Net income was $15.3 million, or $0.56 per share on a diluted basis, in the quarter compared to $9.0 million, or $0.33 per share on a diluted basis, in the second quarter of fiscal 2017. The increase is attributable to higher revenues as a result of acquisitions and a stronger Pound Sterling and Euro, in addition to a foreign exchange gain in the current year compared to a foreign exchange loss in the prior year. On a year- to-date basis, net income was $22.1 million, or $0.81 per diluted share, compared to $20.8 million, or $0.76 per diluted share. As noted, the year-to-date net income was negatively impacted by the provision for the one-time repatriation tax of $8.8 mil- lion booked in the first quarter.

Strong Cash Generation and Accumulation

Enghouse closed the quarter with cash and short-term investments of $155.3 million compared to the October 31, 2017, balance of $130.3 million. The company continues to have sufficient cash resources to fund both its current and future financial operating commitments as well as its dividend strategy. During the quarter, Enghouse generated cash flow from operating activities of $21.8 million compared to $18.4 million in the second quarter of 2017, an increase of 19.0%. For the year to date, cash flow from operating activities was $44.9 million, a 54.8% increase over last year’s operating cash flow of $29.0 million.


From information provided by telco equipment vendors, carriers, and other public companies attached to the Communications segment, trials with commercial-grade equipment for 5G or 5th Generation Wireless will start later this year. At the end of 2017, the wireless industry came up with the first official 5G standard. AT&T plans to launch mobile 5G in the U.S. by the end of 2018 and Verizon reported it will launch 5G for homes, and T-Mobile is working on a network to launch in 2019. Many industry experts expect the first 5G mobile devices to launch in the first half of 2019, based on timelines from Qualcomm. This all lines up with initial goals of having commercial 5G deployments by 2020. Standards development and product commercialization have accelerated.

Enghouse is likely to have solid exposure to the 5G upgrade cycle.  e company could play a significant role in helping carriers revamp legacy systems and migrate to newer technologies. Given this backdrop, there could be additional growth upside in the company’s networks business. The company has stated they see a healthy M&A pipeline related to 5G and there is an expectation for a long 5G investment cycle.


Once again, we were pleased with Enghouse’s Q2 2018 results which beat estimates on an earnings and adjusted EBITDA basis. Q2 marked the second consecutive quarter of EBITDA margins in the 30% range, coming in at the high end of management’s 25%-30% expected range. Near term, margins could stay high until acquisitions are made, which typically make margins lower for the first few quarters of integration.

Enghouse delivered strong FCF (free cash-flow) of $21.5 million and ended Q2 with $153 million of net cash, or $5.65 per share, the highest in over five years. The company is positioned to produce FCF in the range of $80 million in 2018 giving Enghouse more than adequate capacity to continue executing its acquisition strategy. The core story with Enghouse, as it has been since day one, is the strong free cash flow generation and growth via smart accretive acquisitions with cash on hand and Enghouse still sees an active pipeline of opportunities, and attractive pricing its target range. In fact, management reported that new competition may be improving the environment. With the appointment of New President, Vince Mifsud, and his stated goal to revamp the sales organization we expect a longer-term focus on stronger organic growth. Mifsud will focus on demand generation and creation of a sales team that will have more of a direct sales effort as well as stronger channel partner support. The new CEO believes there are significant opportunities to accelerate organic growth considering Enghouse’s products are well-regarded. These changes to the sales organization are not expected to materially impact margins. At present, most analysts expect acquisitions to have a higher impact on margins than organizational changes.

At first glance, with a price-to-earnings of 41, Enghouse appears expensive. Indeed, with the share price up over 750% since our original recommendation, the stock is not cheap. The multiple expansions we have seen has been due to consistent growth (proven track record from management) and has been assisted by a solid overall tech market – or lack of good alternative tech stocks in Canada. When we dig a little deeper we find that the company’s consensus 2019 adjusted EBITDA estimate is in the range of $3.92. If we strip out the $5.65 per share in cash and just look at the base business, the forward looking EV/EBITDA is more reasonable at 18.9.  is multiple is close to Enghouse’s peer group.

