SNC-Lavalin Group Inc. $32 – Toronto symbol SNC

SNC-LAVALIN GROUP INC. $32 (Toronto symbol SNC; SI Rating: Average) specializes in building large public works projects, such as water treatment plants, roads and bridges. It often buys small engineering firms to expand its share of the world engineering market.

SNC also operates public facilities under long-term concession contracts. The largest of these is its 16.77% stake in Highway 407, a toll highway just north of Toronto that uses electronic tracking devices to toll vehicles automatically instead of traditional toll booths.

The highway is still losing money, but losses shrank by 68% in 2005. This investment should soon earn a profit, particularly now that the highway’s owners and the Ontario government have settled their dispute over recent toll hikes.

The company also gets roughly 45% of its revenue from customers outside of Canada. The rising value of the Canadian dollar against many of the world’s currencies means that income from these projects translates into fewer Canadian dollars. However, SNC uses foreign exchange hedge contracts to cut its currency risk.

The stock has more than tripled in the past three years, and now trades at a high 33.3 times its likely 2006 earnings of $0.96 a share. It’s also expensive at 25.4 times its 2005 cash flow of $1.26 a share. That increases the chances of a sharp drop if SNC runs into trouble. The $0.28 dividend yields 0.9%.

SNC-Lavalin is a hold.

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