Power Corp. is committed to further streamlining its operations by off-loading assets that don’t line up with a core mandate that revolves around financial services.Mark Blinch/The Canadian Press
Power Corp. of Canada POW-T is undoubtedly a cheap stock with an attractive dividend. But the reason for investing in the financial conglomerate no longer rests on the substantial discount to its component parts.
Instead, buyers are now betting on growth.
Power Corp. is essentially a holding company that has significant stakes in Great-West Lifeco Inc. GWO-T, IGM Financial Inc. IGM-T, Groupe Bruxelles Lambert – or GBL, the Belgium-based investment firm – and the alternative asset manager, Sagard Holdings Management Inc.
These holdings have holdings of their own, including asset managers Wealthsimple and Mackenzie Investments and a number of hard-to-value private equity investments.
If that sounds like a lot of moving parts, it is. That’s why the share price of the Montreal-based parent company has been subjected to a discount of 20 to 30 per cent over the past five years, based on the estimated value of Power Corp.’s various operations, or net asset value – and that’s after a corporate streamlining in 2019 that was designed to make the stock look more attractive.
The current discount narrowed earlier this week to about 24 per cent from 29 per cent at the start of 2024, after a rally of more than 20 per cent in Power Corp.’s share price this year.
Some analysts expect that the discount can stabilize at current levels or perhaps shrink even further – falling to about 19 per cent, according to Phil Hardie, an analyst at Bank of Nova Scotia – offering a compelling outlook for investors who like a deal.
But to get there, Power Corp. needs to show that it’s more than a cheap stock.
Its latest quarterly financial snapshot, released this week, may have muddied the outlook: The company reported net earnings of 58 cents a share, down from $1.50 a share in the same period last year.
Perhaps more concerning, adjusted earnings – which take into account unusual gains or losses that are unrelated to regular operations – missed analysts’ estimates by a wide margin.
Part of the problem: Power Corp.’s quarterly results reflected a loss at GBL and Lion Electric Co. – another moving part – while the value of its stake in Lumenpulse, a lighting company, declined.
The stock fell 3.9 per cent on Wednesday, the day after the financial report was released, suggesting that investors were having second thoughts about the double-digit discount.
Nonetheless, analysts believe that Power Corp. is moving in the right direction.
“We think underlying growth trends in the quarter were much stronger than the headline earnings numbers suggest,” Mr. Hardie said in a note.
For example, Great-West Lifeco’s latest quarterly earnings increased by 12 per cent from the same period a year ago. IGM’s earnings rose 18 per cent. And the fair value of Wealthsimple, the closely-held online investment manager whose assets under administration have surged above the $52-billion mark – doubling over the past year – jumped 46 per cent.
“It doesn’t show up in the earnings, but it’s obviously a very important mark on the growth and the success of the business,” said Jeffrey Orr, Power Corp.’s chief executive officer, on a call with analysts.
What’s more, Sagard Holdings has agreed to sell its stake in Peak Achievement Athletics Inc., which owns Bauer Hockey, to Fairfax Financial Holdings Ltd., in a $440-million deal.
The sale underscores Power Corp.’s commitment to further streamlining its operations by off-loading assets that don’t line up with a core mandate that revolves around financial services.
As well, the influx of cash from the Peak sale can be used to fund more share buybacks, which the parent company has already embraced to the tune of more than $300-million so far this year, in addition to regular quarterly dividends.
In other words, regardless of whether investors scoop up the stock at the current discount, Power Corp. is more than happy to step in as an enthusiastic buyer – reducing the number of outstanding shares and increasing a couple of key per-share metrics that investors watch closely, including earnings and net asset value.
The take-away here: Even if the discount stabilizes at the current level of 24 per cent, which is about midway in the recent range, the rising value of Power Corp.’s underlying assets should drive its share price higher.
If the discount shrinks? Even better. But for that to happen, investors are going to require more evidence that IGM, Great-West Lifeco and GBL – and all the other moving parts – are indeed moving.