Second Quarter Earnings Recap
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The second quarter 2024 earnings season is coming to a close for Canadian-listed companies.
In case you missed it, I published my Second Quarter Earnings Preview earlier this month, sharing some predictions and companies to watch. Let’s review those predictions and see how they played out!
Underdog to Watch: Covalon Technologies (TSX-V: COV)
The thesis here was that Covalon had published a solid fiscal Q2 (ended March 31), and the market didn’t fully believe these results were sustainable. If Covalon were to repeat its strong performance in fiscal Q3, I thought there would be upside on the stock because the valuation still looked relatively cheap on an annualized basis.
Well, Covalon delivered the goods. Q3 was pretty similar to Q2, showing 47% revenue growth year-over-year with solid profitability, and the market finally gave the company more credit.
Stock price when profiled (August 6): $2.21
Closing stock price yesterday (August 27): $3.21
Return: + 45.2% ✅
Street Favorite: KITS Eyecare (TSX: KITS)
KITS had already pre-announced its revenues, so I didn’t expect any major surprises in the numbers. I was looking for bullish commentary from management in the press release or the earnings webinar.
The webinar was very upbeat, with management confident they can maintain this growth trajectory. The strong results and positive commentary prompted most analysts to raise their price targets and share their favourable views of the company with investors, which propelled the stock higher.
Stock price when profiled (August 6): $9.24
Closing stock price yesterday (August 27): $10.92
Return: + 18.2% ✅
Watch Out For DOWNSIDE: Decisive Dividend (TSX-V: DE)
Decisive Dividend experienced macro pressures in Q1, leading to disappointing results. Management had also shared a soft outlook for Q2. Since bad quarters tend to be followed by more bad quarters, I thought the financial results could disappoint even more than investors had already priced in.
The results came in below the analyst consensus expectations, with revenues and EBITDA down 7% and 35%, respectively, year-over-year. Although the stock touched a low of $5.90 during the month, the market had already priced the stock well, and there wasn’t any significant downside in the short term.
Stock price when profiled (August 6): $6.61
Closing stock price yesterday (August 27): $6.64
Return: + 0.5% ❌
Watch Out For DOWNSIDE: Bragg Gaming Group (TSX: BRAG)
Bragg is another company that had reported underwhelming Q1 results. What concerned me here was that the company had to raise debt financing at unattractive terms in early Q2, providing a hint that the balance sheet was under pressure due to continued weakness in the business.
Bragg reported flat revenue and a 24% year-over-year decline in adjusted EBITDA. The company reiterated its full-year guidance but mentioned it was tracking to the lower end of the range. That didn’t get anybody excited.
Stock price when profiled (August 6): $7.37
Closing stock price yesterday (August 27): $6.69
Return: - 9.2% ✅
Watch Out For UPSIDE: Biorem (TSX-V: BRM)
The thesis on Biorem was fairly straightforward. The company has a sizeable backlog to deliver (about as much as the previous two years’ revenues combined). After a solid Q1, I expected the company to follow with another strong quarter, showing investors that the valuation was still cheap.
All in all, the results were pretty solid. Revenues were up 70% year-over-year, and net income was 5% of revenues compared to nil a year ago. The other positive to me was the $13 million in new bookings, which took the backlog to a new high despite the revenue recognition during the quarter. The only negative I could find was the gross margin % which was lower than I expected (23% vs my expectation of ~30%). Gross margins can be lumpy due to product mix and revenue recognition timelines. I’m not overly worried, but it will be something to watch going forward. Although the stock went higher, the results were insufficient to help it sustainably break out above $2.25 (yet).
Stock price when profiled (August 6): $2.03
Closing stock price yesterday (August 27): $2.25
Return: + 10.8% ✅
Wild Card Pick: Evome Medical Technologies (TSX-V: EVMT)
Evome is a turnaround situation with a heavy debt load. A new CEO joined a year ago to restructure the business and sell non-core assets. I thought Q2 might paint a clearer picture of the progress made so far, leading to a valuation rerating. The company was almost priced like it was going bankrupt, so any positive change in expectations could lead to a solid upside.
The results were not overly impressive, in my opinion, but management shared exciting details about their plans to sell a couple of remaining non-core assets on the earnings call. If executed successfully, these sales could allow the company to fully clean its balance sheet and execute on the growth opportunity in its core Biodex division.
The shares soared following the results, although they pulled back a few days later.
Stock price when profiled (August 6): $0.10
Closing stock price yesterday (August 27): $0.125
Return: + 25% ✅ (the stock went up 80% at some point during the month)
Besides those predictions, there were a handful of spectacular earnings reports and a few disasters (as always). I will share some of those highlights in my “Good, Bad, and Ugly” report next week. Stay tuned for that!
Overall, I am thrilled with how the predictions turned out. Despite the short-term nature of these forecasts, getting 5 out of 6 right gives me confidence in my reading of the market.
Let me know how this earnings season turned out for you!
Did you nail any of your predictions? Did you score a significant gain or avoid a painful loss?
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.
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