Some companies are sexier than others. Likewise, CEOs. Just like Hollywood, corporate Canada has a celeb hierarchy. At the Brad-and-Angelina summit are the powerful and ostentatious-the Gerry-and-Heather, Frank Stronach and Peter Munk types. They sit at the choice tables at charity balls, schuss down Swiss Alps with famous friends, and have their faces plastered on the fronts of newspapers and magazines. Analysts at investment dealers follow these moguls' every move, sometimes even sharing the limelight in the papers and on ROBTv-the equivalent of Entertainment Tonight.
Just below the superstar stratum comes those irresistible bad boys like Conrad Black. A third rank is reserved for the CEOs who are relative dullards but who sit on top of companies so huge they can't be ignored.
Spare a thought, then, for the lowest level of corporate celebrity-those humdrum public companies that are all substance, no sizzle. These are the outfits that simply produce steady profits and share-price appreciation, year after year, in unglamorous yet essential businesses like telephone poles, packaging and, yes, nuts and bolts. Comb through news archives and pretty much all you will find are brief summaries of their quarterly or yearly earnings. Their CEOs don't get the best tables at Canoe. They don't even go to Canoe. Apart from a handful (at most) of analysts who track their shares and a few savvy institutional money managers who've profited from them, no one knows these companies' names.
Is that fair? No, but it's life. Sometimes, real performance gets no respect. "I sometimes look at the companies that do get coverage, and look at their total sales and profits, and say, 'Gee, how come we can't get coverage?' " says Francis McGuire, CEO of Major Drilling Group International Inc., a global player in mining technology.
Yet if you probe behind the frumpish exterior of many mid-sized corporate wallflowers, there are stories just as compelling and complex as the ones that transfix the celeb-watchers. Dynasties, proxy battles, global strategies, leading-edge technology-it's all there. You will also find controlling shareholders and relatively small floats of shares; more important than that, you will find that these companies are on the sunny side of the value investor's traditional price/earnings ratio threshold of 20. All you have to do is phone and ask. So we picked 10 of the glamour-impaired, and did just that.
St. Lawrence Cement Group Inc. 2005 revenue $1.3 billion Profit $20.6 million Three-year share price gain 59%* You can be forgiven if you've never realized how big Holcim Ltd. is in Canada. Holcim, a Swiss company that competes with France's Lafarge to be the world's No. 1 cement, concrete and aggregate supplier, stands a couple steps back from its Canadian brand names. Holcim has run St. Lawrence Cement since 1953, lately with 63% control. And while Montreal-based St. Lawrence operates more than 70 facilities-quarries, concrete and cement plants and distribution terminals-in Ontario, Quebec and the northeastern United States, even its name is not well known. It's more familiar to the public under the monikers of its major operating units, Dufferin in Ontario and Demix Béton/Agrégats in Quebec.
St. Lawrence's recent major projects include the 407 toll highway north of Toronto and the massive 10.4-kilometre tunnel that Ontario Power Generation is building at Niagara Falls. Moreover, St. Lawrence doesn't just supply materials-it has a sizable construction arm as well.
Business has been great lately, thanks to a North American building boom. Philippe Arto, the 50-year-old French civil engineer who has been president and CEO of St. Lawrence since 2003, says demand exceeds the capacity of the company's cement plants, so it is actually importing slag granules from Europe for a new leading-edge cement plant in Camden, N.J. "It's both global and local-that's the amazing part of the business," says Arto.
St. Lawrence is "not hiding from the media, but we're not actively looking for more coverage," Arto says. More attention could be useful on the labour front: The company has about 3,200 employees whose jobs are getting more technical and sophisticated at all levels. "We need new permits, we take part in big construction jobs and we actively recruit in labour markets," he says. "We want to be visible to those people."
St. Lawrence's shares aren't actively traded; more retail investors would help firm up the price. The firm estimates it has a "free float" of about 15 million non-voting class A shares. They have been trading near $32 recently, about 16 times earnings.
CCL Industries Inc. 2005 revenue $1.1 billion Profit $163.8 million Three-year share price gain 46% There's a good chance you come into contact with CCL within minutes of getting up in the morning. The Dove shampoo or Febreze air freshener that you grab in the bathroom comes in a container made or labelled by CCL. And the same experience is pretty likely to occur in Poland or Thailand: More than 80% of Toronto-based CCL's sales come from abroad. All told, it employs about 4,600 people at 46 factories in 15 countries.
Yet CCL gets little attention from retail investors and analysts. There are two reasons for this. The first is that CEO Donald Lang's family controls more than 90% of the A-class voting shares. Most of the more than 30 million B-class non-voting shares are held by institutions. The second is that the company has become a lot more complex-hence harder to understand-since Lang's late father, Gordon, founded it as a supplier of then-futuristic aerosol containers in 1951.
