Pat McKeough responds to many requests from members of his Inner Circle for specific stock tips as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week we had a question from an Inner Circle member about one of Canada’s leading engineering firms. Genivar has grown geographically and by acquisition in recent years. Its business outside of Canada is growing and it has acquired over 50 firms in the past seven years. Pat examines both the opportunities and costs of Genivar’s ongoing acquisition strategy and assesses the company’s prospects for this year and next.
Q: Pat: My broker is recommending Genivar as a pick. How do you feel about this choice? Thanks.
A: Genivar Inc., (symbol GNV on Toronto; www.genivar.com), is one of Canada’s largest engineering-services firms by number of employees, with 15,000. It has over 300 offices in 35 countries.
The company provides consulting services for all stages of a project, including planning, design, construction and maintenance. It has clients in the public and private sectors.
Genivar first sold units to the public at $10 each and began trading on Toronto in May 2006. It converted from an income trust to a corporation on January 1, 2011.
The company continues to grow by acquisition: it has bought over 50 related firms since 2006. That has helped it cut its reliance on Quebec. In 2006, the province accounted for 90% of Genivar’s revenue. That has shrunk to less than 50% today.
On August 1, 2012, Genivar bought U.K.-based engineering firm WSP Group, which has 9,000 employees in 30 countries.
The company paid $442 million for WSP. To raise cash for this purchase, it sold $225 million of common shares to the public. It also sold a total of $197 million of shares to the Canada Pension Plan Investment Board (CPPIB) and Caisse de dépôt et placement du Québec. These sales increased the number of shares outstanding by 35%.
When Genivar completed the WSP Group purchase, the CPPIB owned 14.76% of Genivar, while the Caisse held 14.75%.
Gains in U.S., Europe and the Middle East offset weaker Canadian revenue
In the three months ended September 28, 2013, Genivar’s revenue rose 23.8%, to $490.5 million from $396.1 million a year earlier. WSP Group and other acquisitions accounted for 21.6% of the gain, while revenue from Genivar’s other operations rose 2.2%. Strong demand for the company’s services in the U.S., Europe and the Middle East offset weaker revenue from its Canadian operations.
Earnings gained 32.7%, to $21.5 million from $16.2 million. But due to the extra shares outstanding from the WSP acquisition, per-share earnings rose just 13.9%, to $0.41 from $0.36.
Genivar maximizes its sales by offering its services to existing clients. It cuts its costs by sharing administrative expenses, financing and employee benefits among its divisions. It continues to buy and integrate new companies.
On September 28, 2013, Genivar’s order backlog was $1.55 billion, or about 9.3 months of revenue.
Genivar pays quarterly dividends of $0.375 a share, for a 4.8% annualized yield. It pays out around 40% of its cash flow as dividends.
In the Inner Circle Q&A, Pat looks at the added risk stemming from Genivar’s policy of rapidly buying and integrating small companies. He also examines how the acquisitions have affected the company’s balance sheet as well as its earnings outlook for the rest of this year and for 2014. He concludes with his clear buy-hold-sell advice on this stock.
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