price to sales ratio

MICROSOFT CORP. $25 (Nasdaq symbol MSFT; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 8.9 billion; Market cap: $222.5 billion; Price-to-sales ratio: 3.8; WSSF Rating: Above Average) may have to stop selling Word, its word-processing program and a key part of its top-selling Office software package. A court has ruled that Word violates a patent held by Toronto-based i4i Inc., whose technology makes it easier to find and classify documents stored in databases. The ruling only applies to sales of Word in the U.S. Microsoft is appealing the decision. If it loses, it would have to redesign the program or license the technology from i4i. Either way, this dispute will probably force Microsoft to delay next year’s launch of a new version of Office. The uncertainty could also dampen demand for its upcoming Windows 7 operating system. Microsoft is still a hold.

STATE STREET CORP. $53 (New York symbol STT; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 494.5 million; Market cap: $26.2 billion; Price-to-sales ratio: 2.8; WSSF Rating: Extra Risk) set aside $625 million in 2007 to settle lawsuits related to the company’s dealings in illiquid securities backed by subprime mortgages. As of June 30, 2009, only $193 million remained in this fund, so State Street will probably have to add to it in light of ongoing lawsuits. Meanwhile, the company earned $483 million, or $1.04 a share, in the second quarter of 2009. This excludes charges related to the consolidation of “conduits” to its balance sheet. These trade securities backed by mortgages, credit-card receivables and other loans. Traditionally, State Street does not own conduit assets, but has agreements to back them up with loans. A year earlier, it earned $570 million, or $1.40 a share. Revenue fell 20.6%, to $2.1 billion from $2.7 billion. State Street gets the bulk of its revenue by holding securities for large institutional investors, such as mutual funds and pension plans, and falling stock-market prices lowered its fees....

SONY CORP. ADRs $27 (New York symbol SNE; Conservative Growth Portfolio, Manufacturing & Industry sector; ADRs outstanding: 1 billion; Market cap: $27 billion; Price-to-sales ratio: 0.4; WSSF Rating: Average) has launched a new version of its Play-Station 3 video-game console. The new version is thinner and uses less power than the previous model, which it is now phasing out. Sony has also cut the price of both versions by $100, to $299. The price cut should help Sony increase its share of the highly competitive video-game market. Sony is probably still losing money on each unit it sells, but the new models use fewer parts. This would shrink these losses. Selling more machines will also make it easier for Sony to demand more royalties from video-game developers. As well, more PlayStation 3 users should lead to higher online sales of games and movies. Sony is a buy.

MCKESSON CORP. $57 (New York symbol MCK; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 266.1 million; Market cap: $15.2 billion; Price-to-sales ratio: 0.1; WSSF Rating: Average) is the largest wholesale distributor of pharmaceutical drugs in the U.S. and Canada. It also owns 49% of Mexico’s largest drug distributor. Its customers include over 40,000 pharmacies, as well as doctor’s offices, hospitals and clinics. Aside from drugs, the company sells surgical tools and health and beauty products. McKesson’s revenue rose 32.4%, from $80.5 billion in 2005 to $106.6 billion in 2009 (its fiscal year ends March 31). Earnings rose 82.8%, from $653.3 million in 2005 to $1.2 billion in 2009. McKesson aggressively buys back shares, so earnings per share rose 96.3%, from $2.18 in 2005 to $4.28 in 2009.

New payment system cuts risk

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ATCO LTD. (Toronto symbols ACO.X (class I non-voting) $38 and ACO.Y (class II voting) $39; Income Portfolio, Utilities sector; Shares outstanding: 57.9 million; Market cap: $2.2 billion; Price-to-sales ratio: 0.7; SI Rating: Above Average) is a Calgary-based holding company. ATCO’s main subsidiary is 52.3%-owned Canadian Utilities Ltd.. This business distributes natural gas and electricity in Alberta. It also operates power plants in Canada, the U.K. and Australia. ATCO’s other businesses involve selling specialized services to other companies. These include building temporary structures, airfields and communication systems for resource and construction firms. It also offers billing and payment processing, natural-gas storage and travel services. The company’s revenue fell from $3.3 billion in 2004 to $2.9 billion in 2005, after Canadian Utilities sold its non-regulated retail operations, which supplied households with natural gas and electricity. But revenue rose steadily, returning to $3.3 billion in 2008. Earnings more than doubled, from $130.9 million, or $2.28 a share, in 2004 to $265.6 million, or $4.60 a share, in 2008....

