March 16, 2016

On Wednesday, the S&P 500 and the Toronto market were each up 0.6%.

The Canadian dollar rose over one cent U.S. after the FED left interest rates unchanged. The Canadian dollar is now at 76.4 U.S. cents. Oil rose after OPEC and certain countries agreed to meet regarding doing some price-fixing, I mean production curtailment. Oil is up a further amount in this evenings trading and sits at $39.13.

Canadian Western Bank was up 2.4% to $24.50. Its recent low was $19.26. Toll Brothers was up 2.5% to $28.28. Its recent low was $23.75.

Melcor released earnings after the close. Not surprisingly, earnings were lower in Q4 2015 than they had been in 2014. Revenues were down 16%, Net income was down 25%, Funds from Operations were down 37%. But the company was still profitable. They did not say much about the outlook except that the near-term was challenging while the company was well-positioned for longer term growth and success. They did cut the dividend from 15 cents to 12 cents per quarter. I was surprised at that. But the company actually has a history of adjusting its dividend up and down according to profitability. (But I believe more recently their goal was to maintain a stable or growing dividend.) A lower dividend may provide funds for share buy backs and that would be a better use for the cash.

Melcor is trading at 48% of book value and where that book value does not include any purchased goodwill. Assets are solid and the the debt appears to be modest. Certainly it is possible that the land and building asset values could decline due to the Alberta recession. But purchasing the equity at 52% of book value provides a significant margin of safety. The stock is trading at about 8.5 times my view of adjusted 2015 earnings (It’s 6 times GAAP earnings but the GAAP earnings need to be adjusted downward in this case).

I continue to believe that purchasing Melcor at half of book value is very likely to work out well in the long term. If it happens to trade lower due to the dividend reduction I will look to add to my position even though I already have a very large exposure to it.