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.
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.
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