Rogers Sugar is a familiar brand name in Western Canada; in the East, it’s known as Lantic Sugar, which it bought in 2002.Marc Rimmer
Visit this year's Top 1000 rankings of Canada's most profitable companies and find more tables, multimedia and analysis in Report on Business's full Top 1000 section.
Let's say you want to invest in the Canadian economy. You realize, first of all, that many of the largest players are foreign-owned, and don't trade on the TSX. Among those that do trade on the TSX, the Top 1000 list reveals a top-heavy concentration of giant financial institutions and resource producers—the kind of companies scrutinized by every analyst and institutional investor. So there's few bargains to be found up there. And much of the rest of the list is populated by highly cyclical junior oil-and-gas or mining companies.
Still, you ask, can one find businesses in a variety of sectors that will keep delivering returns to shareholders year after year, through irrational exuberance or pessimism in markets?
Even after you've found interesting and promising-looking businesses, are they available at a reasonable price? Canadian markets, it bears remembering, are approaching their pre-crash highs.
In fact, there are still some bargains priced well below the traditional value investor's price-earnings (P/E) threshold of 20. Five years after the crash, many investors remain nervous about the economy, particularly about hard-hit sectors like manufacturing. Just ask Brian Robbins, CEO of Exco Technologies, which supplies machinery to auto manufacturers. "We're the smallest company in the industry, but have the highest dividend yield," he says. Yet Exco shares are still trading at a lowly 10 times trailing earnings. "We don't like being the cheapest guy in town," he says.
There is no surefire method for finding these companies, but they do share some traits. Almost all of them are rooted in traditional sectors. Many have found a lucrative niche or new strategy that they figure will allow them to prosper through economic ups and downs. To get a complete picture, it helps to go beyond the financial statements and ask senior executives to outline their game plan. So we phoned them, and here's what we found out.
All ranking, revenue and profit numbers are from the Top 1000, which is based on 2012 results. Share price gains are calculated from June 7, 2010, to June 7, 2013.
Black Diamond Group Ltd. (BDI-T)
Top 1000 rank: 221
Revenue: $264 million
Profit: $47.4 million
Three-year share price gain: 200%
Calgary-based Black Diamond rents out and sells temporary housing and offices—about 12,000 rooms in Western Canada, and 2,000 more in the southern United States and Australia. CEO Trevor Haynes says that to attract skilled young workers today, oil companies must provide private rooms with bathrooms, wide-screen TV and Internet access, as well as an on-site gym and food kiosks.
Haynes, 46, and a handful of colleagues founded Black Diamond in 2003. Most of them had worked at Atco, which manufactures temporary accommodations, rents them out and sets up drill camps for clients, too. But Black Diamond focuses solely on buying buildings and renting them out. Having no factories of its own means lower fixed costs, and contracting out catering and other services keeps things simpler.
The group started by scraping together $400,000 to buy two modular drill camps. The business quickly started generating impressive operating margins and cash flow. In September, 2006, Black Diamond went public as an income trust, raising $35 million.
But the company was soon hit with a quadruple whammy. October, 2006, brought news of the end of tax advantages for trusts. The following year, Alberta raised drilling royalties. In early 2008, global oil and gas prices peaked, then plummeted. Then came the global financial crisis. Black Diamond's units troughed at 25% below their issue price.
But the company's basic business was still a solid generator of cash, and it maintained its monthly dividend of 4.5 cents per unit. Black Diamond converted back to a corporation at the end of 2009. Since then, its revenue has almost quadrupled, and it has raised its dividend four times, to seven cents. At recent share prices, that's still a healthy 3.5% annual yield.
Looking ahead, Haynes acknowledges that "we're still concerned that we're overexposed to the oil and gas price cycle and to Western Canada." It's helpful, then, that Black Diamond's foreign revenues have grown to about 10% of the total.
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Rogers Sugar Inc. (RSI-T)
Top 1000 ranking: 274
Revenue: $620 million
Profit: $30.3 million
Three-year share price gain: 70%
Rogers Sugar's history might scare the heck out of you. The industry is fiercely protected; Canada maintains a duty of $31 a tonne on imports of refined sugar, which adds about 5% to the prices Canadian consumers pay. But Rogers Sugar CEO Ed Makin says that's nothing compared to the $370 levied in the United States. The EU adds $500, Japan $1,000. There are also sugar quotas and subsidies galore in those markets.
