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A look at North American equities heading in both directions

On the rise

Summit Industrial Income REIT (SMU-UN-T) soared with the announcement it will be acquired for $4.5-billion by GIC, Singapore’s giant sovereign wealth fund.

GIC’s acquisition, announced Monday, is structured as a joint venture with Dream Industrial REIT (DIR-UN-T), split 90 per cent and 10 per cent, respectively. Together, they are paying $23.50 in cash per Summit unit, a 31 per cent premium to Friday’s closing price.

Canada’s industrial warehouse owners are enjoying some of the strongest business fundamentals across all classes of real estate. The market for domestic warehouse is so strong that the national vacancy rate has fallen to a record low of 1.6 per cent, according to commercial real estate services and investment firm CBRE Group Inc. Supply of properties is so tight that some landlords have been able to raise rents more than 100 per cent in tenant turnovers and lease renewals.

However, publicly-traded industrial REITs have struggled of late because the e-commerce boom has taken a hit, with major online platforms such as Amazon and Shopify warning that the pandemic gains were an anomaly and are starting to reverse.

- Tim Kiladze

Vancouver-based SilverCrest Metals Inc. (SIL-T) jumped with the premarket announcement of the declaration of commercial production at is Las Chispas Mine in Sonora, Mexico, effective Nov. 1.

The miner said the declaration is based on achieving a continuous two-month period operating the processing plant at a minimum of 80-per-cent capacity for its name plate design of 1,250 tons per day and showing a combined gold and silver recovery or silver equivalent recovery of greater than 85 per cent.

Meta Platforms Inc. (META-Q) was higher after the Wall Street Journal reported on Sunday it is planning to begin large-scale layoffs this week that will affect thousands of employees, citing people familiar with the matter, with an announcement planned as early as Wednesday.

Facebook parent Meta in October forecasted a weak holiday quarter and significantly more costs next year wiping about US$67-billion off Meta’s stock market value, adding to the more than half a trillion dollars in value already lost this year.

The disappointing outlook comes as Meta is contending with slowing global economic growth, competition from TikTok, privacy changes from Apple, concerns about massive spending on the metaverse and the ever-present threat of regulation.

Chief Executive Mark Zuckerberg has said he expects the metaverse investments to take about a decade to bear fruit. In the meantime, he has had to freeze hiring, shutter projects and reorganize teams to trim costs.

“In 2023, we’re going to focus our investments on a small number of high priority growth areas. So that means some teams will grow meaningfully, but most other teams will stay flat or shrink over the next year. In aggregate, we expect to end 2023 as either roughly the same size, or even a slightly smaller organization than we are today” Mr. Zuckerberg said on the last earnings call in late October.

The social media company had in June cut plans to hire engineers by at least 30 per cent, with Mr. Zuckerberg warning employees to brace for an economic downturn.

Several technology companies, including Microsoft Corp (MSFT-Q), Twitter Inc (TWTR-N) and Snap Inc (SNAP-N) have cut jobs and scaled back hiring in recent months as global economic growth slows due to higher interest rates, rising inflation and an energy crisis in Europe.

Warren Buffett’s Berkshire Hathaway Inc. (BRK.A-N, BRK.B-N) increased after reporting on Saturday it posted a US$2.69-billion third-quarter loss as rising inflation, falling stock investments and a big loss from Hurricane Ian offset improvement in many of the conglomerate’s businesses.

Operating profit nevertheless rose by 20 per cent, topping analyst forecasts.

Berkshire benefited from increased demand and prices for new home sales, industrial products and energy, while the U.S. Federal Reserve’s inflation-fighting campaign helped Berkshire generate more income from insurance investments.

“On balance, results were strong and demonstrated resilience given the impact of inflation, higher interest rates and supply chain challenges,” said Jim Shanahan, an Edward Jones & Co analyst with a “buy” rating on Berkshire.

Buffett’s company took advantage of declining equity markets to add more stocks to its US$306-billion portfolio, buying a net US$3.7-billion and building a now 20.9-per-cent stake in Occidental Petroleum Corp. (OXY-N).

Berkshire also bought back more of its own stock but was cautious, repurchasing US$1.05-billion, similar to the second quarter. It also bought back some stock in October.

The conservatism may reflect the “significant disruptions” that Berkshire said its several dozen businesses still see from supply chains and events beyond their control, such as the COVID-19 pandemic and Russia-Ukraine conflict.

Berkshire also said rising costs from fuel and accidents hurt respective results at two of its best-known businesses, the BNSF railroad and Geico auto insurer.

