Category Archives: Masters2017_1

Canadian Pacific Railway lowers operating costs and raises profit

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Canadian Pacific Railway (CP) reported lower revenue last year, but the company’s net income increased by 18 per cent due to reduced operating costs.

One of Canada’s largest railways, CP earned almost $1.6 billion last year after taxes compared to $1.3 billion in 2015, according to an analysis of its fourth quarter results.

Although total revenue fell seven per cent, CP lowered its operating expenses by nine per cent. This means the company became cheaper to operate and therefore increased its profit.




Some of the ways CP lowered operating costs was by reducing dwell times, meaning the time the train spent on the tracks and increasing train speed. The longer a train spends on the tracks, the higher the costs. The faster the train can get from port to station, the more money CP saves. CP trains last year also become longer and heavier.

The company also slashed jobs by 10 per cent, reducing the workforce from almost 13,000 to around 11,500 by the end of last year.

The company said in a statement last month that low operating costs helped offset “softer than expected volumes.”

Even though trains became longer, faster and heavier, there were less on the tracks in 2016.

The total amount of freight moved by CP dropped, as commodities such as oil were produced less and at a lower value. Total freight revenue fell from $6.5 to $6 billion.

The decrease in freight revenue made CP tighten its belt and streamline to remain profitable.

Retired business professor Robert Sproule, from the University of Waterloo, says that the company’s decision to slash jobs, increase train speed, and reduce dwell time had “significant” impact on their financial statement and helped offset falling revenue.



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The company’s recent success is largely due to their CEO Hunter Harrison, who took the reins at CP in 2012. According to Sproule, Harrison has been called the “Sydney Crosby” of the railroad industry, known for turning struggling companies into financial successes.

A graph showing the increase in net income for Canadian Pacific under the leadership of CEO Hunter Harrison | Data was compiled from fourth quarter records 2012 – 2016 from Canadian Pacific

He was named “Railroader of the Year” by the Railways Age Journal and “CEO of 2007” by The Globe and Mail when he was CEO for Canadian National Railway from 2003 to 2009.

When hired at CP, Harrison said in a press release that he aimed to “cut costs, reduce train times, and lower expenses.” And it appears he has done precisely that.

Prior to Harrison’s arrival at CP, net income was decreasing yearly, from $651 million in 2010 to $484 million in 2012. Since Harrison has held the reins at CP, the company’s profit has increased by over a billion dollars. Harrison has also slashed 6,000 jobs.

Sproule says that CP has become an attractive company for investors due to the cost saving measures implemented by Harrison. Investors have seen high returns on their investments as dividend payouts rose by 26 per cent last year alone.

CP purchased over a million shares of its own stock. This has resulted in fewer shares available on the market, which contributed to driving up stock prices and dividend payouts.

Harrison announced unexpectedly last month that he would be stepping down as CEO.

CP said in an email yesterday that the “same strategy for the company will remain” under the new CEO Keith Creel. Creel will be replacing Harrison by the end of the month.

Harrison has had to forfeit almost $118 million in stock and benefit options, so he can take a job at a competing railroad company. He hasn’t indicated which company.

In a statement from CP, it was revealed that Harrison must sell his company stock by May 31.

(Too read the annotations, please click on the “Notes” tab.)

Expansions lead to shrinking earnings for Hudson’s Bay Company

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Despite high retail sales, Hudson’s Bay Company reported a net loss of $125 million in the third quarter of 2016.

The Canadian-based retailer, which operates under many banners including Hudson’s Bay, Lord & Taylor, and Saks Fifth Avenue, reported a net loss of $125 million the third quarter of 2016 compared to net earnings of $7 million the year before. This represents an 1,886 per cent decrease in earnings, according to an analysis of its third quarter results.

“During the third quarter we continued to execute our all channel strategy in the face of a retail environment where there were challenges in the women’s apparel, department store and luxury segments,” said HBC’s governor and executive chairman officer Jerry Storch in a statement that accompanied the third quarter results. “To address this we are continuing to move aggressively, making specific improvements both in our digital and brick and mortar operations that will allow us to better serve our customers.”



According to the HBC’s statement, the primary reason for the net loss was the creation of joint ventures and the additional rent expenses associated with business acquisitions.

HBC has reported a business strategy based on growth through acquisitions. In May 2016, the retailer announced plans to expand to the Netherlands with up to 20 new stores over two years and in September, HBC announced long-term leases for 13 locations.

While reporting a net loss in earnings, HBC also reported retail sales of almost $9.86 billion in the first three quarters of 2016 compared to $6.68 billion the year before. This represents a 47.6 per cent increase.

