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Business Briefing

Should we be worried that the biggest undertaker is having a good year? Add to ...

These are stories Report on Business is following Monday, June 3, 2013.

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How the cemetery ground is shifting
I have to admit it sends a shiver up my spine to hear that North America’s biggest undertaker is having a good year.

That’s great for shareholders of Service Corp. International. Clients are another matter. And I’d prefer not to be among that growing number.

SCI has had an eventful few weeks.

First, it posted a jump in first-quarter revenue to $652.4-million (U.S.) from $602.5-million a year earlier, and a gain in profit to $57.6-million, or 27 cents a share, from $48-million or 22 cents.

Here’s the shiver-up-my-spine part, from chief executive officer Tom Ryan:

“Strong pre-need cemetery sales production and a meaningful increase in funeral services performed drove earnings to the high end of our expectations. On this strong performance, we anticipate results for the year trending toward the upper end of the earnings and cash flow guidance ranges previously provided, and we remain confident that our solid operating platform and healthy financial position will allow us to actively pursue our growth strategies throughout the year and continue our focus on increasing shareholder value.”

What, exactly, are growth strategies in this industry? Well, besides the obvious, there are always acquisitions. And SCI just pulled off a big one.

A few days ago, the company struck a $1.4-billion deal for Stewart Enterprises Inc., at $13.25 a share in cash.

Together, the undertakers would boast 2,168 locations in 48 states, eight of Canada’s provinces, and Puerto Rico. That’s more than 1,600 funeral homes and more than 500 cemeteries, a deal SCI believes will save it $60-million a year.

Stewart ranks No. 2 in North America based on revenue, Moody’s says, and the merged company would have annual sales more than 10 times the level of its biggest rival. Or, as the ratings agency put it, “the next largest death care company."

Moody’s, which is reviewing the debt ratings of the two companies, described the deal as “credit negative” because it will mean some $900-million in new debt and eat up about $300-million to finance it.

SCI shareholders have seen a nice run-up in the stock over the past year, with a 52-week low of $10.96 and a recent high of $19.59. And an increase in the quarterly dividend to 7 cents from 6 cents.

(By the way, SCI’s “cautionary statement” in its earnings release is more interesting than the traditionally boring fare. It includes things like “if the number of deaths in our markets declines, our cash flows and revenues may decrease,” and “if we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.”)

CRTC unveils new code
Canada’s telecom regulator has unveiled a new wireless code of conduct that will ease one of the biggest irritants for cellphone users.

The Canadian Radio-television and Telecommunications Commission will allow Canadians to cancel their contracts after two years and pay no cancellation fees, no matter than they may have signed up for longer, The Globe and Mail’s Rita Trichur reports.

There are other measures, as well, including a ceiling on the cost of data and overage and data roaming. The new rules take effect in early December.

“The wireless code will contribute to a more dynamic marketplace by making it possible for Canadians to discuss their needs with service providers at least every two years,” said Jean-Pierre Blais, the chairman of the broadcast and telecom agency.

Ackman to sell piece of CPR
Having sparked an overhaul at Canadian Pacific Railway Ltd., activist investor Bill Ackman is selling down.

Mr. Ackman’s Pershing Square Capital Management said today it plans to sell up to 7 million shares in the railway, a move that will take six to 12 months.

"Thanks to Hunter Harrison's and the CP team's performance over the last nearly one year, Canadian Pacific's share price has more than tripled since we first invested in CP,” Mr. Ackman said, referring to the chief executive officer brought in to guide the transformation.

“As a result, our stake in CP has grown to approximately 26 per cent of the combined assets of our funds. Given that increased concentration, portfolio management considerations have driven our decision to trim our holdings. Even after these sales, we expect to remain CP's largest shareholder and for CP to remain one of our largest investments."

The sales will be limited to ensure that amounts sold won’t top 10 per cent of the combined volume on the New York and Toronto exchanges on any given day.

Car sales climb
Vehicle sales rose 5 per cent in Canada last month to their highest level since before the recession, The Globe and Mail's Greg Keenan reports.