Cathy Seifert, a CFRA Research analyst with a “hold” rating for Berkshire, said the company may be “at an inflection point, not unlike the economy,” where it will need to contain costs to prepare for slowing demand and a possible recession.

“Bottom line, this was a healthy quarter, but one needs to be concerned over its trajectory over the next 12 months,” Seifert said.

The quarterly net loss equaled US$1,832 per Class A share, and compared with a profit of US$10.34-billion, or US$6,882 per share, a year earlier.

Results included US$10.45-billion of losses from investments and derivatives, as the stock prices of many large Berkshire investments other than Apple Inc. fell.

Apple Inc. (AAPL-Q) reversed course and finished higher on news it expects lower shipments of premium iPhone 14 models than previously anticipated following a significant production cut at a virus-blighted plant in China, dampening its sales outlook for the busy year-end holiday season.

Demand for high-end smartphones assembled at Foxconn’s Zhengzhou plant has helped Apple remain a bright spot in a technology sector battered by consumer spending cutbacks amid surging inflation and interest rates.

But the Cupertino, California-based vendor has fallen victim to China’s zero-COVID-19 policy, which has seen global firms including Canada Goose Holdings Inc and Estee Lauder Companies Inc shut local stores and cut forecasts.

“The facility is currently operating at significantly reduced capacity,” Apple said on Sunday without detailing the scale of the reduction.

“We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models. However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated,” it said in a statement.

Reuters last month reported that iPhone output could slump as much as 30 per cent in November at Foxconn’s Zhengzhou factory - one of the world’s biggest - due to COVID-19 restrictions.

The factory in central China, which employs about 200,000 people, has been rocked by discontent over stringent measures to curb the spread of COVID-19, with many workers fleeing the site.

Market researcher TrendForce last week cut its iPhone shipment forecast for October-December by 2 million to 3 million units, from 80 million, due to the factory’s troubles, adding its investigation found capacity utilization rates around 70 per cent.

Apple, which began selling its iPhone 14 range in September, said customers should expect longer waiting times.

“Anything that affects Apple’s production obviously affects their share price,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.

“But this is part of a much deeper story - the uncertainty surrounding the future of the Chinese economy... These headlines are part of the ongoing saga as to whether there is any truth to the consistent rumors that authorities are discussing whether some of the measures will be lifted in the first quarter.”

On the decline

Ritchie Bros. Auctioneers Inc. (RBA-T) dropped after announcing before the bell it has signed a deal to acquire U.S. company IAA Inc. (IAA-N) in a transaction valued at about US$7.3-billion including the assumption of US$1.0-billion of net debt.

Illinois-based IAA auctions vehicles on a digital platform. It has IAA has nearly 4,500 employees and more than 210 facilities in the U.S., Canada and the United Kingdom.

Under the terms of the agreement, IAA shareholders will receive US$10 in cash and 0.5804 of a Ritchie Bros. common share for each share of IAA they own.

The purchase price, valued at US$46.88 per share, represents a premium of about 19 per cent to IAA’s closing share price on Friday.

Ritchie Bros. shareholders will own about 59 per cent of the combined company and IAA shareholders will own about 41 per cent.

The deal will see IAA CEO and president John Kett and three other current members of the IAA board join the Ritchie Bros. board once the transaction is complete, while Ritchie Bros. chairman Erik Olsson will remain chairman.

The deal is expected to close in the first half of next year, subject to approval by the shareholders of both companies as well as regulatory approvals and other customary closing conditions.

Ritchie Bros. announced the deal as it reported third-quarter net income of US$42.9-million or 38 US cents per diluted share, up from a profit of US$32.4-million or 29 US cents per diluted share in the same quarter last year.

Revenue for the quarter ended Sept. 30 totalled US$411.5-million, up from US$329.7-million in the third quarter of 2021.

In a research note, National Bank Financial analyst Maxim Sytchev said: “Investors view RBA as counter-cyclical; hence why shares are up 9 per cent (yes, performance has been generally better than expected but thematic, in our view, is more important… Toromont (TIH-T) - has been beating earnings materially year-to-date but shares are down 9 per cent). IAA, no argument, is a solid business. Yet, shares are down 22 per cent year-to-date on volume/cycle/age of fleet concerns. The co-mingling of different thematic drivers can be viewed as diversification, but we have often seen that investors prefer direct plays. On the positive side of the ledger one might say that as cycle improves for both used equipment / vehicles (both markets are now impacted by lack of new supply), one might really benefit from the cycle up-tick. We are more bullish on the construction market given North American infra plans but autos are now facing some tough backdrop. While we understand why RBA management is deploying its under-levered balance sheet, we do wonder how the different drivers for ownership will impact the pro-forma company’s valuation.”

