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.
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.