Hand-out
Algoma Central Corp. ranks as one of the most obscure publicly traded companies in Canada.
Its shares trade by appointment on the Toronto market, with no stock at all changing hands many days. It has an analyst following of exactly zero. And anyone looking for clues on how Algoma is doing isn't going to get profit forecasts from the company either. Its executives hew to the old-fashioned practice of not offering earnings guidance.
But for investors, obscurity may be the greatest virtue of this little known company that mostly makes money schlepping iron ore, salt and wheat around the Great Lakes. Years of being ignored by just about everybody on Bay Street have created an underappreciated stock that has all the makings of an intriguing value play.
Here are the main metrics for value cognoscenti. The shares sport a single-digit price to earnings multiple of only 6.9 times last year's profit, although the figure could rise a bit this year because of one-time accounting factors. The stock trades below its book value of $120.46, which understates the replacement value of its shipping and real estate assets.
As well, Algoma has scarcity value. It's the only publicly traded Great Lakes shipper in Canada, with arch rival CSL Group privately owned, as are all but one of the shippers on the U.S. side of the Great Lakes.
One recent Algoma buyer has been Michigan-based Cherokee Insurance Co. It picked up 6,200 shares for a portfolio of "what we believe are value stocks in Canada," says company president Mark Dadabbo.
Mr. Dadabbo contends the company is undervalued and that "at some point someone is going to acquire it."
The reason Algoma has no Street following and has tumbled into the depressed, value stock category is that most of the 3.9 million shares outstanding are locked up. Toronto's wealthy Jackman family owns 75 per cent, leaving less than one million shares for everyone else.
With so little stock, brokers can't make much commission money having clients trade the company, so they don't bother to follow it. Because the share price is below book, Algoma is unlikely to be a stock issuer, so there aren't incentives for brokers to talk up the company in hopes of winning lucrative underwriting business.
With a thinly traded stock, Mr. Dadabbo cautions against "market orders," or an open ended bid for the stock at any prices then available. Cherokee bought using a so-called "limit order," or fixed price at which it would be willing to buy.
Algoma president Greg Wight says the company wants to improve liquidity but isn't interested in doing so through a share issue "until the price of the stock is at what we think reflects the value of the company."
To get an idea of what the company thinks the stock should be worth, look at its convertible debenture, issued last year. The conversion price is $154 a share. Mr. Wight is upbeat on the company's prospects, pointing to last year's move to take complete control of affiliate Upper Lakes Group by buying out a partnership interest. The acquisition should boost revenue and profits over the long term.
Algoma's fleet of lake freighters is aging, but the company has announced an ambitious, $500-million program to retire older vessels and replace them with new, highly fuel efficient ships made in Asia. The new vessels cut fuel use nearly in half, have reduced the crew size, and have far lower maintenance expenses – cost savings that will flow to the bottom line.
Ships compete head-on with the railways for many low value, bulky commodities, so the fuel, maintenance and labour savings will give a competitive edge.
Renewing the fleet means more debt on the balance sheet, but the company has stress-tested its borrowing levels and could safely withstand an even deeper downturn than during 2008-09, when which it managed to remain profitable.
The company is a big shipper of iron ore, so part of its prospects depend on the health of the North American steel industry. However, shipments of salt, gravel and wheat give diversification and aren't as economically sensitive, and the company also has some real estate and non-Great Lakes shipping interests.
Algoma has an added shareholder-friendly quirk: It doesn't have an executive stock option plan because of the Jackman family's old school view on compensation.
Many managers claim options align interests of executives with shareholders, but another point of view holds that they encourage excessive risk taking, confer rewards as result of general market upturns rather than corporate excellence, and in general give away too much underpriced stock to the hired help.
The Jackmans believe executives should receive a competitive salary, have bonuses tied to actual corporate performance, and then, if they wish, buy stock the old-fashioned way, using salary.
This approach means executive buys send a message. Mr. Wight recently picked up another 1,000 shares to bring his total to 5,000. "I believe strongly in the business," he said of the move. "I bought them with after-tax, Greg Wight money."