By the early 1980s, acquisitions had shifted CCL's focus to beverage cans, and sales topped $150 million. But with the advent of Canada-U.S. free trade in 1989, CCL executives realized they had to get out of the low-margin, cutthroat North American can business and focus more on specialized containers and labels, and on overseas markets. "Free trade was going to hurt us, so it spurred us to change," says Lang, who was named CEO in 1999.
In the tech-obsessed 1990s, investors couldn't be bothered with manufacturers, especially ones going through a transformation. In 2000, with the price of CCL's B shares stuck around $10, the Langs considered giving up control and converting to a single class of shares. But after hiring an investment bank to review the idea, they concluded the share price probably wouldn't get more than a small, one-time bump.
The B shares have climbed to around $30 recently, putting the price/earnings ratio at 14, but it's evidently still hard for investors to get excited about CCL. The details are interesting enough, though. CCL recently won a contract from Heineken to supply its beer labels worldwide, in large part because of nifty clear plastic film on which only print is visible. "You get that sort of no-label look," says Lang.
And although CCL's businesses are complex, the strategy is simple. It follows its giant multinational customers, like Procter & Gamble and Unilever, into new markets like China and Russia, thereby limiting what analysts call "customer risk" from dodgy clients. The locales get more exotic, but the buyers remain the same.
Strongco Income Fund 2005 revenue $414 million Profit $16.5 million Three-year unit price gain 792% Strongco deals in big stuff-machinery and equipment used in construction, mining, forestry and agriculture. If you want to buy a backhoe, a mobile crane or a custom conveyor-belt system to haul concrete up the side of your skyscraper, you can call Strongco. The company, which operates mainly in Ontario, Quebec, Alberta, Nova Scotia and New Brunswick, lost money from 1999 to 2002, but the turnaround since then has been remarkable. Revenues have climbed by more than a third over the past three years, while profits have quadrupled.
Robin MacLean, a chartered accountant who became CEO in 2004, credits Strongco's new focus for the improvement. First, the company has narrowed its equipment lines to the most respected brand names, including Volvo, Tigercat, Case and Grove Crane. Second, there's more emphasis on service. MacLean says the business is a lot like a car dealership. "The toys are more expensive, but it's the same concept," he says. "Your profitability is in the product support." But this support is more critical than it is for the average motorist. "When our customers are operating equipment and it goes down, they're losing income," he says.
But how long can the good times last? In May, 2005, Strongco converted itself into a trust at $15 per unit. With a building boom in full swing in most of Canada, some analysts warned that Strongco might be near the top of the economic cycle. But the unit price has climbed to more than $22 recently (putting the price/earnings ratio at about 10). Last month, Strongco changed its underlying structure from a corporation to a limited partnership, which is more common among income trusts and, in theory, should allow it to pay out a higher proportion of its profits to unitholders.
True, some cyclical risks are starting to show. Sales to Quebec's battered forestry industry were down in the first half of 2006, but the still-robust construction boom in Western Canada more than offset that. Also, as in the car business, the slower sales of a waning economy are cushioned by an uptick in service revenue. "You have people spending more trying to keep their existing fleet operating," says MacLean.
Stella-Jones Inc. 2005 revenue $157 million Profit $12.3 million Three-year share price gain 494% Stella-Jones president and CEO Brian McManus gets frustrated reading newspaper stories about flashy high-tech firms that are a third of the size of his company, which makes utility poles and railroad ties. "It's not sexy," he says, "but all those high-tech lines and everything else that's out there, that's what we're supporting."
Montreal-based Stella-Jones's revenues have almost doubled since 2003, and its profits have quadrupled. The share price has climbed from below $4 to around $20 recently, which is still only about 13 times its earnings per share. How can wooden poles and ties, which haven't been leading-edge technology since the 19th century, still be so lucrative and promising?
Lots of reasons, McManus explains. First, there's simple wear and tear of old networks. One hydro utility-and he won't tell you its name, even whether it begins with "O"-should have been replacing 75,000 poles a year, but it has only been replacing 25,000. So now it's bound to be a great customer. Railroad traffic across North America is at near-record levels, and track has to be upgraded for higher-speed trains or heavier loads.
There are other good portents. The Bush administration wants the oil-gobbling U.S. to use more coal-which is heavy and has to be transported mostly by rail. Windmills will likely be another boon. "They don't generate huge amounts of electricity, so the transmission lines can be supported by wood structures," says McManus. "The other thing, of course, is that wind farms are out in the middle of nowhere."