Holding companies give investors the choice of buying the parent company or its publicly traded subsidiaries. In many cases, we like some subsidiaries but not others, so we prefer to invest in them directly and avoid the parent. Each situation is different, of course, and sometimes we recommend the parent over the subsidiaries. A good example is Maple Leaf Foods. Another is ATCO, the parent company of Canadian Utilities, which is a long-time recommendation of The Successful Investor. Like most holding companies, ATCO trades for less than the total value of its various pieces. This is known as a “holding-company discount.” Right now, you can buy a share of ATCO for $38, and get roughly $42 worth of Canadian Utilities. That means ATCO’s other businesses are essentially free....

MAPLE LEAF FOODS INC. $9.17 (Toronto symbol MFI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 129.3 million; Market cap: $1.2 billion; Price-to-sales ratio: 0.2; SI Rating: Average) produces fresh and prepared beef and poultry under the Maple Leaf and Schneider brands. It also owns 89.8% of CANADA BREAD CO. LTD. $41 (Toronto symbol CBY; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 25.4 million; Market cap: $1.0 billion; Price-to-sales ratio: 0.6; SI Rating: Above Average), which is Canada’s second-largest producer of baked goods after Weston Bakery. At current prices, Maple Leaf’s stake in Canada Bread is worth roughly $7.25 per Maple Leaf share. That means you can buy Maple Leaf’s meat-processing operations, which account for 65% of its revenue, for just $1.90 a share....

CANADIAN UTILITIES LTD. (Toronto symbols CU (class A non-voting) $37 and CU.X (class B voting) $36; Income Portfolio, Utilities sector; Shares outstanding: 125.6 million; Market cap: $4.6 billion; Price-to-sales ratio: 1.7; SI Rating: Above Average) earned $73.5 million, or $0.59 a share, in the three months ended June 30, 2009....

DUNDEE CORP. $9.40 (Toronto symbol DC.A; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 74.3 million; Market cap: $698.4 million; Price-to-sales ratio: 0.9; SI Rating: Average) is a holding company with subsidiaries in three main areas: wealth management, real estate and resources. The company’s main asset is its 49% stake (62% voting interest) in DundeeWealth Inc. (Toronto symbol DW), which provides investment-management, securities-brokerage, financial-planning and investment-advisory services. It also owns the Dynamic family of mutual funds. In the three months ended June 30, 2009, Dundee earned $29.9 million, or $0.39 a share. That’s a big improvement over the $6.6 million, or $0.08 a share, that it earned in the year-earlier quarter. The gain was largely driven by new floating-rate notes that Dundee received last January in exchange for illiquid asset-backed commercial paper. Based on improving conditions in the credit markets, Dundee recognized a $45.6-million, non-cash accounting gain on these notes in the latest quarter. Revenue fell 13.5%, to $245.6 million from $284 million, as lower stock-market values hurt Dundee-Wealth’s management fees and mutual-fund sales. As of June 30, 2009, DundeeWealth’s assets under management stood at $29.8 billion. That’s a 5.2% drop from $31.5 billion a year earlier....

These four financial companies tend to be more volatile than Canada’s big-five banks. But they are all leaders in their niche fields, and offer strong growth prospects, particularly as the economy begins to recover. We feel that conservative investors should diversify their finance-sector holdings with Great-West Lifeco and IGM Financial. More aggressive investors should consider Home Capital Group. However, we still see Dundee Corp. as a worthwhile hold. GREAT-WEST LIFECO INC. $25 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 944.3 million; Market cap: $23.6 billion; Price-to-sales ratio: 1.0; SI Rating: Above Average) is Canada’s largest insurance company, with $441.9 billion of assets under administration. Great-West also provides retirement-planning and wealth-management services. It gets about 60% of its earnings from Canada, followed by Europe (25%) and the United States (15%). Power Financial Corp. (Toronto symbol PWF) owns 68.7% of Great-West’s shares....