ShawCor Ltd. $29 – Toronto symbol SCL.A

SHAWCOR LTD. $29 (Toronto symbol SCL.A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 74.0 million; Market cap: $2.1 billion; SI Rating: Average) makes coatings that protect oil and natural gas pipelines from corrosion. The company also inspects and repairs pipelines, and makes drilling equipment. In 2006, income from continuing operations rose 13.6%, to $1.25 a share (total $92.9 million) from $1.10 a share ($82.8 million) a year earlier. If you disregard an unusual tax recovery in 2005, income would have grown 44%. Most of the gain came from new, more profitable pipeline coating contracts and ongoing cost controls. Cash flow per share rose 7.3%, to $1.90 from $1.77. Revenue grew 5.0%, to $1.06 billion from $1.01 billion. The company gets 75% of its revenue from customers outside of Canada, and the higher Canadian dollar cut its 2006 revenue by $41.5 million. ShawCor is using its strong earnings to expand capacity. It recently invested $38 million to upgrade its plant in Camrose, Alberta so that it can take advantage of the development of the oil sands. ShawCor is also upgrading many of its 60 facilities around the world, particularly in areas with major offshore pipeline projects such as the UK and Indonesia. The company likes to use joint ventures to enter new markets. In 2006, it paid $9.1 million for half of a pipecoating facility in Brazil. The purchase should help ShawCor profit from new offshore oil exploration projects, while its expertise should help improve productivity at this business. ShawCor can comfortably afford these outlays. It ended 2006 with $309.3 million ($4.18 a share) in cash, and just $87.5 million (14% of shareholders’ equity) in long-term debt. The stock has moved up with oil prices in the past few years, and now trades at 20.4 times the $1.42 a share it will probably earn in 2007. That’s reasonable in light of its improving growth prospects and reputation in this niche industry. The $0.23 dividend yields 0.8%. High energy prices should continue to spur demand for ShawCor’s products and services, particularly as exploration companies shift their focus to remote areas like offshore oilfields. Plans to import liquefied natural gas will also spur more pipeline construction. ShawCor is a buy.

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