Canadians bought 185,040 vehicles in May, the highest monthly sales total since sales of 185,500 in May, 2008.

May tends to be the month when Canadians buy the highest number of new vehicles every year, and success in that month, along with April and June, is regarded as critical to posting a positive year.

Whither Abenomics
Prime Minister Shinzo Abe’s honeymoon may well be over.

Japanese stocks, which have been in turmoil over the past couple of weeks, plunged again today and questions are being raised over so-called Abenomics, the aggressive economic and monetary policy program launched by the new prime minister and his new governor at the Bank of Japan, Haruhiko Kuroda. The Nikkei has now tumbled more than 15 per cent from its peak.

“One driver of the nearly two-week slide in the Nikkei has been erratic communication from the BoJ as Governor Kuroda appears to be facing internal dissent while several BoJ officials have expressed doubt that the revised 2-per-cent inflation target will ever be met,” said Derek Holt, vice-president of economics at Bank of Nova Scotia.

“Even Kuroda has been vague on lining up a timeline with expectations of hitting his doubled inflation target,” Mr. Holt said today.

“Profit-taking after an enormous rally since last fall could be another sensible reason. More fundamentally, we’re sticking to our view that Abenomics is on shaky foundations and markets are coming around to this view.”

Japan, of course, is struggling to get out of a protracted period of deflation, though fresh numbers Friday showed it inching ever closer to that goal. And, of course, it will take time for Abenomics to filter through.

Mr. Holt, however, also cited the fact that Japan’s corporate sector doesn’t appear to be following through.

“In another blow to Abenomics, Japanese companies are still not heeding the political plea to raise their capital spending,” Mr. Holt said, noting that a new reading today showed a spending drop of 3.9 per cent in the first quarter.

“In fairness, cap-ex decisions can be rather long-tailed, such that hoping for such an immediate swing in capital spending in response to Abenomics was a tad unrealistic to begin with,” he said.

“I don’t, however, have a good explanation as to why momentum was lost the minute Abenomics started to get priced in,” he added, though it would seem that the new policies haven’t boosted confidence among Japan’s companies.

(Cheeky) analyst boosts Lululemon target
Lululemon Athletica Inc. has started restocking yoga pants pulled from the shelves this year because some were see-through, says a New York analyst who has boosted the outlook for the company’s shares.

Camilo Lyon of CanaccordGenuity hiked his target on Lululemon shares to $92 (U.S.) from $87, and reiterated his “buy” rating.

Mr. Lyon said today that checks of Lululemon outlets showed the Vancouver-based retailer is restocking with two of the styles pulled in March because of the transparency issue.

The company will benefit from “pent-up demand” in its second quarter, he said in his research note, but could also do better than expected when it reports first-quarter results next week.

“Not only is the impact to the brand from the recall expected to be negligible, we believe LULU benefitted from increased traffic and substitute purchases,” Mr. Lyon said, referring to the retailer by its U.S. stock symbol.

“As such, we expected to see upside to our Q1 estimates when the company reports Q1 results on June 10,” he added, projecting that an estimate of earnings per share of 30 cents will “prove conservative.”

Lululemon has projected that the transparent pants issue could cost it $67-million in revenue this year, and has moved to ensure the quality of its pants, saying it is looking at all of the products and has stationed its own employees in factories to test them.

Though the pants met testing standards, some were “on the low end of Lululemon’s tolerance scale,” the company said earlier, and “when combined with subtle style changes in pattern, the resulting end product had an unacceptable level of sheerness.”

(Mr. Lyon, by the way, has shown a refreshingly cheeky approach in past research notes, having forecast the restocking in April in a report titled “Sheer today, gone tomorrow.”)

Rosenberg on Canada
David Rosenberg has been warning ‘short-Canada’ investors that they could get burned.

And today, the chief economist at Gluskin Sheff + Associates cites Canada’s first-quarter showing as evidence.

Mr. Rosenberg, who has singing the praises of Canada and its loonie for at least a couple of months, was highlighting the fact that the economy expanded at an annual pace of 2.5 per cent in the first three months of the year, which was better than expected.