About 20% of Stella-Jones's revenues come from the U.S., and the company expects that share to grow. Right now, the firm has just one U.S. plant, in the "big metropolis of Bangor, Wisconsin," says McManus.
Stella-Jones is 67%-owned by a joint venture of two large private European firms: James Jones & Sons Ltd., a British forest-products company, and Stella S.p.A., an Italian pole manufacturer. They bought Domtar Inc.'s wood-preserving division in 1993, and took it public as Stella-Jones in 1994. As with other mid-cap companies with big controlling shareholders, Stella-Jones attracts little attention. For McManus, that has its advantages: "When you're under the microscope of the press or analysts, a lot of times you're managing on a quarterly basis."
McManus is just 38. He worked as an auto mechanic while in university. He later bought the service station he worked at, then sold it and purchased a storage company (which he still owns). Next, he went back to university to finish his MBA, which got him into investment banking, where Stella-Jones was a client. Sexy or what?
Arbor Memorial Services Inc. 2005 revenue $199 million Profit $17.5 million Three-year share price gain 82% These days, it's hard to recall how hot, hot, hot the death business-sorry, the funeral and cemetery business-was on Bay Street and Wall Street in the early 1990s. With millions of baby boomers in view, the demographics looked great, and the North American industry, populated by hundreds of family-owned operations, was ripe for consolidation. But then two companies overindulged. B.C.-based Loewen Group's expansion drive was halted when it was slapped with a $500-million (U.S.) verdict in a Mississippi lawsuit in 1995. It went bankrupt in 1999. Sector leader Service Corp. International of Houston, meanwhile, staggered under a $4-billion (U.S.) debt load. Industry share prices sagged, and so did the enthusiasm of investors and analysts.
Nonetheless, many solid mid-sized players kept expanding steadily, including Toronto-based Arbor Memorial, which operates 41 cemeteries, 27 crematoriums and 94 funeral homes, distributed across all provinces except Newfoundland and PEI. Richard Innes, 67, who has been Arbor Memorial's CEO for nine years, says the demographics and other long-term fundamentals are still rosy. The boomers are even closer to their prime purchase years now, and a growing proportion of the population is made up of ethnic minorities that favour traditional full-cost burials. "Italians prefer to be buried above ground," says Innes. For Arbor, that means more sales of big-ticket mausoleums. Innes also says he doesn't see any "death-star competitor" emerging in Canada or the U.S. that could dominate the business.
Like other funeral home and cemetery operators, Arbor Memorial's shares are still relatively cheap-they've traded at around $23 recently, less than 13 times their earnings per share. No analysts track the company.
Innes understands why. Like many mid-cap Canadian companies, Arbor Memorial's public float of shares is small and thinly traded. Toronto's Scanlan family, which has been involved with the company since 1947, controls 53% of its class A voting shares and 23% of its equity. Institutions have much of the rest, with the biggest block (46%) held by the wily value managers at Fairfax Financial Holdings. A stock like this is not as attractive to major investment dealers, which prefer big-cap stocks that trade in huge volumes. "There's no money" in Arbor Memorial for them, says Innes. But for an individual investor looking to buy a few hundred shares…
Vector Aerospace Corp. 2005 revenue $324 million Profit $11.5 million Three-year share price gain 57% Vector Aerospace chairman and CEO Donald Jackson has been involved in some nasty spats in his four-decade career in business. But you wouldn't know it, listening to an old smoothie who speaks in about as even and measured a tone of voice as you can imagine.
In 1990, he replaced founder Michael DeGroote as CEO of troubled waste-management giant Laidlaw Inc., but quit three years later after a massive ($335 million) loss in one quarter. He then founded Parkview Capital Partners, which became a sort of mini-Onex, specializing in private equity investments and leveraged or management buyouts of mid-sized companies.
In 2003, Jackson became embroiled in a bitter proxy fight at Toronto-based Vector, which maintains and repairs turboprop, helicopter and jet engines for civilian and military clients from facilities in Canada, the U.S. and the U.K. The company was spun off in 1998 from Newfoundland-based CHC Helicopter Corp. Mark Dobbin, son of CHC head Craig Dobbin, was named CEO. But by early 2003, free-spending Vector was more than $100 million in debt. Jackson and Parkview held a small stake; Jackson had got his shares for as little as $1.70 apiece. Other unhappy institutions with substantial holdings contacted Jackson, and he led a drive to unseat Vector's board. He lost the battle but won the war: In November of that year, shareholders forced Dobbin out and put Jackson in charge.
