Equity – Page 3

NVidia Q2-2025

I am only making a comment on the raw magnitude of money they are making and making some simple calculations with it.

For the quarter, $46.7 billion in revenues. Gross margin of 72%. Bottom-line after-tax figure of $26.4 billion.

The half-year figures look “worse”, with 67% gross margins and a $45.2 billion bottom-line, but man, that’s still a crazy ton of money they are making.

Let’s take the quarter that has just passed and multiply by 4. I know these figures are projected to grow (for how long?) but let’s just play with the past quarter and extrapolate.

The last quarter times 4 is $106 billion a year in income annualized, or $4.31 per diluted share.

NVidia closed trading at $181.60 per share, giving it a P/E of 42.

What’s funny is there are some other well established companies that are even more expensive when using this simple metric.

Costco, for example, is trading at a P/E of 55. One isn’t going to accuse Costco of having their customers wanting to build trillions of dollars of factories to sell product in Costco’s warehouses, or having 70% gross margins for that matter!

However, let’s go back to NVidia.

If I was a serious long-term investor (not too many of those left these days), the biggest concern of mine would be on the cash flow statement.

In the first half of the fiscal year (start of February to end of July) they generated $42.8 billion in cash through operations. This is less than the net income primarily due to increases in AR and inventories – this is logical considering their revenues are skyrocketing.

However, the biggest concern I would have is the $23.8 billion they blew out the door in stock repurchases and the additional $3.4 billion paid out in taxes relating to option exercises.

What did shareholders get for $23.8 billion going out into the equity markets? In Q4-2024, NVDA had 24.489 billion weighted shares outstanding (basic), while in Q2-2025 they had 24.366 billion, a reduction of 123 million shares or 0.5% of shares outstanding. Percentage-wise it is a drop in the bucket, but because we are dealing with huge numbers, $23.8 billion dollars could have gone in many other places! Perhaps they could buy 20% of Intel along with the US Government……

Needless to say, a lot of hidden compensation is going out the window in equity. While employees and executives are getting very rich (if you have some and haven’t diversified yet, might be a good time to consider it!), shareholders will eventually be paying for this somewhat more hidden compensation. It is a repeat of the dot-com era stock option craze – the public investors have done well, but the buyback is a serious cash drag on the company.

The MEG sweepstakes, revisited

You know you’re starting to get old when you consistently start reciting your own work from years on back.

Does anybody remember Husky Energy (now consumed by Cenovus Energy) tried to take out MEG Energy at $11/share in 2018?

Subsequent to this, I wrote about MEG’s pending takeover in May and December of 2021 where I speculated that Cenovus was the most likely strategic acquirer of MEG Energy. There are significant synergies with the acquisition, including geographical ones (Cenovus and MEG Energy are side-by-side at Christina Lake, Alberta):

(MEG is on the north-eastern end of the lake, CVE is on the southern and northern end, and CNQ is on the southwestern end)

For those unaware, these oil sand assets are the crème de la crème of the Alberta oil sands – they have the best steam-to-oil ratios out of all the oil sands. As most of the capital has already been spent on the projects, they will be generating cash flows for decades. It cannot be understated how valuable this asset is whether oil is trading at 50, 75 or 100 a barrel – they are the lowest cost production fields in North America.

Indeed, I wrote those articles when MEG was $12/share and my very pithy analysis speculated that one of CVE or CNQ would just do a 30-40% premium buyout and get it over with. This would have been about $17/share equivalent. The only element that has changed since then (the commodity price environment round-tripped after the Russian invasion of Ukraine, and when adjusting for Canadian currency and the narrower WCS differential the price is virtually the same today as it was back then) is the price being paid – roughly speaking, $5.2 billion in cash and 84 million shares of CVE for a grand total of about $7.2 billion at today’s market value of CVE or about $28/share for MEG.

This is a very unusual transaction considering that Strathcona’s offer was originally higher than Cenovus’ offer, but the even more shocking factor to me is that Cenovus is trading higher after delivering a lower bid than Stratcona, which MEG agreed to!

I wasn’t expecting this set of circumstances to be on my bingo card.

When running my paper napkin calculations, it will be a synergistic acquisition. Just looking at an apples-to-apples comparison in 2024, CVE trades at 11x EV/FCF, while MEG trades at 10x – this is using the currently elevated share prices at August 27, 2025.

There are other synergies – there are plenty of greenfields in the MEG geographical footprint to facilitate the maintenance of their SAGD projects, TMX allocation, and tax shield assets which will deliver quite a bit more cash flow to the underlying Cenovus entity (not to mention the cost elimination of a management layer). The CVE cash portion will be funded by low cost (and tax deductible) debt and the leverage situation after the acquisition is still modest. Finally, MEG in the end of 2024, in an attempt to appear relevant, announced they would spend about half a billion dollars in what they titled a “Facility Expansion Project”, adding 25,000 boe/d of production in a few years – presumptively this project will be canned as half a billion dollars is one hell of an opportunity cost when you have a limited geographical footprint like MEG did (not to mention egress issues).

