Topic: How To Invest
Inner Circle Hotline
BLACKBERRY LTD., $11.52, Toronto symbol BB, provides wireless communication services, mainly to businesses and government agencies.
The stock jumped 12% this week after an arbitrator awarded the company $814.9 million U.S. in its licensing dispute with computer chip maker Qualcomm Inc. (Nasdaq symbol QCOM). That payment is equal to 62% of BlackBerry’s annual revenue of $1.3 billion U.S.
BlackBerry accused Qualcomm of overcharging for its patents. The two firms later agreed to settle the case through binding arbitration.
The company has not yet said what it plans to do with the cash. However, the extra funds should help it with its long-term plan to focus on software for secure communication networks and self-driving cars.
OUR RECOMMENDATION: BlackBerry is still a hold.
BlackBerry recent coverage
BOMBARDIER INC., Toronto symbols BBD.A $2.36 and BBD.B $2.27, is the world’s third-largest maker of commercial aircraft, after Boeing (No.1) and Airbus (No. 2). It’s also a leading maker of commuter trains.
The stock gained 12% this week in response to media reports that the company and Germany’s Siemens AG may merge their railcar operations.
It’s unclear which firm would control such a joint venture, particularly since Bombardier sold 30% of its railcar division in 2016 to the Caisse de dépôt et placement du Québec. It manages the province’s public pension plan.
If the two railcar operations do merge, that would help them compete with Chinese competitors. However, anti-trust regulators would likely force them to sell certain assets.
OUR RECOMMENDATION: Bombardier is still a hold.
Bombardier recent coverage
CENOVUS ENERGY INC., $14.26, Toronto symbol CVE, recently agreed to acquire full control of its main oil sands properties in Alberta.
Right now, the company owns 50% of the Christina Lake and Foster Creek oil sands projects; ConocoPhilips (New York symbol COP) owns the other 50%.
Under the terms of the deal, Cenovus will buy ConocoPhillips’ interest in both properties, along with ConcoPhillips’ conventional oil fields in Alberta and B.C.
In all, it will pay $17.7 billion, consisting of $14.1 billion in cash plus 208 million Cenovus common shares. That price is 21% higher than the company’s market cap of $14.6 billion.
The company has secured 75% of the financing for this deal. That includes selling 187.5 million common shares at $16.00 a share for gross proceeds of $3.0 billion. Cenovus has also sold $3.9 billion in new notes and arranged $4.6 billion in other loans.
After it completes the purchase in the next few weeks, Cenovus will hold cash of $1 billion and have unused credit lines of $3 billion. Based on the extra production and an oil price of $50.00 U.S. (West Texas Intermediate), the company expects to generate $500 million of free cash flow (cash flow less capital expenditures) in 2018. That, along with sales of less-important properties, will help Cenovus pay down its debt.
OUR RECOMMENDATION: Cenovus is still a buy.
Cenovus recent coverage
SHAWCOR LTD., $38.11, Toronto symbol SCL, makes sealants and coatings that keep oil and gas pipelines from rusting. It also manufactures industrial products such as electrical wire and protective sheaths.
The company has won a contract to coat a new pipeline that will pump natural gas to power plants in Thailand. It expects to complete this project in late 2018.
The deal is worth $40 million. That’s small next to ShawCor’s annual revenue of $1.2 billion. However, it should help the company win more contracts in Asia.
OUR RECOMMENDATION: ShawCor is a buy.
ShawCor recent coverage
SNC-LAVALIN GROUP INC., $53.34, Toronto symbol SNC, is a leading Canadian engineering and construction company that specializes in large-scale public works projects such as roads, bridges, transit systems and water-treatment plants.
SNC announced several new contracts this week. Those include a deal from Colombia’s main pipeline operator to design and build two compression facilities that will speed up the transmission of gas between cities. The company will receive $35 million U.S. under that deal; that’s less than 1% of it 2016 revenue of $8.5 billion.
The operators of the Hibernia offshore oil platform near Newfoundland have also extended SNC’s existing contract to inspect the facility. This deal includes the new Hebron offshore platform, which should begin operating later this year. SNC has yet to reveal how much the contract extension is worth.
OUR RECOMMENDATION: SNC-Lavalin is a hold.