Rogers, 125 years old, converted to an income trust in 1997, early in the trust boom. Yet it didn't prove to be a stable investment. Its unit price fell from $10 to below $4 in 2003, after Gerry Schwartz's Onex Corp. sold its stake and Rogers slashed its monthly distribution.
But the last five years have shown steady growth in revenue and stable earnings. The sugar market in Canada is basically a duopoly of Redpath Sugar and Rogers. Rogers is a familiar brand name in Western Canada; in the East, it's known as Lantic Sugar, which it bought in 2002.
Revenue is up by a third since 2008, and the company maintained its dividend during the financial crisis. Even though Rogers's share price has doubled to about $6 since the meltdown days of 2009 (it converted back to a corporation in 2011), its dividend yield is still a fat 5.7%. And that calculation doesn't include a special 36-cent dividend paid earlier this year.
Makin says that maintaining profit margins via cost control is a priority. Rogers operates three major refineries—two processors of imported cane sugar in Vancouver and Montreal, and a refiner of domestically grown beet sugar in Taber, Alberta. Keeping costs down also helps prospects for exports on the rare occasions when the U.S. opens its doors, as it did last winter. "We trucked 10,000 tonnes of cane sugar across the border in three weeks and 17,600 tonnes of beet sugar in eight weeks," Makin says. "We have trucks rolling the day that door is opened."
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Pulse Seismic Inc. (PSD-T)
Top 1000 rank: 291
Revenue: $86 million
Profit: $27.4 million
Three-year share price gain: 181%
Oil and gas can be very daunting to risk-averse investors. Finding the stuff, then producing it and transporting it takes years, and can be hugely expensive. But the price of your product and the value of your inventory are set by the microsecond on often-volatile commodities and futures markets. Suppose you could invest in the sector, yet remove or smooth out most of those elements?
Calgary-based Pulse Seismic is an entirely digital oil and gas company. It owns and licenses the second-largest library of 2-D and 3-D exploration data in Canada, behind Olympic Seismic, a subsidiary of Texas-based Seitel Inc. "We don't have crews, we don't have equipment," says Pulse's chief financial officer, Pamela Wicks. There are just 29 employees at head office.
The business has its roots in the 1980s, when almost all the seismic data in the oil patch was owned by the industry's giants. But they would often license that data to one another through brokers. The now-retired founders of Pulse had gathered data in the field, and saw an opportunity to warehouse it. Mergers and acquisitions among oil giants helped, because many of them were eager to monetize those data assets. Pulse Seismic went public in 1999.
The data has a long shelf life, since producers keep re-exploring as new recovery methods allow them to squeeze more oil out.
Wicks says that over the past five years, Pulse Seismic has sold more than $50-million worth of two-dimensional data mostly gathered in the 1970s and 1980s.
Nevertheless, Wicks says that the 3-D accounted for more than 80% of revenue last year. To keep the business growing, the company spent $58 million last winter to gather more data. In 2010, Pulse paid $75 million to acquire all the data of rival Divestco Inc.
Pulse Seismic's share price has also been on a tear, having more than doubled since 2010, which can make value investors nervous. But at about eight times trailing earnings, it still looks like a poster child for growth at a reasonable price.
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TransForce Inc. (TFI-T)
Top 1000 rank: 108
Revenue: $3 billion
Profit: $154.2 million
Three-year share price gain: 129%
"I am not a trucker by trade," says TransForce CEO Alain Bédard. An accountant who arrived from the cheese business in 1996, Bédard was able to see a segmented business with a fresh eye.
One way truckers differentiate is by load size—package and courier, less than a truckload or a full truckload, etc. Another is by timing—in the package business, you can be what Bédard calls "the same-day guy or the next-day guy." TransForce is now in almost every segment, but it tries to pick its spots. In Canada, its next-day courier brands Canpar, Loomis and ATS compete with UPS and FedEx. Bédard says he wouldn't go up against those two giants in the United States. But TransForce is one of the biggest "same-day guys" south of the border: It delivers all packages to customers for the likes of Staples. UPS and FedEx are not big same-day players.
Bédard has also diversified into waste haulage, landfill and recycling in Ontario and Quebec, under the Lafleche, Matrec and Malex names. Waste is now about 6% of TransForce's business.
