All three of these leading Canadian food processors are down from their 2008 highs. However, they should all benefit from falling prices for wheat and other raw materials. As well, the recession may actually help their sales by prompting more people to eat at home. Even so, we only see two of them as buys right now. SAPUTO INC. $22 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 207.1 million; Market cap: $4.6 billion; Price-to-sales ratio: 0.8; SI Rating: Average) is Canada’s largest producer of dairy products such as milk, butter and cheese. It also has operations in the United States, Argentina and Europe. Last December, Saputo bought Neilson Dairy, the dairy division of Weston Foods, for $465 million. Neilson makes a wide variety of dairy products in Ontario, and generates $600 million a year in sales....

GENNUM CORP. $5.01 (Toronto symbol GND; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 35.4 million; Market cap: $177.4 million; Price-to-sales ratio: 1.3; SI Rating: Above Average) gets 70% of its revenue by making equipment that stores, manipulates and transfers video signals. The other 30% comes from chips that improve the flow of data inside computer networks. The company focuses on designing products, and outsources most of its manufacturing to chipmakers in Asia. We’ve long recommended Gennum, partly for its high research spending, which is usually over 30% of its revenue. Last year, it started deferring some of its research costs related to certain products. Gennum will recognize these costs once it starts selling the products. However, the company operates in a highly competitive field, and there’s no guarantee of success. Deferring these research costs helps current earnings, but increases the risk of a future writedown against earnings. Gennum recently abandoned its friendly takeover bid for rival chipmaker Tundra Semiconductor Corp. (Toronto symbol TUN) after Tundra accepted a higher offer from a U.S. firm. However, Tundra paid Gennum a $5-million (Canadian) break-up fee. To put this figure in context, Gennum lost $800,000, or $0.02 a share, in its first quarter, which ended February 28, 2009. It earned $4.6 million, or $0.13 a share, a year earlier. (Gennum reports its results in U.S. dollars, but its share price and market cap are in Canadian funds). Foreign markets account for 85% of Gennum’s sales, which leaves it vulnerable to exchange rates. In the latest quarter, it lost $1.9-million on its currency-hedging contracts. Sales in the quarter fell 35.6%, to $19.4 million from $30.1 million. TV broadcasters, hurt by falling advertising revenue, have cut their spending on new equipment....

Great-West and IGM have recovered nicely from their March lows. Despite this, both remain cheap in relation to their earnings. They also stand to expand their leading market shares as weaker competitors fold. This should let them continue paying above-average dividends. GREAT-WEST LIFECO INC. $23 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 944 million; Market cap: $21.7 billion; Price-to-sales ratio: 1.0; SI Rating: Above Average) is Canada’s second-largest insurance company after Manulife Financial Corp. (Toronto symbol MFC). The company also offers wealth-management services and owns Putnam Investments, a major U.S.-mutual fund company. Power Financial Corp. (Toronto symbol PWF) owns 68.7% of Great-West’s shares. The stock market downturn cut Great-West’s assets under administration by 14.7%, to $332.9 billion as of March 31, 2009, from $390.5 billion a year earlier. Great-West’s fees rise and fall with the value of the securities it manages, so the drop hurt its earnings: In the first quarter of 2009, earnings fell 33.9%, to $326 million from $493 million a year earlier. Earnings per share dropped 41.7%, to $0.35 from $0.60, on more shares outstanding....

TIM HORTONS INC. $29 (Toronto symbol THI; Aggressive Growth Portfolio; Consumer sector; Shares outstanding: 180.6 million; Market cap: $5.2 billion; Price-to-sales ratio: 2.5; SI Rating: Average) operates roughly 3,400 coffee-and-donut stores, including 500 in the United States. The recession has slowed Tim Hortons’ sales. At the same time, higher food and coffee costs are squeezing its profit margins. Despite this, Tim Hortons plans to open 150 to 180 new stores this year. Most of these will be in smaller markets, where there are few competitors. The new stores should help Tim Hortons achieve its goal of increasing this year’s operating profits by 11% to 13%. Tim Hortons is a buy.

ARBOR MEMORIAL SERVICES INC. $17 (Toronto symbol ABO.A; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 10.7 million; Market cap: $181.9 million; Price-to-sales ratio: 0.7; SI Rating: Average) owns 41 cemeteries, 26 crematoria, four reception centres and 87 funeral homes in eight provinces. In its second quarter, which ended April 26, 2009, earnings fell 7.6%, to $4.9 million, or $0.45 a share. Arbor earned $5.3 million, or $0.49 a share, a year earlier. Revenue rose 3.3%, to $60 million from $58.1 million. The company performed 2.9% fewer funeral services in the quarter, but earned higher fees per service. Demand for funerals could stagnate or drop in the next few years. Many people born in the 1920s have already died, and birthrates were lower in the 1930s and 1940s due to the Great Depression and World War II. The post-war baby boomers have not yet reached their years of highest mortality. But boomers will likely spend more on funerals than their parents. Arbor is a buy....

