August 4, 2019

Markets fell on Friday probably due to Trump’s escalating trade war with China and disappointment that the FED did not promise more interest rate cuts.

The S&P 500 was down 0.7% and Toronto was down 0.6%.

Restaurant Brands was one of the few gainers. It was up 6.1% after releasing Q2 earnings that were better than expected. See our update on that company.

Melcor was down 4.2% to $12.65 after releasing (as expected) weak Q2 earnings but after also (unexpectedly) cutting the dividend from 13 cents to 12 cents. The number of shares traded was low as usual at less than 9,000 shares. The daily average is 3,500 shares which would represent an annual turnover of 2% which is incredibly low. Book value per share is $31.76. Despite a very soft market for home building lots (which is expected to continue) they did manage to sell 106 lots in Alberta Q2. This was down from 144 in Q2 last year. Their investment properties remains stable and brings in reliable income and development of new investment property buildings is continuing at a good pace. These two divisions allow the company to remain profitable and cash-flow positive despite the much softer housing market. There were no lot sales in the U.S. where lot sales tend to be done in large infrequent batches. There will likely be some U.S. lot sales in either Q3 or Q4.

Melcor is a discounted “asset play” in that its shares trade at 40% of book value and the assets are solid consisting largely of land (which unfortunately generates no income until sold) and the income investment properties. It seems that the controlling family ownership prevents other companies from taking over Melcor in order to basically buy these hard assets at a huge discount. The shares may continue to languish well below book value until and unless earnings improve sharply. Given this discount, I could not resist adding a few more shares to my position although I already have really too much exposure to this company. We cannot count on Melcor’s management to do anything to to boost the share price such as by doing a substantial share buy back. They are very conservative and will likely hang onto cash and wait for earnings to improve. Perhaps progress on the pipeline front will result in a resumption of stronger housing demand. Despite the softer economy, Alberta’s population increased by 1.7% or about 75,000 people in Q2 mostly due to births far exceeding deaths. In Q1 the net immigration was 10,000 people.

The next update will be for TFI International. Its stock price has fallen despite strong earnings growth. Trading at a P/E of 10 and it has been growing strongly. I will be adding to my position.