commodity

Here’s the text of the quarterly letter I recently sent to our Portfolio Management clients: “Nobody can predict the future, but I suspect we are near an historical turning point in the bond market, and in interest rates generally. This has happened a couple of times in the past century. If I’m right and you fail to adapt to the change, the outcome can be extremely costly.

Understanding secular trends

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BIRCHCLIFF ENERGY INC., $8.48, symbol BIR on Toronto, develops, produces and explores for oil and natural gas, mainly in the Peace River Arch area near the Alberta/B.C. border. In the three months ended March 31, 2013, the company produced an average of 26,108 barrels of oil equivalent a day (82% gas and 18% oil). That was up 24.0% from 21,061 barrels a year earlier. The production increase pushed up Birchcliff’s cash flow per share by 33.3%, to $0.28 from $0.21. Last year, Birchcliff completed Phase III of its gas plant expansion in Pouce Coupe, Alberta. This project doubled the facility’s capacity and is helping the company bring the additional gas it is producing to market. That accounted for a lot of the production increase....

SHERRITT INTERNATIONAL $4.74 (Toronto symbol S; TSINetwork Rating: Speculative) (1-800-704-6698; www.sherritt.com; Shares outstanding: 296.9 million; Market cap: $1.4 billion; Dividend yield: 3.6%) reported cash flow of $0.20 a share in the three months ended March 31, 2013....

A couple of decades ago, I began advising Canadian investors to put 20% or so of their investment funds into U.S. stocks. I wanted investors to be able to invest in the great U.S. multinationals. These companies were likely to profit from the downfall of communism and the swing toward free enterprise that was getting underway back then. I also wanted investors to be able to profit from the incredible advances that were taking place in communications and computer technology. Since then, the U.S./Canada foreign exchange differential has at times worked in our favour. Other times, it has worked against us. In years of rising commodity prices, our Canadian stocks beat our U.S. stocks. When commodities were weak, U.S. stocks often did better. Recently, commodities have been weak and the U.S. market has been strong. The Standard & Poor’s 500 index has risen 13.1% so far this year, and 26.5% since the start of 2012. The Standard & Poor’s TSX index has dropped 0.9% so far this year, and has gained just 1.9% since the start of 2012....

SHERRITT INTERNATIONAL $4.74 (Toronto symbol S; TSINetwork Rating: Speculative) (1-800-704-6698; www.sherritt.com; Shares outstanding: 296.9 million; Market cap: $1.4 billion; Dividend yield: 3.6%) reported cash flow of $0.20 a share in the three months ended March 31, 2013. That was down 35.4% from $0.31 a year earlier. A decline in coal sales and lower nickel, cobalt and oil prices were the main reasons for the drop.

Sherritt recently raised its quarterly dividend by 13.2%. The shares now yield 3.6%.

The company needs an improving global economy to fuel commodity demand. But its low production costs and ongoing geographic diversification enhance its prospects.
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FAIR ISAAC CORP., $44.18, symbol FICO on New York, makes FICO Scores, a computer program that helps businesses make better decisions about customer creditworthiness. FICO Scores dominates this niche market. In addition, Fair Isaac continues to profit by selling software that helps credit card issuers control fraud and analyze cardholders’ spending patterns. In its fiscal 2013 second quarter, which ended March 31, 2013, Fair Isaac’s earnings per share before one-time items rose 4.4% from a year ago, to $0.69 from $0.66. Revenue rose 12.4%, to $179.3 million from $159.5 million. That’s largely because the company recently acquired Adeptra, which makes systems that let businesses communicate with customers through a range of channels, including voice, instant messaging, mobile applications and email. Fair Isaac continues to spend around 8% of its revenue on research. That lets it keep producing innovative new products that help it stay ahead of its competitors....

TECK RESOURCES LTD., $26.27, Toronto symbol TCK.B, reported lower quarterly revenue and earnings this week. That’s mainly because slowing industrial activity in China and elsewhere has hurt prices for its metallurgical coal, which is a key ingredient in steelmaking. Prices of Teck’s other commodities, such as copper and zinc, also declined. In the three months ended March 31, 2013, Teck earned $328 million, or $0.56 a share. These figures exclude unusual items, such as gains and losses on asset sales. On that basis, the latest earnings beat the consensus estimate of $0.41 a share. However, they are down 39.7% from $544 million, or $0.93 a share, a year earlier. Revenue fell 8.5%, to $2.3 billion from $2.5 billion. Even with the decline, the latest figure also beat the consensus estimate of $2.2 billion....

FINNING INTERNATIONAL INC. $24 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 171.9 million; Market cap: $4.1 billion; Price-to-sales ratio: 0.6; Dividend yield: 2.3%; TSINetwork Rating: Above Average; www.finning.com) sells and services heavy equipment made by Caterpillar Inc. (New York symbol CAT). Its main customers are in the oil, mining, forest products and construction industries.

In May 2012, Finning paid Caterpillar $305.8 million U.S. for Bucyrus’s distribution and support businesses in South America and the U.K.; Bucyrus makes equipment for clients in the mining and oil sands industries. In October 2012, Finning paid $159.2 million for Bucyrus’s Canadian operations.

Thanks to these new operations, Finning’s revenue rose 12.3% in 2012, to a record $6.6 billion from $5.9 billion in 2011. Earnings jumped 30.1%, to $337.6 million, or $1.96 a share, from $259.4 million, or $1.51 a share. Bucyrus contributed $0.09 a share to the latest earnings.
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SHERRITT INTERNATIONAL (Toronto symbol S; www.sherritt.com) is a natural resource company that produces nickel, cobalt, thermal coal, oil and gas. It also manages 356 megawatts of power generation capacity in Cuba, with an additional 150 megawatts starting up this year. The company is a major nickel producer, with operations in Cuba and Canada. As well, it is now starting up its 40%-owned Ambatovy mine on the island nation of Madagascar, off Africa’s east coast. Sherritt also produces oil and gas in Cuba, Spain and Pakistan and is Canada’s largest thermal coal producer....

INTERNATIONAL BUSINESS MACHINES CORP., $190.00, New York symbol IBM, reported lower-than-expected earnings and revenue for the latest quarter. That’s why the stock fell 8% on Friday. In the three months ended March 31, 2013, the company earned $3.03 billion. That’s down 1.1% from $3.07 billion a year earlier. IBM spent $2.6 billion on share buybacks in the latest quarter. Due to fewer shares outstanding, earnings per share rose 3.4%, to $2.70 from $2.61. Without unusual items, such as costs to integrate recently purchased companies, IBM’s earnings per share would have risen 7.9%, to $3.00 from $2.78. The gain was mainly the result of the company’s ongoing efforts to cut costs and improve productivity. Still, the latest earnings missed the consensus estimate of $3.05 a share....