The diversity can be hard for investors to grasp. In some ways, TransForce looks like an aggressive growth stock. Over the past two decades, it has bought dozens of trucking companies, and its revenue has quadrupled over the past 10 years. To do that, it has borrowed heavily, however. Long-term debt now totals $860 million, which is slightly greater than shareholders' equity. But that's a long way from, for instance, the 3-to-1 debt-to-equity ratio of heavyweight borrower and acquirer Valeant Pharmaceuticals.
On the other hand, many investors appear to have got used to TransForce as a mature income stock. As an income trust from 2002 to 2008, it paid out more than $1.50 annually in distributions some years. Now that TransForce is a corporation again, its dividend is just 52 cents a year—still a respectable 2.6% yield. And last year, TransForce bought back 3.5% of its own stock.
The most reassuring stat is that TransForce's shares have been trading at a modest 12 times trailing earnings.
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Andrew Peller Ltd. (ADW.A-T)
Top 1000 rank: 371
Revenue: $277 million
Profit: $13.0 million
Three-year share price gain: 71%
Canadians weren't sophisticated drinkers when John Peller's Hungarian-born grandfather, Andrew, went into the wine business here in 1961. But Andrew believed there was a huge opportunity to foster a European-style culture of wine and food. "He was right, but it took about 30 years," says his grandson John Peller, 56, president and CEO of the family-controlled company.
The first decade was a struggle. The family moved to British Columbia to work its first vineyards, then back to Ontario to establish more in the Niagara region. And their first hit wine had no Old World pedigree: It was sweet, sparkling Baby Duck, a blockbuster that accounted for an astonishing one-quarter of wine sales in Ontario in the mid-1970s.
The company went public early in its history—in 1970, as Andrés Wines Ltd.—in large part because it had to. "The wine industry is incredibly capital-intensive and the banks did not want to lend us any more money," says Peller. "And there were no angel investors or private capital in those days."
Wine and foodie culture began to blossom in North America in the 1980s, and Peller says that his company has been riding a demographic wave ever since. Average Canadian wine consumption has been climbing by about 5% annually for 25 years, yet it is still only about 15 litres per person annually, compared with close to 50 litres in France, Italy and Spain. So Peller says there's plenty of room to grow.
The Canadian palate is also getting more refined, so Peller's premium and ultra-premium wines, such as Peller Estates and Trius, are an expanding portion of its business compared with its still-growing cheaper offerings, such as Hochtaler and Domaine D'Or, and its winemaking kits.
Andrew Peller is the only publicly traded Canadian winemaker, and its shares are modestly priced, trading recently at about 11 times trailing earnings, and delivering a dividend yield of about 3%. The challenge can be finding stock. Through a dual-class share structure, the Peller family owns almost two-thirds of the voting shares and controls about a third of the company's market capitalization. Much of the rest of the voting and non-voting shares are held by individuals and a handful of money managers.
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Davis + Henderson Corp. (DH-T)
Top 1000 rank: 183
Revenue: $760 million
Profit: $69.1 million
Three-year share price gain: 69%
Hang in there, publishers: Davis + Henderson proves that there's life after paper. As recently as 2005, almost 100% of D+H's revenues came from providing cheques to Canada's eight largest banks. Now, about 60% of revenues come from delivering technology, software and business-processing services to the banking sector.
CEO Gerrard Schmid says the shift away from paper was deliberate, not desperate. The now 138-year-old company had gone public as an income trust in 2001, and looked like a classic widows-and-orphans value investment—it had the lion's share of a profitable market and paid out almost all of its free cash as distributions. But revenue from cheque printing had levelled off at about $300 million a year.
In making the leap to digital, executives chose to focus on the firm's traditional strength—support for retail banking. They also saw a huge potential new market among the thousands of local and regional U.S. banks. Many of them don't have their own IT departments and need help with online customer service. Since 2006, D+H has bought eight U.S. and Canadian financial technology companies. It is a leading provider of technology used to process car loans—and to collect from delinquent customers. D+H's revenue has doubled over the past five years, and Schmid says he's looking for more acquisitions.
