Earnings, not politics, drive shares of Quebec companies

Recent election had little impact on stock prices.

Martin Warych 10 July, 2014 | 6:00PM
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The recent Quebec election revealed that politics had little if any impact on the share prices of Quebec-based companies. The campaign proved to be a wild ride for all concerned. This was particularly so for the previously ruling Parti Québécois, which had presided over a minority government.

Early polls indicated that the pro-sovereignty PQ had a good chance of winning a majority of seats. However, voters handed the PQ its worst ever defeat and lowest popular vote since its first election campaign in 1970.

The earlier prospect of a PQ majority brought the risk of Quebec sovereignty to the forefront. Political uncertainty in Quebec has long been thought to be of concern for both domestic and foreign investors in Canadian stocks, particularly those of Quebec-based companies. One might have thought that the decisive win by the federalist Liberal Party on April 7 would have provided a boost to Quebec-based stocks.

That proved not to be the case. A comparison of the year-to-date performance of the Morningstar National Bank Quebec Index and the S&P/TSX Composite Index reveals that the election campaign played an insignificant role in the performance of Quebec-based stocks.

The Quebec Index tracks the performance of companies whose head offices are in Quebec but may also have extensive operations outside the province. While the index includes many companies with Canadian and foreign exposure, such as Alimentation Couche-Tard Inc.  ATD.B, Saputo Inc. SAP and BCE Inc. BCE, the majority of constituent companies have significant Quebec operations. These companies would stand to gain or lose the most from any political uncertainty.

The Morningstar National Bank Quebec Index returned 8.2% in the first half of 2014, lagging the S&P/TSX Composite Index by approximately 4.6%. This underperformance started in early February, before the dissolution of the Quebec National Assembly and the election call on March 5, and widened as the campaign wore on.

However, the growing underperformance of the Quebec index can be attributed mostly to the index's lack of exposure to the rebounding energy sector. None of the 58 holdings in the Quebec Index are in this sector. By comparison, the S&P/TSX Composite has a hefty 28% energy weighting.

The energy sector has been one of the hottest in 2014, returning 23.8% in the year to date. Moreover the sector's rise began in early February, coinciding with the start of the Quebec Index's underperformance.

With the election over and the risk of a sovereignty referendum put to bed, one option for investors looking for broad exposure to Quebec-based stocks is First Asset Morningstar Quebec Index QXM. Designed to track the performance of the Morningstar Quebec Index, this ETF has performed exceptionally well. The underlying Quebec index garnered a 27% total return versus 24.9% for the S&P/TSX Composite over the 12 months ended June 30, 2014.

As for individual Quebec-based companies, among those with strong fundamentals is Cogeco Cable Inc. CCA, a provider of analogue and digital television, high-speed Internet and telephony services. It has a $2-billion market capitalization and operates primarily in Quebec and Ontario.

On April 9, Cogeco reported second-quarter earnings per share (EPS) of $1.21, beating the consensus EPS estimate of $1.11. It is an attractive stock for investors looking for value and dividend growth criteria. The company provides a stable dividend, currently sporting an expected yield of 2%. It also has a good track record of raising dividends, with the annualized five-year dividend growth rate sitting at a healthy 24.2%.

Perhaps Cogeco's most attractive metric is its price-to-cash-flow ratio. As of June 30, P/CF was sitting at 4.22 times, which is among the best values found in the Canadian equity universe.

Another Quebec-based company worth a look, albeit with a much bigger foreign exposure, is CGI Group Inc. GIB.A. CGI provides high-end technology consulting, systems integration, outsourcing and business solutions.

On April 30, CGI reported EPS of 75 cents, exceeding the analysts' consensus estimate of 68 cents. The positive earnings surprise is attributable to its thriving European operations and better-than-expected results from its 2012 acquisition of Logica. After the earnings announcement, 12 of the 15 analysts covering CGI raised their 2014 EPS estimates, bringing the consensus to $2.86, up from $2.78 three months earlier.

Based on the revised 2014 consensus estimate, the company's expected growth of book value stands at an impressive 21.3%, which qualifies CGI as an attractive buying opportunity for investors seeking growth stocks.

Lastly, SNC-Lavalin Group Inc. SNC is one of the leading engineering and construction groups in the world. The Montreal-based company's reputation and stock price tumbled in recent years while plagued by corruption scandals. Since then, SNC-Lavalin has undergone a corporate cleansing with numerous executive changes and newly developed ethics and compliance frameworks.

The company reported first-quarter EPS of 64 cents on May 8, well ahead of the analysts' consensus estimate of 50 cents, producing a positive earnings surprise. Analysts subsequently raised their 2014 EPS estimates to a consensus of $2.88 from $2.67 three months earlier, and to $3.49 for 2015, from $3.18 three months earlier. SNC should be considered for purchase by investors in Canadian growth and momentum-oriented stocks.

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About Author

Martin Warych

Martin Warych  Martin Warych, CFA, is an equity data analyst with the CPMS division of Morningstar.

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