I have a lot of beef against the way stock markets are behaving these days and how companies and their management play chicken with investors, telling us only what they want us to know, sometimes waiting right to the time before filing for bankruptcy. There is little investors are able to do. They take their lumps and move on to play another game, hoping this time the custodian of their capital will behave in a more honest manner. I am sure you know as many examples as I, ranging from the world leading technology company, Nortel, whose CEO kept telling you all is well right to the end, to the world’s largest insurance company AIG, whose founder is still insisting that in fact he was ripped off by the current management when they turfed him out. That may have been the only reasonable decision AIG managers ever made.
What is getting me hot under the collar today is this wave of large financial companies blaming the US government and Federal Reserve for their problems and their desire to return the TARP money. Now, I am all for free enterprise and coporations reposnsible for their own fate but just two months after the fiancail world came to a dead halt, when the same banks wouldn’t even return the other’s phone call, big unfailable institutions went under or nearly did; we are being asked to trust them to handle their own affairs. Go past the obvious, this is simply a repsonse to the threat that Obama may nto let these self procalimed masters of the universe continue to pay themselves obscenely at your expense. What is the downside for the big boys; how about nothing. I just learnt that the ex-CEO of Lehman Brothers bought a new pad in New York, for several Million. Hey you can’t pass up abargian, can you, not if your uncle, Sam is ready to pay the bills when you run into trouble. If this is not heads I win, tails you lose, I don’t know what else could be. My message to the Obama administration, don’t le t them off that easy, keep the screws on.
Of course, the investors have a bigger problem, not a new problem just a tougher one. Who do we believe, the CEO’s who want to pay off the TARP money so that that they can engorge some more and may be return the company to its previous glory or be suspicious that this is yet another ruse which will lead us back into the same abyss we were in just short few months ago. I am not sure I am ready to plunge in here and buy some of these US banks particulalry because of what their management tell me. Of course, I will loose out a lot of the initial move the stocks have made and will make. But if this turn is for real and we are off to the races in economic recovery and beyond, the stock market will be much higher with enough room to prosper for some years to come.
I, for one, am looking at the other part of the stock market where investors have dumped the shares or ignored them in favour of the fast moving sectors of resources and finance. There are quite a few such casualty , particularly defensive ones which have been left for dead and not participated in the current move since March. Today I point you to the utilities sector and Atco Group (TSX: ACO.X) in particular. The stock was trading over $50 a year ago. It dropped along with the world of stocks, down to $33 in October 2008, made a series of attempts to rise along with the market but it is back down to the $34 range, even though TSX is up nearly 12% year to date in 2009.
First let me introduce you to Atco, an Alberta based what seems to be a family controlled and managed company; there are two Kiefers and two Southerns among the executives. Now, much has been said about the ill prospects of family enterprise but the recent meltdown has convinced me that families tend to look after their wealth a lot more than MBA’s for hire. Check out the way Teck has managed to escape death and how CanWest is still sputtering. There was a time when investors worried that family control will inhibit juicy buy out bids but those were the days when money was plentiful and financial players were robust. As we discussed above, there is little of such genre in the game at this time. Right now the motherly protection of a family can keep your shares safe in storms. With more than 7,700 employees and $9.8 billion in assets, ATCO Group is conglomerate of companies comprised of three main business divisions: Power Generation; Utilities (natural gas and electricity transmission and distribution) and Global Enterprises (industrial manufacturing, technology, logistics and energy services).
ATCO reported sales of over 3.2 Billion in 2008 and more recently reported $875 million in the first quarter of 2009. In both cases earnings are up amounting to $4.60 per share last year. Assuming they hold the earnings level, the stock is currently trading at less than eight times earnings. That makes the company quite undervalued according to my model. Sure, you can assign a holding company discount but this is going too far if you compare with other conglomerates in Canada. For instance Power Corporation (POW) trades closer to 18 P/E. Some may compare it with pipeline companies like TransCanada Pipelines (TRP) which trades are over 14 P/E. In fact there are very few companies other than some banks and insurance companies which trade this cheap. And for the financial companies, need I say again that my confidence in their ability to deliver what they say is much lower than this family enterprise. So, buy.
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