14 Aug The Lato Letter: Volume 1, Issue 24.
Following my appearance on Market Call Tonight, the following are summaries of the three “Top Picks” from last night’s show. If you missed the show, check the Library section of this website for the links to the show.
With crop prices being driven higher due to the North American drought, second half demand in international markets should allow Agrium to build on its excellent first half results. In a rare move, the company twice increased its guidance prior to releasing its second quarter earnings on August 3rd and still surpassed the consensus estimate of $5.20 with earnings of $5.47 for the quarter. These earnings were an increase of 19% compared to last year and position the company to meet or surpass the current consensus estimate for the year of $10.23 per share.
Agrium is extremely well diversified by operating in both the production, wholesale and retail segments of the market, by type of fertilizer and geographically. Combined with its strong management team, this diversification and continued earnings growth should warrant a higher multiple than the current 9.3 times earnings.
The company also announced on their quarterly conference call that they will be buying up to $900 million of stock through a Dutch Auction in early October. By retiring stock at this low valuation, the transaction will be accretive and should boost Agrium’s earnings even more.
Canadian Natural Resources, $30.15
After being one of the poorest performing oil and gas stocks in the first half of the year, Canadian Natural’s relative valuation provides for significant upside potential in the second half. The company has been impacted by low natural gas prices and by unusually wide differentials for the heavy oil that comprises a significant percentage of their overall production. In addition to these uncontrollable factors, Canadian Natural also experienced production problems at their Horizon oil sands project.
Natural gas prices, although still well below previous levels, have firmed heading into the winter heating season and heavy oil differentials that have narrowed significantly. The production issues at Horizon have also been remedied and production in the second half is expected to be at or near full production. Although, the entire sector has underperformed the market this year, as mentioned earlier, Canadian Natural has lagged the group. However, now with its discount to net asset value (NAV) and below average price to earnings and cash flow, the company has recovered from its recent July lows and is well positioned to outperform its peers in the second half.
Poseidon Concepts, $14.96
Poseidon Concepts was created in early 2010 by Open Range Energy Corp (recently the subject of a takeover bid by Peyto Exploration) to help address their exploration costs. Poseidon leases storage tanks that hold the fluids used in the fracking process employed in horizontal drilling. The company’s current fleet of over 400 tanks is employed primarily in Canada but Poseidon is actively targeting the much larger US market.
Although this market is becoming very competitive, Poseidon’s reputation for deployment speed, cost efficiency, safety and environmental friendliness have placed it in an enviable position among its competitors. The company went public in late 2011 and has rewarded shareholders with a well covered 9 cent monthly dividend (7.2% yield) and capital appreciation. With a planned expansion of its tank fleet and further growth in earnings over the next 18 months, Poseidon’s valuation of just under 6.5 times 2013 earnings should augur well for further capital appreciation and possibly increased dividends.
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