Since then, Vector has remained below the radar screens of analysts and the media. That has given Jackson breathing room to restructure the company, and the share price has climbed back above $4 recently. "When you're in a turnaround, you want to be careful that you don't get too much coverage unless you're sure you can get the results," he says. Even at $4, Vector's shares are still trading at about nine times earnings.
Jackson now wants to grow the company. It has three main divisions: Atlantic Turbines in PEI, Sigma Aerospace in the U.K. and Acrohelipro in Vancouver. Parkview also has an investment in Northstar Aerospace, which includes Boeing's spun-off helicopter gears and transmissions business. Its head office is near Chicago, but it trades on the TSX.
Both Vector and Northstar attract only a modest amount of coverage from a few Canadian analysts. Jackson believes that the Canadian aerospace industry would benefit from the consolidation of some of its smaller players, especially Northstar and Vector. He's concerned that they might disappear in the current wave of foreign takeovers of Canadian companies. "It'd be nice to keep Canadiana as part of the industrial complex," he says.
But control of Vector is still unclear. Halifax-based aerospace company IMP Group has increased its holding to 27% from about 14% in 2003. Jackson and Parkview have 13%, and there are a few other institutions with sizable holdings. The retail component is small; Jackson would like it to be bigger.
He would also like to pursue a vision of growth. "We've got some shareholders that I haven't been able to convince that that's the way to go," he says about as tactfully as anyone can.
H. Paulin & Co. 2005 revenue $150 million Profit $6.0 million Three-year share price gain 115% A small but growing Toronto manufacturer that makes and sells industrial fasteners, auto parts, bolts, nuts, screws and fluid system components to auto and hardware companies? One that's nearly doubled its profits over the past three years, even as much of the North American auto industry has been hammered? One with a share price that has climbed from below $20 five years ago to near $50 lately? One that has still traded below 10 times its earnings per share recently?
Sounded interesting to us. So we called. We phoned three times and left messages for treasurer and investor relations contact Carl Krause. Hello, this is the country's leading business magazine. We'd like you to discuss your great financial results.
No response. Nothing. Talk about a wallflower.
Major Drilling Group International Inc. 2005 revenue $269 million Profit $15.5 million Three-year share price gain 169% Every year, Major Drilling CEO Francis McGuire picks up Report On Business magazine's Top 1000 ranking of Canadian corporations by profit. "I see, oh my God, we're 350 in Canada," he says. "I forget how big we are." Yet oil-and-gas drilling companies that are only one-fifth the size of Major Drilling command much more national media attention. Sure, Moncton-based Major gets ink in publications like Progress, an Atlantic Canadian business magazine, "but that's because there are only about 15 publicly traded companies in Atlantic Canada," he says.
McGuire, 54, is a former politico. Perhaps that's why he's funnier and more down-to-earth than other CEOs. He started as New Brunswick Premier Frank McKenna's director of communications and polling in the late '80s, and served as deputy minister of economic development and tourism in the 1990s, helping attract call centres, technology companies and vacationers to the province. Come 2000, McKenna was chairman of Major Drilling. He called McGuire about the CEO's job. "I said, 'Frank, I don't know anything about drilling,' " McGuire recalls. "He said, 'Francis, you don't know anything about call centres, tourism or IT, so what's your problem?' "
Just as McGuire had done with the province's economy as a whole, he tried to find niches where Major Drilling had comparative advantages. The company's roots stretch back to the 1970s, when it did zinc drilling for Noranda at a huge mine near Bathurst, N.B. When McGuire arrived in 2000, the company was doing a lot of low-margin conventional drilling. McGuire chose to focus on hard-to-reach deposits, a market segment in which there were few competitors in Canada or abroad, and which requires highly specialized equipment.
That's still the strategy, and Major Drilling is working high up in Chile, deep down in Sudbury and in just plain tough and hard-to-reach locations like Canada's Arctic and Mongolia. Traditionally, specialty mineral drilling has been performed around the world by Canadians and Australians, many of them former farmers-handy fellows whose passports were widely accepted. But McGuire is trying to diversify and train Chileans, Mongolians and other nationalities.
All told, McGuire's work has paid off for shareholders-Major's share price has climbed from below $2 in 2000 to more than $21 recently. Yet that's still a modest 17 times earnings.
Mineral prices have, of course, boomed in recent years. But the other promising trend is that few major mineral deposits are being discovered in locations that are easy to reach and easy to mine. "They're going to have to go to weird and wonderful places," says McGuire. "We're growing at about $40 million to $50 million a year [in revenue] We'll keep doing that over the next several years, unless people find stuff in easily accessible places, which I doubt."