A woman holds a Hudson’s Bay shopping bag in front of the Hudson’s Bay Company (HBC) flagship department store in Toronto January 27, 2014. REUTERS/Mark Blinch

Doug Stephens, business advisor and founder of Retail Prophet, said that in the face of higher sales, the factors that are playing into the operating loss are either higher operating costs or lower than expected gross profit margins.

“I would argue that HBC has rapidly trained their shoppers to expect to buy at a discount,” wrote Stephens in an emailed response. “Discounting sets off a viscous cycle where deeper and deeper discounts become necessary to hold market share, which of course results in lower profits and cuts into operating costs including staff.”

HBC also reported that while earnings were impacted by retail acquisitions, these same acquisitions increased retail sales.


HBC’s Stock Prices by atera on TradingView.com

According to Stephens, many in the industry believe that the recent acquisitions have less to do with buying retail businesses and more to do with buying real estate. Indeed, HBC has a real estate strategy.

“The Company has demonstrated a history of leveraging value from its substantial real estate holdings,” reported HBC in its report that accompanied the financial results. “The Company’s valuable real estate portfolio also serves to strengthen the Company’s balance sheet and operating business and provides the Company with increased financial flexibility.”

Stephens says that one-time costs associated with acquisitions could temporarily impact net earnings, but he doubts the strategy could work long term.

“Even as a retail strategy, acquisition can only work for them in the short term. At some point they will run short of acquisition opportunities and have to grow organically on a comparable store basis,” wrote Stephens.

On Friday, the Wall Street Journal reported that HBC and U.S. based company Macy’s have entered into preliminary deal talks. One deal option involves HBC taking over Macy’s real estate.

Coca-Cola trails behind Pepsi

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The soda game has been dominated by Coca-Cola for over a century, but Pepsi may take the lead thanks to its secret weapon: food.

In both companies most recent financial reports, PepsiCo. had the edge over Coca-Cola Co. by $5 billion.




But the question is, how?

While Coca-Cola brands range from Powerade to Dasani, the only thing they produce are beverages, and even though it’s something they do very well, Pepsi has the upper-hand. Acquiring companies like Frito-Lays has allowed PepsiCo. to break into the former side of the food and beverage industry, and become the $152 billion company it is today. While similar in origin, the dueling soda giants have begun to diverge over the last decade with Pepsi soaring higher than Coke every day.

Separated at birth

PepsiCo. and Coca-Cola Co. have been constant competitors since the late 19th century when both companies got their start. Coke was invented by John Pemberton as a substitute for his morphine addiction, while Pepsi was created by Caleb Bradham with the intention of boosting energy.

Nearly identical in formula, the sugary colas have been each company’s flagship product for over a century, their almost identical taste spurring an eternal debate between consumers over whether there is a difference in taste. Either way, both have remained constant companions in both the stock market and supermarket since their establishment.



A Comparison of Pepsi Co. and Coca Cola Co. by laurensproule on TradingView.com


With an increase in obesity and diabetes across North America, a significant amount of pressure has been placed on the soda industry to develop alternative options in order to stay afloat. Both Pepsi and Coke have introduced juice, water, and diet beverages into their product lines in an effort to appeal to the increasingly health-conscious consumer. Coca-Cola recently announced the re-launch of Coca-Cola Plus, a sugar and calorie free beverage with added fibre. Marketed as the “first Coke to actively improve your health,” Coca-Cola Plus is the latest in a stream of Coke products to be deemed “the healthier option.”

Pepsi has made similar strides as its competitor, answering Coke’s Diet Coke, Coca-Cola Zero, and Coca-Cola Life with “diet-friendly” alternatives of its own, like Diet Pepsi, Pepsi Max, and Pepsi True.

All that and a bag of chips

The waning interest of the consumer has forced both companies to diversify their portfolio, a challenge that Pepsi has taken up while Coke has not. Diversification, Steve Balaban says, is a wise business strategy and a sure-fire way to decrease the risk of failure. The Toronto-based financial analyst likens PepsiCo. to Rogers Media, another company that adapted and grew their product offering with great success.

Since 1965, Pepsi has been absorbing other food and beverage corporations across the globe. PepsiCo. declined to comment on its ever-expanding dossier, although a 2012 press release announced its entrée into the dairy industry, suggesting Pepsi has no interest in limiting itself to the snack aisle.

The extent of diversification Coke has engaged in is investing in the bottling companies that package its products. Coke’s Bottling Investments Group division made the largest contribution to the company’s revenue from July to September last year, as seen in its most recent financial statement. The following compares Pepsi and Coke’s most recently released profits broken-down by division.

