October 4, 2015

I am currently working to add Fortis Inc. to our list. It’s a “pure-play” regulated electric and gas utility which owns a number of utilities in Canada and the U.S. (and a small amount further south). It looks like the rating will end up being Buy of (higher) Buy. It appears set for excellent earnings growth in the next few quarters.

Fortis is getting an extra boost from the lower Canadian dollar as it translated back U.S. dollar earnings. It made significant acquisitions of U.S. utilizes in the relatively recent past but at a time when the Canadian dollar was higher. The lower dollar will be a benefit to reported earnings and even more so to the reported book value per share.

Another company that will benefit from the lower dollar when it reports Q3 earnings is Stantec. Also CN rail, Valeant and Agrium. There are many other factors at play, but the currency impact will be favorable for these companies.

Another beneficiary will be Alimentation Couche-Tard, However it is an odd one in that it reports in U.S. dollars. The lower Canadian dollar will hurt its U.S. dollar reported earnings but if the earnings are translated back to Canadian dollars the currency impact will be favorable. Overall it will be unfavorable in form but favorable in substance. Substance is what matters though the market can sometimes fail to see substance in the short-term. Bombardier also reports in U.S. dollars and the same comments apply.

There is speculation that the Caiise Depot which is owned by the government of Quebec will possibly buy some equity shares in Bombardier such as in a private offering. The share price reaction, if that happens may depend on the price per share paid and also whether it is accompanies by the Bombardier family reducing the multiple of votes that the A shares have as compared with the B shares. The reaction of Bombardier’s debt and pref shares should be to increase if this equity injection occurs.

U.S. market commentators seem worried that the Q3 earnings reports will be weak due to currency impacts. This should not be a surprise but also it tends to create just a blip in earnings growth. In most cases where the currency has impacted the translation of profits from foreign operations (as opposed to profits from exports), it does not signal a downward trend in earnings since the impact on growth in EPS from foreign operations would be gone once the U.S. dollar stops rising. It does sort of move the long-term earning graph down but the upward slope or growth rate should resume once the currency stops moving. Of course growth could also be decreased by many other factors.