ATCO LTD. (Toronto symbols ACO.X (class I
non-voting) $50 and ACO.Y (class II voting) $51; Income Portfolio, Utilities sector; Shares outstanding: 58.2 million; Market cap: $2.9 billion; Price-to-sales ratio: 0.9; Dividend yield: 2.1%; SI Rating: Above Average) is a holding company. Its main subsidiary is 52.3%-owned Canadian Utilities.
ATCO recently reorganized its operations into three main divisions: Utilities (which distributes electricity and natural gas); Energy (which operates power plants); and Structures & Logistics (which provides services to energy-exploration and construction companies). ATCO owns 75.5% of the Structures & Logistics division; Canadian Utilities owns the remaining 24.5%.
ATCO earned $4.81 a share (or a total of $278.4 million) in 2009. That’s up 4.3% from $4.61 a share (or $266.3 million) in 2008. These figures exclude losses on hedging contracts and other one-time items. All three divisions cut their costs in 2009. That was the main reason for the gain, as revenue fell 4.8%, to $3.1 billion from $3.3 billion.
Based on current prices, you can buy a share of ATCO for $52, and get roughly $54 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 10.5 times the $4.76 a share it will probably earn this year. ATCO’s lower dividend yield compared to Canadian Utilities has also depressed its p/e ratio. However, ATCO may break itself up in the next few years. That would quickly unlock its value.
ATCO is a buy. The cheaper, more liquid class I non-voting shares are the better choice.
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