Two New Ways to Play Canada

11/19/2007 12:00 am EST

Focus: GLOBAL

Roger Conrad

Founder and Chief Editor, Capitalist Times

Roger Conrad, editor of Canadian Edge, says the strength of the Canadian dollar and economy make some Canadian companies more attractive to investors.

Canada continues to report strong economic data. The Canadian dollar’s rise gained momentum after a government report showed the economy added five times more jobs than forecast in October, and the unemployment rate fell to a 33-year low.

The Canada-US trade relationship is the largest ever to exist between two nations, [and] Canada’s economy is tied like no other to the US. But Canada should be able to avoid the sharpest impacts of a mortgage meltdown. From 2004-06, subprime lending grew to 22% of new mortgages in the US. In Canada, subprime loans account for 5% of new loans.

Demand for natural resources should only intensify as consumption patterns evolve along with rising Asian household income. And resources are the most important part of Canada’s economy.

Given the changing global resource supply/demand profile and Canada’s ability to prosper from it, the loonie should enjoy a long stay above parity [with the US dollar]. And the wealth generated by Canada’s resources should filter down to support a broadening of the domestic economy.

Talisman Energy (NYSE: TLM), Canada’s number-three independent exploration and production (E&P) firm, has operations in North America, the North Sea, Southeast Asia, and Trinidad. The company has struggled in recent quarters to meet production and earnings guidance, but aggressive new chief executive officer John Manzoni, late of BP, pledged in his first quarterly conference call to break the habit.

As new capital projects progress, Talisman’s longer-term growth potential should become evident. It’s trading at a substantial discount to its peers, and some analysts have suggested a breakup of assets along geographic lines. Raymond Jamesanalyst Stephen Calderwood forecast a breakup would create more than $C45 in value for each Talisman share.

The value of Talisman’s asset base exceeds its current share price. A great value relative to other E&P firms, Talisman Energy is a buy up to $US24. (It closed below $US19 Friday—Editor.)

Shaw Communications (NYSE: SJR) boosted its annual dividend 9% to 72 cents Canadian per share, making it the highest-paying North American cable company. Shaw has been rumored as a possible entrant to the Canadian wireless market and could do it without harming its dividend.

[Meanwhile], Shaw continues to focus on its core cable business, paying down debt and returning capital to shareholders. If the auction rules are favorable for new [wireless] entrants, Shaw has the flexibility to compete. A spectrum set-aside or mandated tower-sharing and roaming may mean a strategic shift.

Another potential catalyst: the $C30 billion in funds currently invested in BCE will soon be looking for a new home, and Shaw’s operating results suggest it as a viable candidate [if and when the buyout of BCE is completed—Editor].

Earnings excluding nonoperating items were up 66%, revenue increased 13%, and free cash flow increased 38%. Buy Shaw Communications up to $US32. (It closed below $25 Friday—Editor.)

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