The Globe and Mail - 30.07.2019

B8 OTHEGLOBEANDMAIL | TUESDAY,JULY30,2019

EYEONEQUITIESDAVIDLEEDER

CANACOLENERGY(CNE-TSX)
CLOSE$4.94, UP 11¢

THOMSONREUTERS(TRI-NYSE)

CLOSEUS$68.30,DOWN US$2.11

CARGOJET(CJT-TSX)

CLOSE$96.11,DOWN 19¢

AECONGROUP(ARE-TSX)

CLOSE$20.75,DOWN 84¢

GILEADSCIENCES(GILD-NASDAQ)

CLOSEUS$67.87, UP 95¢

Canaccord Genuity analyst Jenny
Xenos raised her rating forCana-
col Energy Ltd.to “buy” from
“hold” in reaction to last week’s
announcement that the work as-
sociated with the expansion of
the gas pipeline between its oper-
ated Jobo gas processing facility
and Cartagena has been complet-
ed, which she called “a significant
milestone long awaited by the
market.”
Target:Ms. Xenos raised her tar-
get to $6 from $5. The consensus
target is $6.19.

Citing improving fundamentals

in its core business and a “higher

probability” of value creation

amid news it is in talks involving

London Stock Exchange Group

PLC acquiring Refinitiv Holdings

Ltd. in a US$27-billion deal, Credit

Suisse analyst Kevin McVeigh up-

gradedThomson Reuters Corp.

to “outperform” from “neutral.”

Target:He hiked his target to

US$80 from US$70. Consensus is

US$65.60.

Although he says the bull case for

Cargojet Inc.is “widely under-

stood, generally accepted, and re-

flected in the current share price,”

Raymond James analyst Ben

Cherniavsky says its valuation is

“ahead of itself.” Accordingly, he

initiated coverage with a “market

perform” rating and encouraged

investors to “wait for a more at-

tractive entry point.”

Target:Mr. Cherniavsky set a tar-

get of $90 a share, which falls be-

low the $100 consensus.

After “solid” second-quarter re-

sults, Desjardins Securities ana-

lyst Benoit Poirier saysAecon

Group Inc.is “on plan and on

budget to create further sharehol-

der value.” “Over all, we are main-

taining our bullish stance on ARE

due to its strong operational track

record, solid balance sheet, ro-

bust backlog and healthy market

conditions across a diversified

range of sectors,” he said.

Target:Keeping a “buy” rating,

he increased his target to $24

from $23. Consensus is $24.45.

Gilead Sciences Inc.’svaluation

discount is “too big to ignore,” ac-

cording to RBC Dominion Securi-

ties analyst Brian Abrahams,

leading him to upgrade his rating

for the U.S. biotech giant to “top

pick” from “outperform.” “Shares

will begin to better reflect the val-

ue of future cash flows from their

marketed products and pipeline,”

the analyst said.

Target:He maintained a US$91

target. Consensus is US$80.59.

WHAT ARE WE LOOKINGFOR?

Today we focus on U.S. compa-
nies in the consumer discretion-
ary sector. We are looking for
wealth creators and comparing
them with the premium or dis-
count the market has attributed
to them.

THE SCREEN

We screened the S&P 500 Con-
sumer Discretionary stock uni-
verse by focusing on the follow-
ing criteria:
Market capitalization above
US$10-billion;
A current economic perform-
ance index (EPI) equal to or grea-
ter than one – this ratio is the
return on capital to cost of cap-
ital. It gives shareholders an idea
of how much return the compa-
ny is generating on each dollar
spent;
A positive 12-month EPI
change – this measures the
growth in return on capital ver-
sus cost of capital over the past
12 months;
A future-growth-value-to-
market-value ratio (FGV/MV)

between 50 per cent and minus

50 per cent. We chose this range

to eliminate stocks that trade at

an exaggerated premium or dis-

count as that would increase the

risk. This ratio represents the

proportion of the market value

of the company that is made up

of future growth expectations

rather than the actual profit gen-

erated. The higher the percent-

age, the higher the baked-in pre-

mium for expected growth and

the higher the risk.

We have also included recent

stock price, dividend yield and

one-year return. Please note that

some ratios may be reported at

the end of the previous quarter.

MORE ABOUT INOVESTOR

Inovestor for Advisors is a funda-

mental-analysis research plat-

form specializing in the econom-

ic value-added (EVA) approach.

With Inovestor, advisers can

quickly identify attractive invest-

ment opportunities, outsource

their stock picking by using mod-

el portfolios and easily commu-

nicate investment decisions with

clients through client-friendly re-

ports. In addition, Inovestor al-

lows users to create personalized

filters, build custom portfolios

and carry out in-depth analysis

on more than 13,000 companies

(Canadian stocks, U.S. stocks and

American depositary receipts).

WHAT WEFOUND

Topping our list, based on mar-

ket cap, we haveMcDonald’s

Corp.A few days ago, McDo-

nald’s released its second-quar-

ter figures with earnings and

sales higher than expected,

pushing the stock price to new

highs. The company is operating

efficiently and has no problem

covering its cost of capital; this

can be seen by an EPI of 2.9. Also

note the optimism in the market

toward this stock, based on the

45-per-cent premium priced into

the stock price.

