SNC-Lavalin Group Inc. $33 – Toronto symbol SNC

SNC-LAVALIN GROUP INC. $33 (Toronto symbol SNC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 151.0 million; Market cap: $5.0 billion; SI Rating: Average) is a leading Canadian engineering and construction company. SNC specializes in large-scale public works projects, such as roads, bridges, transit systems and water treatment systems. It also builds chemical plants and electrical power systems. In the past few years, SNC has expanded into concessions. These are public facilities that it builds and runs on behalf of governments. SNC’s biggest concession project is its 16.77% interest in Highway 407, a toll highway just north of Toronto. Concessions give SNC predictable revenue streams, which cuts its reliance on new projects for growth. In 2006, SNC earned $0.89 a share (total $136.6 million) from continuing operations, up 29.0% from $0.69 a share ($105.6 million) a year earlier. Revenue grew 50.7%, to $5.2 billion from $3.45 billion, due to new contracts for petrochemical plants and infrastructure products. Higher income from Highway 407 also contributed to the improved earnings. Thanks to the higher profits, SNC raised its quarterly dividend 28.6%, from $0.07 a share to $0.09. The new annual rate of $0.36 yields 1.1%. The bankruptcy of a key supplier to its power plant operations will hurt SNC’s profit in the first quarter of 2007. But an $83 million after-tax gain on the recent sale of a subsidiary that makes bullets and other types of ammunition should help offset this setback. International operations provide roughly 40% of SNC’s total revenue. Besides currency risk, many of these projects are in politically unstable areas of Africa and Asia, which increases SNC’s insurance costs. But the company has a long history of operating overseas, which helps it hold down losses from foreign operations. SNC’s improving earnings in the past few years have helped it strengthen its balance sheet. Nonrecourse long-term debt (not secured by specific assets) was just $104.5 million or 12% of shareholders’ equity at the end of 2006. SNC also had $1.1 billion or $7.32 a share in cash. The stock has tripled in the past four years, mostly due to SNC’s involvement with the cyclical energy and mining industries. But SNC is expensive at 32.0 times the $1.03 a share it will probably earn in 2007. SNC-Lavalin is a hold.