Exchange Income Corp.: One Of My Favorite Monthly-Paying Companies For 2023

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Dear readers/followers,

At times, you tin beryllium amazed by really agelong a institution tin spell nether everyone's radar despite, arsenic it is to "you", clear that said institution is of immense value and has real, convincing upside.

Such is the lawsuit I'm continuing to make for Exchange Income Corporation (OTCPK:EIFZF). Over nan past fewer months, I've moreover seen a fewer times wherever I've been tempted to commencement trimming somewhat arsenic immoderate of my much affirmative theses person started materializing.

Seeking Alpha Exchange Income (Seeking Alpha)

Being that I look to beryllium nan only 1 covering this peculiar business, I consciousness that it falls to maine to continually effort to constituent retired nan upside, nan fundamentals, and what you whitethorn get erstwhile you put successful Exchange Income Corporation.

Exchange Income Corporation - What location is to for illustration astir 2023

So, to beryllium clear - 2 tickers are applicable here, and arsenic I ever do erstwhile faced pinch a native/non-native aliases ADR choice, I spell autochthonal whenever I can. In this case, that intends investing successful nan Canadian ticker EIF (TSX:EIF:CA). That's wherever nan banal is typically traded.

You could argue, and you would beryllium astatine slightest partially correct successful doing so, that Exchange Income is simply a riskier play than I usually constitute about. My agelong history of covering this banal and nan occurrence I've had pinch it exposes maine to nan consequence of confirmation bias, not to mention a full different big of issues, nan slightest of which and 1 I intend to talk here, is "not knowing erstwhile to quit".

Part of my strategy involves trimming erstwhile a institution reaches heights that I either judge it should not aliases that I judge it will/likely could driblet from. It's been my acquisition from years of investing that this is simply a sound strategy to prevention you from losing insubstantial profits from erstwhile your high-conviction holdings spell into bubbles.

Do you "have" to do this?

No, of people not. Buy-and-hold-investing is simply a perfectly valid strategy, and investors will do conscionable good pursuing that. However, arsenic a valuation-oriented investor, I'm patient successful my stance that each institution has a authorities of undervaluation, and 1 of overvaluation. It's nan measurement nan marketplace useful - it overreacts, and it does truthful pinch unexpected volatility astatine times.

So, let's make thing clear present from nan get-go and thing that will dictate really I constitute astir Exchange Income this year. Because for nan first clip successful complete 2.5 years, which is not that acold from erstwhile I started penning astir nan company, Exchange Income is really trading supra its 10-year normalized P/FFO level.

More connected that later successful nan valuation section.

For nan uninitiated, Exchange Income Corporation is an M&A-focused business pinch a humanities superior attraction connected aviation, aerospace, and manufacturing. This intends there's a definite complexity to knowing nan ebbs and flows of nan company's P&L because it's cyclical and macro-dependent. It besides intends that arsenic acold arsenic peers go, very fewer aliases nary really exist. Comparing this business to thing is simply a difficult task astatine champion and a foolish errand astatine worst.

Instead, we person to look astatine really nan business does successful its various segments, past effort to comparison nan segments to macro and to different companies successful those segments.

Now, immoderate positives. Exchange has accrued nan dividend a full of 16 times successful 18 years. It has ne'er trim it - not moreover during COVID-19. While it lacks organization credit, it nevertheless has a coagulated financing instauration - galore of these positives and numbers are things I spell into successful my earlier articles connected nan company, which you tin follow.

The company's segments, varied arsenic they are, person been doing good successful their ain correct for nan past mates of quarters arsenic well. There person been immoderate sector- and macro-related impacts, but thing unexpected from nan larger position fixed what we're seeing successful position of inflation, nan building sector, and nan aviation sector.

4Q22 is retired successful astir a week aliases truthful - truthful I'll apt do a mini update to this article astatine that constituent if this changes nan thesis materially. But I don't expect immoderate monolithic surprises. As we've seen successful nan past fewer quarters, nan institution is connected a maturation way pinch some integrated and inorganic growth.

The past 4th of 3Q22 saw immoderate reasonably astonishing gross maturation - complete 40% YoY, but it was still eclipsed by nan 58% summation successful EBITDA connected an adjusted basis, which is among a institution record. Despite wide inflationary pressures and different issues. All of nan company's affirmative results contributed to driving nan applicable payout ratio metric to less than 55%. For a monthly paying value company, wherever my ain YoC is almost 9% pinch nan latest dividend increase.

I've seen genuinely astonishing returns from this investment, and existent forecasts - some company/management and expert forecasts, do not propose that this is going to alteration anytime soon.

Here are nan existent expert forecasts for this peculiar business.

EIF dividend/EPS forecasts (EIF dividend/EPS forecasts)

As you tin see, dividends haven't taken a deed contempt little GAAP, and nan early is expecting amended GAAP here. There is thing successful nan company's caller results, aliases its forecast that suggests that nan institution is successful for a materially much difficult time. Northern Mat particularly has fundamentally been hitting nan crushed moving - arsenic opposed to problems, we're seeing immoderate awesome institution execution.

I've been successful interaction pinch IR for this company. And what impresses me, for nan years I've been covering Mr. Pyle and his squad is their almost obsessive attraction connected getting nan correct returns connected their money. I of people don't cognize nan deals they passed on, aliases nan afloat grade of their action process and KPIs erstwhile it comes to M&As - what I do cognize is that almost each of it seems to beryllium moving erstwhile looking astatine nan bottommost statement indicators and results. In Europe alone, nan institution has been scoring statement aft statement that will make semipermanent returns going into nan adjacent decade and more.

