Analyst picks two best buys │ one in leasing; one in mining

Over the past few decades, Steven Hudson started two businesses: Newcourt Capital and, later on, a hair club for men and women.  So, now that he’s started a third business, you might say he’s in his element.

Especially since this third company is actually called Element Financial Corp. (EFN-TSX).

Be that as it may, John Stephenson likes what Mr. Hudson has done. Mr. Stephenson is president and CEO of Toronto-based Stephenson & Co. Capital Management.

And he says that Element, which handles equipment leasing, is now growing by leaps and bounds. Indeed, he notes, the company has taken the market by storm. Why?

Market now underserved

Simple, Mr. Stephenson says. Equipment leasing in Canada is an underserved market, one with just a few players.

Moreover, Element  is capitalizing on the need for rail tank cars with which to ship crude oil — a need that’s reportedly growing fast, given that there aren’t enough pipelines to move all the petroleum that Canada produces to market.

Although Mr. Stephenson admits Element’s shares slid during the beginning of October, he blames this on the weak loonie. Moreover, he says, the stock is now rebounding.

For Mr. Stephenson, Element Financial, which is based in Toronto, is a best buy — one with a price target of $20, as well as a 2015 net earnings estimate of $0.91 a share. He also thinks the company could become a takeover target for one of Canada’s big-five banks.

For the three months ended Sept. 30, Element swung to a net loss of $20 million, or $0.10 a share, from net income of $7.8 million, or a nickel a share, for the similar period in 2013.

Net financial income, however, was higher, climbing to $111.2 million from $31.8 million, while interest income climbed more than two-and-a-half times to $96.2 million.

Mr. Stephenson may like an outfit such as Element Financial that operates in the financial services sector. But he also has a soft spot for a firm like Lundin Mining Corp. (LUN-TSX) that operates in the primary resources sector.

Copper is now best base metal

For one thing, he says, Lundin mines copper. And copper, Mr. Stephenson believes, is now the best way to play the global market in base metals.

Indeed, because copper production typically requires both capital and expertise, Lundin needn’t worry it will have to contend with armies of workers in the Third World  who might decide to go out and start mining copper as they’ve done with other metals.

“There’s no chance for Seven-Dwarfs, picks-and-shovels mining of copper in countries like China,” says Mr. Stephenson who notes that the metal is comparatively harder to get at, as well as harder to extract.

Mr. Stephenson admits Lundin’s shares dipped during the first part of October, but he also notes they’re now on the way back up.

In the meantime, he likes the stable growth the company gets from Neves-Corvo, its copper-zinc mine in Portugal, as well as from Tenke Fungurume, a copper-cobalt mine in the Democratic Republic of the Congo, in which Lundin has a 24 per cent share.

Mine enjoys geopolitical stability

And, by virtue of being located in the U.S. — in upper Michigan, to be exact — the company’s Eagle mine, which produces copper, is obviously geopolitically safe, says Mr. Stephenson.

 For Mr. Stephenson, Lundin Mining is also a best buy — one with a 12-month price target of $8.50, as well as a 2015 EPS estimate of $0.60 a share.

Besides Portugal, the U.S. and the Democratic Republic of the Congo, Lundin boasts operations in Sweden, Spain and Ireland.

For the three months ended Sept. 30, Lundin’s net income rose to US$33.7 million or $0.06 a share, from $27.9 million, or a nickel a share, for the similar period in 2013.

But sales were actually lower, sliding to US$166.6 million from $176.4 million, while operating earnings fell to US$42.9 million from $58.9 million. Cash flow, though, was higher, climbing to US$57.5 million from $27.4 million.

For the nine months ended Sept. 30, Lundin’s net earnings fell to US$86.8 million or $0.15 a share, from $94.6 million, or $0.16 a share, for the similar period in 2013.


Investor’s Digest of Canada, MPL Communications Inc.
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