Yamana Gold Inc. (YRI-T) was narrowly lower after the board of South Africa’s Gold Fields (GFI-N) said on Monday it will not change its offer after a surprise rival bid from Agnico Eagle and Pan American.

Gold Fields’ decision reflects “commitment to capital discipline” and to fairness for shareholders in Gold Fields and Yamana, the South Africa-listed miner said on Monday.

The joint cash and stock offer from Agnico Eagle (AEM-T) and Pan American (PAAS-T) on Friday trumped the Gold Fields bid, which valued Yamana at around $4.2-billion at Thursday’s close. Under the offer, Yamana shareholders would receive $1.0406 in cash, 0.0376 of an Agnico share and 0.1598 of a Pan American share for each share held.

“We do not believe GFI (Gold Fields) is looking to acquire Yamana at all costs despite the strategic rationale,” Investec analysts wrote in a note.

If Gold Fields matches the Agnico/Pan American offer, it would raise the risk the company would not win the necessary backing of 75 per cent of shareholders, the analysts said.

Tilray Brands Inc. (TLRY-T) closed down after announcing it has acquired Montauk Brewing Company in a bid to expand its U.S. alcohol division.

The cannabis company says the acquisition of the New York brewer will be accretive to Tilray’s adjusted EBITDA, but did not disclose the terms of the deal.

Montauk Brewing Company has more than 6,400 distribution points across retailers such as Target, Whole Foods, Trader Joe’s, Costco and Walmart.

The premium brewer will join Tilray’s roster of alcohol and beverage brands, which include SweetWater Brewing Company, Alpine, Green Flash and Breckenridge Distillery.

If cannabis is federally legalized in the U.S., Tilray intends to use the brands to make products with tetrahydrocannabinol, the main ingredient in pot.

Tilray also announced today that Ty H. Gilmore, an executive from Glazer’s Beer and Beverage, will become the first head of the company’s U.S. beer business.

Retailer Sleep Country Canada Holdings Inc. (ZZZ-T) slid with the release of weaker-than-anticipated quarterly results.

After the below on Friday, the Toronto-based company reported revenues of $251-million, down from $273.8-million during the same quarter a year ago and below the Street’s expectation of $268.2-million as same-store sales fell 11.1 per cent year over year. Adjusted earnings per share of 89 cents was a a 16.8-per-cent drop and also missed expectations (97 cents).

“The decline in same-store-sales is a combination of (1) a strong comparable period when SSS were up 10.6 per cent and (2) the declining consumer confidence impacting big ticket purchases such as mattresses,” said Sitfel analyst Martin Landry in a note. “We believe this dynamic could continue in the near future as inflation and rising interest rates curb consumer spending. We believe that ZZZ’s shares may be weak [Monday] on the back of these results. Our earnings are under review with a downward bias until the earnings call.”

Palantir Technologies Inc. (PLTR-N) posted its slowest quarterly growth in revenue since going public in 2020 due to weak demand for its data analytics software in Europe, while a strong dollar weighed on its profit, sending its share down on Monday.

The company, known for its work with the U.S. Central Intelligence Agency, has been trying to cut its reliance on uncertain government contracts by seeking more commercial business.

But in the third quarter, revenue from the segment declined nearly 3 per cent to US$204-million from the previous three months, raising doubts among Wall Street analysts about sustained revenue from commercial deals amid rising cost of borrowing.

“What I believe and other people should talk about is that we are going to see negative impacts because of strong dollar... because of sluggishness to adopt new technologies in Europe,” Chief Executive Alexander Karp said on an earnings call.

The company once again leaned on renewals and expansions of existing U.S. military deals in the third quarter, which helped it close about US$1-billion in government contracts.

Analysts had expected the Ukraine war to draw in more business to Palantir, but finance chief David Glazer said the timing of new government contracts remained uncertain.

“We saw some improvement in backlog, but government only grew by 4 per cent quarter-over-quarter and commercial was actually down quarter-over-quarter, which is not something we want to see in a subscription model,” RBC Capital Markets analyst Rishi Jaluria said.

With files from staff and wires

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 17/04/24 4:00pm EDT.

SymbolName% changeLast
Agnico Eagle Mines Ltd
Apple Inc
Berkshire Hathaway Cl A
Berkshire Hathaway Cl B
Dream Industrial REIT
Meta Platforms Inc
Occidental Petroleum Corp
Palantir Technologies Inc Cl A
Pan American Silver Corp
Rb Global Inc
Silvercrest Metals Inc
Sleep Country Canada Holdings Inc
Tilray Inc

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