SHAWCOR LTD. $33(Toronto symbol SCL; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 64.6 million; Market cap: $2.1 billion; Price-to-sales ratio: 1.3; Dividend yield: 1.8%; TSINetwork Rating: Average; www.shawcor.com) makes sealants and coatings that keep oil and gas pipelines from rusting. This business supplies 87% of its revenue. The remaining 13% comes from making industrial products such as electrical wire and protective sheaths.
In the three months ended March 31, 2016, ShawCor’s revenue fell 22.5%, to $365.6 million from $471.9 million a year earlier.
That’s mainly because weaker oil and gas prices have prompted exploration firms to drill fewer new wells. In turn, that has reduced demand for new pipelines and maintenance services.
Due to the lower revenue and higher interest costs, earnings in the quarter fell 80.2%, to $7.5 million, or $0.12 a share, from $37.8 million, or $0.58.
The company’s order backlog at March 31, 2016, was $358 million. Its strong reputation should help it win more contracts; it is currently waiting on decisions involving over $2.6 billion worth of bids.
ShawCor is also expanding into new areas. It recently paid $37.9 million for Lake Superior Consulting. From its facilities in Minnesota, Texas, Nebraska, Kansas and North Dakota, this firm provides design, construction and related services to pipeline operators.
This purchase enhances the company’s pipeline inspection expertise. The outlook for these services is bright, particularly due to the high cost of cleaning up oil spills.
As of March 31, 2016, ShawCor’s long-term debt was $467.8 million, or 22% of its market cap. It also held cash of $281.0 million.
The company is taking steps to improve its financial flexibility. In April 2016, ShawCor used some of its cash to retire $87 million U.S. worth of its debt. It also struck a new deal with its lenders to relax some of the conditions on its remaining loans.
ShawCor will probably earn just $0.08 a share in 2016. However, it earnings in 2017 could improve to $1.21 a share. The stock trades at 27.3 times that forecast. That’s still a reasonable multiple in light of the company’s leading 25% share of the global pipeline coating market. The $0.60 dividend yields 1.8%.
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