acquisition

These three technology firms continue to see slowing demand for their traditional, but still highly successful, products. In response, they’re shifting into related areas such as cloud computing. We feel their strong balance sheets and expertise will help them adapt, both through acquisitions and internal growth, but only two are buys right now. INTEL CORP. $34 (Nasdaq symbol INTC; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 4.7 billion; Market cap: $159.8 billion; Price-to-sales ratio: 2.9; Dividend yield: 3.1%; TSINetwork Rating: Above Average; www.intel.com) is the world’s leading chip maker. Its products power 80% of all personal computers....

With plans to boost production by 75% over three years, Alamos Gold is poised to benefit from a recovery in the gold price

SUN LIFE FINANCIAL $44.67 (Toronto symbol SLF; Shares outstanding: 610.6 million; Market cap: $27.2 billion; TSINetwork Rating: Above Average; Dividend yield: 3.5%; www.sunlife.ca) sells life insurance, savings, retirement and pension products to individuals and corporations. The company has $812.6 billion of assets under management and mainly operates in Canada, the U.S. and the U.K. It’s also expanding in Asia. In the three months ended September 30, 2015, Sun Life’s earnings per share rose 2.4%, to $0.86 from $0.84.

The company continues continues to expand in the U.S. At the same time, it’s cutting its risk by focusing on highly profitable niche markets with low capital reserve requirements.

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GREAT-WEST LIFECO $34.21 (Toronto symbol GWO; Shares outstanding: 997.4 million; Market cap: $34.1 billion; TSINetwork Rating: Above Average; Yield: 3.8%; www.greatwestlifeco.com) is one of Canada’s largest insurance firms. It also offers mutual funds and wealth management. Power Financial owns 67.1% of Great-West.

In the three months ended June 30, 2015, Great-West’s earnings per share rose 6.5%, to $0.66 from $0.63 a year earlier.

In recent years, Great-West has bought firms in Ireland and the U.S. that have added new business lines and boosted its profits. Growth by acquisition can be risky, but the company’s large size lets it take advantage of opportunities with strong chances of success.

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Over the past few decades, we’ve built a list of what we call “reasons for wariness”. No single one of these factors is a sure sign of a bad investment. But we watch out for them when analyzing investments, especially where we find more than one. When we spot reasons for wariness in a business model or a growth plan, we want to be sure the company understands the risk. One prominent factor on our list is growth by acquisition. A company can speed up its growth by buying other companies, rather than building on or duplicating its existing operations. But, while acquisitions speed growth, they also accumulate risk. After all, the seller of something always knows more about it than the buyer. When a company focuses on acquisitions for corporate growth, it assumes it can out-perform the current management of what it buys. It assumes it can raise the return by a wide enough margin to increase its earnings, over and above the acquisition’s cost....

In June 1999, the Loewen Group, North America’s second-largest funeral company, filed for bankruptcy protection in the U.S. and Canada. At the time, it operated 1,116 funeral homes and 429 cemeteries in North America and 32 funeral homes in the U.K.

Loewen Group grew rapidly by acquisition, but it made other moves that greatly added to its risk.

For one, it took on a lot of debt to finance its purchases, many of which it bought at inflated prices in bidding wars with larger rival Service Corporation International.

The new operations’ profits didn’t cover the extra interest costs. Loewen eventually had to sell many of them below cost to comply with its debt obligations.

Loewen Group’s debt stood at $2.3 billion when it filed for bankruptcy in 1999. That was high even in relation to its market cap of $3.4 billion at its stock-price peak of $57 in 1996. It was insurmountable in 1998, when the company’s interest costs of $182.4 million exceeded all its earnings and cash flow. That year, Loewen had negative cash flow (more money flowed out than in) of $34.3 million.

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Concordia Healthcare Corp., $48.01, symbol CXR on Toronto (Shares outstanding: 41.7 million; Market cap: $2.5 billion; www.concordiarx.com), is an Oakville, Ontario-based drug company that acquires and sells established treatments, mainly in the U.S. Concordia aims to acquire the rights to relatively small, mature products as opposed to the newer treatments larger pharmaceutical firms target. Its main products include Donnatal, for irritable bowel syndrome and acute enterocolitis; Zonegran, for epilepsy; and Photofrin, a cancer drug. In April 2015, the company paid $1.2 billion for 12 branded drugs and five generic products from Covis Pharma (all figures except share price and market cap in U.S. dollars). These include Nilandron (prostate cancer); Dibenzyline (vascular disease); Lanoxin (heart disorders); and Plaqueni (lupus and rheumatoid arthritis)....

CONAGRA FOODS INC., $40.85, New York symbol CAG, rose 5% this week after announcing it will spin off its commercial-food operations as a separate publicly traded company. This new business, called Lamb Weston, sells frozen potatoes and other vegetable products to restaurants and other food makers. It had $2.9 billion of revenue in ConAgra’s 2015 fiscal year, which ended May 31, 2015. The remaining operations will operate as Conagra Brands and will focus on the company’s branded consumer foods, including Chef Boyardee canned pastas, Hunt’s tomato sauce and Orville Redenbacher’s popcorn. It will also hold ConAgra’s 44% stake in the Ardent Mills flour-milling joint venture. In fiscal 2015, these businesses had $7.2 billion of revenue....

CALIAN TECHNOLOGIES LTD., $17.05, symbol CTY on Toronto, has won two more contracts for emergency response preparedness training, a new area for the company. These deals build on the first one it signed, with Bruce Power, earlier this year. No terms were disclosed. Under one of these new contracts, Calian will help Emergency Management British Columbia design, develop, conduct and evaluate an exercise in support of the province’s new Earthquake Immediate Response Plan. The other deal, with the City of Kingston, involves setting up a plan for simulating complex emergency situations and enhancing the city’s response procedures....

EXTENDICARE INC. $9.36 (Toronto symbol EXE; TSINetwork Rating: Extra Risk) (905-470-5534; www.extendicare.com; Shares outstanding: 87.7 million; Market cap: $833.7 million; Dividend yield: 5.1%) owns 57 longand short-term senior-care facilities that can house 8,118 residents. It also manages a further 95 residences that are home to 6,195 seniors. Extendicare also operates 47 ParaMed Home Health Care branches in six provinces. ParaMed’s 10,900 staff members provide nursing care and other forms of assistance to clients who live at home. In late 2014, the company sold its 156 U.S. facilities for after-tax proceeds of around $231.1 million U.S. Extendicare is now reporting improved results and has deployed the cash from the sale....