**September 12th Issue of The JMRD Market Observer**
In This Week’s Market Observer…
- JMRD 2014 Calgary trip
- Railroads – Strong long-term growth prospects support higher valuations for CN and CP
- Markets’ Review – August 2014
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD 2014 Calgary trip
In keeping with tradition, members of the JMRD Wealth Management Team will be travelling to Calgary next week for an annual due diligence trip. While in Calgary, Zach, Jaden and a handful of clients and acquaintances will be meeting management teams of ten different energy companies. Some of the notable companies held within our Diversified Income and Growth or All Cap Baskets that we will be meeting with are Whitecap Resources, Surge Energy, Canadian Energy Services and Bellatrix Exploration. We find this trip very educational and insightful because each year we have returned from Calgary with a new investment idea or two…or three. We rely on NBF Energy analysts when doing our work in assessing a company’s prospects but we also feel it is very important to sit face to face with the management teams of companies in which we invest because we’re able to better understand their businesses and their personalities, the latter being very revealing at times.
There will not be a Market Observer on September 19th but we will provide a full update on the trip to Calgary in the September 26th edition.
Railroads: Strong long-term growth prospects support higher valuations for CN and CP
A sector that has seen significant share performance and change over the last couple of years has been the Canadian railroads, notably CN Rail and CP Rail. Within this thematic note, NBF Transportation analyst Cameron Doerksen, highlights the reason for the outperformance and why the outlook remains strong for the sector.
Longer-term growth prospects for CN and CP remain robust
In this note we highlight the key factors behind our belief that robust railroad volume and revenue growth can continue through 2016.
- Strong outlooks for Intermodal, Crude-by-rail and U.S. economy-tied volumes
We see strong near-term and long-term growth for CN and CP from three key market segments. Firstly, international intermodal volumes should be boosted by U.S. economic growth in the short term and by the relative competitive position of Canada’s West Coast ports over the longer run. Domestic intermodal will also be boosted by economic activity and market share gains from trucks. Secondly, we see crude-by-rail as a sustainable business for the rails and also a long-term growth driver, especially as new rail terminal loading capacity comes on-line. Thirdly, other rail volumes tied to U.S. economic growth, such as lumber and autos, should see strength. Finally, even grain, which typically fluctuates year to year based on the harvest, could see ongoing strong volumes as record carry-out stocks in Canada and a good crop in the United States support shipments well into 2015.
- Supports valuation roll-forward to 2016
Based on the sustainable growth we see from these key market segments, we are comfortable rolling forward the basis for our valuation on CN and CP to 2016 from 2015 currently.
- We rate CN Sector Perform with a target of $85.00 (from $75.00)
We maintain our Sector Perform as the upside to our target is relatively modest, but given the strong outlook for the company, we believe that CN shares should remain a core holding for investors
- We rate CP Sector Perform with a target of $240.00 (from $199.00)
While our Sector Perform is maintained, we see the potential for further short-term gains in the stock as there are a number of upcoming potential positive catalysts
Markets’ Review – August 2014
U.S. equities were the talk of the street in August. The asset class was propelled into record breaking territory at month end, adding fuel to an already impressive five year stock rally that has invigorated markets since March 2009.
Interest rates are still low and all eyes are on U.S. Federal Reserve Chair Janet Yellen, who addressed the issue at the Jackson Hole conference in August. Despite the fact that the economy has come a long way since the financial crisis, Chair Yellen highlighted that it has yet to fully recover. Although significant improvements have been witnessed on the labour front, ambiguousness regarding how far the Federal Reserve is from achieving its goal of “maximum employment” suggests that the precise time and magnitude of future interest rate hikes still remain unclear.
On the domestic front, Bank of Canada (BoC) Governor Stephen Poloz addressed Canada’s respective labour force issue and reiterated that Canada does not have to follow the U.S lead in setting monetary policy. Though Canada recovered its job losses (from the financial crisis) at a faster pace than a host of nations, it has since then experienced a slowdown in its labour market. Though jobs are being created, Governor Poloz noted that most of these jobs aren’t full time (25% of jobs created this year were part time). With respect to growth, the BoC believes Canada has much more room to run.
With regards to growth-stricken Europe, European Central Bank President Mario Draghi hinted that a new round of asset purchases could be in the works, insinuating that the risk of doing nothing to counter the troubles in Europe far outweigh the risks of doing too much. Firms are reducing prices hurriedly, but retail sales have yet to pick up pace. What’s more is geopolitical uncertainty in Ukraine continues to play a role in stalling the recovery in the euro zone. Labour market disparities make the situation harder for the European Central Bank, who has been assigned the difficult task of tailoring a common policy that is fit for all of its euro zone countries.
JMRD Basket Corner
Crescent Point Energy (CPG) – “Crescent Point Woos U.S. Investors With Dividend Payout”
Pembina (PPL) – Pembina announced that they had secured additional long-term shipper commitments to underpin further capacity for its previously announced Phase III pipeline expansion. PPL will construct a new 16-inch diameter, 100 mbpd pipeline from Fox Creek, AB into Namao, AB and a new 12-inch diameter, 95 mbpd pipeline from Wapiti, AB into Kakwa, AB for ~$435 mln (in-service late 2016 to mid-2017). In aggregate with the original Phase III Expansion, PPL secured ~289 mbpd under contract – representing 69% of the initial combined capacity. Meanwhile, PPL’s secured growth capital program through 2017 now totals ~$5.3 bln.
Whitecap Resources (WCP) – Whitecap closed their recently announced $125M financing this week that was used to fund a $267M acquisition in Central Alberta. WCP is consolidating interests in a conventional oil pool that has long life assets and should provide a consistent and stable future cash flow stream with a low decline. The assets also encompass a number of important infrastructure investments which will aid in a cost-effective handling of growing production (two oil batteries, water disposal and pipelines).
Boyd Group (BYD.un) – Boyd announced a bought deal financing for gross proceeds of approximately $100M and in a separate announcement, said they have acquired a U.S. collision repair company with 7 locations in Louisiana for $35M. Boyd now owns 313 collision repair locations across 16 states and 5 provinces
Sealed Air Corp (SEE) – Credit Suisse updated their outlook for the company this week following an update with management. They view the company as one of the best investment opportunities in the Basic Materials sector, given the opportunity for significant margin expansion in the near and longer-term, potential for an acceleration in growth over the intermediate term and huge cash generation that go toward creating shareholder value
- “What aging audience means for the future of network television” (Yahoo Finance)
- “How much money can retirees safely withdraw?” (Globe and Mail)
Week at a Glance
Reads of the Week
- A good read ahead of Alibaba’s upcoming IPO: “The Jack Ma Way” (NY Times)
- “Buying Stocks Based on How Other People Feel” (Bloomberg)
- “Warren Buffett’s Right-Hand Man Reveals His Secrets for Success” (Motley Fool) and “The Secrets of Berkshire Hathaway’s Success: An Interview with Charlie Munger” (Wall Street Journal)
Monday September 15th – Canadian Existing Home Sales, U.S. Industrial Production, U.S. Capacity Utilization, U.S. Manufacturing Production
Tuesday September 16th– Canadian Manufacturing Sales
Wednesday September 17th – U.S. CPI, FOMC Rate Decision
Thursday September 18th – U.S. Housing Starts, U.S. Building Permits, U.S. Initial Jobless Claims
Friday September 19th – Canadian CPI, Canadian Wholesale Sales, U.S. Leading Index
Monday September 15th – None
Tuesday September 16th– FedEx Corp
Wednesday September 17th – Oracle Corp
Thursday September 18th – None
Friday September 19th – None