Stockwatch – Michael Sprung’s Top Picks
Stockwatch – Encana Corporation: ECA-T, Owned by clients, Last Purchase December 16 2013 $19.19
Encana Corporation (TSE:ECA, Mkt cap 17.63B, P/E 20.69, Div/yield 0.08/1.26, EPS 1.15, Shares 741.00M) is successfully transitioning from a natural gas firm to a more liquids rich producer. Management has narrowed the focus of operations to five core areas. Acquisitions and divestitures have enriched the company beyond investors’ expectations.
The company is reportedly gearing up for the sale of its Deep Panuke natural gas project located off the coast of Nova Scotia. Encana has been divesting assets and buying new ones as it seeks to rebalance its portfolio. We continue to recommend ECA.
Stockwatch – Enercare Inc.: ECI-T, Owned by clients, Last Purchase March 13 2014 $10.23
Enercare Inc. (TSE:ECI, Mkt cap 802.19M, P/E 30.76, Div/yield 0.06/5.28, EPS 0.45, Shares 58.47M) owns and rents water heaters in Ontario and manages a cub-metering business in Ontario, Alberta and else where in Canada. Recently, management was disinclined to consider an offer in the $13.50 to $15.00 range from their largest shareholder just prior to announcing a complimentary and significant acquisition of Ontario Home Services from Direct Energy Marketing Limited. Concurrently, the Company issued $310 million in equity to finance the purchase. The market capitalization will increase to well over $1 billion and the acquisition will substantially increase cash flow.
Stockwatch – CAE, Inc.: CAE-T, Owned personally and by clients, Last Purchase March 19 2013 $10.20
CAE, Inc. (TSE:CAE, Mkt cap 3.74B, P/E 19.45, Div/yield 0.06/1.70, EPS 0.73, Shares 264.02M) provides simulation and modelling technologies primarily to the civil and military aviation industries. The Company also offers integrated pilot training services around the globe. The company continues to win contracts in both markets and the stock is reasonably valued at current levels.
CAE recently won contracts with an aggregate value of about $110m from global military aviation clients, including the air forces of Germany and New Zealand.
Stockwatch – Market Outlook
While economic conditions have improved in North America and more recently in the emerging markets, equities in North America have had a very strong run over the past few years. It is getting more difficult in the current market to identify stocks with great value characteristics. In this environment, taking some profits where securities have had large appreciation may be prudent. A larger weighting in cash can provide a good option to be deployed should any market setback occur.
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Mark Bunting: We have the top picks now for Michael Sprung, the President of Sprung Investment Management. And we’re looking at EnerCare ECI, what’s going on with this company lately. Usually pretty sleepy as a utility, but there’s a lot happening. Why are you choosing this?
Michael Sprung: Well, you know, it’s a company that certainly has been in the news little bit lately. Their larger shareholder that owns about 12% of them recently suggested that they’d like to have a data room, and they’d like to look at the company with the potential of buying it between $13.50 and $15. Management said, “Well, that’s not enough.” And then just a few days ago, they announced that they were buying the Consumer Services Division from Direct Energy which now gives them direct access to consumers in Ontario and so on.
So, this is a company that’s largely involved with water heaters and then they also run a submetering business which hits more provinces than just Ontario. And I think that this transaction that they’re making with Direct Energy is quite interesting. They’re issuing about $300 million worth of equity. So the market capitalization of this company I estimate is going to go from around $800 million to a billion one, a billion two which will put it on a lot more people’s radar screen. And in addition to that, it’s a very creative acquisition to cash flow. So I estimate per share, it’s going to be somewhere between 22% and 25% accrued to cash flow which also then puts the potential out there for dividend increases down the road.
So I think it’s an extremely well-managed company. And I think even though I did recommend it in January when it was at much lower levels than it is today, but I think the management has proved that the valuation metrics are in the company and so I wouldn’t be hesitant to still buy it today.
Mark Bunting: Next up is a CAE, the flight simulator company. Why is this one standing out for you?
Michael Sprung: Well, you know, again, it’s been doing better, but just recently, since their last quarter, they’ve actually announced about $120 million in new training contracts for training pilots and so on. But they also announced about $110 million contract for a military side of their business with New Zealand. So a lot of people, I think, think that over the last few years of military side particularly in the U.S. has been a little bit more constrained into what they would be purchasing. We’ve seen more activity in the civil aviation side. But going forward, it’s a company that continues to gain new business whether it would be in the military or the civil space. They’ve got a very small segment that’s diversified into other industries but it’s really not that material at this point in time.
Mark Bunting: And just a quick thought, literally, 15 seconds on EnCana which was also a prospect.
Michael Sprung: Sure. I think that the big thing here is that management over the last while, they’ve spun out the Prairie Sky. They’ve sold Bighorn to Jupiter. They acquired some property in Eagle Ford. It’s a company that’s got a good cash position of about 2.7 billion, I believe, and they’re soon going to have another couple of billion when the Jupiter transaction closes. So again, I think this is a company that has a good future going forward.
Mark Bunting: In Toronto, we have David. Hello, sir.
