Sprott: Growth Started To Sprout At The Height Of The Pandemic

Summary

• Sprott, Inc. has shown financial stability despite the slow-moving revenue and income growth as a result of its strategic acquisition, sale, and diversification of assets for the last five years.
• Dividend growth has not been continuous but the payouts have been consistent since 2014.
• After the downtrend followed by almost unchanged values of the stock price for about four months, a stronger uptrend has been observed since the latter part of January.
• With its fruitful performance despite the adverse effects of the pandemic, the potential reopening of the economy may give opportunities to speed up its growth.

Sprott, Inc. (NYSE: SII) emerged unfazed and even stronger despite the disruptive effects of the pandemic in the previous year as growth and stability have been more visible. Likewise, dividend payments increased substantially despite decreased Free Cash Flow ("FCF"). Moreover, even if there were points when the stock price moved in the opposite direction, the potential of a strong uptrend for more than a month must be given more attention to.

Company Financials

Operating Revenue and Total Expenses

Sprott, Inc. has been operating in a wide range of financial services, particularly investment advisory across many segments such as Exchange Listed Products, Lending, Managed Equities, Brokerage, and Corporate. The main revenue growth drivers consist of fee income, particularly management and advisory fees, commissions from the income and its investment services, and income from its lending and investments. While growth has been quite slow, revenues remained stable and adequate for the last five years. In 2015-2016, the operating revenue has grown by 30% to $165 million, primarily driven by the IPO of Sprott Energies Opportunity Trust that raised $46 million. But as the company tried to optimize its resources and expenses, it sold some of its Canadian retail assets contract and other non-core assets to focus on its core competencies, which in turn, temporarily decreased its capacity. With that, the operating revenue fell for two consecutive years to $110 million in 2017 and $100 million in 2018, respectively. This optimization to improve its diversification of assets, particularly investments, and improve efficiency can be confirmed through the downtrend in total expenses. This was most noticeable in selling and administrative expenses, fee expenses, compensation expenses, provision expenses, and amortization of intangibles as the total expenses decreased to $96 million and $72 million. The operating profit has initially dropped from $41 million to $13 million before rising again to $28 million. Note that the changes in revenue and expenses were also driven by its acquisition of the Central Fund of Canada. With that, it may be safe to say that the advantageous effect has just been observed in the following year which remained reasonable. Revenue and expenses rose again to $101 million and $84 million, respectively in 2019. Higher expenses were driven by its initial joint venture with Tocqueville Asset Management before conclusively acquiring it in 3Q.

In 2020, things have become fruitful for the company despite the challenging environment caused by the pandemic. The positive effect of the acquisition of Tocqueville matched with its prudent diversification of assets, and increased inflows to the capital market have led it to more stable growth. This may show that the underwhelming trend in 2017-2019 was a prelude to its impressive performance. Also, its earlier optimization helped it to get ahead of potential disruptions and stabilize its operations which gave opportunities for further growth as the hype in the financial sector became more apparent. As revenues grew in all quarters, total expenses remained manageable which gave a combination of increased demand for its services and enhanced prudence and efficiency. With that, the operating revenue rose to $120 million while the total expenses remained reasonable at $87 million which caused an increase in operating profit to $33 million.

Taken from MarketWatch Net Income

Net income shared an exact trend with the operating profit which conveys smaller values and stability in the non-core operations and consistency with the core operations. Despite the slow-moving growth in 2016-2019 from $32 million to $13 million, it remained viable to remain operations and capable of growing, given its strategies in the core operations. Things have paid off at the height of the pandemic as stability was maintained and increased hype in the financial sector was easily utilized with efficiency. With that, net income doubled to $26.9 million.

Taken from MarketWatch

Liquidity and Growth

Despite the generally downward pattern, FCF has been adequate despite several acquisitions and divestments which enabled it to sustain its operations and cover its financial obligations for the last five years. FCF reached $56 million in 2016, primarily to higher income and the IPO of one of the subsidiaries. It dropped in 2017 as revenues and income became lower in the same year. Meanwhile, the cash inflows from the sale of assets in 2017 were verified in 2018 which increased FCF. Despite the increased expenses due to the acquisition of Management Central Fund in Canada in the same year, one can see its added value as FCF rose to $88 million. But in 2019 and 2020, it continuously decreased to $38.72 million and $25.6 million. This is understandable due to the acquisition of Tocqueville matched with the increased investments of the company and the expansion to cope with the hype and growth in the financial sector amidst a more challenging environment.

