Mention Canadian auto parts makers and you immediately think of such heavyweights as Magna Intl. Inc. (MG-TSX), or Linamar Corp. (LNR-TSX). But Martinrea Intl. (MRE-TSX)?
Yet Martinrea is an outfit worth looking at, says Keith Farrant, portfolio manager and analyst at Montreal-based Claret Asset Management.
For one thing, he says, car manufacturing is picking up. So, Martinrea, as a maker of car parts, can’t help but prosper.
Moreover, car makers, in an effort to cut down on emissions, are increasingly switching to lighter chassis — ones with aluminum components.
And Martinrea stands to benefit from this as well, given that Honsel, its German subsidiary, is a maker of aluminum auto parts.
Company takes big hit
Mr. Farrant admits Martinrea took a big hit in the fourth quarter as a result of the breakdown of one of its forging plants in Kentucky.
But the company, he says, is now fixing the problem. It has also put paid to a legal dispute with one of its founders, thereby cutting away an overhang on its stock.
For Mr. Farrant, Martinrea is a best buy — one with a 12-18-month price target of $16-$19. He’s also forecasting 2014 net earnings of $1.35 a share.
Headquartered in Vaughan, just north of Toronto, Martinrea is not only North America’s second-biggest metal former, but one of the continent’s top-three suppliers of fluid management systems.
With more than eight million square feet of manufacturing space in 38 facilities, the company boasts operations in Canada, the U.S., South America, Europe and Asia.
For the three months ended March 31, Martinrea’s adjusted net earnings fell to $17.6 million or $0.21 a share, from $19.9 million, or $0.24 a share, for the similar period in 2013.
Gross margin rises 30 basis points
But its gross margin rose to $87.5 million, or 10.1 per cent of revenue, from $75.7 million, or 9.8 per cent of revenue.
Mr. Farrant may like an outfit such as Martinrea that deals in steel and aluminum components like auto parts.
But he also has a soft spot for a Vancouver-based firm such as Conifex Timber Inc. (CFF-TSX/VEN) that specializes in forest products.
For one thing, he says, the sawn lumber — specifically, the spruce, pine and fir — that Conifex turns out is used in housing construction. And the U.S. housing market, Mr. Farrant believes, is slowly, but surely, regaining its health.
As well, the company should be able to cut its electric bill, given the power it hopes to generate from the biomass plant it’s now building near its two sawmills at Mackenzie in northwestern B.C.
The plant, which is costing $45 million, will be fueled by 300,000 metric tons of biomass waste the two mills are expected to produce each year.
And because Conifex will sell power from the plant to BC Hydro, the former will get an additional income stream as well.
Mr. Farrant admits that because the biomass plant is yet to go on-line, investors have shied away from Conifex.
He also says the company’s stock has been low because the recovery in U.S. housing has proceeded in fits and starts.
But he notes that because Conifex trades at a 20 per cent discount to its net asset value, its shares are now a bargain.
For Mr. Farrant, Conifex Timber is also a best buy — one with a 12-18-month price target of $10-$13 a share. He’s also predicting 2015 EBITDA (earnings before interest, taxes, depreciation and amortization) of $70-$80 million.
Third sawmill is at Fort St. James
Besides Canada and the U.S., Conifex sells lumber to China and Japan. In addition to its two mills at Mackenzie, the company has a saw mill at Fort St. James in north-central B.C.
For the first quarter of 2014, Conifex’s net income slid to $1.6 million or $0.08 a share, from $6.2 million, or $0.29 a share, for the similar period in 2013.
Sales, however, were slightly better, inching up $1 million, or 1.5 per cent, to $67.2 million, although EBITDA tumbled $2.3 million, or 33.7 per cent, to $6.1 million.
Operating income, not surprisingly, was also lower, falling to $2.8 million from $6.6 million.
Investor’s Digest of Canada, MPL Communications Inc.
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