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October 2012

Bombardier Inc.

Tuesday, October 30, 2012 0

Buy, Hold, or Sell?


Bombardier is experiencing significant growth in emerging markets, and is taking advantage of this by shifting its focus towards non-US customers. Demand in many regions remains high and above the world average, including Brazil, Latin America, and Asia-Pacific. China and Europe, with their recovering economy, are going to be one of the major players in the company's growth. Bombardier also secured a $7.3 billion order with Buffet's NetJets. This is quite important, as its the largest purchase agreement in the history of private aviation. In addition, its new CSeries of jets, being more environmentally friendly and so on, has a significant amount of orders and may play a part in company growth. It is expanding its operations too -- in April 2012, it opened a new sales and marketing office in Shanghai. In Nouaceur, Morocco, it built a new manufacturing plant. This is big news.


The company experiences quite a variety of risk, being in such a volatile industry. Oil prices, appreciation of the Canadian dollar (less exports), subordinate voting share structure (The CEO Pierre Beaudoin and his family own 64% of total shareholder votes), volatility of airline customers (Air Canada, anyone?), etc. These all impact the company and impact our decision on whether to buy, hold or sell.


Based on analysis of EBITDA and FD EPS, I suspect the price will go up to $4.65-4.80. This is over $1.00 of a capital gain.

Buy it.

Silver Wheaton

Thursday, October 25, 2012 0

After a massive low, this company seems to be doing some justice regarding increasing stock prices. It is virtually dominating competitors, with the exception of First Majestic Silver (TSX: FR). Also, its stock prices closely correlates with S&P. Whether investing in precious metals is a good idea or not, many consider it to be an excellent hedge against inflation. If you know this or not, more money supply being injected into the economy allows for gold/silver prices to inevitably increase. This is happening as we speak especially in the Asian countries.

Silver Wheaton has been closing tons of deals lately, so people are definitely going to be optimistic. The company risk is generally low, since it doesn't own mines at all -- just the silver. Its market cap is around $13.5 bln, where the average silver company is around $4.5bln. This is an enormous difference, and this goes hand in hand with their earnings that have been increasing over the past few years.

Their EPS is expected to skyrocket for 2013, so many feel this is the best time to buy in. However, it is just important to note that after the price goes up, get out as fast as you can. A goal of buying in around $37 and selling at $43 may very well be a viable choice. As many know, after silver goes up, it goes down like crazy. You make the choice.

SNC-Lavalin: Buy or Sell?

Tuesday, October 23, 2012 0

Hi all,

After some thorough analysis on SNC-Lavalin, I came to a few conclusions. If you noticed, they had a new CEO October 1st, 2012. Interestingly enough, after this date, the stock price began to rise gradually again. Actually, they've been going up finally instead of dropping significantly. The 52-week high is $55 or so, so I believe the stock still has a lot of room for growth.

You can see this >here<.

Moreover, SNC-Lavalin is winning quite a significant amount of contracts, in which their revenues should continue to experience respectable growth. The problem with the company is not cash flows or revenues though, it is their expenses. Due to the previous CEO and other key executives cooking the books and breaching the code of ethics in various foreign countries, this has put a lot of undue stress unto the company in forms of expenses to various stakeholders and also contingent liabilities. In fact, they have a contingent liability of $1.5B from a class-action lawsuit from stakeholders. More than likely this won't go through, the company seems to be doing all it can regarding getting back on track and so forth, and it is a solid company in general.

In case you're interested, here are the remedial measures the company has been doing to get back on its feet:
1) Management override policy (specific procedures if management does unethical things/tries to force certain things)
2) Code of ethics amended (whistleblowing encouraged)
3) New financial management solution in individual business units

Note: this is taken directly from the MD&A, rewritten a bit in simpler more concise terms

The stock price should be going anywhere but down. They have a new CEO, new policies, and a solid foundation for a company. I am sure shareholders are wide aware that such a scandal will very likely never be happening again. Things are looking optimistic.