Meanwhile, the Return on Asset ("ROA") and Return on Equity ("ROE") shared an identical trend to net income which conveys consistency in the viability of the operations with growth and sustainability. Despite the general downward trend of ROA, growth has been ideal except in 2019, as the ratio exceeded the ideal level of 5%. In 2020, as recovery and growth were observed, ROA bounced back from 3% to 7%. Moreover, the value of ROE has been close to ROA which shows that the company has been prioritizing equity to leverage its acquisitions and expansions over the years which may be the reason why the company continued paying dividends. Although it has been quite unpredictable, the distribution remained consistent and has substantially increased with a Dividend Payout Ratio of 46% in 2020. With that, 54% remained in the equity, and given the current ROE of 9%, the company has a potential or Sustainable Growth Rate ("SGR") of 5% which means that it can grow more by 5% without increasing its financial leverage.

Taken from MarketWatch

Taken from MarketWatch

What's in Store for the Investors?

Dividends Per Share

Dividend growth has been quite unpredictable despite consistent payments due to the changes and the decrease in 2018-2019. It has followed the trend of net income which shows its dependency on it. Despite this, the Dividend Payout Ratio has always been low and conservative although it increased to 12% in 2019 to ensure adequacy to sustain dividend payments. In 2020, when net income grew, it has grown more than its usual rate as it accumulated to $0.501 per share. Despite the substantial growth, the ratio remained manageable but more reasonable at 46%. FCF remained more than twice which can further prove the adequate capacity of the company to sustain and expand its operations and cover its obligations.

Stock Price

When the pandemic came and spread around the world, it disrupted the global market and the effect was also reflected in the stock market. SII hit one of its price levels at $14.37 last March 12. The sideways pattern that geared more towards bearish remained apparent in April. Since then, the pattern shifted and an uptrend was observed to its all-time high since 2013 at $42.96. For the next three to four months it went back to its usual sideways pattern although the decrease was evident at $28-$29. But when it went up to $30.43 last February 1, upward momentum was seen for the next few weeks until it's set at its current price of $37.87, the highest since mid-September. With that, it is safer to assume that the trend remains neutral since the sideways trend with gradual decrease and the sudden shift could have been a pullback that intensified the upward momentum. But it may also be a pause from the downward trend which may continue for the next few weeks. While it is recommended to watch it closely for the next few days and even weeks while being more updated on press releases and news in the industry, it will also help to assess the four stock price models. Given the PE Ratio of 35.95, the PB Ratio of 3.7, and the PEG ratio of 3.5, the three models convey overvaluation and that the price must go down to its correct value while the Dividend Discount Model says otherwise as it derives $38.80. With this, despite the start of upward momentum, the sideways pattern remains reasonable.

Potential Growth Catalysts

The Reopening of the Economy

Although the pandemic hasn't ended yet, the increased production and approval of vaccines continue to raise our hopes for the gradual return to normal, which in turn, culminates in the reopening of the economy. While the financial sector continues to thrive, financial services and investment advisory firms go along with it. Despite this, increased economic activities, increased consumption, increased monetary flows, and investments remain primary growth catalysts for most firms. While this may increase employment, purchasing power, and levels of income, increased consumption and investment may be observed which may cause an increase in the demand for investment brokerage and advisory services. Hence, higher revenues and income with maintained stability may be observed once the economy reopens.

Conclusion

Before the pandemic came and spread, Sprott, Inc. had an unexciting growth as the values of the key accounts remained almost unchanged. Despite this, it maintained stable fundamentals which helped it sustain its operations and cover its obligations as proven by dividend payments although growth was quite unstable. Also, FCF remained high that it showed the reasonable capacity of the economy to continue acquiring companies and selling assets to focus on its core competencies and diversify its portfolio at the same time. This was further proven at the height of the pandemic where financials remained fruitful and even grew faster as shown by the operating revenue, net income, and some financial ratios. Dividends rose drastically despite lower FCF due to its acquisition and increased capacity and investments. Likewise, the current pattern of the stock price seems to agree with the impressive performance although generally, it remains in a neutral or sideways pattern. This company may be considered by an interested investor although one must have extra caution, especially with the stock price and dividends to ensure growth and stability.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.