Mark Bunting: All right, what’s your question?
David: I was asking about Fairfax Financial, which is the Canadian version of Berkshire Hathaway and has outperformed them every year for five years.
Mark Bunting: All right, thanks, David.
Michael Sprung: Well, I have a lot of respect for Prem Watsa and Fairfax. When I started in the business, Prem was a portfolio manager and I was an analyst at the same insurance company. He is certainly a person who is a value-oriented investor, and I think he has built quite a good company with Fairfax. Their last quarter, they had fairly significant investment gains.
It is an insurance company so I would really like to see them have a better combined ratio overall than what we see, but the lines of insurance that they’re participating in can be quite volatile as well. The company has done fairly well lately. It’s back over $500,000 a share. I think that at current levels, if I was a very long-term investor, I might consider stepping in, but quite frankly, you could see this company price can move fairly significantly.
I don’t believe they have any intentions of splitting the shares so you’ve got a much more limited, I guess, market too in terms of who can buy it and who can participate. Overall, longer term, well-managed company, and I think that you really have to ask what is it you’re buying it for because it has about a 2% dividend yield and that dividend could increase down the road. I think really, you’re buying it because it works on the formula like Berkshire Hathaway. Year after year you try to maintain a return on equity over a cycle. You try to increase book value and the share price should follow book value.
Mark Bunting: David was talking about Fairfax outperforming Berkshire in the last five years. I’m assuming he was talking about the stock. I’m looking at Berkshire actually outperforming up about 99% over that time period, Fairfax, doing well too, up by 76% just by that measure. John is in North Bay with the next question. Hi, John!
John: Hi, my question through on Power Financial, two parts: buy, sell or hold, and secondly, the corporation description says they in fact are diversified and have holdings in Europe in builder supplies and concrete company. I’m wondering if you know anything about that alternate diversity that they have over in Europe. Thanks, bye.
Michael Sprung: Well, certainly, in terms of Power Financial, its biggest holding in Europe is Pargesa, which is a European bank. Pargesa has been the one part that has really stumbled a bit of late. In addition, they have Great-West Life and within Great-West Life, I think, Putnam has had its problems too, but we’ve seen the stock come back here from pretty low levels to the point now where I’d say I don’t know if I would call it a hold or I wouldn’t be tempted to buy in around the $35 level.
I think if you could buy it in the low 30s, you’re getting a relatively good deal at this point in time, I mean going forward here. We think earnings are going to be in the neighborhood of $3 this year, maybe growing to $3.30 next year. Return on equity in the company is around 14% thereabout. So it’s one in 1.4 times book. It’s a fairer value.
Power Corp I think is the alternative that you could look at that does bring a bit more diversification in but at any point in time, it’s really what —
You look at these companies and sort of what is the discount to the parts that they are trading at because they are holding companies and from time to time, one can seem to be a better buy than the other. Right now, I think you’re just getting a little bit more yield if you buy Power Financial than you would if you are buying Power Corp. So maybe that’s the way I would go if I was comparing the two of them.
Mark Bunting: All right then, a detailed answer there for you John. I hope you appreciate that. Next up is Henry who’s in Mississauga. Go ahead, Henry.
Henry: Yes. Thank you very much for taking my call. I’d highly appreciate it if you would — is to measure for Precision Drilling if he’s a buyer or seller. Thank you very much, good night.
Mark Bunting: Okay, thanks Henry, Precision Drilling.
Michael Sprung: Well, Precision Drilling, that’s a really good question. I think it’s very illustrative of what our position has been lately. I mean we’ve owned Precision Drilling for quite a long time. We’ve made a lot of money in it. Recently, we’ve taken profits around current levels and sold about half of our position. If we didn’t think that it still had scope going forward, we probably would have sold it all. So that tells you that A, we still like the company. We still think that they are going to prosper going forward. It’s just that, again, it was a case where we had such a big, big gain that we thought it was prudent to take some off the table at this point in time.
So they recently just announced an agreement with Schlumberger which is going to open up some new markets for them.
Mark Bunting: Right.
Michael Sprung: So I think that again, we’re dealing with a very well-managed company here. It’s come back from very low levels a year or two ago, and so I guess my view would be, we’re continuing to hold it. I don’t know if I would be jumping in at this point.
Mark Bunting: Okay, one last question here before we get to top picks. Erick is in Toronto. Good evening.
Erick: Yeah, hi. I like to play the large-cap oil stocks and particularly CNQ, but I’ve noticed, every time it hits a certain point, it drops right back down. I’m wondering if that’s not the kind of stock to play, but I’ve noticed the same thing happens to Crescent Point Energy. Can you give me your comment on this? Thank you very much.
Michael Sprung: Well, I think both of these companies are sort of companies that are really amongst the seniors within the oil and gas producers, and so they have a huge following. Canadian Natural Resources in particular, it’s always been extremely well-managed company. It’s really just a question of what do you pay for at any point in time. Lately, it’s had a very, very, very good run. I don’t think I would be running in to buy it right at these levels but certainly, it is a company that we don’t currently own but that at some point, we probably will own.
The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.