ATCO LTD.(Toronto symbols ACO.X (class I non-voting) $57 and ACO.Y (class II voting) $57; Income Portfolio, Utilities sector; Shares outstanding: 58.1 million; Market cap: $3.3 billion; Price-to-sales ratio: 1.0; Dividend yield: 1.9%; TSINetwork Rating: Above Average; www.atco.com) is a holding company. Its main subsidiary is 52.2%-owned Canadian Utilities (see CANADIAN UTILITIES LTD. – Toronto symbols CU $50 and CU.X $50).
ATCO recently grouped its businesses into 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 earned $1.02 a share (or a total of $59.1 million) in the three months ended September 30, 2010. That’s up 10.9% from $0.92 a share (or $53.3 million) a year earlier. These figures exclude one-time items, such as losses on hedging contracts. Regulators let ATCO’s utilities businesses increase their rates. As well, rising oil and mineral prices have prompted mining and energy firms to increase exploration. That has lifted earnings at ATCO’s structures business. Revenue rose 11.2%, to $761.1 million from $684.3 million.
Based on current prices, you can buy a share of ATCO for $57, and get roughly $56.50 worth of Canadian Utilities. That means you get ATCO’s non-utility businesses for just $0.50 a share.
This “holding-company discount” is why ATCO trades at just 11.8 times the $4.85 a share it will probably earn in 2010. ATCO’s lower dividend yield compared to Canadian Utilities has also depressed its p/e ratio. However, ATCO may break up in the next few years. That would unlock value.
ATCO is a buy. The cheaper, more liquid class I non-voting shares are the better choice.
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