Yet he admits that he still has to explain the game plan to many investors. He describes D+H as an "evolving hybrid" between a value company and a growth company. While the institutions that account for about 30% of its shareholders do get the vision, a lot of retail investors still assume, "Oh, they are the cheque people." Much of that retail crowd also remains hungry for income. So in 2012, D+H paid a $1.28 dividend. At recent share prices, that's a fat 5.3% annual yield. Given the push for growth, D+H's trailing price earnings multiple has climbed slightly above 20, but it's still less than 15 times forecast earnings for this year.
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Exco Technologies Ltd. (XTC-T)
Top 1000 rank: 300
Revenue: $243 million
Profit: $24.5 million
Three-year share price gain: 110%
The Canadian auto parts sector is full of outsized personalities: the Stronachs at Magna, Fred Jaekel at Martinrea and the Hasenfratzes at Linamar. Brian Robbins, the 66-year-old CEO of Exco, is not one of them. You won't see the soft-spoken Robbins much in the media. But, oh, what an eye-popping story he has to tell.
Exco concentrates on creating dies and moulds for aluminum parts, as well as making machinery for other manufacturers. At its plant in Newmarket, Ontario, Exco can pour the prototype of a new Maserati engine block in less than three minutes.
The company has grown steadily and deliberately since it was founded by Robbins's father in 1952, but in recent years the expansion has involved bold new ventures in exotic locales, as Exco has followed automakers to lower-cost countries. In 2002, it opened an interior-trim plant in Morocco, the equivalent of Mexico for European parts-makers. In the past year, Exco has set up a factory in Colombia and bought another in Texas; it has two more plants under construction in Brazil and Thailand. Despite that expansion, Exco is carrying no long-term debt.
So why are Exco's shares still trading at a lowly 10 times earnings? Of total sales, two-thirds are auto-related, and three-quarters are to North American customers. Robbins says that many investors assume all this business is with the troubled Big Three—GM, Ford and Chrysler. In fact, foreign-owned automakers are big in the mix, which shifts from year to year. "The Big Three are a substantial part of our business, but not the only part," he says. Nor has Exco been burdened by Stronach-style dual-class shares designed to maintain family control. Robbins owns the biggest stake, but it is just 24%.
Exco has increased its dividend by 125% over the past three years. If that doesn't generate some excitement among value investors, you have to wonder what will.
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Pason Systems Inc. (PSI-T)
Top 1000 rank: 244
Revenue: $387 million
Profit: $39.9 million
Three-year share price gain: 78%
Pason makes electronic sensors and instruments that measure just about every aspect of a drill rig's performance and transmit the data back to an oil company's headquarters. So is it an oil-field services stock or a tech stock? "It's hard to explain even to analysts and institutional investors," says Swiss-born CEO Marcel Kessler, who has master's degrees in both engineering and finance.
Either way you look at it, Pason's performance has been phenomenal. The company was founded in 1978, but the driving force behind it was Jim Hill, an accountant and engineer who became general manager in 1986. He soon bought the firm, and took it public 10 years later. Shares that were then priced at 17.5 cents now trade near $18. The five-cent annual dividend introduced in 2003 is now 52 cents.
The company's two core products also date back to the 1990s, although they've been updated steadily. One is the pit volume totalizer, introduced in 1990, which monitors a rig's mud system to detect water, gas, oil or other fluids in the well that might cause a blowout. In 1994, Pason introduced its even more comprehensive electronic drilling recorder. "It's a nervous system for a rig, and it was truly revolutionary at the time," says Kessler, who succeeded Hill as CEO in 2011 (Hill remains chairman).
Unlike a lot of Canadian oil-field services companies, Pason has already established itself in the United States; indeed, it earns more than half its revenue there. And unlike a lot of Canadian tech companies, Pason has just one major competitor: giant Houston-based drilling equipment maker National Oilwell Varco. But Pason's electronic drilling recorder has a better than 50% market share in North America, and Kessler says there's still room to grow internationally—the company has yet to mount a big push into the Middle East.
Pason's shares are priced attractively from the perspective of either growth or income investors. Revenues are up a third over the past five years, yet the share price is just 12 times forecast earnings for this year. When will Pason stop growing? "Only when we run out of ideas," says Kessler. With more than 200 engineers on staff who concentrate on R&D, that's not likely to happen any time soon.
