ATCO LTD. - Toronto symbols ACO.X [class I non-voting] $44 and ACO.Y [class II voting] $44

ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $44 and ACO.Y [class II voting] $44; Income Portfolio, Utilities sector; Shares outstanding: 115.1 million; Market cap: $5.1 billion; Price-to-sales ratio: 1.1; Dividend yield: 2.3%; TSINetwork Rating: Above Average; www.atco.com) holds 53.2% of Canadian Utilities (see page 53). The company also owns 75.5% of ATCO Structures & Logistics, which makes temporary buildings for construction, mining and energy exploration firms; Canadian Utilities owns the other 24.5%. In the three months ended March 31, 2015, the company earned $94 million, or $0.82 a share. That’s down 26.0% from $127 million, or $1.10. Revenue declined by 12.6%, to $1.1 billion from $1.2 billion.

Lower earnings at Canadian Utilities hurt ATCO’s profits. As well, the structures business completed two big contracts in late 2014. As a result, this division’s earnings fell by $11 million in the latest quarter.

However, ATCO recently started working on a $125-million contract to build worker shelters at the Wheatstone liquefied natural gas project in Western Australia. It expects to finish these buildings by the end of the year.

ATCO is also building a 16-kilometre pipeline that would pump natural gas near Tula, Mexico, to a local power plant. This deal is worth $50 million U.S., and the new line should start up later this year.

ATCO’s has special appeal due to its holding company discount: based on current prices, you can buy an ATCO share for $44 and get roughly $45 worth of Canadian Utilities. You might say this means you get the structures business, which provides around 20% of ATCO’s earnings, for free. The company has no plans to split itself up right now, but the chance of a spinoff adds appeal.

The stock trades at a moderate 14.9 times the $2.95 a share ATCO will likely earn in 2015. It also trades at a low 5.9 times its forecast cash flow of $7.49 a share. The $0.99 dividend yields 2.3%.

The class I (X) non-voting shares are more liquid than the class II (Y) voting shares.

ATCO class I stock is a buy.

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