ATCO LTD.(Toronto symbols ACO.X [class I non-voting] $61 and ACO.Y [class II voting] $60; Income Portfolio, Utilities sector; Shares outstanding: 58.2 million; Market cap: $3.4 billion; Price-to-sales ratio: 0.9; Dividend yield: 1.9%; TSINetwork Rating: Above Average; www.atco.com) is a holding company. Its main subsidiary is 52.7%-owned Canadian Utilities (see page 1).
ATCO has four main divisions: Utilities (which distributes electricity and natural gas); Energy (which operates power plants); its Australian business (which operates power plants and distributes natural gas in Australia); and Structures & Logistics (which serves 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 also owns several smaller businesses. For example, ATCO I-Tek manages computer networks, billing and payment processing for a wide variety of businesses. Another subsidiary, ASHCOR Technologies Ltd., makes fly ash from the residue from ATCO’s coal-fired power plants. Adding fly ash to cement makes it more durable.
ATCO’s revenue rose 14.1%, from $2.9 billion in 2006 to $3.3 billion in 2008. Revenue fell 4.8% to $3.1 billion, in 2009, but increased 10.8%, to $3.4 billion, in 2010.
Earnings rose 55.5%, from $190.3 million in 2006 to $296.0 million in 2010. Earnings per share rose at a faster pace of 59.1%, from $3.20 to $5.09, on fewer shares outstanding.
Big discount is ATCO’s main appeal
Based on current prices, you can buy a share of ATCO for $61 and get roughly $71 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 10.9 times the $5.58 a share it will probably earn in 2011. The stock also trades at 10.5 times the company’s forecast 2012 earnings of $5.82 a share. ATCO’s $1.14 dividend yields 1.9%.
ATCO is a buy. The more-liquid class I nonvoting shares are the better choice.
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