Newalta Income Fund 2005 revenue $248 million Profit $47.0 million Three-year unit price gain 154% How can a Calgary-based income trust that has more than doubled its revenues over the past three years, and has grown from a market capitalization of $180 million to $1.2 billion, not attract media and analyst attention? Simple: Its business is waste oil and industrial waste recycling, the far end of the glamour scale from oil and gas production.
"We've grown steadily for 13 years-25% or 30% a year-no big sizzle, nothing ever goes wrong," says Newalta CEO Al Cadotte in a voice that never rises above the deadpan. Even the institutional investors who hold about two-thirds of Newalta's units don't get excited. In annual one-on-one meetings with them, says Cadotte, they just check off targets from the previous meeting. "They do like boring," he says. "Boring is fine."
There's a lot to like-units have traded around $32 lately, a fourfold gain since 2003, but still only about 15 times earnings per unit. Cadotte would like more media coverage, however: It would boost the number of retail investors and smooth out fluctuations in the unit price. "Institutions buy and sell in blocks," he says. "The retail side determines the price."
Newalta went into the oil-field waste business with just a handful of employees in 1993. Now there are 1,600 employees, double what there were just last year. About 60% of Newalta's business is in its oil field division, mainly in Alberta. It recovers about 1.3 million barrels of waste oil a year. The other 40% is industrial waste recovery at sites across Canada.
Cadotte, 56, is an engineer who joined Newalta in 1993. No one dreams of going into waste management, right? "No, in 1993 that was the vision," he says. "The margins in the waste business look very attractive. A lot of people think they should be in it. They come and go very quickly." Newalta's equally deadpan chief financial officer, Ron Sifton, explains why it's a difficult sector for new competitors to enter: There are huge capital costs. Regulators require all sorts of letters of credit and performance bonds, plus health and safety plans. "We have 59 facilities," says Sifton. "It's not a simple business. The cost of mistakes is extremely high."
Neither Cadotte nor Sifton are going anywhere soon. Most managers have been with the company more than 10 years. "We haven't changed," says Cadotte. "One executive retired." He and Sifton are planning to stick around. "We're loping along here at 30%," he says. "At our age we don't want to sprint, but we can lope all right."
Canam Group Inc. 2005 revenue $713 million Profit $38.7 million Three-year share price gain 173% The transition from family business to public company is always tough. Just ask Frank Stronach. Or Canam Group's Marc Dutil.
In 2003, Dutil took over as president and chief operating officer of the construction products business that his grandfather, Roger, founded in 1961. Canam makes massive steel frames for construction in 11 plants across North America. Marc Dutil says that chances are that "you are under a Canam bridge, under a Canam roof, in a Canam gymnasium, in a Canam airport every week." Major projects it has been part of in recent years include the New England Patriots' and Philadelphia Eagles' football stadiums, the massive overhaul of Toronto's Pearson International Airport and two bridges spanning the North Saskatchewan River in Edmonton. "God help you if you go to the Casino Niagara; we built that too," says Dutil. All told, Canam employs 3,000 people in North America, India and Romania.
Despite that size and history, the company was struggling in 2003-it lost $40 million. As Dutil recalls, Canam was coming off a peak in the non-residential construction cycle in 2002, and should have had cash to pick off competitors hurting from the same slump. "We had an empty war chest," he says. "We need to have a strong balance sheet when others are waving the white flag." Dutil reorganized management and started cutting debt.
This past March, Marc's father, Marcel, who is Canam's chairman and CEO, announced he would give up the multiple-voting shares that gave him 57.6% control of the company. He carried through on his promise in August, reducing his voting stake to about 19%. "Is it better to own 10 million shares worth $4 each and have control, or 10 million shares worth $10, and the company in the hands of capable individuals?" asks Marc. What he's describing is the recent history of Canam's share price. But even at $10, Canam has still traded near a low, low 10 times its earnings per share.
At age 41, the younger Dutil is trying to maintain his entrepreneurial outlook-a mixture of fear and confidence. "Lose fear, and the edge isn't there. Lose confidence, and you're in the fetal position in your bedroom," he says. Has his dad thanked him? "His friends tell me he thinks I'm doing a good job," says Dutil. "He's not the generation that will hug and kiss me, but that's okay."
Dutil still has the pride of a small-town proprietor. Canam is headquartered in Ville de Saint-Georges, in the famously entrepreneurial Beauce region south of Quebec City. There are 30,000 people in the surrounding area. "You announce big contracts and the guys know they're going to work through the winter," says Dutil. "It's not the goal, but it's a big source of pride."
* All three-year price gains based on the closing price on the Toronto Stock Exchange on Sept. 5, 2006