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Russel Metals Inc. (RUS-T)
Top 1000 rank: 145
Revenue: $3 billion
Profit: $98.8 million
Three-year share price gain: 67%
Russel CEO Brian Hedges says that one sure test of a company's strength is how it copes with calamity. He ought to know: Mississauga-based Russel has been put on life support twice during his 19 years there: once during a shareholder revolt three years after he joined as CFO, and once during the global meltdown in early 2009, just after he was promoted to CEO. "My timing was always impeccable," he jokes.
Russel, whose stock symbol is RUS-T, traces its roots to a trading company founded by Scottish immigrant John Russel in Montreal in 1784. Today, it is a distributor and processor of metal products such as pipe for oil and gas drilling and I-beams for construction. In the early 1990s, however, it was part of Federal Industries, an almost-insolvent conglomerate. Activist investor Rai Sahi led a proxy battle that replaced the CEO and much of the board in 1997. Hedges was part of the team that then refocused the company on its core business and boosted cash flow and return on equity.
During the 2009 crisis, the price of hot-rolled steel coil, an industry benchmark, plummeted to $400 a tonne from $1,200 within weeks. "There was nothing ever like it," Hedges says, "but we lived through it."
Discipline was key to the firm's quick recovery. Russel limits its invested-capital spending even in good times. "I don't want to take the big systematic risk to get the last $1 of earnings," says Hedges. Contrast that attitude with top steelmakers Dofasco and Stelco, taken over at sky-high prices in 2006 and 2007, both by foreign buyers who soon came to grief. That said, Russel has acquired 11 firms since 2000. "We're almost a growth stock at a reasonable price," Hedges says.
Almost, because more than half of Russel's shares are held by individuals hungry for dividend income. But Hedges says he won't pay out excessive amounts to them, either. Russel almost halved its dividend to 25 cents a quarter in 2009, but has since raised it back to 35 cents, giving it a hefty annual yield of 5.4% at recent share prices.
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Paladin Labs Inc. (PLB-T)
Top 1000 rank: 195
Revenue: $218 million
Profit: $59.9 million
Three-year share price gain: 117%
There are plenty of good reasons why you wouldn't want to go into the pharmaceutical business in Canada. It's a tiny slice of the world market—only about 2%—but it's also a complicated one because of stacks of government regulations. Those rules keep an uneasy peace between the many relatively small Canadian drug makers and sellers, and the handful of multinational Big Pharma giants that might otherwise crush them.
But to Montreal-based Paladin, regulatory complexity and small size are both competitive advantages. Big Pharma tends to fixate on Europe and the United States, but there are a lot of fast-growing smaller markets that, like Canada, are tightly regulated, including Brazil, Mexico and South Africa. "We call it rest-of-world pharma," says Paladin chief financial officer Samira Sakhia. "We want to be the partner-of-choice for that rest-of-world territory that others are not interested in."
Paladin also concentrates on product niches. The company doesn't develop its own drugs; it buys or licenses them. Paladin focuses on drugs that are proven sellers already—such as Dexedrine, for attention-deficit hyperactivity disorder, specialized pain drugs Tridural and Abstral, and the over-the-counter morning-after pill Plan B. "We are not a one-blockbuster company," says Sakhia. "And our small size has allowed us to be very nimble." Growth comes from steadily acquiring more drugs. Paladin now has more than 80 in its stable, yet it has almost no long-term debt.
That strategy has produced textbook success. Paladin was founded in 1996 by CEO Jonathan Goodman, a Montrealer with a pharma background. Revenues have grown steadily by more than 25% over the past five years. The only crisis came in August, 2011, when Goodman suffered severe head injuries in a bicycle accident. Paladin's share price dropped by almost 20% within weeks, but then began climbing again. Goodman resumed some duties the following May, but vice-president Mark Beaudet runs the company day to day.
As with many successful entrepreneurial companies, the hard part for individual investors can be finding Paladin stock. Goodman's family owns 34% of the shares, and much of the rest is tightly held by a handful of institutions. The public float is small, and those shares are getting pricey for value investors—about 20 times trailing and forward earnings.
The Top 1000 rankings in ROB Magazine and this website only provide a limited snapshot of data for the top 1000 companies in Canada. The most comprehensive database of Canadian corporate financial information is available for purchase in spreadsheet format here. This year we have improved on what we have offered in previous years in two separate packages based on whether your needs are research or sales prospecting. Find in-depth financial and contact information, total compensation for every CEO on the Top 1000 and more.