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WestJet does it again

Also: Agrium disappoints, and Eric Nuttall dishes on the big themes for 2013

Nov 7, 2012

by Max Fawcett

The streak is now at 30. WestJet posted yet another profitable quarter in Q3 2012, and this one was among the most impressive they’ve ever delivered for investors. Net earnings came in at $70.6 million, or $0.52 per diluted share, up from $39.3 million and $0.28 per share a year earlier, on revenues of $866.5 million. That’s year over year growth of 79.9 per cent in overall profits, 85.7 per cent in per-share profits and 11.8 per cent in revenue. WestJet shares are actually trading down on the broader market weakness today at just under $18, but the continued growth in its top and bottom lines, along with the impending launch of a new regional carrier, could easily push its shares past the $20 mark – and beyond.

Agrium, on the other hand, shocked investors with an uncharacteristically bad third quarter earnings report, and those investors responded by selling the company’s shares down to its lowest level in two months. Its net income came in at US$129 million, or 80 cents per share, down from US$293 million or $1.85 per share in the third quarter of 2011. Some one-time items hampered the company in the quarter, but even excluding those its earnings still would have been below estimates at $1.34 a share. Its sales revenues were also down year-over-year, dropping six per cent from $3.17 billion to $2.96 billion.

And Sprott Asset Management’s Eric Nuttall did a live chat at the Globe and Mail yesterday in which he discussed his favourite picks for the next few months. He’s surprisingly bullish, given the macro-economic headwinds that appear to be ahead of the market, and has reduced his cash position in his portfolio to less than five per cent. “The oil business at $90/bbl is HIGHLY profitable,” he wrote in the chat. “Many mid caps in Canada do not reflect this reality…people are paralyzed right now about the potential for significant demand destruction which I do not see, barring a global recession.”

One of his big themes for 2013 is M&A activity, which he thinks will pick up dramatically after the government of Canada rules on the proposed CNOOC-Nexen tie up (and hopefully clarifies the rules around the net benefit test). “I think there will be MUCH more activity once the government finally gets around to clarifying SOE [state-owned enterprise] rules for takeovers,” he said. “Look for interest in the Montney, the Duvernay, and continued oil sands JVs or outright sales.”

Another theme is finding companies that are initiating dividends or look like they might do so. Nuttall said energy companies are finding it key to attracting capital in the open market. “We’ve seen Twin Butte very successfully adopt the model, and last week Renegade Petroleum did as well,” he said. “I think you’ll see this trend continue, and the multiple paid for dividend stocks is materially higher than regular growth stocks now. Many dividend companies will trade over seven times EV/CF, where some junior growth companies are trading below three times.”




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