Head North for Solid Profits

06/27/2011 8:30 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

The Canadian economy is strong, as is its currency relative to the US dollar, and that has created some unique opportunities, says Roger Conrad of Canadian Edge.

No matter how you slice it, Canada’s hot—and America’s not. For starters, the Northern Tiger’s economy grew twice as fast as the US in the first quarter, following a now more than two-year-old trend.

Canada’s currency—the loonie—is in the midst of an historic bull market at the expense of the US dollar. Canada’s natural-resource exports are booming, while the US economy is struggling under the weight of higher food and gasoline prices.

The Canadian banking system is as sound as any in the world. Loan activity is healthy, as is wealth management. And thanks to a history of conservative mortgage lending, Canada’s property market is also strong.

That’s a stark contrast to the still soft US banking system and housing market—which, except for a few areas of the country, continues to slide.

Finally, the Canadian government is the very model of stability, with a Conservative Party majority locked in place for at least the next four years.

Corporate tax rates, already the lowest in the developed world, are slated to fall to just 15%, less than half US rates. Meanwhile, the country is near fiscal balance, despite extensive social welfare spending that includes a national health-care system.

Contrast that to the increasingly dysfunctional US government, which is so polarized on partisan lines it still hasn’t been able to agree to raise its borrowing limits. That’s despite the fact that the business community—which finances most political campaigns—is pleading with politicians to find some agreement to avoid a potentially catastrophic and unprecedented default this summer.

As for investing, the Canadian market indexes continue to outperform most US stocks by a wide margin. And that margin has expanded for US investors, whose gains in Canadian stocks as well as dividends are magnified by currency appreciation.

Throw in increasingly unpredictable US regulation—from the environment to the financial sector—and there would seem to be little reason for Canadian companies to invest here.

Yet that’s exactly what a growing number of companies are doing, across a wide range of industries. And the pace appears to be accelerating.

NEXT: Buying Power


Buying Power
Why head south now? The sheer size of the US economy and markets alone has always been attractive to Canadian companies desirous to expand.

So has our common history and common language, at least for most of the population. NAFTA has broken down many of the formal barriers to direct investment as well.

What really makes the US attractive right now to Canadians, however, is buying power. The loonie's purchasing power is up 30% since early 2009.

As successful investors know, almost anything can be a good buy at the right price. And the appreciating Canadian dollar has made everything significantly cheaper in the US for Canadian companies, just at the time when balance sheets are back in order and local revenue and profits are strong.

Moreover—though housing in particular continues to weigh down the US economy—there are sectors of strength. If Canadian companies can buy in cheaply, they can rev up their growth for many years to come.

"The US is a market of consumers and producers, whereas Canada is a market for producers and no consumers. It’s a much more solid bet in the US, so this is where my focus will be.”

So says Alain Bedard, CEO of the rapidly growing transportation and logistics firm TransForce (Toronto: TFI).

The company has grown rapidly over the past decade by consolidating the diffuse Canadian freight business in Eastern (and now Western) Canada. It continues to move in that direction.

It has grown its geographic reach, and has also expanded into high-margin services, which now comprise 40% of revenues.

This year’s biggest move by the company, however, was the $247.9 million purchase of Dynamax, a Dallas-based parcel and same-day logistics company, which closed in February. TransForce was able to outbid two other would-be buyers, gaining a window into what Bedard calls “the highly fragmented US market.”

TransForce’s strategy is “asset light,” meaning it’s focused on expanding its network, rather than simply acquiring more trucks, for example.

This has the impact of leveraging capital spending, which in turn makes for faster growth.

Managing currency risk will be key in coming years, given my view that the loonie will at least gradually strengthen against the greenback over time. But first-quarter results demonstrate the potential growth of this business far outweighs the risk.

In a recent interview Bedard stated he expects the company will double its revenue in the US oil-drilling rig business alone to $200 million in three years. That’s more than a third of TransForce’s current total revenue.

The upshot: Driving south will open up a whole new avenue of growth for the company. The stock is rapidly moving back towards its all-time high of around $17, which it achieved in early 2006 as an income trust.

Now a far more valuable company, despite its lower dividend, TransForce is a buy up to $15. [After briefly jumping above this mark a few days ago, the stock is now trading in the $14.50 area—Editor.]

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