Investors Digest – ‘Best Buys’ from Michael Sprung

Investors Digest of Canada recently interviewed Michael Sprung. Here is the full text as published in this week’s issue.

You’ll often hear start-ups being touted as nimbler and more innovative than older companies. But there are advantages to a company having been around for a while. Just ask Michael Sprung.

Investors Digest - Precision Drilling Corp bench strength technical managerial

Investors Digest – Precision Drilling has bench strength from both a technical and managerial point of view.

Mr. Sprung is president of Sprung Investment Management in Toronto. And he’ll tell you that because Precision Drilling Corp. (PD-TSX, $11.36) has been in business for many years, it has bench strength from both a technical and managerial point of view.

Mr. Sprung is particularly impressed with Kevin Neveu, Precision’s president and CEO, as well as with Rob McNally, its executive vice president and chief financial officer.

But Mr. Sprung also lauds Precision’s decision to broaden its footprint, singling out the service and marketing deal it inked in July with Schlumberger, the world’s biggest oilfield services firm.

Not only, he says, does the deal give Precision more visibility, but it also gives it access to Schlumberger’s technology.

Mr. Sprung admits that since topping $15 a share in July, Precision has pulled back to where it’s now selling at roughly 1.5 times its book value.

But as oil drilling in North America picks up over the next few years, he believes Precision could potentially top $15 and even $17 a share. And since the company’s downside is roughly $9.50, it boasts very good upside relative to its downside.

Meanwhile, at 0.46:1, Precision has a good ratio of debt to equity. It’s also well capitalized. And at a little over two per cent, the company has a modest yield.

Headquartered in Calgary, Precision is Canada’s biggest drilling and oilfield services firm, as well as a big player in the U.S.

For the three months ended June 30, Precision swung to a net loss of $7.2 million or $0.02 a share, from net income of $473,000, or zero cents a share, for the similar period in 2013.

But revenue presented a brighter picture, increasing to $475.2 million from $378.9 million, while adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) grew to $129.7 million from $88.2 million.

For the six months ended June 30, Precision’s net earnings inched up to $94.4 million, or $0.32 a share, from $93.8 million, or $0.34 a share, for the similar period in 2013. Revenue was also higher, rising to $1.1 billion from $974.6 million, while adjusted EBITDA grew to $367 million from $303.4 million. For Mr. Sprung, Precision Drilling is a best buy.

Mr. Sprung may like a meat-and-potatoes outfit such as Precision that caters to one of Canada’s primary industries. But he also has a soft spot for a firm like CAE Inc. (CAE-TSX, $13.68) whose flight simulators for training pilots are definitely high tech.

Investors Digest CAE strong demand hardware software world airlines replace old planes new ones

Investors Digest – CAE – strong demand as airlines continue to replace old planes.

For one thing, he says, CAE should log a strong demand for both its hardware and software as the world’s airlines continue to replace old planes with new ones. Moreover, the company stands to benefit from increased demand for training pilots of business jets, as sales of such aircraft rise with an improving U.S. economy.

Mr. Sprung admits that because of America’s cutbacks in defense spending, CAE will do less business selling simulators for training military pilots. But he notes that because of a deal it recently inked with General Atomics, a California-based maker of surveillance aircraft, CAE will now be training the operators of drones.

And since General Atomics boasts 24 per cent of the U.S. drone market, CAE’s deal is obviously significant.

In the meantime, CAE has a strong balance sheet; indeed, at roughly 35 per cent, its debt-to-capital ratio is well below the cut-off of 50 per cent, Mr. Sprung notes. Moreover, in Marc Parent, the company has a president and CEO with years of experience in the aviation industry.

Then, too, CAE is fattening its order book, having regularly announced new contracts over the past few months. For Mr. Sprung, CAE is also a best buy.

For the three months ended June 30, CAE’s net income fell to $41.6 million, or $0.17 a share, from $45.4 million, or $0.17 a share, for the similar period in 2013.

But revenue was higher, rising to $526.2 million from $520.1 million, while gross profit fell to $136.5 million from $138.3 million. Operating profit, however, was up, rising 16.4 per cent to $71.7 million.

© Copyright 2014 by MPL Communications Inc., Reproduced by permission of Investors Digest of Canada, 133 Richmond St. W., Toronto, ON   M5H 3M8. Sign up for free investment reports here>>

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