November 12, 2015

On Thursday, the S&P 500 fell 1.4% and Toronto was down 1.6%.

Valeant was down 6.2%. Based on my view of adjusted earnings as of Q2 (which was a lower number than the company provided as I did not agree with all of their add backs) Valeant is trading at 11.6 times earnings which would seem to be attractive. However, we don’t know how much the earnings will be hit by their troubles. This company is likely to continue to be volatile. My own concerns about trusting management have certainly not gone away. Overall, this is a highly speculative company and I am not too interested in buying. If I did buy shares I would take only a small speculative position.

The Canadian Western Bank pref shares were down 4.2% to $19.80 and seem attractive.

Canadian Tire released earnings which I think it is fair to say were much better than expected – a blowout quarter. The shares rose 2.1% on a day when very few stocks were up. I continue to be surprised that they are not being hurt by the lower dollar as they indicate they have found offsetting savings in purchasing and in cost control. I still think there may be some delayed impact as merchandise being sold in Q3 may have been purchased earlier this year or the price may have been contracted for when the dollar was higher. Based on the numbers Canadian Tire would have a rating of Buy. Listening to the conference call management sounds very confident and they believe the shares are under valued.

Stantec is updated and rated Buy at Canadian $32.75 and U.S. $24.66. Stantec has seen a significant slowdown in its oil and gas related business to the point where this dropped from 25% of revenue down to 15%. But acquisitions and growth in other business areas and a huge boost from the lower dollar allowed Stantec to post an adjusted earnings per share gain of 7% in Q3. The only adjustment is that I add back amortization of client relationships and backlog because those are like goodwill and in reality are not declining in value. Stantec may struggle to show much growth in the next few quarters but its business model of (significant) growth by  acquisition along with (usually) modest organic growth remains in place and I expect this company to continue to be a good or very good investment.

It’s interesting to note that Stantec’s operations in the U.S. benefit immediately from the lower dollar in that the revenue and profit is translated back to Canadian dollars at a higher rate. In contrast Canadian manufacturers that sell into the U.S have often not seen an immediate benefit. The reason for that may be that the manufacturers are pricing in Canadian dollars. In that case it is their U.S. customers who get the immediate benefit. Over time these manufactures will likely gain market share against U.S. competitors or can raise their prices to U.S. customers.