ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $58 and ACO.Y [class II voting] $58; Income Portfolio, Utilities sector; Shares outstanding: 58.2 million; Market cap: $3.4 billion; Price-to-sales ratio: 1.0; Dividend yield: 2.2%; TSINetwork Rating: Above Average; www.atco.com) is a holding company. Its main subsidiary is 52.8%-owned Canadian Utilities.
ATCO has three main divisions: Utilities (which distributes electricity and natural gas); Energy (which operates power plants); and Structures & Logistics (which sells services to construction companies and firms that explore for oil and natural gas). ATCO owns 75.5% of the Structures & Logistics division; Canadian Utilities owns the remaining 24.5%.
The company recently created a fourth division, ATCO Australia, which will manage its Australian operations, including three power plants.
In 2010, ATCO earned $296.0 million. That’s up 6.3% from $278.4 million in 2009. Earnings per share rose 5.8%, to $5.09 from $4.81, on more shares outstanding. These figures exclude one-time items, such as losses on hedging contracts. Revenue rose 10.8%, to $3.4 billion from $3.1 billion.
Based on current prices, you can buy a share of ATCO for $58, and get roughly $60 worth of Canadian Utilities. That means you get ATCO’s non-utility businesses for free.
This “holding-company discount” is why ATCO trades at just 9.8 times the $5.39 a share it will probably earn in 2011.
ATCO’s lower dividend yield, compared to Canadian Utilities, has also depressed its p/e ratio. However, ATCO could unlock some of its value by spinning off some of its businesses as separate companies.
ATCO is a buy. The cheaper, more liquid class I non-voting shares are the better choice.
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