Given the 30% rise in Enghouse’s shares year to date and significant move since our upgrade, we return our near-term rating to HOLD as it is now closer to near- term fair value. We maintain our long-term rating at BUY (HALF POSITION). With management’s track record, we believe the company will outperform the market over the next 3 to 5-years. Enghouse remains on our Focus BUY list.

Quick Developing Update

One of our Canadian Focus BUY Portfolio small-cap stocks, added in September 2017 has had a tremendous start to 2018 and is worth another look.

Of stocks on the TSX-Venture that entered 2018 trading at above $1.00 (non-penny stocks), XPEL Technologies Corp. (DAP.U:TSX-V) is now the single best performing stock, gaining over 240% year-to-date.

Industry: Auto Tech Specialty Product Marketer/Distributor

Recommended: September 2017

Recommendation Price: US$1.42

Current Price: US$4.82

Market Cap: US$131 Million

Shares Outstanding: 27,612,597

Fully Diluted: 27,612,597

XPEL Technologies Corp. is based in San Antonio, Texas manufactures, sells and distributes, and installs after-market automotive products, including automotive paint protection film, headlight protection film, automotive window films and other related products. In the United States, Canada and parts of Europe, the company operates primarily by selling a complete turn-key solution directly to independent installers and new car dealerships which includes XPEL protection films, installation training, access to XPEL’s proprietary design so ware, marketing support and lead generation. Additionally, the company operates six company-owned installation centers in the United States as well as one installation center each in the United Kingdom and the Netherlands that serve wholesale and/or retail customers in their respective markets. In other parts of the world, including China (30% of Q1 sales) which grew rapidly in 2017 and Q1 2018, XPEL operates primarily through third party distributors, who operate under agreement with the company to develop a market or a region under the company’s supervision and direction.  e company operates through 100% owned subsidiaries in Canada, the Netherlands and Mexico and through an 85% owned subsidiary in the United Kingdom.

What is Driving the Stock – Blowout Q1 2018 Earnings


XPEL was recommended in September 2017 with the company’s shares trading at US$1.42. In March of this year, following a strong Q4 2017, we reiterated our BUY rating on the stock and its position in our Focus BUY Portfolio with the stock trading at US$1.59. Following the company’s record Q1 2018 financial results, we review the numbers and update our rating on the stock.

Revenues increased approximately $12.6 million to $25.2 million, or 99.5%, over the prior year period. On a constant currency basis, revenues grew 97.5% to $25.0 million.

EBITDA increased $2.7 million to $3.1 million. On a constant currency basis, EBITDA increased to $3.0 million.  This increase was due mainly to improvements in overall gross margin and gains in SG&A operating leverage.

Net income increased to $2.0 million. Earnings per share jumped to $0.07 compared to a loss of ($0.002) per share in first quarter 2017.


XPEL has been a difficult company to value based on earnings given the one-time charges and significant noise in the results over the course of 2017. 2017 was a transformational year for the company and management was focused on driving top-line growth, which would be a great strategic decision if the company addressed margin deterioration in 2018. The margin improvement came to fruition in Q1 2018 as gross margin improved to 29.7% from 26.4% in first quarter 2017.

With the sharp up-tick in margins in Q1 and the commensurate jump in EBITDA and earnings per share and the potential continuation of the business in a higher margin reality moving forward, the forward estimates will be revised to a whole new level. If the company can sustain Q1 margins (or in the range of 28-30%) moving forward the potential of an EPS breakthrough to the $0.24-$0.28 range in 2018 is real. If XPEL hits $0.26 in earnings per share in 2018, a conservative multiple of 18 times (below market multiple) PE would push fair value to the range of $4.68 or roughly its current trading range. There are a good deal of assumptions in this estimate which increases the risk, but the company appears to be hitting its targets and the business growth is very strong.

Near-term the stock closer to a HOLD than a buy, but if revenue and earnings growth continues, the stock could justifiably earn higher multiple. At the very least, the tremendous growth in the last quarter makes it a company to watch closely.

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