Stock Pitches

Our stock pitches are intended to be a resource for interview preparation, they should not to be interpreted as investment advice.

Contents

1 Stock Pitches Overview
2 Approaching the Stock Pitch for Investment Banking
3 Sample Stock Pitches – Long Version
- 3.1 Stock Pitch: Suncor Energy Inc. (TSE:SU)
- 3.2 Stock Pitch: Hudson’s Bay Co (TSE:HBC)
4 Sample Stock Pitches – Short Version

Stock Pitches Overview

Many finance interviews will involve a stock pitch. When applying for an equity research, equity sales or any sort of hedge fund that includes longs in their strategy, an interviewee should expect to asked for more than one investment idea (and possibly a short idea; bond and credit funds may require credit analysis). Candidates are also asked for a stock pitch in an investment banking or non-equity sales and trading if the interviewer is particularly obnoxious, although the likelihood of a more general market question such as “what industry do you favor in the next year?”

In this section, we provide stock pitches (these pitches are for helping structure potential stock pitches and in no way reflect actual views on the security in question) which will not be updated for accuracy with the passing of time – which also serves as a comparison between how firm-specific and macro factors actually played out and what was forecasted.

Approaching the Stock Pitch for Investment Banking

To have a fully sound stock pitch and cover all bases, there is actually a substantial amoutn of research that has to be done.

Now, most banks do not drill that deep into the stock pitch because investment bankers are not hedge fund portfolio managers. However, you should be prepared for this:

Sell a story where there are strong fundamentals for the name as well as a supportive macroeconomic environment/tailwinds
- For instance, you could find a SaaS company that is valued above their peers but has a large and growing addressable market with no competitors in their niche (a competitive moat)
- If the economy tanks, they will still get business because switching to the cloud is actually a cost cutting exercise
You need to know the enterprise value, market cap and relative valuation of the company
- A lot of software companies are easy in this regard because they are generally low debt and this means fewer numbers to remember
- You need to know where they are valued on the multiples that matter versus their peer universe
  - This is easily gleaned from any equity research report
  - You may be asked follow up questions on where they stack up, who the closest peer is and why the market is viewing them differently
- You will also need to know about recent news releases and the ramifications on the stock
  - Equity research is again a good place to start here so ask your friends for their Knowledge Reuters account
- You should be able to articulate the key risks for the stock
  - Look for a bear thesis on Seeking Alpha and also look at the Risk Factors outlined in the 10-K or annual report and look for ways to refute these
- You should know the revenue and EBITDA and other key operating metrics, which again is readily available in equity research (and if you are sly, you can back these out using the multiples)

Also, if the investment bankers are looking for a short instead, this does not mean an actual short thesis – investment bankers know nothing about short selling. Instead, they are looking for a stock that you can sell them as overvalued using the buzzwords that they understand (valued at a higher multiple to peers but I think it does not have as good of a business). Going into catalysts, momentum and other details can only confuse them.

Sample Stock Pitches – Long Version

Stock Pitch: Suncor Energy Inc. (TSE:SU)

Suncor Energy is a $70BN EV integrated oil & gas company based primarily out of Canada with 578mboe/d production, 99% liquids weighted with 35 year reserve life. Suncor also has 462kbpd refining capacity and substantial marketing operations.

Key stats

$30BN revenue $7BN EBITDA, $77BN in assets.

Analysts target price of $29.50 vs $36 dollars.

Trades at 7.3x EV/DACF vs 9.8x peer

12.3x EV/DACF vs 14.8x peer

Bear case rebuttal

Suncor lives within cash flow for $40 WTI – $6.8BN in operating cash flow in 2015 ahead of $6.2BN in capex and has $1.45Bn in discretionary dividend. Cash costs per barrel have fallen to $28 per barrel while realized price is $50 (C$ natural hedge and realizing tidewater pricing through marketing and refinery outtake). Still below 30% debt to capitalization with low refinancing risk (A- S&P) and no upcoming maturities other that 2018.

First oil for FCF generating projects to come online (Hebron, Golden Eagle in Newfoundland – easy to extract light oil).

Ample resource that is low cost, low decline. 4.7BN P1, 7.5BN P2.

1) Retail spinoff – 500kbpd in product sales over almost 1500 retail sites (biggest urban market share in Canada) and 280 wholesale sites. Recent Imperial spin off of ESSO suggests a favorable valuation (even more so than originally thought) for the retail assets outside of an energy conglomerate.

2) Full cycle acquisition opportunities – Substantial liquidity with $4BN cash, $7MM in unutilized credit facilities. Examples: Fort Hills share for 56k per flowing barrel vs 80-100k for other mining operations. Purchase of COS. At a stage in a cycle with various motivated sellers where it is more profitable full cycle to buy versus build and without any other obvious buyers with adequate balance sheet sans Imperial (Exxon’s recent $12 billion debt raise may be focused on other acquisitions worldwide).

3) Cost rollback not captured – Suncor is continuing to see cost decline across oilfield services providers, labor and energy used to extract hydrocarbons (lower natural gas prices, $25/kwh Alberta electricity).

Appendix: Acquisition of Canadian oil sands ~$6.9BN EV including $2.6BN assumption of debt. 24% net debt to capitalization on a pro-forma basis in February 2016. Suncor increases its working interest in Syncrude from 12% to 49% with a 20% increase in 2P reserves to 9.1BN barrels. Suncor believes it can offer operational expertise in excess of Imperial (Operator).

