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Gordon Pape
Gordon Pape

How Canadian Investors Can Profit From a Weak Loonie

Some Canadian companies are reaping a bonanza from our weak currency and their share prices are reflecting that.

The tumbling loonie has sent food prices skyrocketing and ruined many vacation plans. According to RBC Capital Markets, our dollar has fallen 9% against the U.S. greenback and 11% against the euro since mid-November.

But the news is not all bad. Some Canadian companies are reaping a bonanza from our weak currency and their share prices are reflecting that. These are firms that derive a significant part of their revenue from the U.S. and/or Europe but have a large percentage of their costs in Canadian dollars. For them, every time the loonie drops another tenth of a cent, their bottom line improves.

Since many economists believe the loonie will sink even lower from current levels, the shares of these companies could appreciate more going forward.

Here are five to look at, drawn from our recommended list.

New Flyer Industries (TSX: NFI) (OTC: NFYEF). New Flyer is the leading manufacturer of heavy-duty transit buses in the United States and Canada and an industry leader in clean technology. The company also operates the industry's most sophisticated aftermarket parts organization, sourcing parts from hundreds of different suppliers and providing support for all types of heavy-duty transit buses. The head office is in Winnipeg and the company has parts distribution and service centres in both Canada and the United States.

Most of the business flows from the growing demand for clean public transit vehicles in the U.S., which is heavily subsidized by Washington. Over the 52-week period to Sept. 27, 2015 New Flyer reported total revenue of just over US$1.5 billion, of which 89% came from American bus sales and aftermarket operations. During that time the company delivered 274 buses to Canadian buyers compared to 2,197 sales in the U.S. Net earnings, expressed in U.S. dollars, increased 43% to $47.2 million. Of course, in Canadian dollar terms those results would be even more dramatic.

The share price has responded as you might expect, rising from the $19.23 at the time of our last review in October, when we rated it a Buy, to $27.85 as of mid-day Friday. In December, the company announced a dividend increase of 12.9% and said it will move to quarterly payments of $0.175 ($0.70 a year) from the current monthly schedule. The stock yields 2.5% at the current price and still rates as a Buy.

Boyd Group Income Fund (TSX: BYD.UN) (OTC: BFGIF). Boyd is the largest operator of non-franchised collision repair centres in North America in terms of number of locations and it is one of the largest in terms of sales. The company operates in five Canadian provinces under the trade name Boyd Autobody & Glass, as well as in 17 U.S. states. It has more than 300 locations in the States and about 80% of the company's business is in U.S. dollars although it is actually based in Winnipeg.

The company is displaying strong growth, with total sales increasing by 38.1% in the third quarter, due largely to contributions from 23 new locations. Boyd had about $375 million in cash and available credit facilities and intends to draw on this money to continue to expand, especially in the U.S.

The stock was first recommended by contributing editor Ryan Irvine in August 2010 at $5.50. It now trades at more than 10 times that level, although it has pulled back somewhat from its all-time high of $70.45, touched in early December.

Alimentation Couche-Tard (TSX: ATD.B) (OTC: ANCUF). From its humble beginnings as a Quebec convenience store chain, Couch-Tard has grown into an international giant with extensive operations in the United States and Europe and is about to enter Mexico. Through a series of major acquisitions, the company now controls such brands a Circle K, The Pantry, and Statoil. For the first nine months of the 2015 fiscal year, the company generated about US$11.9 billion in revenue from its United States stores, representing almost 69% of total revenue. Same store merchandise revenue from U.S. stores was up 5.2%. Diluted earnings per share for nine months came in at $1.25, up 27.6% from the year before.

The company shows no signs of slowing down. In December, it announced the acquisition of Topaz, Ireland's leading convenience and fuel retailer. No purchase price was released but Couche-Tard said the purchase would be financed from available cash and existing credit facilities. Topaz operates 464 stations across the island of Ireland, including its recently acquired Esso station network.

Couche-Tard has been on our recommended list since it was picked by retired contributing editor Tom Slee in March 2013 at $17.62. It hit a high of $64.19 in early December, then pulled back in the January correction. It was recently rated a Buy by contributing editor Shawn Allen, who has taken over the coverage.

Toronto-Dominion Bank (TSX:TD) (NYSE: TD). Owning shares in a Canadian bank may seem like an unlikely way to profit from the fall in the value of the loonie but in the case of TD it makes sense. The Green Machine has aggressively expanded in the U.S. where it now has more "stores" (1,300) than it does in Canada. The U.S. operation by itself qualifies as one of the 10 largest banks in that country, with a strong presence along the eastern seaboard from New England to Florida. It has some 25,000 employees and serves about eight million customers. Another major U.S. operation is the brokerage firm TD Ameritrade, which has a national branch system and provides a full range of services.

TD's U.S. retail business generated adjusted net income of US$491 million in the fourth quarter of fiscal 2015. That represented about one-third of the company's total profit for the quarter.

The bank continues to build its U.S. assets. In October, it acquired substantially all of department store giant Nordstrom Inc.'s U.S. Visa and private label consumer credit card portfolio, with a gross outstanding balance of US$2.2 billion. In addition, TD and Nordstrom entered into a long-term agreement under which the Bank became the exclusive U.S. issuer of Nordstrom-branded Visa and private label consumer credit cards.

All the Canadian bank stocks have come under pressure recently because of investor concerns that the weak Canadian economy and low oil prices will have a downward pull on profitability. However, TD's strong U.S. presence helps to offset this and makes it my top choice among our current bank recommendations.

CGI Group (TSX: GIB.A) (NYSE: GIB). CGI is the fifth largest independent information technology and business process services firm in the world. It employs about 65,000 professionals in offices and delivery centres across the Americas, Europe, and the Asia Pacific region. The company offers a range of services including high-end business and IT consulting, systems integration, application development and maintenance, infrastructure management, as well as many proprietary solutions.

The company is managed through the following seven segments: the U.S., Nordics, Canada, France (including Luxembourg and Morocco), the United Kingdom, Eastern, Central and Southern Europe (ECS, primarily Netherlands and Germany), and Asia Pacific (including Australia, India, and the Philippines).

In fiscal 2015 (CGI has a year-end of Sept. 30), the company recorded $11.6 billion in bookings. Of that, less than 30% came from Canada. About 21% of the business originated in the U.S. ($2.5 billion), while about 36% ($4.2 billion) came from continental Europe.

RBC describes the foreign exchange gains as a "strong tailwind" that will enable the company to achieve or exceed its target for double-digits earnings per share growth in 2016. CGI earned $3.13 in 2015 and the brokerage firm is projecting $3.45 in the current fiscal year and $3.78 in 2017. RBC has a price target of $65 on the stock, which was trading on Friday at $54.65. It was originally recommended in August 2012 at $24.42.

About the author:

Gordon Pape
Gordon Pape is the best-selling author/co-author of many acclaimed investment books, including the recently-published Sleep-Easy Investing (Viking Canada ). He is also publisher and editor of five investment newsletters, including the Internet Wealth Builder, Mutual Funds Update, The Income Investor, and The Canada Report, which was created specifically for U.S. residents interested in investing in Canada . He is a columnist for several magazines and websites and a frequently quoted media source. He has been a featured speaker at numerous events including the World Money Show in Orlando . His websites can be found at www.BuildingWealth.ca and www.TheCanadaReport.com.

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