ShawCor Ltd. $19 – Toronto symbol SCL.A

SHAWCOR LTD. $19 (Toronto symbol SCL.SV.A; SI Rating: Average) makes sealants and coatings that protect oil and natural gas pipelines from corrosion. It also inspects pipelines for damage, and makes drilling and other equipment for the oil and gas industry. The company has used small acquisitions to enhance its market share in the past few years. For example, it recently launched a takeover offer for publicly traded Garneau Inc., which operates a pipeline coating plant in Alberta.

ShawCor owns 19% of Garneau, and the Garneau family owns 45%. The Garneau family is negotiating with ShawCor to retain the manufacturing operations, which make equipment for oil and gas producers. The deal was to cost ShawCor $22.6 million, but that includes the manufacturing business.

To put that figure in context, ShawCor earned $0.30 a share (total $21.8 million) from continuing operations in the three months ended December 31, 2005. That’s a big improvement over the $0.16 a share ($12.3 million) it made in the year-earlier quarter, when losses from its now-closed pipecoating facility in Alabama weighed on its earnings. Revenue rose 28.1%, to $291.7 million from $227.7 million.

It should take a year to absorb Garneau, so it can start contributing to ShawCor’s earnings by the second year. The new plant will also let ShawCor compete for more pipeline coating contracts, particularly in Alberta’s booming oil sands region.

ShawCor should earn $0.95 a share in 2006, and it trades at 20.0 times that estimate. It has increased its share repurchase authorizations by nearly 50%, which will increase future per-share earnings. The $0.09 dividend yields 0.5%.

ShawCor is a buy for aggressive investors.

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