Pierre Duhaime, president and CEO of SNC-LavalinPaul Chiasson
The Source
David Baskin, president, Baskin Financial Services Inc. in Toronto
The Idea
Buy shares of SNC-Lavalin Group Inc.
The Reasons
With $7-billion in revenue last year, SNC-Lavalin is one of the world's leading engineering and construction companies, Mr. Baskin notes.
As such, it is well placed to cash in on the boom in infrastructure spending in both the developed and developing world. Indeed, SNC's projects range from a subway extension in Calgary to oil and gas projects in Saudi Arabia.
"It's a real Canadian success story," Mr. Baskin said in an interview. "Nobody in Canada has their range and scope."
Given the company's $12-billion order backlog, "they're not going to run out of work in the short run," he adds.
SNC-Lavalin shares have rebounded from their 52-week low of $26.35 to trade in the $45 range. Mr. Baskin thinks they're easily worth $50 and could climb even higher than that over the next couple of years as earnings continue to grow.
SNC-Lavalin also pays a small dividend, for a yield of about 1.3 per cent, he says.
"We normally look for higher yields, but in this case we're prepared to give up cash flow for growth."
The company earned more than $300-million in 2008. As well, it has "lots of free cash flow, a good return on equity - which was more than 30 per cent last year - and not that much debt, Mr. Baskin says.
If the company wanted to pay off its $2-billion in debt, it could sell its 17 per cent interest in Highway 407 toll road, he says.
As for competition, "the barriers to entry are enormous," he adds. "We like companies that have a protected space."
The Payoff
Mr. Baskin figures that over the next couple of years, SNC-Lavalin shares could return to their mid-2008 peak in the high $50s as earnings continue to grow.
The Big Risk
As with every engineering firm, "they could screw up and misprice a project," he said. The project could turn out to be more complicated than originally thought; the soil could be sandier, or there could be problems with ground water or being able to hire enough workers from the local labour.
"That's why we'd rather have a company that's done a lot of this around the world and that's very experienced."
As well, the company's share price could be dragged down by a falling stock market.
Why Listen to David Baskin?
Mr. Baskin has more than 25 years of experience in the investment industry and a knack for seeing promise in companies that others may have overlooked. Earlier this year he took a liking to National Bank of Canada, which rose smartly, and then to Onex Corp. as it was climbing back from a 52-week low of $12.86. Onex subsequently rose to a high of $28.43 but has since pulled back to $23.50.