Bottom-Up Company Analysis: SNC-Lavalin

Saturday, October 20, 2012 0

Bottom-Up Company Analysis: SNC-Lavalin

After my last post, which was part I of the transportation sector as a whole, I've now decided to actually begin the process researching my first company. What I will do is try to set up the post so that it'll be somewhat interactive in the sense that you can also do the research yourself, and I won't be spoonfeeding you information (if you're interested in seeing what exactly goes into these analyses). For today, we will solely go over public available information and financials derived from them. Anyway, since us financiers like it concise and short, I'll begin:

Company Fundamental Analysis'

Step 1: Review Public Information

  • 10-K (http://quote.morningstar.com/stock-filing/Annual-Report/2011/12/31/t.aspx?t=XTSE:SNC&ft=&d=576922afa6235de01d716b084d032106)
  • 10-Q (http://quote.morningstar.com/stock-filing/Quarterly-Report/2012/6/30/t.aspx?t=XTSE:SNC&ft=&d=85a4526d9aff1d73b61c4dcf6dca9756)
  • Annual Reports (this can be found on (http://www.sedar.com , company search SNC-lavalin and the date is April 26, 2012)
  • Conference calls (optional, will not be done in this analysis)

Step 2: Financials

1) EPS growth rate

To determine this, we will look at the diluted EPS (which is more accurate than basic EPS) for the previous years, which can be shown as such from the annual report:
EPS                                               Growth
2008: $2.05
2009: $2.36
2010: $3.13                            (3.13-2.36)/(2.36)=  32%
2011: $2.49                            (2.49-3.13)/(3.13) = -20%
1st quarter
2011: $0.50                             -12%
2012: $0.44
2nd quarter
2011 $0.67 
2012 $0.21                       (0.21-0.67)/0.67 = -68%
6 months
2011 $1.17      
2012 $0.66                        (.66-1.17)/(1.17) =  -43%

Since there seems to be a lot of bad spark around SNC around 2011 for Bangladesh and other things, this seems to be the reason why the EPS dropped. Also, in May 2012 there were class action lawsuits commenced, and thus we base a prediction on future EPS growth to be negative. Based on this, the growth rate between Quarter 1 and Quarter 2 is (0.21-0.44)/(0.44) = (-52%) EPS will continue to drop.
  • Cash Flow from Operations 2011 2012 % growth
    2Q 82452 185051 124.4348227
    6M 202055 227182 12.43572295
    Revenues 2011 2012 % growth
    2Q 564388 787011 39.44502718
    6M 1044541 1456065 39.39759186
    EPS 2011 2012 % change
    1Q 0.5 0.44 -12
    2Q 0.67 0.21 -68.65671642
    6M 1.17 0.66 -43.58974359
    Current Assets 2010 2011 2012
    1YR 3566480 3546282
    6M 3670533
    Current Liabilities 2010 2011 2012
    1YR 2886592 3514328
    6M (june 30 2012) 3789849
    Current Ratio 2010 2011 2012
    1YR 1.235533113 1.009092492
    6M 0.968516951
    Working Capital 2010 2011 2012
    1YR 679888 31954
    6M -119316
    Total Net Cash Flow 2010 2011 2012
    6M 1111399 1241419
    inc of 10370
    Net Income 2010 2011 2012
    6M 183665 100040
    Gross Margin 2010 2011 2012 % change
    1yr 1301 1252 -3.76633
    6M 592801 578113 -2.54068

Anything that was bolded above is a positive indicator for the company. As you can see, it is doing phenomenal with its cash flows and revenues. Unfortunately, this can not be said for much of anything else.

