3 Stocks to Consider North of the Border

by Will Ashworth | April 6, 2012 11:20 am

canada flag 630 300x199 3 Stocks to Consider North of the BorderA colleague of mine recently remarked to me that he was impressed about Canada’s projected economic growth in 2012[1] compared to others in the Group of Seven. However, as someone who lives in Toronto, I can assure him that the Canadian economy, while showing signs of life, still is very much affected by all that has transpired in the past four years.

Sure, there is a general sense that we are a relatively healthy and happy country, but there also is plenty that keeps us up at night — including what stocks to buy.

Canadian stocks tend to gravitate to two sectors: basic materials and financials, making stock selection more difficult. Still, there’s at least a few worth exploring. Here are 3 stocks to consider north of the border:

Canadian Pacific Railway

The railway’s history is Canada’s history. CP was established in 1881 to make good on a promise politicians made to Canadians on its confederation on July 1, 1867, to build a national railway. By 1889, the railway went coast to coast and was flourishing. As a result of this success, it expanded into various unrelated businesses. By 1986, it was Canada’s second largest business with $15 billion in revenue.

However, it all came to an end in October 2001, when CP Rail — along with CP Ships, Fording Coal, Fairmont Hotels and PanCanadian Energy — were spun off into five publicly traded companies. Today, Canadian Pacific Railway (NYSE:CP[2]) is an independent company with its own set of shareholders.

The largest of those shareholders is William Ackman, whose Pershing Square Capital Management owns 14% of the company. Ackman believes it’s poorly run and seeks to replace seven of the existing board members with a slate of his own that includes Stephen Tobias, the former vice chairman of Norfolk Southern (NYSE:NSC[3]) and a 40-year industry veteran. If successful, Ackman would install Hunter Harrison, former CEO of Canadian National Railway (NYSE:CNI[4]), in the top spot.

Ultimately, this situation boils down to a case of who to believe. The fact CP has the worst operating performance of any major railroad in North America isn’t the argument here; it’s about how you make the railroad more efficient. Management and Ackman differ on the answer.

However, working in the iconic railroad’s favor is the fact it generated $5.2 billion in revenue in 2011, its highest top-line number in its long and storied history. Ackman knows that activist agitation, whether by installing his own slate or keeping the pressure on current CP CEO Fred Green, is the best way to ensure it delivers record numbers on the bottom line as well. If you look at CP’s stock performance over one-year, three-year and 10-year lines, you’ll find a company that handily has outperformed both its railroad peers and the S&P 500.

There’s a lot to like about CP, or Ackman wouldn’t have bought in the first place. Stay tuned as the story continues to unfold.

Bombardier

Anyone who lives in New York City and routinely takes the subway should recognize the Bombardier (PINK:BDRBF[5]) name. If not, look more closely as the subway car pulls into the station on your next trip. The car itself probably was made by Bombardier.

In 2003, Bombardier completed delivery of 1,030 rapid transit cars to the Metropolitan Transportation Authority and New York City Transit. In Toronto, we are in the midst of receiving 420 next-generation subway cars that will make my trip downtown much more enjoyable. Every year, in subway systems across the globe, more than 7 billion people use Bombardier trains to get to work and play. Mass transit is here to stay, and Bombardier is a big part of that future.

However, Bombardier doesn’t just make trains — it also makes planes. In its commercial segment, BDRBF manufactures three aircraft. First, there is the CRJ series of regional jets that commuter airlines use to ferry passengers to and from their destinations. Second is the Q400 turboprop that airlines like Toronto-based Porter use, which can be a more fuel-efficient and cheaper plane to run. Lastly, there is the CSeries, which hopes to capture much of the market for 100-to-149-seat aircraft.

Moving over to the business jet segment, Bombardier has three brands that include Learjet, Challenger and Global. The Global 8000, which is expected to enter service in 2017, will fly farther than any other business jet. Its expected range is 7,900 nautical miles, allowing executives to fly nonstop from New York to Hong Kong and perform other long-haul flights.

Bombardier has had its ups and downs in recent years. However, if you listen to CIBC World Markets analyst Michael Willemse, its current share price of $4.08 as of April 4 is a tad pessimistic. Willemse reasons that if you value the subway cars and business jets at $5.30 a share, the market is valuing the commercial aircraft segment at -$2 billion or -$1.15 a share. He pegs the value of the commercial jets at $1.20 a share, 200% higher than currently valued. Given that Bombardier’s peers are trading at much higher multiples, I’d say the downside already has been baked into the price of its stock. Bombardier’s ready for take-off.

Shaw Communications

The thinly traded Shaw Communications (NYSE:SJR[6]) is a smaller, Canadian version of Comcast (NASDAQ:CMCSA[7]). Its entertainment and communications businesses run the gamut from video distribution to cable to broadcast television and everything in between.

Unknown by most investors outside of Canada, it generated revenues of $4.7 billion in fiscal 2011 and EBITDA of more than $2 billion. That’s an EBITDA margin of 43%, approximately 9 percentage points higher than its much larger peer. Income-focused investors should note its current dividend yield is 4.6%, more than double Comcast’s and 60 basis points higher than Canadian rival Rogers Communications (NYSE:RCI[8]).

As a business, I think it holds its own against any of its Canadian counterparts. However, where it fails badly is in its corporate governance. Founded by Alberta’s Shaw family, it’s paid out a king’s ransom in recent years to various members of the family in the form of excessive executive compensation[9]. Supporters of the company will point to its stock’s appreciation as evidence it was money well spent. In my books, excessive executive compensation is just plain wrong. For that reason alone, I’d take a closer look before investing.

Bottom Line

Canadian stocks have had a good run the last decade, seriously outperforming their American counterparts. However, over the past year, it has become obvious Canadian stocks are in a bit of a stall. Therefore, rather than putting your money in a broad-based ETF, you’ll want to consider Canadian stocks on a case-by-case basis. The three above give you a good place to start.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Endnotes:
  1. Canada’s projected economic growth in 2012: http://money.cnn.com/2012/03/29/news/international/oecd-g7/index.htm?iid=HP_LN
  2. CP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CP
  3. NSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSC
  4. CNI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CNI
  5. BDRBF: http://studio-5.financialcontent.com/investplace/quote?Symbol=BDRBF
  6. SJR: http://studio-5.financialcontent.com/investplace/quote?Symbol=SJR
  7. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  8. RCI: http://studio-5.financialcontent.com/investplace/quote?Symbol=RCI
  9. excessive executive compensation: http://www.theglobeandmail.com/globe-investor/investment-ideas/features/vox/the-relentless-rise-of-shaw-communications-executive-pay/article2276990/

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