Yum Brands Inc.is another

fast-food-related company on

our list. The company is one of

the strongest performers in

terms of 12-month stock price

growth, at 44.4 per cent. Also, the

EPI is seven, which is quite high

and has increased steeply over

the 12-month period. According

to this, the performance is great,

but a premium of 35.6 per cent is

baked into the stock price. Sec-

ond-quarter earnings are sched-

uled to come out later this week.

Discovery Inc., a media com-

pany and television network op-

erator, is one of only two on our

list (the other being General Mo-

tors Co.) that is trading at a dis-

count. With an EPI of 1.6 that has

grown by 51.5 per cent over the

past year, and a one-year return

of 19.9 per cent, Discovery is posi-

tioned competitively and is still

undervalued (as shown by its

negative FGV of minus 43.8 per

cent).

Investors are advised to do

further research before investing

in any of the companies that are

listed here.

SeekingwealthcreatorsamongU.S.consumerdiscretionarystocks

SelectU.S.consumerdiscretionarystocks

COMPANY TICKER

MKT.CAP.

(US$MIL.) EPI

EPICHG.

12M(%)

FGVON

MV(%)

DIV.

YLD.(%)

1Y

RTN.(%)

RECENT

PRICE(US$)

McDonald'sCorp. MCD-N 164,595.3 2.9 73.4 45.0 2.3 38.1 215.58

BookingHoldingsInc. BKNG-Q 86,907.3 2.1 94.0 47.9 0.0 -5.6 1,966.85

TJXCompaniesInc TJX-N 67,618.3 3.0 18.8 41.1 1.5 14.4 55.76

GeneralMotorsCo. GM-N 57,078.0 1.4 104.8 -7.9 4.1 10.9 40.77

MarriottInternational MAR-Q 46,864.2 1.6 56.3 45.9 1.3 7.1 140.27

TargetCorp. TGT-N 44,601.9 1.6 11.5 15.4 3.3 9.0 87.06

ActivisionBlizzardInc. ATVI-Q 36,756.7 1.7 44.4 8.4 0.7 38.2 47.99

DollarGeneralCorp. DG-N 35,640.8 1.9 31.1 36.6 0.9 39.1 137.97

YumBrandsInc. YUM-Q 34,890.1 7.0 337.0 35.6 1.5 44.4 114.02

eBayInc. EBAY-Q 34,715.7 1.0 129.7 45.9 0.7 19.8 41.23

O'ReillyAutomotiveInc. ORLY-Q 29,432.9 3.9 69.8 41.6 0.0 26.4 383.79

AutoZoneInc. AZO-N 28,208.6 3.4 109.9 36.1 0.0 61.2 1,146.18

RoyalCaribbeanCruises RCL-N 23,876.7 1.2 8.8 23.3 2.3 2.2 113.96

BestBuyCo.Inc. BBY-N 20,759.3 1.9 69.0 19.7 2.5 2.3 77.75

OmnicomGroupInc. OMC-N 17,769.5 1.1 28.7 31.0 3.1 18.7 81.69

D.R.HortonInc. DHI-N 16,604.4 1.1 6.8 26.4 1.3 1.5 44.50

DiscoveryInc. DISCA-Q 16,553.2 1.6 51.5 -43.8 0.0 19.9 31.47

GenuinePartsCo. GPC-N 14,302.5 1.6 39.0 19.8 2.9 0.3 97.91

Source:InovestorforAdvisors

NOORHUSSAIN

NUMBERCRUNCHER

Analyst and account executive for
InovestorInc.

N

FI Group Inc., formerly
known as New Flyer In-
dustries Inc., should be in
the sweet spot of Canadian in-
dustry right now. The company
builds energy-efficient buses
that run on everything from nat-
ural gas to electricity.
Its products are in demand
across North America as more
municipalities opt for low-
emission or emission-free tech-
nology to meet mass transit de-
mands.
But somehow, things aren’t
going right for this Winnipeg-
based company.
The stock (NFI) has been in
free-fall for much of the past
year, dropping from $52 last Sep-
tember to $30.16 on Monday, a
loss of 42 per cent. The dividend
remains unchanged at 42.5 cents
a quarter ($1.70 a year), provid-
ing an attractive yield of 5.5 per
cent. But the sharp decline in the
share price has many investors
worried.
So, what’s happening? Earlier
this month the company re-
leased its second-quarter report

on deliveries, orders and back-

log, and it offered some insights

into the problems plaguing NFI.

The company revealed

that deliveries of all products in

the second quarter were down 11

per cent year-over-year to 1,029

vehicles or, as the company re-

fers to them, “equivalent units”

(EU).

Supply delays, missed produc-

tion days and postponed cus-

tomer acceptance inspections

contributed to the decline, chief

executive Paul Soubry said in a

company news release. He ex-

pressed confidence that deliver-

ies would pick up in the second

half, but the company adjusted

its full-year guidance downward.

