Every Tuesday we bring you “Best Canadian Stocks” from one of our three newsletters featuring Canadian stocks—The Successful Investor, Stock Pickers Digest and Canadian Wealth Advisor. Today we look at how one Canadian growth stock continues to build on the unique service it provides to the oil and gas industry.
This Canadian growth stock provides a hard-to-replace service to oil and gas producers. That gives it a big advantage, particularly as oil prices recover. Future gains in crude could also spur its earnings and give it more room for dividend hikes.
SHAWCOR LTD. (Toronto symbol SCL; www.shawcor.com) makes sealants and coatings that keep oil and natural gas pipelines from rusting. This business supplies 90% of its revenue. The remaining 10% comes for making industrial products, like electrical wire and protective sheaths.
The company recently won two contracts to coat pipelines that will pump natural gas to various locations in northeastern Argentina. The total value of these deals—$55 million
U.S.—is equal to 3% of the company’s 2014 revenue of $1.9 billion (Canadian). ShawCor expects to complete these jobs in early 2016.
Last year, the company won contracts to coat underwater pipelines for the South Stream Pipeline project, which pumps natural gas from Russia under the Caspian Sea to Turkey. From there, other pipelines pump the gas to Italy and into Europe.
The pipeline’s operators suspended construction in late 2014, but they have recently restarted the project. ShawCor now expects to complete these jobs in the second half of 2015. The company has resumed work on one contract worth $65 million. A second job, worth $60 million, is still suspended.
Hidden value in plain sight
Corporate balance sheets sometimes fail to reflect some very valuable assets. In The Successful Investor Pat McKeough seeks out hidden value that brings spectacular gains where many others fail to look—in well-established dividend-paying stocks. Like the real estate assets whose value Loblaw and Canadian Tire unlocked when they spun them into a REIT.
Strong reputation should help ShawCor expand its $703 million backlog
ShawCor’s revenue fell 1.5% in the three months ended March 31, 2015, to $471.9 million from $479.1 million a year earlier. That’s mainly because the company coated fewer pipelines. However, favourable exchange rates added $16.2 million to its revenue in the latest quarter.
Earnings fell 39.0%, to $37.8 million, or $0.58 a share, from $61.9 million, or $1.03. Aside from the lower revenue, ShawCor completed a highly profitable contract in the same quarter last year. These were the main reasons for the lower earnings.
As of March 31, 2015, ShawCor’s backlog was $703 million. Its strong reputation should keep helping it win contracts; it has submitted a total of $1 billion worth of bids on new jobs.
The company will likely earn $1.86 a share in 2015, down 40.8% from 2014. The stock trades at a still-reasonable 21.0 times that depressed earnings estimate. The $0.60 dividend yields 1.5%.
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