The statement against Exchange - aliases rather, nan only 1 that I've been capable to find complete nan past fewer years (aside from its size and nan aviation/manufacturing assemblage overall) has been really nan institution accounts for leases (aviation) and attraction expenditures. If you're willing successful those arguments, nan articles connected that are still astir if you spell backmost a fewer years connected EIF. However, I don't position nan points made location arsenic each that valid, and I position nan institution arsenic being materially different coming than it was backmost then. It's much of a construction/infrastructure operation astatine this point, compared to what we saw only 3-4 years ago. EIF has really been growing.

I'll beryllium updating wherever basal for nan 2023E results, but for now, this is wherever this valuation puts nan entreaty of nan company.

Exchange Income - The valuation is compelling, but it's getting somewhat stretched

So, first a repetition - this is nan first clip since I started earnestly covering EIF, that we're supra a 10-year P/FFO average. That successful itself marks a spot of a alteration present because it intends that we really want awesome FFO maturation estimates from present connected retired to warrant that.

Fortunately, we do person that here, and that makes it easier to warrant that I'm still mostly positive. EIF has been a victor for maine for years, and nan institution has delivered TSR of good successful excess of 60% for me, pinch a dependable, precocious monthly dividend. It's go a spot of a "favorite" for me, and it wouldn't beryllium incorrect to authorities that I've go somewhat attached to nan company.

Dangerous, successful much ways than one. So I'm checking my bias here, and making judge that moreover connected today's valuation, there's capable of an upside present to proceed to warrant holding and perchance buying much of this company.

Even pinch nan dividend increase, nan existent output is down to little than 4.7%. This isn't a bad output per se, it's conscionable very different and overmuch little from erstwhile I bought nan company's shares. This chart from F.A.S.T graphs illustrates nan alteration successful valuation.

F.A.S.T Graphs Exchange income (F.A.S.T Graphs Exchange income)

If nan institution hadn't forecasted a important alteration successful its operating rate travel going forward, it would beryllium stretched astatine this point, to nan grade that we would want to look astatine taking location immoderate profits.

Even with those forecasts, it's not an invalid prime to return profits astatine this point, particularly if those returns are precocious and you tin deploy them successful cheaper companies. Exchange Income is nary longer what I would see "cheap". The truth that we're supra $54 for nan autochthonal intends a very marked alteration - remember, you could bargain this 1 for nether $20/share during COVID-19, and that's what I did.

The underlying lawsuit for nan maturation successful FFO is comparatively solid. The problem is that nan forecast accuracy for really these analysts person been capable to estimate this institution is debased - a antagonistic nonaccomplishment ratio of complete 40% connected a 1-year ground pinch a 10% separator of error.

Exchange is starting to show immoderate of nan signs I've travel to subordinate pinch exuberance connected a stock. This besides includes analysts going higher and higher. Many disliked EIF arsenic an finance erstwhile I called for it astatine $40/share, but they're now calling for it to beryllium worthy complete $60/share. Why, is my question. Very fewer caller facts person travel to ray that was extracurricular nan realm of forecastability (bullish/bearish theses), and nan results we're seeing a good wrong nan realm of my ain sensitivity tables.

Rather than being much affirmative astir nan institution here, I attack this pinch much care. The blimpish upside connected an annualized ground is now, arsenic I spot it, down to adjacent to 15%. This is still good, and still warrants a "BUY", but it's now based connected maturation estimates that may not beryllium realized.

My ain thesis is that nan wide guidance of nan company's net will materialize to a grade that makes a double-digit upside possible. I person seen thing successful nan latest results, successful nan existent forecasts, aliases successful nan macro that suggests we spot a worldly deterioration here. However, because nan institution depends connected a subset of comparatively small/nano-cap subsidiaries to make portion of its earnings, nan imaginable for disappointment is very overmuch successful there.

For that reason, I'm issuing my first informing that immoderate of nan upside may commencement to beryllium realized astatine a value adjacent to $55/share native. Still, though - this is my existent thesis for nan company.

My standing continues to beryllium a "Buy". My ain value target, conservative, is $58/share for nan Canadian ticker of nan shares.

Thesis

My thesis for Exchange Income is reasonably simple.

• This is simply a mini usability pinch a large upside. Fundamentals are solid, and I for illustration their operations and their niche. At an charismatic price, and for nan correct investor, this is simply a definite "BUY" astatine a $58 PT. I'm not changing this PT, because I don't spot immoderate logic for nan clip being to set it either down aliases up.
• Risks do exist, but they're connected a much subjective and "what-if" level, pinch very fewer existent logical risks to nan company's equilibrium expanse aliases operations.
• My stance is simply a "Buy", but astatine this level, we're getting beautiful adjacent to nan institution being afloat valued.

Remember, I'm each about:

• Buying undervalued - moreover if that undervaluation is flimsy and not mind-numbingly monolithic - companies astatine a discount, allowing them to normalize complete clip and harvesting superior gains and dividends successful nan meantime.
• If nan institution goes good beyond normalization and goes into overvaluation, I harvest gains and rotate my position into different undervalued stocks, repeating #1.
• If nan institution doesn't spell into overvaluation but hovers wrong a adjacent value, aliases goes backmost down to undervaluation, I bargain much arsenic clip allows.
• I reinvest proceeds from dividends, savings from work, aliases different rate inflows arsenic specified successful #1.

Here are my criteria and really nan institution fulfills them (italicized).

• This institution is wide qualitative.
• This institution is fundamentally safe/conservative & well-run.
• This institution pays a well-covered dividend.
• This institution is presently cheap.
• This institution has a realistic upside based connected net maturation aliases aggregate description /reversion.

EIF is nary longer cheap, but it's still coagulated here.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.