acquisition

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 a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “U.S. Stock Picks” on Thursday.

This week an Inner Circle Member asked us about a Canadian company that’s an international leader in the aircraft parts industry. Héroux-Devtek is the world’s third-largest maker of landing gear for aircraft, with clients such as Boeing, Embraer and Bombardier. Pat considers the company’s rising earnings in light of a recent acquisition and a new contract with Boeing. He also looks at the impact of shrinking military budgets around the globe on Héroux-Devtek’s prospects.

Q: Pat: What is your opinion on Héroux-Devtek Inc.? Best regards.

...

MITEL NETWORKS $11.35 (Toronto symbol MNW; TSINetwork Rating: Extra Risk) (613-592-2122; www.mitel.ca; Shares outstanding: 99.9 million; Market cap: $1.1 billion; No dividends paid) has reported its third quarter of results that include Aastra Technologies, a Stock Pickers Digest recommendation that Mitel acquired in a friendly takeover on January 31, 2014. In the latest quarter, Mitel’s revenue jumped 101.2%, to $272.4 million from $135.0 million a year ago (all figures except share price in U.S. dollars). Most of the increase came from Aastra. Without one-time items, earnings gained 134.6%, to $19.0 million from $8.1 million. However, earnings per share rose just 28.6%, to $0.18 from $0.14, as the company issued new shares to pay for Aastra....

LEON’S FURNITURE $15.20 (Toronto symbol LNF; TSINetwork Rating: Average) (416- 243-7880; www.leons.ca; Shares outstanding: 71.0 million; Market cap: $1.1 billion; Dividend yield: 2.6%) reported sales of $629.2 million in the three months ended September 30, 2014, up slightly from $628.6 million a year earlier. Earnings gained 25.4%, to $27.3 million, or $0.38 a share. A year earlier, Leon’s earned $21.8 million, or $0.31 a share. Growth by acquisition can be risky, especially with a deal as big as The Brick purchase. However, Leon’s is doing a good job of integrating The Brick. It’s also finding savings by combining both companies’ distribution networks and computer systems....

NEW GOLD $4.71 (Toronto symbol NGD; TSINetwork Rating: Speculative) (888-315-9715; www.newgold- .com; Shares outstanding: 504.0 million; Market cap: $2.4 billion; No dividends paid) has four mines: the Mesquite project in the U.S., Cerro San Pedro in Mexico, the Peak mine in Australia and the New Afton mine in B.C. New Gold also owns 30% of the El Morro copper/ gold project in Chile, 100% of the Blackwater property in B.C. and 100% of Ontario’s Rainy River project. In the three months ended September 30, 2014, New Gold’s cash flow per share rose 60.0%, to $0.16 from $0.10 a year earlier. Gold production fell slightly, to 93,367 ounces from 94,038. But an 8.2% rise in copper output from New Afton and lower overall costs increased New Gold’s cash flow....

COMPUTER MODELLING GROUP $12.59 (Toronto symbol CMG; TSINetwork Rating: Speculative) (403-531-1300; www.cmgl.ca; Shares outstanding: 78.8 million; Market cap: $990.2 million; Dividend yield: 3.2%) sells software and consulting services that help oil and gas producers use advanced recovery techniques to get more out of their wells. In the quarter ended September 30, 2014, Computer Modelling’s revenue rose 14.8%, to $19.7 million from $17.2 million a year earlier. Earnings gained 33.3%, to $7.5 million, or $0.09 a share, from $5.6 million or $0.07. The company cut its costs, pushing its earnings higher. Computer Modelling holds cash of $65.4 million, or $0.83 a share, and has no debt. The stock yields 3.2%....