SNC-Lavalin recent coverage
RESTAURANT BRANDS INTERNATIONAL INC., $56.09, symbol QSR on New York, is the world’s third-largest fast-food operator after McDonald’s (No. 1) and Yum Brands (No. 2). It has 15,243 Burger King outlets and 4,492 Tim Hortons stores, in 100 countries.
Restaurant Brands has also just bought Popeyes Louisiana Kitchen Inc. (symbol PLKI on Nasdaq) for $1.64 billion.
Restaurant Brands plans to open its first U.K. Tim Hortons next month in Glasgow, Scotland. The first location will be on Argyle Street, one of the main shopping streets in the city centre.
Tim Hortons then plans to rapidly roll out more stores in the U.K. over the next 12 months.
OUR RECOMMENDATION: Restaurant Brands International is still a hold.
Restaurant Brands recent coverage
COLLIERS INTERNATIONAL GROUP INC., $63.25, symbol CIGI on Toronto, is one of the world’s top three commercial real estate firms, offering a range of services in the U.S., Canada, Europe, Australia, New Zealand, Asia and Latin America.
The company has 15,000 employees operating from 500 offices in 68 countries.
Colliers continues to grow by acquisition. Its latest buy is WelshCo LLC. It has yet to reveal the terms of the purchase.
WelshCo has 240 professionals operating in the greater Minneapolis-St. Paul area of Minnesota. The company provides investment sales, lease brokerage, property management, facilities management and architecture services. It also offers project management services to local, regional, national and global clients.
OUR RECOMMENDATION: Colliers International remains a hold.
Colliers International recent coverage
NISSAN MOTOR CO., $18.43, symbol NSANY on Nasdaq, is Japan’s second-largest automaker, after Toyota.
In March 2017, the company sold a record 168,832 vehicles in the U.S. That’s up 3.2% from March 2016.
Sales of crossovers, pickup trucks and sport utility vehicles (53% of the total) increased 28.8%. That’s thanks to strong sales of the mid-sized crossover Rogue (up 42.6%). Among the vehicles that compete with the Rogue are Toyota’s RAV4, Honda’s CR-V and Ford’s Escape.
Nissan’s car sales (47% of the total) fell 15.4%. Lower sales of the Versa, Sentra and Altima offset higher demand for the Maxima.
OUR RECOMMENDATION: Nissan is a buy.
Nissan recent coverage
SYMANTEC CORP., $30.04, symbol SYMC on Nasdaq, sells computer-security technology, including antivirus and email-filtering software, to businesses and consumers.
The company recently formed Symantec Ventures, a cybersecurity venture capital business that aims to serve as an incubator for startup firms. That support could include funding as well as access to Symantec software that lets startups accelerate their development.
Symantec Ventures is looking to invest in new and emerging technologies to add to the company’s portfolio such as analytics and artificial intelligence.
The new business could ultimately give Symantec access to possible acquisition prospects. For example, the company already has a close relationship with Appthority, a mobile app security vendor. Symantec has invested in the firm, which identifies and protects against mobile threats targeting companies through mobile devices, apps, and data networks
OUR RECOMMENDATION: Symantec is a top pick for 2017.
Symantec recent coverage
WESTJET AIRLINES LTD., $22.92, symbol WJA on Toronto, has hired airline industry information technology veteran Craig Maccubbin as chief information officer.
Maccubbin was chief technology officer at Southwest Airlines (symbol LUV on New York) over the past four years. There, he oversaw a staff of 500 employees in the information technology and mobile applications area.
Southwest Airlines is one of the largest carriers in the U.S. by revenues and the largest by passengers flown. The company specializes in low fares and short-haul flights. It has a market cap of $33.9 billion compared to WestJet’s market cap of $2.7 billion.
Computer systems are increasingly important for airlines, handling everything from bookings and passenger check-in, to crew scheduling and bag tracing. The systems also need to meet the expanding demands of smartphone and mobile access.
A major computer failure in August 2016 at Delta Airlines, the second-largest carrier in the U.S., forced it to cancel more than 2,000 flights over a number of days and cost upwards of $100 million in lost revenue.
OUR RECOMMENDATION: WestJet is a top pick for 2017.
WestJet recent coverage
AT&T INC., $40.28, New York symbol T, is the largest wireless provider in the U.S. It also sells TV cable packages, and high-speed Internet and landline phone services.
This week, the company agreed to acquire Straight Path Communications Inc. (New York symbol STRP).