It now expects to deliver 4,260

EUs this year, a decrease of 150

EUs, or 3.4 per cent, from previ-

ously reported expected deliver-

ies.

Second-quarter profits, to be

released Aug. 13, will be affected

by the delivery slowdown.

Even more alarming is the

dramatic drop in new orders,

which are down 52 per cent year-

over-year from 6,303 (firm and

options) in 2018 to 2,997 in the

second quarter of this year. The

company expects more bids in

the second half but cautions that

“the individual awards are ex-

pected to be smaller in size with

fewer options or shorter contract

terms as transit agencies develop

plans for future battery-electric

vehicle adoption.”

Another worrisome sign is

that the backlog is declining. At

the end of the second quarter,

NFI’s total backlog was 9,997 EUs

(valued at $4.8-billion) com-

pared with 10,587 EUs (valued at

$5.2-billion) at the end of the

first quarter.

The company also reported

problems with its new US$28-

million fabrication plant in Ken-

tucky, which makes parts and

components. The operation has

been slow to reach operational

goals and the company has re-

placed top management and

“deployed additional resources

to improve operational execu-

tion and efficiencies.” But NFI ac-

knowledged that the Kentucky

facility will be a drain on earn-

ings until at least 2020.

On the plus side, the company

believes that its recent acquisi-

tion of U.K.-based Alexander

Dennis Ltd. (ADL) for US$405-

million will be immediately ac-

cretive to earnings and free cash

flow per share. ADL is the world’s

top producer of double-decker

buses.

In short, NFI is going through

a difficult period. The transition

to electric buses is under way but

will take time. The ADL acquisi-

tion should be beneficial, but the

integration process could be

longer than expected.

For those reasons, I would not

buy the stock at this time. The

yield is very attractive, but the

risk of a further decline in the

share price is significant.

Despiteanattractiveyield,

NFIdoesn’tlooksogood

Winnipeg-basedmaker

ofenergy-efficientbuses

hasseenitsstockdive

formuchofthepast

year–here’swhy

GORDONPAPE

OPINION

INSIDETHEMARKET

Editor and publisher of theInternet
WealthBuilder andIncomeInvestor
newsletters

On the plus side, the

company believes that

its recent acquisition of

U.K.-basedAlexander

Dennis Ltd. (ADL) for

US$405-million will be

immediately accretive to

earnings and free cash

flow per share.ADLis

the world’s top producer

of double-decker buses.

CANADIANSTOCKS

Canada’s main stock index closed lower to start a busy week

with investors focused on an expected interest rate cut by the

U.S. Federal Reserve. The S&P/TSX composite index was

down 38.87 points at 16,492.17 points, after being dragged

down by technology as Shopify Inc. decreased 5.1 per cent

and the key energy sector fell despite higher crude prices.

Vermilion Energy Inc. dropped 7.33 per cent after reporting

decreased quarterly production in the second quarter. Husky

Energy Inc. was down about 4 per cent and Cenovus Energy

Inc. was off 3.7 per cent.

U.S.STOCKS

U.S. stocks stepped back from last week’s record highs as in-

vestors took a breather ahead of an expected interest rate cut

by the Federal Reserve and looked for signs of progress from

U.S.-China trade negotiations under way in Shanghai.

The Dow Jones Industrial Average rose 0.11 per cent, to

27,221.35, the S&P 500 lost 0.16 per cent, to 3,020.97 and the

Nasdaq Composite dropped 0.44 per cent, to 8,293.33.

Mylan NV’s shares jumped 12.6 per cent after the generic

drug maker confirmed reports that it was combining with

Pfizer Inc.’s Upjohn unit that sells its off-patent branded

medicines, a move that brings blockbuster treatments Via-

gra, EpiPen and Lipitor under one umbrella. Pfizer shares slid

3.8 per cent after news of the deal, and after the company

lowered its full-year profit and revenue forecasts in an earli-

er-than-expected release of its quarterly results.

COMMODITIES

Oil prices rose as the prospect of an expected interest rate cut

by the U.S. Federal Reserve overshadowed pessimism over

U.S.-China trade talks and worries about slower global eco-

nomic growth. Brent crude gained 25 cents to settle at

US$63.71 a barrel, while U.S. West Texas Intermediate crude

futures rose 67 cents to settle at US$56.87 a barrel.

FOREXANDBONDS

The Canadian dollar edged slightly higher against its U.S.

counterpart, with the currency on track to break its six-day

losing streak. The U.S. dollar held near a two-month high

ahead of what is expected to be the first U.S. interest rate cut

since the financial crisis, while the rising risk that Britain will

exit the European Union without a deal knocked the pound

to a 28-month low.

Canadiangovernment bond prices were lower across the

yield curve, with the two-year down 1 cent to yield 1.478 per

cent and the 10-year falling 3 cents to yield 1.469 per cent.

U.S. Treasury yields fell broadly, in linewith government

bond markets around the world amid global economic un-

certainty.

REUTERSANDTHECANADIANPRESS

Marketssummary

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