Student Transportation Inc., $7.17, symbol STB on Toronto (Shares outstanding: 83.2 million; Market cap: $596.3 million; www.ridesta.com), is North America’s third-largest school bus operator, with more than 11,000 vehicles in Canada and the U.S. In its fiscal 2015 first quarter, which ended September 30, 2014, Student Transportation’s revenue rose 21.0%, to $88.5 million from $73.1 million a year earlier. The company lost $8.8 million, or $0.11 a share, in the latest quarter, unchanged from a year earlier. Student Transportation typically loses money in its fiscal first quarter because it includes the summer break. The stock yields a high 7.8%. Student Transportation has paid dividends for 118 consecutive months, and its payout appears safe for now. But its continued rapid growth by acquisition adds risk, as does its somewhat high $301.9 million of debt, which equals 51% of its market cap. It also operates in a competitive business....

Héroux-Devtek Inc., $11.40, symbol HRX on Toronto (Shares outstanding: 35.9 million; Market cap: $409.6 million; www.herouxdevtek.com), is the world’s third-largest maker of landing gear for aircraft, particularly helicopters and small jets. It also makes metal enclosures for airborne radar and other electronic equipment. Customers include Boeing, Sikorsky, Bombardier and Embraer, as well as various militaries. About 75% of Héroux-Devtek’s sales come from outside of Canada. In February 2014, the company paid $138.8 million for U.K.-based landing gear maker APPH Ltd., which has four plants in the U.K. and one in Wichita, Kansas....

Surge Energy, $6.26, symbol SGY on Toronto (Shares outstanding: 219.8 million; Market cap: $1.4 billion; www.surgeenergy.ca), produces oil and gas in central and northwestern Alberta and southwestern Saskatchewan. Its output is 85% oil and 15% gas. In the three months ended September 30, 2014, Surge produced 20,327 barrels of oil equivalent a day, up 69.3% from 12,008 barrels a year earlier. Acquisitions—including Longview Oil Corp., which Surge bought for $430 million in June 2014—were the main reason for the gain. Longview’s properties are near Surge’s holdings in southeastern Saskatchewan and central Alberta. Cash flow jumped 60.4%, to $71.3 million from $44.5 million, as the increased output and higher natural gas prices offset lower oil prices. However, per-share cash flow fell 10.8%, to $0.33 from $0.37, as the company issued more shares to pay for acquisitions, boosting the total number outstanding by 79%....

CHEMTRADE LOGISTICS INCOME FUND, $21.40, symbol CHE.UN on Toronto, is one of North America’s largest providers of removal services for resource firms, such as oil refineries and base metal processors, whose operations create sulphur, acid and other by-products. Chemtrade converts these substances into useful chemicals, like sulphuric acid. The company reported that its revenue rose 56.9% in the quarter ended September 30, 2014, to $324.6 million from $206.9 million a year earlier. That’s largely due to General Chemical Corp., which Chemtrade bought for $900 million U.S. in January 2014. General makes a range of chemicals, including aluminum sulphate, aluminum chlorohydrate and ferric sulphate (all of which are used in water treatment), as well as ingredients for prescription drugs, nutritional supplements and veterinary products....

Pat McKeough responds to many requests from members of his Inner Circle for specific stock investing advice 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 a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.

Recently an Inner Circle member asked us about Parkland Fuel, a company that sells gasoline and operates convenience stores through its own brands and under license to bigger companies like Imperial Oil. Parkland recently lost a major supply contract with Suncor Energy and Pat examines the company’s attempts to replace that business with new acquisitions. He also looks at the impact of lower oil prices on Parkland’s profits.

Q: Hi Pat: Could you give us an update on Parkland Fuels? They are continuing to make acquisitions, and the stock continues to rise. Would you consider it a buy now? Regards.

A: Parkland Fuel Corp. (symbol PKI on Toronto; www.parkland.ca) operates gas stations, convenience stores and a fuel distribution business, mostly in Western Canada and Ontario. It was called Parkland Income Fund before it converted to a dividend-paying corporation on December 31, 2010.

The company owns 144 rural gas stations and convenience stores. Brands include Fas Gas Plus, Race Trac Gas and Short Stop. Many of Parkland’s stations sell propane in addition to gasoline and diesel fuel. The company also operates Esso stations in Western Canada and Ontario under a licensing deal with Imperial Oil (symbol IMO on Toronto). It recently signed an agreement to use the Chevron brand in B.C.

...