Canada on My Mind: 5 Stock Updates

Because of the new importance of Canada in my life (it is where my interim webmaster hangs out and also where those awful geese which crash airplanes come from), I wanted to talk a bit about our neighbor to the north on this U.S. holiday, which saw European markets tumble.

CryptoLogic (CRYP), a Canadian developer of internet casino and branded gambling software, last week updated its forecasts. It now expects profitability this year and growth in future years. It slashed operating costs and took charges for restructuring and rationalization last year. This included outsourcing its poker network (with Gtech Corp.) and cutting its network server and overhead costs by 75%. Its targets are to cut operating costs by $13 mn by midyear and spend $3.5 mn in restructuring to save $20 mn in non-cash charges.

It expects new customers 888.com, PartyGaming, and GigaMedia (GIGM) to generate revenues of $8 mn this year. It also expects more licensing contracts and announced a new deal with Britain's Gaming Technology Solutions for serving brands like Unibet and bwin.

Based on no significant further deterioration in economic conditions and stabilization of currency rates, the company says it expects to turn profitable in Q2 09 and generate cash of $11-13 mn this year and net profits of around $9-10 mn. It also expects eps of 65 to 71 cents this year. This explains the CRYP stock popping up.

It takes one to know one. Peter Rozenberg of UBS Investment Reseach maintains his 'buy' on Bank of Nova Scotia (BNS). Scotiabank had its 2009 target cut to $47/sh from 52, although Q4 results met UBN expectations thanks to strong loan growth and higher margins. Our main reason for owning BNS is its international business, mainly in Latin America, where profits rose 15% year over year. A weaker loonier helped.

Mr. Rozenberg says Q4 return on equity, a key bank metric, was 19.7%, despite a 50% rise in international provisioning from the prior quarter. To achieve this the bank reclassified C$394 mn of assets as available for sale, which cut losses by C$%34 mn. The bank has a tier 1 ratio of 9.3%, which is quite healthy, according to Mr. Rozenberg. He cut his forecasts for higher provisioning and lower growth although he actually expects faster growth than Canada's no. 3 bank itself estimated.

UBS also did a paper on Bombardier, this one by Fadi Chamoun (quoted by Investment Digest of Canada). He predicts lower earnings ahead. His target for BBD.A.Toronto is now $1 lower, at $8, double the present price level. As per Frida Ghitis, who recommended this share forecast, it is not selling as many small jets in the current market, but is making it up with transportation equipment. Its Q3 backlog has fallen to C$51.9 mn from $57.2 mn at the end of of Q2. Its cash is down to C$3.3 bn, off 1 bn, because of forex impact, but is still very sound.

Mr. Chamoun says aerospace margins will grow from 9% now to 12% by fiscal 2013 (Bombardier's fiscal year ends in March). But even apart from planes, the transportation business is driving ahead with book-to-bill 1.2 times. This is very healthy and does not only reflect rail spending south of the border, but also demand from Europe and China.

Our bailing out of Canadian Oilsands (COSWF.PK) because of the political and environmental risks associated with extracting oil from tarsands has become the new orthodoxy. But we told you first.

Finally, broker Edward Jones likes Canadian National Railway (CNI), which we sold anticipating the current economic malaise causing demand drops. This too is an infrastructure play. However, Canaccord Adams rates it a hold but may revise its estimates if the Canadian railway manages to complete its takeover of the Elgin, Joliet, and Eastern Railway to ring around Chicago. We sold CNI last year.

Disclosure: Author owns both Cryptologic (300 shares) and BNS (100 shares)

Comments

[Teutonic Kn...:]

Thanks for a good article. Question for the author and other readers who would chip in as well.

Although a detailed analysis and treatise would be out-of-scope in this forum, why would the author have picked BNS vice BMO, TD, or RY? The dividend rate of BNS is seemingly at the lower end of the Big 4 at this moment. Would the author think the BMO or RY would likely cut dividends?

Thank you in advance for your response. As a former citizen of that lovely country, Canadian stocks are always on my mind.

Jan 20 12:29 PM

[User 340983:]

dear Teutonic Knight from Canada
our main reason for picking Scotiabank was its Latin American network. we set out to find a way to play South America, Mexico and the Caribbean with a 'safe' bank and picked BNS for that business.
As for bank dividend rates, this is an area where there will be plenty of surprises, and not just in Canada, in the next few quarters.

vivian lewis
global investing editor

Jan 20 02:52 PM

[Teutonic Kn...:]

Vivian,

Thanks for your cue on BNS. It will certainly help. I have enjoyed reading your article.

Teutonic


On Jan 20 02:52 PM User 340983 wrote:

> dear Teutonic Knight from Canada
> our main reason for picking Scotiabank was its Latin American network.
> we set out to find a way to play South America, Mexico and the Caribbean
> with a 'safe' bank and picked BNS for that business.
> As for bank dividend rates, this is an area where there will be plenty
> of surprises, and not just in Canada, in the next few quarters.

>
>
> vivian lewis
> global investing editor

Jan 20 07:12 PM