JMRD Market Observer for February 10, 2017 – TSX Diversified Income Equities: Ranking 2017 Attractiveness

February 10, 2017

In This Week’s JMRD Market Observer

 

 

  • Reminder – Skate the Trail with Prusty4Kids

  • Special Situations: TSX Diversified Income Equities: Ranking 2017 Attractiveness

  • NBFM Forex (February 2017) – Can the loonie maintain the pace?

  • NBFM Monthly Equity Monitor – February 2017

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the week

  • Economic Calendar

  • Earnings Reports

 

 

Reminder – Skate the Trail with Prusty4Kids

 

As we mentioned in the January 20th Market Observer, The JMRD Team has been a proud supporter of Prusty4Kids, a foundation started by NHLer and London native, Brandon Prust, with the goal of helping kids lead happier and healthier lives.  Prusty4Kids is hosting a “Skate the Trail” event at Storybook Gardens in London on February 17 (next Friday night) from 6:00-9:00pm and we still has some passes available.  If you are interested in bringing your kids out for a skate that evening, contact Sue Lidbetter at sue.lidbetter@nbc.ca who will set aside some passes for you at our office.  Passes are available on a first come, first served basis. 

 

 

Special Situations (Thematic Research): TSX Diversified Income Equities: Ranking 2017 Attractiveness

 

  • We use a scorecard approach to assess our coverage list of TSX diversified yield equities, evaluating each on three criteria using multiple considerations:

 

  1. Income attractiveness – the company’s capacity to increase dividends/distributions, whether financial health can support higher payouts, management’s willingness / track record of dividend growth and the relevant free cash flow and current yields.
  2. Growth attractiveness – the relative organic profile, M&A accretion opportunity, capacity to finance, industry backdrop and y/y trajectory in free cash flow per share/unit.
  3. Valuation attractiveness –the relative valuation versus legacy levels and relevant peers, potential for a takeout/LBO transaction materializing and the attractiveness of forward EV/EBITDA and P/DCPS / P/AFFO multiples. Following this framework we rank our coverage list equites

 

Key Takeaways:

Using this framework our top 12 picks for 2017 are: 1) Crius Energy (KWH.un); 2) Exchange Income (EIF); 3) Parkland Fuels (PKI); 4) Enercare (ECI); 5) American Hotels (HOT.un); 6) New Flyer (NFI); 7) Tricon Capital (TCN); 8) Boyd Group (BYD.un); 9) Alaris Royalty (AD); 10) Morneau Shepell (MSI); 11) WPT Industrial (WIR.u); and 12) Crown Capital (CRN).

 

Note: Parkland Fuels, Enercare, New Flyer and Boyd Group are held in JMRD’s All-Cap Growth Basket

 

 

NBFM Forex (February 2017) – Can the loonie maintain the pace?

 

Highlights

 

  • The U.S. dollar took a breather in January, as the new administration in Washington doubled down on its protectionist rhetoric. Still-favourable yields suggest the USD could bounce back sooner rather than later, particularly if, as we expect, Trump delivers on his promise to provide fiscal stimulus. The Fed, which already expects three rate hikes this year (one more than markets expect), will then have to upgrade its growth forecasts because the last Summary of Economic Projections did not include fiscal measures.

 

  • While we’ve adjusted our near term forecast to reflect a stronger-than-expected loonie, we continue to expect oil prices to soften and hence for USDCAD to head towards 1.40 later this year. A depreciation past that cannot be ruled out, particularly if U.S.-Canada trade relations take a turn for the worse. Over the near term, however, the loonie could temporarily capitalize on the USD’s weakness.

 

See the full article.

 

 

NBFM Monthly Equity Monitor – February 2017

 

Highlights

 

  • World economic momentum seems to be returning, with a pretty dramatic effect on profit expectations. Global earning revisions have turned positive for the first time in six years, helping sustain the uptrend in equity markets. However, we do not see the current pace of gains as sustainable, not at this point in the economic cycle and not given current valuations. Upside there still is, but it will be limited.
  • Even if most of the new U.S. administration’s moves prove to be the right ones, an extension of the equity uptrend at this point in the cycle also requires that the Federal Reserve avoid becoming overly aggressive in its interest-rate normalization campaign. Fortunately, the market anticipates no more than two Fed rate hikes in 2017. We share this view.
  • Most market watchers say that P/E contraction is the norm when the Fed tightens. But that needs qualification: much depends on the point the economic cycle has reached. True, P/Es tend to decline as the cycle ages. But not early in the mature phase. The current mature phase is very young – just one month.
  • At this juncture we continue to recommend an asset mix tilted towards equities and away from bonds, with a higher-than-usual cash position. Though the current cyclical backdrop remains encouraging for equities, the outlook has been blurred by Washington.
  • To reflect the recent strengthening of the Canadian dollar, now trading near the bottom of the 1.30-1.40 range assumed in our Forex letter, we are making a geographical switch this month and reducing our exposure to the S&P/TSX in favour of U.S. equities.

