Second Quarter Earnings Preview

To learn more about microcap strategies or the Rivemont MicroCap Fund, check out this post and see the disclaimer at the bottom.

---

The second quarter earnings season is about to kick off! TSX issuers have until August 14th to report their financials, while TSX-V issuers have until the 29th.

Are you expecting any surprises? Who's going to beat expectations? Who's going to disappoint?

Here's what I'll be watching for!

Underdog to Watch: Covalon Technologies (TSX-V: COV)

Covalon is a medical device company that provides patented, innovative, and cost-effective solutions for wound care, infection control, and medical device coatings.

The company has been in the penalty box for most of the last five years after multiple disappointments, delays, and its lack of profitability. However, things could be changing.

A new CEO, hired in January 2024, quickly made operational changes to the business. Covalon reported surprisingly strong results last quarter (fiscal Q2), with double-digit revenue growth, improved gross margins, and positive net income. Following those results in late May, the share price quickly doubled.

You might think you've missed the boat, but wait…

If the last quarterly results were sustainable (a big IF), the stock would be trading at an annualized 5-6x EBITDA, less than 10x P/E, and less than 2x revenue. For a profitable, patented medical devices company growing double-digits, I would argue this still looks very attractive.

Many people have reached out to me after the last quarterly results. Anecdotally, I feel like there's a lot of money on the sidelines waiting for the next financials before deciding on this one. If Covalon can repeat (dare I say improve?) its strong quarterly performance, there could be significantly more upside in the stock.

Street Favorite: KITS Eyecare (TSX: KITS)

KITS is a leading vertically integrated digital eyecare brand offering customers a vast selection of contact lenses and eyeglasses at great prices. KITS delivers made-to-order personalized products with incredible care and accuracy, disrupting the industry.

KITS pre-announced $37.5 million in estimated Q2 revenues, a 25% growth year-over-year. The exciting part is a couple of press releases around the pre-announcement, in which the company boasted record weekly sales and customer acquisition. Based on those press releases, you can extrapolate that the company is already on a $40+ million quarterly revenue run rate going into Q3, highlighting continued solid sequential growth.

Strong results, a positive outlook and perhaps some additional comments from management on the earnings call could keep KITS's momentum going.

The company will report on August 7th before the market opens.

Watch Out For DOWNSIDE: Decisive Dividend (TSX-V: DE)

Decisive uses a disciplined acquisition strategy to identify already profitable, well-established, high-quality manufacturing companies with a sustainable competitive advantage, a focus on non-discretionary products, steady cash flows, growth potential and strong leadership.

Since 2023, the company has made several acquisitions and hiked its dividend, gaining the favour of institutional investors and brokers. The stock was a star performer in 2023, with a 58% increase and a slew of new analyst coverage.

However, Decisive didn't meet expectations in Q1 2024, citing a challenging macro environment and softer demand for some of its products. Management also mentioned they expect Q2 to be softer.

A quick look at the stock chart will tell you everything you need to know about the current consensus. Investors and analysts expect an underwhelming quarter. Perhaps that's already fully priced in, but I wouldn't rule out a negative earnings surprise or a softer outlook for the remainder of the year. Based on my experience, bad quarters tend to be followed by more bad quarters.

The company will report on August 8th after the market close.

Watch Out For DOWNSIDE: Bragg Gaming Group (TSX: BRAG)

Bragg is an i-gaming content and technology solutions provider serving online and land-based gaming operators with proprietary and exclusive content and technologies.

On March 26th, Bragg announced that it had formed a special committee to review strategic alternatives, including a potential sale of the company. The share price reacted positively, increasing more than 30% in the days following the news.

However, the next string of news was not so positive, including the resignation of the CFO and underwhelming Q1 results, showing little growth, a lower gross margin and lower EBITDA year-over-year.

The most concerning to me was a US $7 million promissory note financing announced in April (the first month of Q2). An insider of the company granted the note that bears interest at an annual rate of 14%. If the business was doing well or was about to be sold, why would they borrow at such a high rate for one year? To me, this is a hint that Q2 was not going so well. We shall see!

The company will report on August 8th before the market opens.

Watch Out For UPSIDE: Biorem (TSX-V: BRM)

Biorem is a leading cleantech company that designs, manufactures, and distributes a line of high-efficiency air emissions control systems that eliminate odours, volatile organic compounds, and hazardous air pollutants.

Due to project delays in previous years, Biorem had a record-high backlog of $52 million at the end of Q1. Compared to annual revenues of $25 million and $29 million over the previous two years, it's evident that Biorem has a high degree of visibility over upcoming growth.

When I chatted with the CEO several months ago, he mentioned that the delivery of that backlog was tilted towards the first half of the year, unlike previous years, when Q4 was typically strongest. So far, Q1 has not disappointed with 87% year-over-year revenue growth.

Over the last month and a half, the stock has been building a nice base around the $2.00 level and looks poised to break out higher on strong Q2 results.

Wild Card Pick: Evome Medical Technologies (TSX-V: EVMT)

Evome is a medical device company specializing in human performance and rehabilitative solutions. The company, formerly known as Salona Global, is a failed roll-up that almost went bankrupt.

The board hired Mike Seckler as its new CEO a year ago to turn the business around. Seckler quickly went to work by cutting expenses, renegotiating debt agreements, and selling non-core assets. The picture is still somewhat unclear, but based on recent disclosures, it seems like the turnaround is progressing well. Biodex, the company's primary asset, is growing. The company reported two quarters of positive EBITDA last year. The balance sheet is getting cleaner due to non-core asset sales. Gross margins have been improving. Meanwhile, the stock is down 52% YTD and sitting near its 52-week low.

When it becomes obvious that the company is not going bankrupt, I think this stock could experience a solid rerating. Maybe the next quarterly financials will paint a clearer picture of the situation.

That's all I have for this earnings season. May your portfolio holdings report strong earnings!

What are some of the companies you'll be watching? Let me know in the comments.

---

Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds positions in Covalon Technologies (TSX-V: COV), KITS Eyecare (TSX: KITS), and Biorem (TSX-V: BRM). Always do your own research and consult a professional before making investment decisions.

If you’d like to invest in small public companies, check out this post.