Genevieve Roch-Decter is portfolio manager at LDIC Inc. Her focus is energy infrastructure stocks.
Top Picks:
Badger Daylighting
Badger Daylighting is North American's largest provider of non-destructive hydrovac excavation for oil and gas pipelines and utility, transportation and industrial sectors. We like Badger Daylighting because they have the ability to grow their business organically by 20 per cent a year, with 30-per-cent EBITDA margins, a 20-per-cent return on equity and a strong balance sheet. They just reported a very strong Q2 with EBITDA up 48 per cent year-over-year and their U.S. margins expanded significantly from 23 per cent to 31 per cent year-over-year. Their most mature market is Canada and they still manage to grow that business by 25 per cent year-over-year, so we are very excited about the growth in the U.S. which is just starting to gain traction. Badget Daylighting has over 700 trucks, business is split 50/50 Canada/U.S. and they are building three trucks a week.
Trinity Industries
We like the crude-by-rail sector and believe it is here to stay as a complimentary transportation option to pipelines. Crude-by-rail is helping alleviate price differentials between WTI and Brent as seen from Q1 to Q2 this year. The WTI-Brent spread was as wide as -$18/barrel (U.S.) and has since narrowed to -$4/barrel, while crude moved by rail was up 30 per cent over the same period. Large pipeline projects like Keystone XL continue to experience regulatory delays and others like TransCanada's conversion of its mainline will take years before it's online. In the meantime, rail will fill the transportation gap and rail car manufacturers and leasers such as Trinity Industries will do well. We like Trinity because they are the market leader in rail car manufacturing. They have been on a strong growth trajectory over the last three years and we expect that to continue, they have a solid balance sheet, a growing dividend and compelling valuation trading much lower than peers and lower then its historical multiple. Trinity also has a strong leasing segment that we believe could be worth much more if spun-out or eventually sold.
Inter Pipeline
Inter Pipeline is our largest holding at the firm and in our new fund. We have owned it since it was $8 a share. It has returned 20 per cent a year plus a dividend yield for the last ten years. We like Inter Pipeline because of the growth with $3-billion in oil sands projects and expansions over the next few years, the ability to self-fund a large portion of this through internal cash flow generation, they continue to increase their dividend and they operate all within Alberta so there is very low risk of large regulatory hurdles. Most recently shareholders approved both the internalization of the external management contract and conversion to a corporation which will allow foreign investors to own the stock. We believe IPL is worth $30 a share based on 2016 EBITDA and a historical EV/EBITDA multiple of 12x.
Past Picks: May 23, 2013
AltaGas
Then: $38.79
Now: $35.36
Total return: -7.88 per cent
Canexus
Then: $8.86
Now: $7.49
Total return: -14.71 per cent
Badger Daylighting
Then: $48.48
Now: $56.20
Total return: +16.75 per cent
Total return average: -1.77 per cent
Market outlook:
We believe the building blocks are in place for sustained economic improvement in the U.S. that should spill over to the Canadian economy. Housing data continues to improve steadily, manufacturing remains strong and, most importantly, the consumer appears to be in good shape according to recent data on income, consumption and confidence. Our interest rate forecast is that they will remain fairly low. U.S. Federal Chairman Ben Bernanke has been quite clear that it is his intention to maintain low short-term interest rates through 2014 and based on his past behaviour has demonstrated enormous patience in ensuring the economy has stabilized before withdrawing any form of stimulus and when he does it will be at a slow and measured pace and that Canada's policy will be similar. The market will be choppy until September 18, when the Fed meets next and makes a decision on whether to taper it's $85-billion (U.S.) in monthly bond purchases.