 

See the full article.

 

 

JMRD Basket Corner

 

DIG Basket

 

Open Text (OTC) – A Day of Management Meetings. On Friday, we had the opportunity to meet investors with OpenText CEO Mark Barrenechea and CFO John Doolittle. This timely day of meetings came off the back of OpenText’s solid fiscal Q2 results and more importantly followed the recent closing of its biggest acquisition in history – EMC’s ECD (Documentum) for ~$1.6 bln. As you would expect, many of the questions from the day revolved around: 1) the integration plans for EMC ECD; 2) the environment for M&A; and 3) the potential for organic growth. What we heard throughout the day was consistent with our investment thesis. This note provides you with what we thought were the important takeaways from the day. The most important of which is a path to doubling EPS as we look ahead. If that weren’t enough, we see growing optionality for a valuation re-rating care of a number of potentially organic opportunities.

 

See the full article.

 

OpenText has been on a US$3 billion buying spree, and its CEO says it’s not done yet

 

SNC-Lavalin Group (SNC) – 407 ETR Q4/16 results – the road continues to surprise on the upside: Recall that SNC-Lavalin owns a 16.77% stake of the 407 ETR concession while Cintra Infrastructures S.A., a wholly owned subsidiary of Ferrovial S. A. (FER-MC, not covered), owns a 43.23% stake, and the remaining 40% belongs to Canada Pension Plan Investment Board. Approximately 41% (pre-tax; or $29.04/SNC share) of our $66.00/share SoTP SNC valuation is allocated towards the company’s 407 ETR stake. Actual results along with our expectations are presented below (note that there are no consensus numbers on the 407).

 

See the full article.

 

All-Cap Growth Basket

 

New Flyer (NFI) – New Flyer of America Inc., a subsidiary of New Flyer Industries Inc., the largest transit bus and motor coach manufacturer and parts distributor in North America, announced this week that Seattle’s King County Department of Transportation had awarded New Flyer with a contract for 222 60-foot articulated New Flyer Xcelsior(R) diesel-electric hybrid buses. The approximate value of the contract was $202M

 

U.S. Growth Basket

 

HD Supply (HDS) – HD Supply to explore sale of Waterworks unit – sources

 

Microchip Technologies (MCHP) – The Hot Stock: Microchip Technology Jumps 6%

 

Retirement Corner

 

 

 

 

Reads of the Week

 

 

 

 

  • NBF Hot Charts – Canada: Long-term economic growth stimulated by demographics Statistics Canada published data from the latest census showing that population growth, stimulated mostly by migratory increase, was the strongest among G7 countries between 2011 and 2016, a ranking also recorded in the prior intercensal. It is not a coincidence that Canada’s economy also registered the strongest growth among G7 countries during the past decade as real potential growth is strongly correlated with working–age population growth. As today’s Hot Chart shows, international migration could have lift potential GDP growth by almost one percentage point in 2016 because without net migration the 15-64 cohort would be declining at a 0.3% pace instead of a 0.6% rise. Which helps furthermore the Canadian economy is that among OECD countries, Canada has been receiving the highest proportion of immigrants with a high level of education which also explains why the country’s employment rate for residents born abroad is among the highest of the advanced economies.

 

See the full article.

 

 

 

 

 

 

Economic Reports

         

Monday February 13th – None

Tuesday February 14th – Canada National Bank/Teranet Home Price Index

Wednesday February 15th – Canada Manufacturing Sales; US Retail Sales, US CPI, US Empire State Index, US Industrial Production

Thursday February 16th – US Housing Starts, US Initial Jobless Claims

Friday February 17th – US Leading Indicators

 

 

Earnings Reports

 

Monday February 13th – Gluskin Sheff, Grenville Strategic Royalty, Student Transportation

Tuesday February 14th – AIG, CAE Inc.

Wednesday February 15th – Barrick Gold, Cineplex, Kinross Gold, PepsiCo, Sun Life Financial,

Thursday February 16th – Echelon Financial, Equitable Group, Fairfax Financial, Inter Pipeline, Superior Plus, Waste Management, TransCanada Corp

Friday February 17th – Deere and Co., Enbridge, Enbridge Income Fund, Chorus Aviation, Air Canada

 

 

Have a good weekend!

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