Not only that but Statistics Canada revised its fourth-quarter measure of gross domestic product to an annualized growth rate of 0.9 per cent, still lame but better than the initial reading of just 0.6 per cent.

Here’s what Mr. Rosenberg told Gluskin Sheff clients in his morning note:

“Well, well. For all the talk of how the Canadian dollar, the Canadian banks and the Canadian economy are all such great shorting opportunities, real GDP growth exceeded consensus views in Q1 with a +2.5-per-cent annualized growth rate. The market was braced for +2.2  per cent and this also eked out the +2.4-per-cent pace stateside and, in fact, Canada has now quietly outpaced the USA in three of the past four quarters!”

Add to that the fact that Canada’s economy did that “without nearly as much government support for the housing sector or expansion of the central bank balance sheet.”

In fact, the government has been successful in taming the housing market to prevent a bubble.

“Not to mention that the personal savings rate in Canada at 5 per cent is now double the 2.5-per cent level in the United States, so there would seem to be more potential for spending growth north of the border,” Mr. Rosenberg added, projecting that economic growth in the second quarter should be at least 2 per cent.

Mr. Rosenberg is taking on investors who are shorting Canadian assets, or at least bad-mouthing them, believing, among other things, that the cooling of the real estate market could hurt the country’s banks.

Speculative short positions against the loonie, as the dollar coin is known in Canada, have declined from elevated levels of a few months ago.

Mr. Rosenberg is not alone here.

Last month, for example, BMO Nesbitt Burns also advised foreign investors to abandon “The Great White Short.”

Suitors eye Iron Ore
A huge commodities player and a private equity group are among potential buyers eyeing Rio Tinto PLC’s stake in Iron Ore Co. of Canada, The Wall Street Journal reports.

The recently merged Glencore Xstrata PLC and Blackstone Group LP are among others that have also been studying an offer the 58.7-per-cent interest said to be worth some $4-billion (U.S.).

Mitsubishi Corp. holds 26.2 per cent of the company, and Labrador Iron Ore Royalty Income Corp. 15.1 per cent.

The Globe and Mail reported in early March that Rio Tinto had put the stake on the auction block, part of widespread assets to deal with the huge debt from acquiring Alcan in 2007.

Antitrust watchdog pushes ahead
Canada’s Competition Bureau says it’s now in a position to forge ahead with its probe into the setting of key interest rates after Royal Bank of Scotland abandoned its legal attempt to hold back documents.

RBS had been challenging an Ontario Superior Court of Justice order from mid-2011 to produce bank records, arguing, among other things, that the judgment breached the Charter of Rights and Freedoms.

The order involved not only RBS, but others that are part of the probe, as well, and demanded documents from outside the country.

No allegations have been proven.

The Canadian arm of RBS has now given up its challenge, the Competition Bureau said on its website.

“The abandonment comes approximately 18 months after the launch of the challenge and will allow the bureau to move forward with its investigation of alleged collusive conduct into the setting of yen Libor rates,” the antitrust watchdog said in its Friday statement.

“With the abandonment of its challenge RBS Canada is now required to comply with the order issued against it by June 28, 2013,” it added, warning it could still take further action on the delay.

“The bureau is considering its options for recuperating the costs arising from the resources expended to respond to RBS Canada’s now abandoned challenge.”

This is part of an ongoing tussle between the Competition Bureau and RBS, and part of a broader, global probe into the setting of key interest rates.

Last November, for example, the Canadian agency took on the bank over statements in connection with its third-quarter financials, where it says is was co-operating with the various investigations.

“The suggestion that the RBS Group is ‘co-operating fully’ with the bureau is false,” it said at the time.

“The RBS Group has not applied to the bureau’s immunity or leniency programs and, in fact, has challenged a production order issued by the Ontario Superior Court of Justice in relation to the bureau’s investigation.”

RBS, which last week appointed a former official of Britain’s Financial Services Authority to oversee its conduct and compliance, said today it’s not commenting on the Competition Bureau statement, though a spokesman for the bank did tell Reuters is co-operating with the agency.

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