Strathcona will also get a tactical victory by virtue of its short-term investment in MEG paying off, but strategically they are still looking for ways to tap into the very valuable market of having enough of a stock float to be picked up by index ETF investors – I am absolutely sure they will be on the prowl in the oil patch to boost their own liquidity. At this point the only other obvious target that is publicly traded is Athabaska Oil Sands (TSX: ATH), but they’ve received too much of a bid recently in anticipation of exactly that.

What is ahead in the Canadian fossil fuel industry?

From a broad strategic perspective, the next logical merger would be Cenovus and Suncor. The major synergy here is with the refining networks both companies have – internal consumption of your own product hedges against the inevitable egress risk that will be coming up later this decade. Irvine, Valero, Shell and Imperial Oil would still be primary competitors in the refining space.

Smallcap time – Utah Medical Products

This article (or any on this site) was not assisted by AI in any manner.

In my perpetual quest to scrape the bottom of the investment barrel for the last few morsels of marginally edible grub, I have encountered quite a few companies over the past couple decades that I investigate and then decide to let mentally collect dust, only to have them emerge from their deep slumber and end up with me throwing some capital in their direction.

One example of this was Yellow Pages which I had the misfortune of losing some money in them in the early 2010’s and fortunately later that decade was able to obtain my capitalist revenge on them (note: never forget the cliche of “you don’t have to recover losses using the same financial instruments which caused them in the first place”, it doesn’t always end up working out!). Shockingly, they still generate cash flow although I think the “melting ice cube” is within a reasonable fair value.

The most recent example is Utah Medical Products (Nasdaq: UTMD) that I have known about for about 15 years but never gave them any attention until recently.

You can run their 10-K through an AI machine and get a reasonable summary, but a long story short is they are a small-scale manufacturer and seller of gynecology, andrology and urological products, some selling much more than others. The Filshie clip (a device used to clamp fallopian tubes, contrasted with surgical cutting) consists of a quarter of their revenue. 57% of their 2024 revenues are US domestic, with the other jurisdictions being western countries.

Financially the company received some tailwinds due to Covid spending, but one of my investment theories is that we are almost through the removal of the perception of tailwinds. The company’s reporting is relatively blunt, with page 9 and 10 of their 10-K being relatively insightful – competitive factors and various contractual issues are leading to a decline in revenues.

Despite this, the company has been able to generate ample amounts of cash flow and their balance sheet remains flush with cash – just under half the company’s market cap is in cash, with little in the way of material liabilities. The very trivial paper napkin valuation is a company that generated 14 million in cash flow over the past 12 months with an EV of about $104 million gives a 13.5% yield (7.4x) on EV.

However, the whole world can see this, so this information is not relatively relevant. It does give a relative hint, however, of a limited amount of downside.

Looking at miscellaneous factors, we have the following, in no particular order of importance, positive or negative:

1. Their website looks like it was built in the 1990’s, which makes me like them a bit more. If you got me to design something, it would probably end up looking like this.
2. In case if you thought this was some fluke, their UK subsidiary, Femcare, uses the same web designer.
3. Over the course of its history, the company has paid out a consistently rising dividend, but its buyback history is a little more interesting – relatively small stuff except in 2016 (which was when they were on the verge of posting better financial results) and 2020 (they bought back shares at an average price representative of the Covid drop at an average of US$80). They have been massively buying back shares in 2024 ($20 million at US$66/share) and Q1/Q2 2025 ($3.2M/US$59/share, $3.5M/US$54/share) – August 11, 2025 shares outstanding is 3,206 thousand vs. 3,630 thousand on December 31, 2023. The driving point here is that these buybacks tend to be timed at local minima and the recent buybacks have been more significant than any point in the company’s history.
4. The board of directors, five directors, is entrenched with three-year staggered terms. Two of them are older than Joe Biden. The CEO is 78 years old and been serving as CEO since 1992. In an attempt to refresh the board, Carrie Leigh, 42 years of age, was installed in the previous AGM. She is the daughter of the CEO – having previously worked at UTMD at the age of 20 to 32. She lost the election for directors, with 56% of the vote withheld against her (23% broker non-votes and 21% in favour) – a terrible ‘endorsement’ – the board installed her anyway.
5. The CEO owns 6% of the company. Other directors have roughly 1.3%. Top 5 institutions own 32%. Top 10 institutions own 46%.
6. The “build in America” mantra of the existing administration should eventually result in a minor tailwind for the company. I’d humbly submit that Utah is in the top quintile of states to do this type of business in.
7. The target market of the company’s products is declining by virtue of demographics. There may be a headwind in regards to overall spending.
8. The product space the company is involved in could generally be classified as too boring and pedestrian for additional competition, yet with some fixed advantages of incumbency (the regulatory process of certifying, approving, etc.) and also incumbency of “mind share” of those that are the end-users of the products.
9. Point #4, specifically the vote, is essentially a signal that the institutional shareholders may force a particular direction.
10. All things considered, management compensation is quite low.
11. The company owns their property.