Questions for us:

Are you looking at companies with upcoming maturities for debt and who will not be able to meet with certain stress tests? What cash cost is a level investors are comfortable with? Who are the big consolidators?

What plays are seeing the lowest costs at the moment?

What themes are we seeing in the space? Midstream infrastructure spinoffs? Retail spinoffs for integrated names? Build vs buy for larger names?

Stock Pitch: Hudson’s Bay Co (TSE:HBC)

25/02/2017

Key stats

CEO – Gerald L Storch
HQ – Toronto, ON
Market Cap = 2.2Bn
EV = 6.7Bn
SP = $9.29 (2/17/17) NYSE (6.84 to 14.86)
SP = $12.17 (2/17/17)TSX (52w 8.97 to 19.69)

Canadian-based department store, diversified – locations in Europe, US, and Canada with multiple brands (HBC, Lord and Taylor, Saks Fifth, Gilt, Home outfitters, Galeria Kaufhof, Sportarena)

Currently trading near 52w low

Investment Thesis

Long HBC, currently undervalued because the company is investing heavily in digital channels to combat dying brick and mortar industry, has a large real estate holding (potential for REIT spinoff), and the Q3 losses are exaggerated the share price market as it’s more reflective of industry than company

Catalysts

Benefits of online transition not fully realized

(margins will increase due to lower costs)
(Online sales up 73% Q3 from prior year)

Potential future REIT. Joint venture with Simon Properties (HBS Global Properties), and the with RioCan (RioCan-HBC joint venture). Valued at $13Bn according to April 2016 investor report.

Valuation

Currently trading at 52wk low (mostly reaction from low Q3)

Trading lower than sum-of-parts ($17/share)

Risk Factors

Struggle for brick and mortars to adapt to ecommerce
High cost margins that may never drop even after transition to ecommerce.
High Rent/EBITDAR = 71% (57% after netting out rent paid back through Joint Venture for real estate portfolio).
- landlords tend to like to see 20-25% rent/EBITDAR

Conclusion

Focus on ecommerce will help increase sales and high cost margins will eventually subside once the company adjusts

(ex. Purchase of Glit online retailer)
(Nov 2016 investment in high tech warehouse for faster turnaround for online order)

Could be valued at additional $13Bn if including real estate joint ventures (April 2016 investor presentation) that aren’t on current books.

(Current EV = 6.7Bn)

Sample Stock Pitches – Short Version

Shopify (NYSE: SHOP / TSX: SHOP)

After Shopify’s 7% jump after beating estimates for 2019 and our increasing cloud content makes sense to discuss.

Currently Shopify is trading at over 20x sales (although free cash flow positive). SaaS stocks that are high growth have different valuation rules such as the rule of 50 where revenue growth plus free cash flow yield should exceed 50%.

Gross Transaction Volume of $61 billion
4Q 2019 revenue was approx. $500mm, representing 47% growth over the prior year comparable period
Brokers are expecting 35% growth in 2020
Shopify is spending to improve Shopify Plus, Shopify Fulfillment Network and to expand globally

Key Catalysts for Shopify

As per usual, the total addressable market for Shopify is expected to be over 50 million small to medium enterprises that can benefit from having an online store that is ready to go and easy to customize (with low fixed costs per month)
- As of 2020 there were already over 1 million merchants using Shopify
Market leader and above market growth
- First mover advantage is key in any cloud business – look at Amazon’s AWS being the market leader despite Azure (Microsoft) being more assessible to a Windows dominated clientele and Google Cloud Products (superior technologically – a simplification but commonly said)
E-commerce continues to grow rapidly and global consumer spending is getting bigger
Shopify offers vendor financing via Shopify Capital (which has above 10% interest rates)

Northland Power (TSX: NPI)

Independent power producer with 2,014MW net economic interest in operated generating capacity
399 MW of generating capacity under construction, including:
- Deutsche Bucht offshore wind project in North Sea
  - Will add 269 MW of offshore wind to portfolio meeting power needs of 328k households
- La Lucha solar project in Mexico
- 60% stake in 1,044 MW Hai Long offshore wind in Taiwan
  - Are looking at Japan and South Korea as future business opportunities (island and peninsula)
BBB (stable) S&P rating
A good ESG stock given clean generation assets
10 year total shareholder return (TSR – includes dividends) of 16% per annum, well ahead of benchmark TSX
95% of total debt is non-recourse to Northland (project finance)
1 billion of adjusted EBITDA in 2019 (¬11x EV/EBITDA), acceptable for long term, stable cash flows secured by power purchase agreements
Acquisition of EBSA (regulated utility in Columbia) diversifies asset base and adds stability of cash flow
- New platform to work off of in Latin America

Encana – Now Ovintiv (NYSE:OVV)

EnCana, (TSE:ECA) is a great buy right now due to it being the largest producer in the Montney, a play that is undervalued by the market due to its potential and a short-term focus on the lack of decent takeaway capacity in Canada. However due to the economies of scale that the market feels are not yet derisked, EnCana has tremendous growth opportunities. It is a drilling cost leader with over a decade of operations in the play with very good engineering statistics (longest laterals, highest completion intensity) with massive wells flowing with high-margin condensate (worth much more in Canada vs the US due to usage as diluent blending feedstock).