Two best buys: a manufacturing stock and a consumer goods stock

Analysts follow as many as 20 stocks, most of which are rated “buys”. Of those buys, an analyst has one or two special favorites seen as most suitable for new buying. This analyst has chosen a manufacturing stock in the specialty packaging industry and a consumer goods stock in the retail food industry with a real estate portfolio.

With the plunge in petroleum, contrarian investors are likely swooping down to buy oil and gas stocks on the cheap. But they should also consider buying a maker of film-based, pressure-sensitive tapes.

That’s what Barry Schwartz might tell you. Mr. Schwartz is chief investment officer with Baskin Wealth Management in Toronto. And he says the free fall in energy prices pushed manufacturing stock Intertape Polymer Group Inc. (TSX─ITP) down more than 14 per cent in less than a month.

But that’s not because the company is in trouble. Far from it. Not only does Intertape continue to generate a huge cash flow, but it’s also extremely profitable, Mr. Schwartz says.

What’s laid Intertape low are its customers — or, more specifically, their reluctance to buy its products. Those folks know oil is a main ingredient in the company’s products.  So, they figure that as oil goes down, Intertape’s prices should go down as well.

But these same folks believe oil will drop even more. So, they’re keeping their wallets in their pockets, explains Mr. Schwartz, who views Intertape as a perfect example of what happens when bad things happen to good manufacturing companies stocks.

Oil prices will stabilize

Yet, at some point, Mr. Schwartz says, oil prices will stabilize and Intertape’s customers will start buying again. In the meantime, this manufacturing stock is a bargain.

But Intertape’s cheap share price is just one reason Mr. Schwartz likes the company.  He also likes its potential for lower operating costs and higher gross margins — a potential he thinks will be realized when the company’s new factory in South Carolina revs up this spring.

In fact, Mr. Schwartz thinks that later this year, Intertape will be able to pay out a dividend, buy back shares or make an acquisition. For Mr. Schwartz, Intertape is a best buy.

Besides pressure-sensitive tapes, Intertape makes woven fabrics, as well as packaging systems, for retail and industrial customers. Employing roughly 1,800 people, the company boasts 10 factories in North America and one in Europe.

For the three months ended Dec. 31, Intertape’s net income tumbled to US$6.1 million or a dime a share, from $53.6 million, or $0.86 a share, for the similar period in 2013.

Not surprisingly, EBITDA (earnings before interest, taxes, depreciation and amortization) was also lower, sliding US$16.3 million from $22.3 million.

Mr. Schwartz may like a manufacturing stock such as Intertape whose packaging materials are likely used to seal cartons of food. But he also has a soft spot for a consumer goods stock like Empire Co. Ltd. (TSX─EMP.A) whose food retailer subsidiary, Sobey’s Inc., sells the contents of those cartons in its grocery stores.

For starters, he says, Sobey’s is one of the best run grocery chains in Canada, given its low ratio of price to cash flow. Moreover, Empire, which already generates significant cash flow, will likely generate even more once it finishes its integration of Canada Safeway, says Mr. Schwartz.

He admits Empire is spending a lot of money merging Sobey’s information technology and distribution systems with Safeway’s. But he believes that once the process is complete, Empire’s net income per share will jump — late this year or early the next.

Real estate value would be unlocked

Elsewhere, Mr. Schwartz thinks Empire could unlock a lot of value were it to download its roughly $1 billion of real estate to Crombie REIT (TSX─CRR.UN), the company that owns a big chunk of Sobey’s stores and in which Empire has a 41.5 per cent stake.

For Mr. Schwartz, Empire is a best buy — especially for investors looking to get off what he calls the commodities roller coaster.

“They’ve got terrific real estate, a terrific brand name,” he says of Empire. “They’ve blanketed the country.  And in a few years, their balance sheet is going to be squeaky clean.” Headquartered in Stellarton, N.S., Empire boasts more than 350 food retail stores in all 10 provinces of Canada.

For the 13 weeks ended Jan. 31, Empire’s net earnings zoomed to $123.6 million or $1.34 a share, from $6.4 million, or $0.07 a share, for the similar period in 2014.

But sales were lower, sliding to $5.9 billion from $6 billion, although EBITDA was higher, climbing to $322.5 million from $188.9 million.

For the 39 weeks ended Jan. 31, Empire’s net earnings rose to $3.94 a share from $1.96 a share, for the similar period in 2014.

 

Investor’s Digest of Canada, MPL Communications Inc.
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