Stantec Inc. (STN)
Originally recommended on Aug. 28/06 (IWB #2632) at C$20.48, US$18.45. Closed Friday at C$28.03, US$24.23.
Over at Stantec the picture is much more encouraging. First-quarter revenues jumped 38.7% to $405 million. Earnings came in at $20.6 million, equal to 45c a share, well above the 37c many analysts were expecting. The results were particularly heartening because the previous quarter had been a little disappointing with the slump in U.S. housing starts taking a toll. Stantec seems to have regained its stride.
It's a strong start in 2009 and all of the operating divisions are performing well, except for Urban Land where a soft residential housing market remains a drag. Management's diversified model is paying off with solid growth in Transportation and Buildings, where the public sector remains strong, doing the heavy lifting. Total backlog has now increased to $1.1 billion, up from $1 billion at the end of 2008 despite the economic slump.
Stantec has always been acquisition-driven: six takeovers were closed last year and, given the company's strong cash flow, we can expect more deals this year. There are always more attractive opportunities when business is slack. Even if no new acquisitions are announced, however, it now looks as though Stantec will generate about $1.7 billion of revenue this year and earnings of $1.90 a share. We could see earnings as high as $2.40 a share in 2010.
The shares have reached my target price of C$28 so I am setting a new upside target of $35. I will revisit the stock if it dips to $23.
Action now: Buy.
Kansas City Southern (KSU)
Originally recommended on May 12/08 (IWB #2818) at $45.90. Closed Friday at $16.32. (All figures in U.S. dollars.)
On another front, Kansas City Southern is having a very difficult time. When I recommend the stock in May 2008, KSU was tightening controls, the outlook for intermodal traffic in Mexico was promising, and freight rate increases were sticking. This seemed to be a railroad that would buck the trend and prosper during the downturn. Unfortunately, the U.S. slump had a multiplier effect in Mexico and Kansas City was hurt by sharply lower shipping volumes towards the end of 2008. The slide has continued and steepened in 2009.
The company reported a loss of 8c a share in the three months ending March 31, a sharp reversal from a profit of 39c a year ago and a 40c per share profit in the fourth quarter. Carload volumes slumped 15% (Mexican carloads fell a staggering 25%) and that wiped out the bottom line even though management slashed operating expenses by 23%. KSU has become another casualty of the recession.
Looking ahead, it's now apparent that Mexico, where KSU generates 40% of its revenues, is recovering very slowly from the recession. As a result, 2009 is shaping up to be a bleak year for the company. Earnings of about 80c a share are expected, which means the stock at $16.32 already has a hefty 20.4 P/E ratio. The upside is limited for a year or so.
Action now: We have had Kansas City Southern on Hold since last November because of the gathering clouds but things have become worse, not better. KSU therefore becomes a Sell. There are much better situations available.
Canadian National Railway (CNI)
Originally recommended on May 6/02 (IWB #2216) at C$25.95 (split-adjusted). Closed Friday at C$50.21, US$43.57.
Finally, a word about CNR's proposed Pipeline on Rail, a plan to ship oil by train. The railway has been in discussion for months with Alberta's provincial government about conveying oil sands production south to the U.S. and west to British Columbia. CN claims that it can gear up its capacity and ship four million barrels a day at relatively little cost and bypass the need to finance new pipelines. It's the sort of proposal I would expect from CN's innovative management and there is a good chance that a deal will be struck. I hope so; it would be another reason for recommending CNR.
One caveat! As one subscriber has pointed out, the Pipeline on Rail concept raises questions about Enbridge's growth prospects. He has a good point but, given the limited information that we now have, I cannot see any cause for concern. Enbridge has several major projects on the drawing boards, as much work as it can handle. As a matter of fact, analysts are more concerned about financing the new business than any competition from CNR. Moreover, I am sure that if it came to a showdown an established pipeline could ship oil more economically than a railway. CN's argument is really based on the fact that there is not sufficient pipeline capacity available at the moment. Keep in mind that we have been through this before. During Canada's first oil rush in 1947 trains transported the original output from Leduc. Three years later, Interprovincial Pipe completed the first pipeline and the railways bowed out of the picture.
To summarize, I think that this is a great opportunity for CN with very little threat to Enbridge.
Action now: Buy.