Canadian Pacific Railway
Lululemon Athletica is Not a Lemon!
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Canada is a great country. Yet Canada gets very little press here in the U.S. Instead, we hear about the real estate bubble in China; the debt crisis in the PIGIS (Portugal, Italy, Greece, Ireland and Spain) countries; the slow economic recovery in the U.S. and Europe; and the myriad political battles in the U.S., U.K. and elsewhere.
Investors seem a lot more focused on stocks in the Emerging Markets, BRIC countries (Brazil, Russia, India, and China), and the U.S. rather than on stocks in Canada. But aren’t there some Canadian companies that provide steady growth in the seemingly steady political and economic environment in Canada?
When I was a young boy of 14, my mom and dad took my three sisters and me on the vacation of a lifetime. From New England, we swung through 21 states and 5 Canadian provinces. We traveled by car, train, bus and ferry. Most of the trip was by train, which was great fun. The wonders that we saw were fabulous and riding in an open-air railcar through the Canadian Rockies was the most memorable.
Later in life, I was able to travel to Nova Scotia, Prince Edward Island, Montreal and Quebec City. Three years ago, I accompanied my youngest son to Vancouver, British Columbia, where he began his first year at the University of British Columbia. He knew he chose the right college, when, from his third-floor dorm-room, he looked out over the Strait of Georgia to the City of Vancouver and Whistler Mountain in the background.
Canada is the world’s second largest country by total area. Russia is first. China and the United States are slightly smaller. Canada’s common border with the U.S. is the longest in the world. Canada’s population of 33.5 million is spread out over 10 provinces plus three territories. The capital of Canada is Ottawa and the three largest cities are Toronto, Montreal and Vancouver. Stephen Harper has been the Prime Minister since 2006.
Canada has the highest immigration rate of any country in the world, with more than half the total coming from Asia. Currently, 28% of Canadians derive their heritage from Great Britain, 23% from France and 15% from other European countries. English is the primary language spoken in 59% of Canadian households, while French is spoken in 23%. Immigration has continued to contribute significantly to the nation’s population growth.
Since World War II the development of Canada’s service, manufacturing, mining and energy sectors has led to strong GDP growth. Services now account for nearly 70% of the GDP. Tourism and financial services represent Canada’s most important industries within the service sector. Manufacturing is led by transportation equipment, chemicals, processed and unprocessed minerals, processed foods and wood and paper products.
Canada is the world’s largest source of nickel, zinc and uranium and a major source of a large number of other minerals. Major mineral areas include; Sudbury, Ontario (copper and nickel); Timmins, Ontario (lead, zinc, and silver); and Kimberley, British Columbia (lead, zinc, and silver). Petroleum and natural gas are found in Alberta and Saskatchewan.
Canada is a net exporter of energy. The country’s rich energy resources, including hydroelectric power, petroleum, natural gas, coal, and uranium fulfill the country’s power needs and provide important sources of exports. The vast Athabasca Oil Sands in Alberta give Canada the world’s second largest oil reserves behind Saudi Arabia.
We often think of Canada as being too cold for farming, but agriculture employs about 2% of the population and provides much of the country’s agricultural needs. In addition, Canada is one of the world’s leading agricultural exporters, especially of wheat, which is grown in Manitoba, Saskatchewan and Alberta. Apples and peaches are grown in abundance in Canada. More than half of the country’s total land area is forest, and Canadian timber production ranks among the highest in the world.
Fishing is an important economic activity in Canada, too. Lobster from the Atlantic and salmon from the Pacific are the principal catches, of which 75% is exported. The once flourishing fur industry is centered in Quebec and Ontario.
The United States is by far Canada’s leading trade partner, followed by China and Mexico. About 76% of Canada’s exports go to the U.S. and 65% of Canada’s imports come from the U.S. Canada enjoys a favorable surplus in its trade with the U.S.
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There are many interesting corporations located in Canada. Most major Canadian corporations are located in large cities within a short distance of the U.S. border. The fastest growing Canadian companies with five-year revenue and earnings growth of 15% or higher are:
Research in Motion
SXC Health Solutions
There are many more companies worth noting: companies with slower, but dependable growth such as Canadian Pacific Railway, as well as newer companies with exciting growth prospects such as Lululemon Athletica.
I am a value investor. I follow the teachings of Benjamin Graham, which are now utilized by many leading investors, including Warren Buffett. I look for quality companies at bargain prices. It doesn’t matter in what industry the company operates and where the company is headquartered. Lately, my attention has been drawn to a larger number of Canadian companies that are clearly undervalued and offer excellent appreciation potential during the next one to three years.
Two of the most attractive Canadian companies are Canadian Pacific Railway and Lululemon Athletica.
Canadian Pacific Railway (CP), founded in 1880 and based in Calgary, Alberta, operates over 15,000 miles of rail serving the Midwest and Northeast U.S., and more importantly, the major business centers of Canada. The railway offers coast-to-coast freight transportation for goods produced in Canada and the northern U.S. Canadian Pacific Railway’s low-cost freight transport is taking market share from trucking, which is burdened with rising fuel prices.
Intermodal container shipping offers an efficient means to transport goods over long distances. Goods typically arrive in the port of Vancouver on the west coast in containers and are hauled to their destinations efficiently by rail. Likewise, freight arrives in the port of Montreal near the east coast from Europe and is hauled to other areas in Canada and the U.S. Freight is frequently transferred to other railroads in Canada and the U.S. to reach destinations not served by Canadian Pacific Railway.
Revenues increased 3% during the past 12-month period ending 3/31/10. Earnings per share (EPS) fell 5% during the same period, but will likely increase 27% during the next 12 months. Revenues should rise 8% during the next 12 months led by intermodal container transportation.
Canadian Pacific Railway generates excellent cash flow and pays an attractive dividend yielding 1.6%. CP shares are undervalued at 16.4 times 12-month forward EPS of 3.64. In comparison, Warren Buffett paid 20 times EPS for Burlington Northern. I recommend buying CP at 60.00 or below.
Lululemon Athletica (LULU), founded in 1998 in Vancouver, British Columbia, makes athletic clothing for yoga, dancing, running and other active endeavors. The company sells women’s pants, shorts, tops and jackets in 106 company-owned and 13 franchised stores in Canada, the U.S., Australia and Hong Kong.
The company has distinguished itself from competitors by utilizing superior fabrics and unique clothing designs. The company works with athletes in local communities to obtain valuable product feedback.
Lululemon’s sales increased 40% and EPS soared 55% during the last 12-month period. For the most recent quarter, same store sales increased an amazing 29% and earnings per share doubled. We expect sales to increase 23% during the next 12 months accompanied by a 33% jump in earnings per share.
Share price, as measured by Lululemon’s price to earnings ratio, is expensive at 33.8 times our 12-month forward earnings estimate, but the company’s exciting growth potential provides an advantageous investment opportunity. Lululemon has a strong balance sheet with no long-term debt and lots of cash. I recommend buying LULU now.
J. Royden Ward
For Cabot Wealth Advisory
Editor’s Note: Roy just completed a brand new Special Report featuring 10 undervalued, high-quality Canadian companies that have the potential to make big profits for patient investors. For further details on how you can obtain a copy of the Special Report click below.