Sector Overview: Transportation Part 1

Sunday, October 14, 2012 1

What is the Transportation Sector? (PART 1)
A Brief Analysis on Industries in the Sector

Transportation is everywhere, essentially when you move it's a form of transportation. This does not pertain to our interest, though. What we're interested in is the transportation sector, which is a type of stock related to the transportation of goods or customers. Typical examples of this include: airlines, railroads, shipping, and trucking companies.

Sector Performance Indicators

A major factor indicating the success of many transportation firms is the price of oil. This makes perfect sense, as if the price of oil/fuel decreases, these companies will have lower costs and thus earn more. If the price of oil/fuel increases, higher costs will lead to lower profits and lower cash flows. Therefore, knowledge of oil prices is essential in determining the right time to buy in to a company. In fact, fuel cost are airlines' second highest expense, indicating how important they are in determining profits.

Major Airlines

Company Profiles
As indicated on Yahoo! finance (source: http://biz.yahoo.com/p/770mktd.html), the top 5 major airlines (based on market cap) include:
1) Ryanair Holdings
2) easyjet PLC
3) Air China Limited
4) Cathay Pacific Airways Ltd.
5) China Southern Airlines

If you haven't noticed, Ryanair Holdings is absolutely dominating the market in terms of size and share. Shortly, we'll be looking at specific indicators to really understand why it's on top, and to deem whether how strong these businesses really are currently.

An important fact to note here is that major airlines are not solely regional airlines, which are companies that only focus on short-haul flights (typically have <$100M revenues)

Performance Indicators

Labour, according to the ATA is an airline's number one cost. Pilots, flight attendants, dispatchers, customer service, baggage handlers, security guards - these numbers do add up.

In addition fuel costs are airlines' second highest expense, really proving how important monitoring the price of oil is. 

Weather also plays another major unpredictable and variable factor. The cancellation/delay of flights is quite common (I'm sure we've all been delayed before, right?)

A few other indicators are: airport capacity, route structures, technology, and costs to lease or buy aircraft. 

Regional Airlines

As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/771mktd.html), the top 5 regional airlines (based on market cap) include:

1) LATAM Airlines Group S.A
2) Southwest Airlines Co.
3) Copa Holdings SA
4) Alaska Air Group Inc.
5) JetBlue Airways Corporation


As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/775mktd.html), the top 5 shipping companies (based on market cap) include:

1) Adani Ports & Special
2) China Merchants Holdings
3) Irish Continental Group PLC
4) Essar Ports Ltd
5) Ocean Wilsons Holdings Ltd


As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/776mktd.html) the top 5 railroad companies (based on market cap) are:

1) MTR Corporation Ltd.
2) Container Corporation of India
3) National Express Group PLC
4) Union Pacific Corporation
5) Canadian National Railway Comp

Railroads, as outdated and old western as they seem, are still a crucial part of our economic infrastructure. Like airlines, railroads are in a type of industry that is very cyclical (in good economic times, higher profits, and the inverse) and thus it is important to monitor macroeconomic indicators. More products that companies will sell = more cargo that will be shipped via railroads.

Interestingly, there is indeed profit opportunity in smaller short-line railroads (coal mines, power plants) though it's a bit hard to actually tell whether the company is great or the industry is growing. If it's the latter, fundamental analysis of companies will not be sufficient in determining the value of a company. This is because the companies will have high start-up costs and thus negative cash flows. These companies will have to be analyzed in different ways, particularly by highly skilled adept investors. Speculation will inevitably occur and the risk is very high, but so is the reward.

However, it is important to note that the railroad industry is in a declining market due to decreased demand due to the fact of more efficient ways of transporting goods (air transport). Lack of adaptation to environmental and competitive pressures is another major factor. The bright side of this is that even though it's a declining sector, the non-competitive firms have been weeded out and therefore most of the current companies still in the game will still experience periods of growth.

Rail traffic also is a useful indicator for economy activity - carload traffic correlates well with it, as do railcars deployed and stored.