ANDREW PELLER LTD. $7.30 (Toronto symbol ADW.A; Income Portfolio, Consumer sector; Shares outstanding: 14.9 million; Market cap: $108.8 million; Price-to-sales ratio: 0.4; SI Rating: Above Average) owns wineries in Ontario, Nova Scotia and B.C. In its latest fiscal year, which ended March 31, 2009, Peller’s revenue rose 9.8%, to $268.2 million from $244.3 million in the prior year. The gain was partly due to two acquisitions in 2008. It paid $11 million for World Vintners Inc., which sells home winemaking kits, and $1.6 million for Small Winemakers Collection Inc., which imports and markets premium wines in Ontario. Without these purchases, revenue would have risen by 5.7% in fiscal 2009. Despite the higher revenue, Peller lost $125,000, or $0.03 a share, in fiscal 2009. That’s down from earnings of $11.4 million, or $0.78 a share, in the prior year. Profits fell mainly due to a $9.5-million, non-cash writedown of foreign-exchange hedging contracts, which the company uses to shield itself from changing exchange rates. It also incurred a $1.3-million charge in connection with the closure of a Quebec distribution centre....

CAE INC. $7.03 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 255.1 million; Market cap: $1.8 billion; Price-to-sales ratio: 1.1; SI Rating: Average) makes flight simulators and operates pilot-training facilities. CAE trains over 75,000 pilots a year at 75 sites in 20 countries.

CAE gets about half of its revenue and earnings from highly cyclical commercial airlines. However, the remaining half comes from military clients, which cuts its risk. As well, steady revenue from long-term training contracts helps offset its reliance on new-simulator sales, which have slowed recently. CAE’s revenue rose 68.6%, from $986.2 million in 2005 to $1.7 billion in 2009 (CAE’s fiscal year ends March 31). Earnings soared from $0.19 a share (or a total of $46.9 million) in 2005 to $0.79 a share (or $200.5 million) in 2009. The gain was largely due to a successful restructuring plan, including the sale of its non-aviation businesses.

Research spending a hidden asset

The company continues to spend about 5% of its revenue on research. This lowers CAE’s earnings, but helps it compete with larger simulator makers, such as Boeing and Lockheed Martin.

CAE also plans to spend $714 million over the next five years to apply its expertise to new areas. For example, CAE’s high-resolution displays and simulation technology could help pilots take off and land in foggy or misty conditions. The Canadian government plans to provide up to $250 million in financing.

...

BANK OF NOVA SCOTIA $40 reported record revenue in its latest quarter, despite the recession. Revenue rose 13.4%, to $3.6 billion from $3.2 billion a year earlier. However, earnings per share fell 16.5%, to $0.81 from $0.97, as loan-loss provisions jumped 219.6%. Still, the bank is in a good position to increase its profits as the economy improves. Best Buy. ROYAL BANK OF CANADA $46 lost $50 million, or $0.07 a share, in the three months ended April 30, 2009. This figure includes a $1-billion writedown of goodwill related to the American banks that Royal bought over the past few years. The slow U.S. housing market and economy have driven down the goodwill related to these purchases. Without this writedown, Royal would have earned $950 million, up 2.4% from $928 million a year earlier. Per-share earnings fell 10%, to $0.63 from $0.70, on more shares outstanding. Buy. TELUS CORP. $32 has won a $31.5-million expansion of its contract with the Montreal Regional Health Authority. Telus will speed up the conversion of patient records from paper to electronic form. This is a small sum next to Telus’s $9.7 billion in annual revenue, but electronic record conversion is a fast-growing field. Buy.

PETRO-CANADA, $48.43, Toronto symbol PCA, rose 5% on Thursday after its shareholders voted 96% in favour of the proposed takeover offer from SUNCOR ENERGY INC., $38.47, Toronto symbol SU. Suncor shareholders have also approved the merger by 98%. The deal gives Petro-Canada shareholders 1.28 common shares of the new company for each share they own, while Suncor investors will get one share of the merged company for each of their Suncor shares. Suncor shareholders will own 60% of the combined company, while Petro-Canada shareholders will own the remaining 40%. (The new company will operate under the Suncor name.) Competition regulators still have to approve the merger. However, the deal should close by the end of the third quarter....

BANK OF MONTREAL, $43.80, Toronto symbol BMO, earned $358 million in its second quarter, which ended April 30, 2009. That’s down 44.2% from $642 million a year earlier. Earnings per share fell 51.2%, to $0.61 from $1.25, on more shares outstanding. If you exclude writedowns of securities it holds and severance costs related to the layoff of 1,100 employees, the bank would have earned $0.91 a share. That beat analysts’ forecasts of $0.90, and the stock gained over 5%. The recession forced Bank of Montreal to set aside $372 million for bad loans in the latest quarter, up 146.4% from $151 million a year earlier. Still, that’s down 13.1% from $428 million in the first quarter. Moreover, the staff cuts, which amount to 3% of the bank’s total workforce, should save at least $118 million a year....