September 14, 2017

On Thursday, the S&P 500 was down 0.1% while Toronto was up 0.3%.

CRH Medical was up 11.6% to $3.47 in Toronto. It appears that some of the recent plunge in this stock was overdone.

Today I am looking at the reports from RioCan in preparation for an overdue update. Essentially this retail property REIT is down because of fears of the death of bricks and mortar retail, The CEO of RioCan believes such death rumors and fears are greatly exaggerated. I have not done the analysis yet but  I think he is probably right and that RioCan is attractive. RioCan has a yield of 5.8% and while the distribution has not increased since 2012, there likely will be increases at some point. On that basis the investment looks attractive. I have no real ability to predict the future of bricks and mortar retail. But I do think the RioCan CEO is both knowledgeable and sincere in downplaying that fear.

Yesterday, I was mentioning Stantec. In my files I have an old summary page from its 1998 annual report that shows that its gross revenue in 1994 was $89 million and net income was $3.9 million. 22 years later, in 2016, the gross revenue was $4,300 million and net income was $130 million or $181 million adjusted for certain amortization and acquisition costs. By any standard, this is HUGE growth. The share count however was up by about 155%. The shares that existed in 1994 represent about 39% of today’s shares. The adjusted earnings per share have grown from $09.25 to $1.69. Again that is a huge increase even over 22 years. Perhaps surprisingly that is 14.1% per year which may not sound all that high.

The fact is that compounding earnings per share at double digit figures for two decades produces remarkable gains. And every extra 1% in the compound return adds tremendously to the tally over two decades.

Anytime we can find a company that seems likely to continue to compound earnings per share at double digits for a decade or more it will turn out to be a great investment unless the shares are trading at a very high P/E ratio.

Stantec, at the end of 1994 was trading at $0.9375 (spit-adjusted) or 10.1 times trailing earnings. In retrospect, we now know that would have been a fantastic buy-and-hold stock. The stock has compounded up at an average 17.8% per year (faster than earnings per share growth due to an increase in the P/E ratio) . But even if it had been trading at 25 times earnings, it still would still have been a very good investment with a compounded annual growth rate of 13.0%.

For long term holdings that will really build wealth it is very important to select companies that can grow earnings per share at high rates. It is less important that they be purchased at bargain prices (though at some point a too high price ruins the investment).

Stantec is still growing in the same way that it has for decades. There are no guarantees, but it seems reasonable to assume that it could continue to grow earnings per share at 10% or more per year. Its P/E ratio at 19 is not the bargain it was in 1994 or 1999 but is also not unreasonably high.

If Stantec is purchased today, the wisdom of that should not be judged on the share price in six months or a year but rather based on the share price a decade from now.