Evaluating Railroad Companies

Factors to consider when choosing to buy into a railroad company are quite abundant, but there are a few important ones that standout:

1) Revenue growth and strong margins
2) Operating income, operating cash flow, and operating margins
3) Operating Ratio (major measure of profitability) 
  • Operating Expenses / Revenue
  • A ratio of 80 or lower is acceptable, but less than 75 is excellent
4) Top Line sales
  • At the "top" of the income statement, the first line at the top is usually gross sales. Therefore, a company that increases their revenues experiences 'top line' growth
  • The reason why it's important is because pricing can signal investors about management's strategy
5) Capital expenditure needs
  • Railroads aren't very successful at converting revenue into free cash flow
  • These companies are essentially in virtual duopolies and have lower costs of capital than might be expected
  • In laymen's terms: railroads spend a lot of money, but money spent by railroads is lower risk and more probable return than money spent elsewhere
Dangers/Threats for the Railroad Industry

Things to note before investment in the railroad industry is commenced:

1) Fuel Costs (20% of operating expenses)
2) Labor Costs (33% of operating expenses, workers heavily unionized)
3) Capital Demands (High capital requirements)
4) Economic Activity (if the economy is active, a railroad can stimulate demand through this)
5) Cyclical Nature (limits viability of railroad stocks as long-term investments, but these can be useful in the short term)
6) Difficulty to Value (Due to high capital expenditures, railroads aren't exactly gold when looking at discounted cash flow models, though due to the lower risk nature of the cost of capital, a lower discount rate can be utilized. Other methods include price/book, EV/EBITDA, and price-to-earnings.


As indicated on Yahoo! Finance (source: http://biz.yahoo.com/p/774mktd.html) the top 5 trucking companies (based on market cap) are:

1) Stagecoach Group PLC
2) FirstGroup PLC
3) CSR Corporation Ltd.
4) Go-Ahead Group PLC
5) Stobart Group Ltd.

This is it for now, part 2 will include company specific analysis of the top five companies for each component of the transportation sector. It will be fairly detailed, in order to give a more efficient technical analysis of companies that are doing well in the sector and how this affects prices.

Research Assistant for Investing Club

Friday, October 5, 2012 2

Hi all, it has indeed been awhile since my last post. To be brief - I have taken this blog into a new direction. A direction that will hopefully provide you and myself with advice, ideas, and perspective on how I will slowly become an adept investor.

First things first - I have been accepted to an investing club as a research associate for the industrial sector. The position is a lot more work intensive than I thought it'd be, but that is a main factor for driving my motivation. Yes, this is indeed a good thing.

We had a somewhat long-somewhat brief training session today that lasted about 90 minutes. An executive of the club very briefly went over fundamental analysis and technical analysis. Going in, I had no idea what to expect.

I however recognized most of the "fundamental analysis" of investing due to some finance and accounting courses. These include: a company's health, management, competitive advantage, and an economic/industry/company specific analysis. Most of this is derived from the financial statements (10-Ks). Moreover, management discussion and analysis will be analyzed in great detail. In addition, certain ratios are used heavily in fundamental analysis - some in certain sectors more than others.

The topic that will be the most troublesome not because of its intricacies and complexities, but because of the obligation to learn two different software programs (Bloomberg and Reuters Eikon). They are extremely complex to use at first, but after awhile it becomes quite basic and almost instinctual. Technical analyses include trendlines, relative strength index, and a few other indicators. Most of these graphs can be snagged almost instantaneously from Bloomberg, but Google Finance/Yahoo is a viable source if you have some time to waste.

Bi-weekly research reports and stock pitches are the norm with a position such as this. The template for the report is a bit intimidating, but doable. All in all, it will be a great experience for real-life practical investing knowledge and it is a huge competitive advantage as an individual interested in finance.

Back to e-valuating stocks I go!

Here is a Relative Strength Indicator.

Included below is what Bloomberg typically looks like. Definitely not used for its aesthetics!

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