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ShawCor Ltd. $25 – Toronto symbol SCL.A

SHAWCOR LTD. $25 (Toronto symbol SCL.A; Aggressive Growth Portfolio, Manufacturing & Industry sector; SI Rating: Average) makes sealants that protect oil and natural gas pipelines from rust and other forms of corrosion. The company also inspects and repairs pipelines, and makes specialty cables and wires.

In the three months ended September 30, 2006, ShawCor’s earnings from continuing operations fell 52.2%, to $0.22 a share (total $16.6 million) from $0.46 a share ($34.7 million) a year earlier. However, the drop was entirely due to one-time items. The latest quarter included a $5.4 million charge related to ShawCor’s decision to scale down its operations in Nigeria due to political instability. The year-earlier earnings included an unusual $18.4 million tax gain.

Revenue grew just 2.6%, to $245.3 million from $239.2 million, due to the timing of several major contracts. The recent rise in oil prices has spurred strong demand for ShawCor’s products and services, and the start-up of new contracts should increase its fourth quarter revenues.

Earlier this year, ShawCor had to drop its plan to merge with Garneau, Inc., which provides pipecoating services to oil sands developers in Alberta. Competition regulators felt the purchase would have given ShawCor an unfair advantage.

ShawCor still aims to capture a bigger share of this fast-growing market, and now plans to build a new $30 million pipecoating facility in Camrose, Alberta next to its existing plant. The new plant should begin operations in mid-2007. Its extra capacity will help ShawCor compete for new contracts.

The company is also expanding its operations outside of Canada, which supply 80% of its revenue. It recently paid $8.6 million for a 50% stake in a Brazilian pipeline coating company. This business nicely complements ShawCor’s other Brazilian operations, and will help the company profit from increasing offshore exploration in the region.

ShawCor’s strong earnings and cash flow let it repurchase $7.8 million worth of its shares in the first nine months of 2006. The company will probably increase its $0.18 dividend (0.7% yield) early next year.

The stock now trades at 22.9 times its likely 2006 profit of $1.09 a share, and at 15.1 times its forecast cash flow of $1.66 a share.

ShawCor is a buy.

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