4 undervalued Canadian stocks

by J. Royden Ward, editor Cabot Benjamin Graham Value Letter

I believe many outstanding buying opportunities exist among undervalued Canadian stocks. Canada's banks were not allowed to sell risky loans, its housing market remains solid, its economic growth continues to climb, and its debt remains low.

I screened my Ben Graham Database to find Canadian companies with rapidly growing earnings and strong balance sheets. The 4 stocks below offer excellent appreciation potential during the next six to 12 months.

Based in Calgary, Agrium (AGU) is a leading producer, wholesaler and retailer of agricultural nutrients and industrial products in North and South America. Products include nitrogen, phosphate and potash fertilizers; herbicides, insecticides and fungicides; and seeds.

Nitrogen fertilizers account for 37% of Agrium’s wholesale business and are enjoying increased profi ts because of the low price of natural gas, which is used as an ingredient in the manufacturing process.

Demand is rising for crop protection products in North America, and potash exports to Brazil and China are increasing.

High crop prices in the U.S. and elsewhere will enable farmers to use more nutrients to increase crop production.

In addition, worldwide population growth will spur demand for increased farm production and improved efficiency which can be provided by better nutrients and crop protection. Sales increased 15% and EPS advanced 20% during the past 12 months ended 9/30/12.

The semi-annual dividend was increased to $0.50 from $0.055 a year ago, and now provides a yield of 1.0%. After a slow year ahead, future earnings growth will be erratic but should average 15% per year.

Founded in 1817 in Montreal, Bank of Montreal (BMO) provides a wide range of retail banking, wealth management and investment banking services in North America. The bank also provides an array of credit and non-credit products and services.

The bank maintains 1,600 bank branches in Canada and the U.S., and operates internationally in major fi nancial markets and trading areas throughout most of the world.

Bank of Montreal has made three major acquisitions during the past three years. Marshall & Ilsley (M&I) of Wisconsin was purchased in July 2011 for $4.2 billion. BMO paid a very reasonable price, but M&I’s loan portfolio includes some non-performing loans.

BMO folded M&I Bank into its Harris Bank division (based in Chicago). In 2009, BMO acquired Diners Club North America from Citigroup for $1.0 billion cash. In 2009, it acquired AIG’s Canadian Life and Health Insurance unit for $375 million cash.

Revenues climbed 22% and EPS increased 13% during the 12 months ended 9/30/12. Remarkably, Bank of Montreal has been paying dividends since 1829. It now provides a high 4.8% yield. At 9.7 times my forward 12-month EPS forecast of $6.16, the shares are undervalued. BMO is low risk.

Gildan Activewear (GIL), based in Montreal, manufactures basic apparel including T-shirts, sport shirts, socks and sweat clothes.  It sells plain garments, known as blanks, to screenprinters and decorators who add designs and logos.

The company is adding new products including men’s and boy’s underwear, and expanding geographically into Mexico and Asia. The company has steadily boosted its U.S. market share for major items, partly because of the low price of its products.

Gildan suffered through a year of very high cotton prices which caused expenses to soar and profits to drop. Cotton prices have retreated to previous levels during recent months. Profits will probably rebound 82% during the 12-month period ending 9/30/13 from the depressed EPS level during the last 12 months.

GIL shares remain undervalued at 13.7 times my 12-month forward EPS estimate of 2.35 despite the probable surge in sales and earnings during the foreseeable future.

Based in Mississauga, near Toronto, Valeant Pharmaceuticals International (VRX) markets about 900 pharmaceutical products globally. It has developed drugs in almost all areas of medicine with a slightly higher emphasis on neurology and dermatology products.

The 2010 merger with Biovail tripled Valeant’s sales. The marriage has produced better than expected results and includes a vast array of products and marketing capabilities throughout the world.

Management is aggressively acquiring small companies with potential to immediately add earnings (commonly called accretive). It has acquired 50 companies during the past four years.

Management recently announced its biggest deal since the merger with Biovail, the acquisition of Medicis Pharmaceutical for $2.4 billion.

The purchase is due to be completed during the first or second quarter of 2013 and will be immediately accretive to Valeant’s earnings.

For now, the price-to-earnings ratio of 11.6 is a bargain, even though the company pays no dividend. The balance sheet is solid, although debt is a tad high. VRX is high risk because of the stock’s high volatility and the company’s erratic past performance.

Learn more about this financial newsletter at J. Royden Ward's Cabot Benjamin Graham Value Letter.

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