There’s a few upside catalysts. One is that revenues (and hence gross margins/net income) stabilize and the 7.4x multiple remains constant resulting in a share price increase. Two is that the 78 year old CEO’s exit plan, instead of having his “let’s get 21% in a shareholder vote” daughter take over the business, will be through a managed buyout. A logical transaction would be to do a tax-free stock-for-stock buyout with somebody like Thermo Fisher (NYSE: TMO) who are trading at around 20x EV/EBITDA. Say UTMD sells out at 12x EV/EBITDA, that would be a 60% premium to current market value AND TMO would be able to scoop up a (much smaller) firm at a lower multiple to its own stock. Win-win!

UTMD is not an exciting company. The stock is relatively illiquid, the industry is very mature, management and board is (apologies to them) stale and entrenched albeit seemingly reasonable capital allocators by not blowing it on pet projects and actually being one of the few teams that can do stock buybacks at a proper price. The result is that this isn’t exactly a stock that will be on anybody’s radar or mentioned at cocktail parties lest you put the person you are talking to asleep. The downside appears limited, especially given the ample amounts of cash stacked up in the bank account and being used to repurchase stock in the 50s. Eventually the supply out there will shrink and result in higher prices.

To summarize – appears to be a relatively low risk, medium-reward type situation. Long.

Suncor firing on all upgraders

The turnaround in Suncor (TSX: SU) after Rich Kruger took over has been remarkable. It has almost been like a Hunter Harrison story.

Financial metrics at Suncor have been as good as it gets, with 2024 generating about $9.5 billion in cash flow, or $8 billion if you make some adjustments for working capital.

Using the $8 billion figure, Suncor has 1.25 billion shares outstanding, so $6.40/share in free cash flow. Market value is around CAD$55/share at present.

The balance sheet is mostly de-levered with about $7 billion of net debt. They intend to keep it at around the $8 billion level.

The capital allocation after capital expenses is currently going toward an approximate $3 billion/year dividend and the rest of it dumped into a share buyback.

If Suncor was trading as an income tax-free income trust like in the old days where income trusts were freely traded, they’d be generating about 15% distributions on their cash flows. With a 23% combined federal-provincial tax, that goes down to about 11.6% net on market cap.

At $55/share, the buyback is an acceptable use of capital, especially when measured against the cost of their 10-year debt (5.6% pre-tax at present).

The risks are fairly well known – regulatory (although the pendulum is definitely swinging on the environmental policy front), geopolitical (Suncor is relatively better positioned than Cenovus with respect to potential US tariffs on crude), and the commodity market (will oil crash?).

The biggest risk is that they spend money on a really stupid acquisition. Their most recent large profile acquisition (consolidating the remainder of the Fort Hills oil sands project from Teck and Total Energies) was a remarkably good one.

On the flip side, the upside is fairly contained – the company is operating at capacity.

Hence the valuation dilemma – will there ever be a catalyst to warrant a valuation that takes the company from ~12% after-tax to 10, or 8%?

It is too cheap to sell, but since zero growth and volatile commodity companies tend to be out of vogue at present, too expense to purchase.

Still, in theory, if everything remains equal, by this time next year, the company’s shares plus the dividend distribution should take the total value of a share purchased today at $55 and turn it into roughly $61, a lot better than a risk-free 3% on short term cash.

From an engineering and operational perspective, Suncor is a very exciting company doing really amazing things with gigantic volumes of dirt and water – it is truly a modern version of energy alchemy they are performing. Few people appreciate the magic that is being performed with these energy companies.

Financially, however, they are starting to resemble REITs. Whether this is a good or bad thing, I do not know.

I remain long on a moderate position taken shortly after Kruger took over. I am not expecting fireworks from this position, but take solace in having some degree of exposure to perpetually rising prices and having something better than cash silently raking in those free cash flows.

Implementing a Bitcoin Treasury Strategy

Divestor Investments Inc. has announced a strategic shift in its treasury management to strengthen its balance sheet and create long term shareholder value. We are adopting Bitcoin investment as a treasury reserve asset, joining a global community of forward-thinking companies leveraging digital currencies.

Just kidding!

Actually, it was Goodfood Market Corp (TSX: FOOD) that announced the same today.

The Company has completed an initial Bitcoin investment of approximately $1 million through a spot Exchange-Traded Fund (ETF) and plans to strategically increase holdings by investing part of future excess cash flows in Bitcoin. “Accumulating Bitcoin aligns with our long-term focus on value creation, protects against inflation and rising food costs, and leverages its potential as digital capital,” said Jonathan Ferrari, Goodfood’s Chief Executive Officer. “Goodfood is proud to join the ranks of public companies holding Bitcoin on their balance sheet.”

What is interesting is that they will probably be creating shareholder value (by creating a selling opportunity for existing shareholders) with this announcement in an attempt to become the next Microstrategy (along with all the others trying to piggyback on the same concept). The stock is up about 8% today.

Goodfood, as of September 7, 2024 had about $24 million cash on its balance sheet, but also $6.2 million in debt payable March 31, 2025, $29 million payable March 31, 2027 and $12.7 million payable February 6, 2028. Perhaps this is part of a “Hail Mary” strategy to pay off the debt when Michael Saylor manages to talk up Bitcoin to US$1,000,000 per coin.