Earnings Insights

Takeaways from some of my holdings’ recent performance

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The real man smiles in trouble, gathers strength from distress, and grows brave by reflection.

-Thomas Paine

I tend to not dive deep into quarterly results as soon as they come off the press. The news headlines tend to give me an overstated impression of the significance of recent results that are framed in short time periods. That is not to say that I ignore them either. I like to give them a few days to cool off. Now that some of my largest holdings have reported, I thought it would be interesting to try to focus on a few key takeaways from how the businesses have performed and to see if there’s anything changing fundamentally about future prospects.

Let’s take a look at a few…

Brookfield Corp BN 0.00%↑

On the Q2 2023 earnings call, Bruce Flatt opened with some optimism:

Fee related earnings were up 16% year over year, excluding performance fees on the back of 12% growth in fee-bearing capital to $440 billion, highlighting the significant fundraising that we've done over the past year, and the stable, predictable nature of the business with nearly 85% of our fee-bearing capital being long term or perpetual in nature.

In addition, the company sees a good year ahead for fundraising, which will be good long term for fees and ability to take advantage of opportunities over the next few years when others may not have the capital to do so.

As we look ahead, we continue to see an attractive investment environment and have a very positive outlook for capital raising. This backdrop should lead to excellent returns for clients in our recently launched fund vintages and in turn should allow us to continue to raise significant amounts of capital.

On the real estate outlook they see an amazing opportunity set in a stressed capital environment which counters the popular narrative…

Retail centers hit record sales in 2022, record sales in 2022. Premier office rents are at all-time highs in most cities. As an example, our South Korean, Dubai and Sao Paulo portfolios are 99% full, with all time high rents. Rents for logistics properties grew 11% in 2022. Multifamily rents in the U.S. went up 15% year over year… Hotel rooms are full almost everywhere, with ADRs ahead of pre-pandemic levels. The combination of the pockets of stress in capital markets and strong underlying fundamentals with constraint and supply will lead to the best environment we've seen since 2009 to execute on our long-standing investment strategy for real estate, which is to buy high quality assets for value and drive upside through active asset management…

Buying great assets with compromised capital structures is always the easiest way to strong returns.

I'd say the following. Firstly just to reiterate what Connor just said, 80% of properties of the real estate space, which is a lot, have fundamentals that are really good. So, the issue in real estate largely isn't fundamentals. Fundamentals are actually really good in a lot of things. There are some things they're not, probably 20% of it on the fundamental side, I would say traditional not premium office or office in some cities is not so good, bad retail is not so good.

So there is real estate that doesn't have good fundamentals, but 80% of it does have good fundamentals. Really what the situation today is that the financing structures given the increase in interest rates, if people were ill prepared or unlucky with financing structures that is where the opportunity is going to come.

In addition to traditional real assets, they commented on their potential in data centers to power the AI and tech advancements and power/server needs that is ever-increasing in a connected world.

Today, we are well positioned to be a key enabler for the world's largest and fastest growing technology companies by both meeting their data center needs and also supplying the huge sums of clean power that are required for increasing levels of advanced computing. In just the second quarter, we committed to acquire businesses collectively valued at $12 billion to meet this digitalization trend. This includes Data4, a European datacenter operator at a value of $4 billion, Compass Datacenters at approximately $5 billion, and Network International, a digital payments leader in the Middle East at a value of $3 billion.

Constellation Software CSU 0.00%↑

Constellation notoriously do not hold quarterly calls and their annual meetings are not typical either. If you’ve never listened or read the transcript from the AGMs, I highly recommend you do. You get a sense for how the management team thinks independently and doesn’t like to disclose too many “trade secrets”.

Anyway, here’s some highlights from the quarter:

• Q2 Revenue grew 26% ($2.039B)

• H1 Revenue grew 30% ($3.958B)

• 4% organic growth (7% for recurring revenue)

• $506M in acquisitions + $700M for Optimal Blue announced July 17th. (huge)

Leatt Corp $LEAT

Leatt suffered a doozie of a hangover from a surge in demand during COVID. It had a lot of pull forward demand and it had suffered from oversupply as a result of the timing and shift in demand vs. supply. It is now seeing stabilization in these trends and the worst appears behind them.

For Q2 2023:

• Revs $12.35M (-31% from Q2 2022)

• gross profit margin up to 44% from 41%

• Helmet sales up 48% to $3.52M

• cash and equivalents up 69% to $12M

• Stabilizing shipping and logistics costs

Some management commentary on ordering patterns and inventory:

The sales decreases come in the context of continued temporary distributor and dealer adjustments to ordering patterns as high Covid-era inventory levels continue to be digested and participation remains strong.

While industry-wide inventory stocking dynamics continue to delay new orders, we continue to focus heavily on areas that we believe will stimulate growth moving forward

And on their helmet segment boom:

We are particularly enthused by global sales of our helmets featuring our innovative 360 Turbine technology. Overall helmet sales increased by 48% to $3.52 million over last year's second quarter and accounted for 29% of our total revenues for the second quarter of 2023. Our award-winning MTB helmet lineup was our leader, generating a sales revenue increase of 116% led by initial shipments of our highly-anticipated MTB 3.0 helmet designed to reach a wide rider audience of elite and amateur athletes. Additionally, our redesigned MOTO helmets also generated strong demand, with sales volumes increasing by 141%.

OTC Markets $OTCM

OTC Markets has been digesting a few acquisitions (BlueSky and Edgar Online) while at the same time the OTC Link and Corporate Services segments are managing a slowdown in trading volume. Overall, pricing is increasing which has helped offset some revenue declines which I believe are temporary as the trading volumes ebbs and flows with market enthusiasm.

Revenue and other data. Source: Q2 2023 OTCM Investor Presentation

The following chart shows the trading volume declines.

Overall, I’m being patient to see the results of the acquisitions fully integrated. I believe there is a vision there to truly make the offerings a value proposition for customers. I believe the team has done a good job lobbying for the right direction of the industry and actually is a good example of a win-win-win for all parties involved. The competitive advantages for OTCM remain and the capital allocation will be proven out over time.

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