Put Some Fiber in Your Portfolio

09/30/2008 12:00 am EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape, editor of the Canada Report, sees profit in a company that “feeds the world.”

At a time of growing concern about world food supplies, Viterra (TSX: VT; OTC: VTRIF) occupies a pivotal position in bringing Canadian grain production to international markets. More than 70% of the grain production handled by Viterra is destined for export markets.

The Saskatchewan-based company was formed in May 2007 from the merger between the Saskatchewan Wheat Pool and Agricore United. The company is almost unknown in the US, but it’s a giant in Western Canada. Viterra owns and operates Canada's largest grain-handling network with 104 grain elevators with a combined 1.9 million tonnes of storage space.
 
After languishing for several years, wheat prices more than doubled their five-year average in 2007; soybeans were 75% higher than their five-year norm, and corn prices continue to rise, due to the growing demand for ethanol, enabling Viterra to profit from the interest in biofuels.

Not just an export operation, Viterra also provides products and services, including proprietary seeds to crop nutrients, as well as offering financing programs to more than 90,000 farmers in Western Canada.

In [the fiscal year ending October 2007], Viterra earned C$111 million (80 cents a share) on C$3.5 billion in sales. For the first nine months of fiscal 2008, sales exceeded C$5 billion and net earnings were C$241.5 million (C$1.13 a share). The company has achieved C$87.3 million in synergies resulting from the merger and expects that to grow to C$104 million by mid-2009.

Viterra has been cleaning up its balance sheet and in July Standard & Poor’s upgraded its long-term credit rating to BB+ from BB.

However, based on a slight drop in grain handling revenues and a decline of C$3.80 in gross margin per tonne, RBC Capital Markets projects earnings per share will be C$1.19 in fiscal 2008, but warns of a slippage to 83c a share in fiscal 2009. Using that figure, the shares are trading at a forward P/E multiple of 13.4x, which is not an unreasonable valuation for a company with this potential.

This is a well-run company with good growth potential. The stock traded as high as $15.19 earlier this year but recently fell as low as $9.31, and is still well below its April high. Since this is a time for bargain-hunting, let's watch for an opportunity to enter at below $11. (It closed at $9.65 Monday—Editor.)

Viterra trades on the Toronto Stock Exchange, with good liquidity, often trading more than a million shares a day. It’s also traded over the counter in the US; however, volume is thin and we strongly advise using limit orders.

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