Category: Equity

CN Rail vs. CP Rail

This chart or post is not a value judgement on the respective companies, but it looks like that somebody playing the two-stock Canadian railroad industry should be shorting CN and longing CP:

CP Rail’s market cap at present is about CAD$10.1 billion, while CN Rail is at CAD$33.6 billion. In terms of profitability metrics, for the year ended 2010, CP had $651 million income, while CN had $2.1 billion income. Strictly in terms of backward looking P/E, they both scale equivalently which could justify the upper end of the price differential seen by both companies historically.

Petrobakken – Watch for a dividend cut

I wrote earlier about how Petrobakken (TSX: PBN) was a value trap. After PBN reported their first quarter results, my assessment has not changed that much.

Serious investors will just look at their financials, but you can also look at their press release.

The most salient point (and note that this analysis is not exhaustive by any stretch of the imagination – I will leave it to the reader to punch holes in this summary assessment) is that the company has maintained their production at around 41,500 barrels of oil equivalent per day. However, in order to maintain this production they needed to spend about $300 million in the quarter in capital expenditures. Operationally, the company did roughly $140 million in cash, so when you subtract another $45 million out in dividends, you are left with a negative $200 million cash flow quarter.

The company is expecting to spend another $600 million in capital expenditures this year. Doing some paper napkin calculations, if you assume for the rest of the year the company will be able to maintain a rough $150M/quarter operating cash flow, a $45M/quarter dividend rate, and $200M/quarter capital expenditure rate, you are still net negative $315M cash. Their bank facility has about $240M room left. The difference in cash is a $75M gap.

If they get lucky, they can bridge this gap with increases in revenues from increased crude and gas prices or an increase in production (via drilling new wells), but their margin of error is tight. The only other realistic option that management has (since I do not foresee them doing another debt financing) is cutting their dividend.

Anybody investing in PBN for yield is going to receive a nasty shock if this occurs. Petrobakken shares do have value, but I believe they are still trading above their fair value.

Skype – Another kick at the can

The news is making the rounds that Microsoft is paying a large amount of money for Skype, approximately $8.5 billion in cash.

It is virtually guaranteed the acquisition will lose money. EBay tried their hand with Skype back in late 2005 and they only had to pay $2.6 billion for the privilege before they threw up their hands in late 2007 when they dumped the company for a loss.

Now Skype has found a bigger sucker to sell itself to, which in this case is Microsoft.

All of these value investors that have their money in Microsoft have to be wondering what Steve Ballmer is thinking, and how much more money Microsoft will run themselves through before realizing that it has gotten to the size where it is unable to compete effectively outside of its Windows/Office monopoly.

Can HEAT and COOL mix together?

This is probably why I don’t try financial humour too often on this site, but I couldn’t help but spot the two ticker symbols together on the daily gainers:

You can see HEAT and COOL are together in the gainers list. Isn’t that COOL? Or should I say they are HEATing up the Nasdaq?

This sad attempt at humour will not be repeated again here for a long, long time.

How much is a vote worth? Rogers Class A vs. Class B Shares

As the Canadian election trail continues, media frequently comments on the dropping voter turnout over the past few elections. There may be an economic reason for the drop in turnout – mainly that as electoral districts increase in population, the value of a vote is subsequently less.

Trying to quantify the value of a vote in an election (e.g. if you could “sell” your vote, which is illegal) has always been an interesting academic exercise. However, there is real market data that could give some sort of insight to the matter. The data can be obtained from companies that have dual classes of shares which share the economic interests, but split the voting interests in the firm.

One example of this is Rogers Communications (TSX: RCI.A / RCI.B). Each class of shares has the same dividend and economic interest in the corporation, while the Class A shares give you one vote in the election to the board of directors. Rogers’ voting shares is 90% owned by a family trust and hence the shares trading are in a minority position. However, in the event of a buyout offer, Class A and Class B shares can receive different economic consideration.

Class A shares are relatively illiquid – they trade about 5,500 shares a day, while Class B shares are very highly liquid. However, the voting rights with Class A shares, offset by the liquidity penalty that the shares would have, trade approximately $1-2 higher than Class B shares. Measuring the ratio of Class A to Class B share values, you have the following rather interesting chart:

Over the past three years, the ratio has gone from about a 10% price differential to as low as 1%, and there has been some badly placed orders that have brought the ratio below 1 – which gives you the economic interests AND voting interests – presumably this is a discount for illiquidity.

Shaw Cable (SJR.A / SJR.B) also has a similar structure, with the voting shares having a slightly lower dividend than the non-voting B shares. The spread there, however, is about 20% and the voting shares are highly illiquid.

Although both of these examples are not a precise comparison since the voting shares are majority-owned and thus your vote in the voting shares are meaningless, it is an interesting exercise in measuring the value of a vote. I am sure readers out there can come up with better examples of companies that have dual class structures that do not have majority ownership on the voting shares.