Atco Ltd. (TSX—ACO.X) suffered temporary setbacks in the second quarter and the first half of 2014. But its earnings are expected to recover in the second half of the year and rise significantly next year. The company remains rock solid and its shares are temporarily bargain-priced for a recovery and growing dividends. It has raised its dividend for 21 years in a row.
Atco is a conglomerate of nine operating subsidiaries delivering natural gas and electricity and providing modular housing and support logistics on five continents.
Atco is one of 10 conglomerates that The Investment Reporter regularly reviews on its Back Page feature. Since The Investment Reporter’s May 2 issue, Atco’s shares have fallen by 14.3 per cent. This reflects lower earnings in the second quarter and the first half of 2014.
Atco earned less in the second quarter and the first half of 2014. In the second quarter, it earned an adjusted $57 million, or 50 cents a share. This was down by over a third from adjusted earnings of $89 million, or 78 cents a share, a year earlier. In the first half, the company earned an adjusted $172 million, or $1.50 a share. This was down by a more modest 18 per cent from adjusted earnings of $209 million, or $1.82 a share, a year earlier.
Atco’s three setbacks are only temporary
Three temporary factors hurt Atco’s earnings. First, Atco Power faced a 66 per cent drop in the average Alberta power pool price in the second quarter. Given Alberta’s rapid growth, we expect power prices to rise. The division also incurred more costs for power generation projects and its commercial and industrial sales program. But this investment should deliver higher earnings in the future.
Atco Power also suffered from an adverse ruling by the Alberta Utilities Commission. It’s related to information technology from 2010 through 2014. The regulator reduced the company’s earnings by $14 million. The second quarter accounted for only $1 million of the charge. Earlier periods accounted for the other $13 million. We don’t see such charges recurring anytime soon.
Atco Structures & Logistics earned less in the second quarter than a year ago. Given the troubles of some natural resource projects, this is hardly surprising. The company writes, “Reduced manufacturing activity and profit margins, combined with lower utilization and reduced rental rates and expiry of a logistics and facility services contract, resulted in lower earnings.” Just keep in mind these slowdowns in cyclical natural resource industries are always followed by cyclical upswings.
On a more positive note, Atco’s revenue rose in both the second quarter and the first half of 2014. This largely reflects the higher rate bases of its utilities. And with colder weather, the company was able to recover more of the costs.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •9/23/14 •