February 12, 2015

On Thursday the S&P 500 rose 1.0% and Toronto rose 0.5%

Notable gainers included Canadian Western Bank up 1.7%, Boston Pizza Royalties up 1.7%, Wells Fargo up 1.8%, Toll Brothers up 1.5% and Bank of America up 1.9%.

America Express was down 6.4% on news that American express would no longer be the exclusive accepted card at Costco’ U.S. stores and will no longer be accepted. This decline may be over-done. It does not take effect until next year. Apparently is impacts 8% of the spending on Amex cards. That is a lot. But I suspect Costco has a super-thin merchant fee and so the revenue loss to Amex could be significantly less than 8%. But given fixed costs perhaps the profit loss will be significant. And, Costco may have been the only reason a lot of people carried Amex. But Amex will likely continue to survive and thrive. Costco is in a powerful negotiating position and will no-doubt squeeze Visa and Mastercard in a bidding war for an ultra-thin merchant fee.

The big news today was that Bombardier has kicked its CEO upstairs to be executive Chairman and has hired a new CEO from outside the company and will issue shares and debt.

I had emailed the company on January 15, under the subject “New CEO Needed?” and included the following sentence:

“Maybe get a new CEO and bite the bullet and issue a pile of new shares while eliminating the multiple voting shares. It’s time.”

I am not sure that anyone other than investor relations saw my email. I am sure a lot of people were suggesting a new CEO. I also suggested they clear out some of the six or so family members on the Board.

The common shares fell 11.5% to $2.60 and the Series 4 preferred shares that I follow fell 13% to $15.30. The common dividend has been eliminated but the preferred share dividends continue.

They hope to issue $600 million in new common shares. That is going to increase the share count by about 25%. Such share issues are usually termed “dilutive” because they spread profit over more shares. But, it is usually accretive to book value per share and that will be the case here.

If they can issue these shares in the $2.50 range then it seems quite possible that the pref shares will do well since the added common equity adds some “cushion” to protect the value of the pref shares. However, they have the right to call in these pref shares and replace them with common shares. That might be beneficial since pref holders would receive $25 worth of common shares per pref share. Except however the maximum common shares tio be received is capped at 12.5 and so if the common go much below $2.00 there is a danger of a disadvantageous conversion.

All in all this is a risky company. It should be considered only as a quite speculative investment and that includes both the common and preferred shares.