Straight Path’s main assets are a portfolio of licenses for wireless frequencies. They will help AT&T with its plan to offer 5G wireless services, which are up to 10 times faster than its current 4G networks. Faster networks will let AT&T attract new subscribers with new wireless services, such as high-definition video streaming.
AT&T will pay $1.6 billion for Straight Path. That’s less than 1% of its $248.3 billion market cap (the total value of all outstanding shares). The company expects to complete the purchase within the next 12 months.
OUR RECOMMENDATION: AT&T is a buy.
AT&T recent coverage
BHP BILLITON LTD. ADRs, $36.09, New York symbol BHP, is a leading producer of iron ore, oil and natural gas, copper and coal. It operates in Australia, the U.S., U.K., Chile and South Africa.
Activist investment firm Elliott Management, which owns 4.1% of BHP, has announced several proposals to help unlock the company’s value. Those include incorporating BHP as a single corporation based in Australia (right now, the company is headquartered in both Australia and the U.K.); and spinning off its U.S. oil operations as a separate firm.
Elliott claims these moves, along with using BHP’s excess cash flow to buy back shares, would increase the stock price by about 50%.
The company has rejected Elliott’s proposals. It feels its U.S. oil business would struggle to raise capital without access to BHP’s strong balance sheet. As well, having its shares trade in Australia and the U.K. makes it easier for the company to issue stock as part of any future acquisitions.
OUR RECOMMENDATION: BHP Billiton is still a hold.
BHP Billiton recent coverage
PROCTER & GAMBLE CO., $90.03, New York symbol PG, is one of the world’s largest makers of household and personal-care goods. Major brands include Tide (laundry detergent), Pampers (diapers), Gillette (razors) and Crest (toothpaste).
Starting with the May 2017 payment, the company will raise its quarterly dividend by 3.0%, to $0.6896 a share from $0.6695. The new annual rate of $2.76 yields 3.1%. Procter has paid dividends for 127 years and has increased its payout annually for the past 61.
Meantime, activist investor Nelson Peltz—his firm Trian Partners owns 1% of Procter—continues to pressure the company to improve shareholder value. He wants it to set up its less-profitable businesses as separate companies and further cut its costs.
Procter already spun off its beauty products business in 2016. It’s also improving productivity at its remaining operations. Those moves should help it cope with the growing number of people who buy razors and other personal care items over the Internet.
Even if the company decides against more spinoffs, Trian’s involvement should continue to draw investor attention to Procter’s improving long-term prospects.
OUR RECOMMENDATION: Procter & Gamble is a buy.
Procter & Gamble recent coverage
MTS SYSTEMS INC., $46.25, Nasdaq symbol MTSC, makes equipment and software that manufacturers use to test the behaviour of materials, machines and structures. This helps them reduce production costs and errors. MTS also makes sensors for industrial equipment.
The company had to put off filing the earnings for its fiscal 2017 first quarter, ended December 31, 2016. The delay was due to its investigation of certain executives at its Chinese operations. Specifically, those individuals formed a new firm that competes directly with MTS. In response, the company has tightened its oversight procedures.
Now that MTS has completed its investigation, it has reported first-quarter earnings of $1.7 million, or $0.09 a share. That’s down 85.5% from $11.8 million, or $0.78, a year earlier.
The latest results include PCB Group Inc., which MTS purchased in July 2016 for $580.0 million. PCB makes sensors and instruments for measuring pressure, load, torque, shock and vibrations.
If you disregard costs related to the China investigation and the integration of PCB, the company earned $0.55 a share in the latest quarter. Revenue gained 10.4%, to $131.1 million from $118.8 million.
OUR RECOMMENDATION: MTS Systems is still a hold.
MTS Systems recent coverage
INTERNATIONAL FLAVORS & FRAGRANCES INC., $131.94, New York symbol IFF, makes over 38,000 compounds that improve the taste of food and the smell of consumer products.
The company has acquired Oregon-based Columbia Phytotechnology. Operating under the PowderPure name, this private firm has developed a patented drying process that removes water from (or desiccates) fruits and vegetables. That dried substance is then ground into powdered flavourings for commercial foodmakers.
IFF has not yet said how much it paid for this firm. However, the new operations will help it take advantage of growing consumer demand for natural and organic foods.
OUR RECOMMENDATION: IFF is a buy.
IFF recent coverage
Our next Hotline will go out on Friday, April 21, 2017.
