Mark Thomson, senior vice-president and director of research at Toronto-based Beutel Goodman & Co. Ltd., says that some high-profile, quality Canadian consumer-related stocks and insurers were left behind in the surge in the S&P/TSX Composite Index over the past 12 months. These are the areas where he and the Canadian equity team, which he heads, have been finding value.
Companies such as Canadian Tire Corp. Ltd. CTC.A, "a Canadian icon," and Shoppers Drug Mart Corp. SC, a leading player in Canada's retail drugstore market, are trading at "depressed valuations." Thomson says investors are ignoring the quality of these businesses. Also in this category is Molson Coors Brewing Co. TPX.B.
Looking at performance versus the S&P/TSX Composite Index over the past 12 months since its March 9, 2009 bottom, the Canadian banks powered the financial-services sector to the top spot. At the other end of the spectrum, telecommunications services and consumer staples were the laggards.
A specialist in the financial-services sector, Thomson says that the Canadian banks are "undoubtedly among the best businesses in the country." They have the financial strength to grow, he says, and will clearly benefit from the economic recovery.
Despite the rebound in bank stocks, they still trade at low valuations by historic standards. "On a forward P/E (price/earnings) multiple basis, these stocks trade at 12 to 12.5 times and the banks could generate EPS (earnings per share) growth of 20% to 25% over the next 12 to 18 months," Thomson says.
While he considers that these stocks will continue to do well, he points out that the team has not added to its bank positions in more than one year. "We already had a substantial weighting in them, which we had built up starting March 2008, when the cracks in the global financial-services sector started to appear.
| Consumer staples lag since March 9, 2009 low | ||
| Index | 1-Yr % | |
 |
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| S&P/TSX Financials | 106.9 | |
| S&P/TSX Industrials | 70.2 | |
| S&P/TSX Information technology | 67.9 | |
| S&P/TSX Composite | 62.3 | |
| S&P/TSX Energy | 50.3 | |
| S&P/TSX Consumer discretionary | 46.0 | |
| S&P/TSX Materials | 45.5 | |
| S&P/TSX Utilities | 37.9 | |
| S&P/TSX Health care | 37.5 | |
| S&P/TSX Telecommunications services | 31.9 | |
| S&P/TSX Consumer staples | 14.6 | |
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| For the period ended March 9, 2010 | ||
| Source:Morningstar | ||
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When it comes to Canadian insurers, Thomson says investors are not "giving credit" to some companies for the high quality of their businesses. A prime example, he says, is Manulife Financial Corp. MFC. Thomson and his team added to Manulife over the past three months.
Beutel Goodman, which manages assets of $19 billion, is a traditional value manager. Thomson and his team manage $6 billion in large caps, includingBeutel Goodman Canadian Equity 
.
Thomson is also co-manager ofBeutel Goodman Balanced, as well asHartford Canadian Dividend,Hartford Canadian Value andNorthwest Canadian Dividend. The $1.1-billion Beutel Goodman Canadian Equity, with 32 names, is overweight in financial services, telecom services and staples. It is modestly underweight in energy and significantly underweight in materials.
Thomson and his team favour companies with predictable earnings that are steady cash- flow generators and pay good dividends. For example, Canadian Tire "is in an unassailable position in its niche in the Canadian retail market." This general merchandiser with a financial-services component "has had relatively high loss provisions in respect of its credit card program." But, this is due to cyclical factors, Thomson says.
Also, the mild Canadian winter has crimped sales of certain seasonal items. This is all built into the stock, says Thomson. Canadian Tire trades at about 1.2 times book value per share and at a low double-digit multiple on forward EPS estimates.
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| Mark Thomson |
A "well managed company, which is a significant generator of free cash flow and has substantially raised its dividend over the past five years," is Shoppers Drug Mart. The retailer is well positioned in Ontario, is growing its business in Quebec and expanding across Canada, says Thomson. "In its merchandising mix, its move into brand-name high-margin cosmetics has worked well." In addition, its introduction of new store formats has been successful, he says.
There are concerns, Thomson says, that the Ontario government will introduce drug-pricing legislation that will hurt the pharmacies. "Our call is that it will not be as bad as investors fear and it will afflict Shoppers' rivals more than it does the company." Shoppers stock trades at a multiple of 14 times forward EPS estimates.
As one of the consolidators in what is a stable, mature industry, Molson Coors has become a "significant player" in the global brewing business, says Thomson. The company is a "huge" generator of free cash flow. The pairing of the U.S. operations of Molson Coors and SABMiller PLC has given them market clout against industry giant Anheuser-Busch. It has also led to cost savings for the two companies and "the joint venture is a strong cash flow generator."
Molson Coors trades at "a little above book value per share" and at a P/E multiple in the low double digits on forward EPS estimates, says Thomson. The company has raised its dividends by around 10% per annum over the past five years.
Turning to financial services, Manulife Financial is a global player and one of the biggest insurers in the United States, "where competition will be constrained due to the weak balance sheets of some of its competitors," says Thomson. Manulife is also building its footprint in Asia.
"There were concerns about the health of Manulife's segregated funds and variable annuity business, but this issue is largely behind it," he says. The stock trades at a price to book value per share of 1.4 times, despite Manulife's return on equity of 13%, "which is being depressed by the fact that the company has excess capital on its books." This excess, he says, will be reduced over time.
Thomson and his team have been doing little selling of late, but they did reduce their holding in Talisman Energy Inc. TLM based on valuation. "The energy sector had a big run and some stocks hit our targets."
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