Investors looking to make money from private companies through a public vehicle are eyeing alternative financier Alaris Royalty Corp.
The recent pullback in Alaris's stock price presents a good buying opportunity, analysts say, alongside the company's growing dividend, now yielding just under 6 per cent.
Shares of Calgary-based Alaris, which provides financing arrangements for private companies such as End of the Roll and Planet Fitness, have fallen about 10 per cent over the past year, due in part to operating hiccups at some of the 14 private North American companies in its portfolio.
Still, all eight analysts that cover the stock have a "buy" recommendation and, according to S&P Capital IQ, the consensus price target is $38.44, which is about 35 per cent above its current price of about $28.25.
Analysts say Alaris has a unique business model, providing financing in exchange for royalties and distributions, and a long-term track record of making money for investors, with regular dividend increases. The company has raised its dividend 10 times in the past five years.
"It's a lather, rinse, repeat type model in the sense that they have been very successful at raising capital, deploying capital and raising the dividend and then going back and doing the exact same thing," said National Bank Financial analyst Trevor Johnson, who has a $40 target on the stock.
"For years and years they've created a ton of shareholder wealth on the back of that and I don't see that model having broken" despite the recent dip in the stock, Mr. Johnson said.
Haywood Securities analyst James Reid has a $38.50 target and describes Alaris as "an ideal vehicle for income."
Canaccord Securities analyst Scott Chan has a $38 target and likes the company's diversified and growing portfolio, including everything from retailers to health-care companies, as well as increased focus on doing deals in the plentiful U.S. market. About 55 per cent of the company's revenue today is from the United States, which is an advantage since it reports in Canadian dollars.
However, some of the businesses Alaris has invested in have underperformed over the years, including more recently Mississauga-based medical diagnostics company KMH Ltd. Partnership. KMH, which accounted for 10 per cent of Alaris's revenue in 2014, experienced cash-flow constraints and growth challenges. It's now going through a strategic review, which could include a sale of the company.
"We don't have anything in our portfolio that is a long-term issue," said Alaris founder and chief executive officer Steve King, adding that KMH's troubles won't affect the dividend payout.
"My job is to just keep on increasing that dividend."
Mr. King said the company is also actively seeking new investments to continue to grow the portfolio.
Alaris has invested $153-million into companies so far this year and Mr. King forecasts more deals that will surpass the company's record of $173-million set in 2013. About 80 per cent of the deals the company is targeting are in the United States.
Michael Sprung, president of Sprung Investment Management, started buying Alaris a year ago and has been adding to his investment since the stock started to slip in recent months.
"After following it for a year or two, I became convinced that this is a good long-term story that is going to result in increasing cash flow and dividends to shareholders," said Mr. Sprung, citing also its diversified portfolio. Alaris also avoids investing in more turbulent resource and technology companies.
Mr. Sprung is a fan of the company's unique financing structure that gives private companies an alternative to venture capital investors and the public markets, which allows their management to retain control.
"I think Alaris has hit upon a winning formula," Mr. Sprung said.