Even though Coca-Cola as a whole is worth more than Pepsi by about $27 billion, the gap is shrinking. Coke’s long-term partnerships with companies like McDonald’s and Ford have proven to be very lucrative over time, giving Coca-Cola Co. a cushion between itself and PepsiCo. But before Coke gets too comfortable in the lead, it should talk to the hare.

TransCanada investors steady after Columbia acquisition, Keystone support

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Despite a $135 million net loss in its third quarter, investors maintain confidence in TransCanada Corporation in the early days of a pipeline-friendly presidency.

According to the company’s most recent financial statements, common shares are down 130 per cent from last year’s third quarter, and are valued at 17 cents per share. This loss is largely due to a $1.1 billion hit the company took when it sold its northern hydro businesses in order to fund a new acquisition.

The acquisition of Columbia Pipeline Group marks a streamlining of TransCanada and “a return to what it knows,” according to Dr. Robert Sproule, a retired finance professor of the University of Waterloo.

By absorbing Columbia, TransCanada hopes to bring the company’s $7.7 billion of planned business growth. The move gives TransCanada a greater share of the pipeline market, which it only stands to benefit from moving forward in an increasingly pro-pipeline political climate.



TransCanada Corp. Stock Prices by MaggieParkhill on TradingView.com

The process of acquiring Columbia began just as Donald Trump, who has been publicly supportive of TransCanada’s Keystone XL pipeline project, clinched the Republican nomination. Since Trump became the clear GOP nominee front-runner, the company’s common stocks have been higher than ever, with the third quarter resulting in a 41 per cent increase in comparable earnings before losses related to the acquisition.

Another, even larger net loss of related to the Columbia acquisition is expected to be reported in the fourth quarter. “They’re trying to spread the pain, because they don’t want it in one reporting period,” Sproule says. But with President Trump’s executive order to pull an about turn on Keystone, TransCanada has been able to reapply for the controversial pipeline.

This policy change indicates a new path forward for pipelines, keeping investors content despite losing money on their shares. As Sproule explains, “Investors are always looking to the future.”

President and CEO Russ Girling is also looking to the future. In a press release, Girling says the infrastructure project will help meet growing energy demands and create tens of thousands of jobs in the U.S., a campaign promise of the president.

Protestors took to the streets after President Trump’s executive order to push through Keystone XL. (Pax Ahimsa Gethen – Wikimedia Commons)

The path forward, however, is not without risks. With any acquisition, there is a chance that the returns will not cover the losses, according to Sproule. There’s also the potential for legal challenges to the Keystone XL project from environmental or indigenous lobby groups, as well as over land disputes from private citizens.

None of this seems to be affecting shareholder confidence, despite the stocks’ cooling off period this week after the executive order high. “TransCanada has been around for a long time, and the nature of the pipeline business is pretty solid,” says Sproule.

Trump’s executive order not only gives investors confidence, but also halts a $15 billion lawsuit that TransCanada filed against the U.S. government for rejecting Keystone XL over a year ago after the Obama administration axed the project.

U.S. District Judge Kenneth Hoyt ordered that the lawsuit be abated until May 1 to allow for TransCanada’s reapplication to be processed and for a final decision to be made by the Trump administration. The reapplication was submitted on Jan. 27, and the U.S. government has 60 days to respond. According to Judge Hoyt, a decision in to go ahead with the pipeline in March would render the lawsuit moot.

(To view the annotated notes in this financial statement, please click on the “Notes” tab at the top.)

Risky times are brewing for Montreal-based DAVIDsTEA

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A Montreal-based tea company’s recent quarterly report shows that its cost of sales increased by about one third compared to last year, but they’re still making some money, despite the higher cost of doing business.

The specialty tea company, DAVIDsTea, made around $44 million in sales during its third quarter of 2016. This is about a 21 per cent increase from its third quarter sales in 2015.

The company’s cost of sales, however, increased by 29 per cent to $23 million from $18 million in 2015.



Christopher Lackey is an analyst, investor and founder of Moneybear.ca. He believes that the company’s problems lie in the U.S. According to Lackey, the brand has not caught on the same way it has in Canada, especially due to its “niche” market nature.

Lackey says the U.S. expansion is costing the company money without making much back. He also says the tea store has more competition in the U.S. with the already established presence of Starbucks-owned Teavana stores.

“It’s not like Tim Hortons or McDonalds where you can put one anywhere,” said Lackey as he noted the inconvenience of having to spend time in a retail store to purchase a cup of tea.

In a Globe and Mail article, DAVIDsTEA’s recently departed CEO Sylvain Toutant is quoted saying that “[they] have found that [their] U.S. customers prefer to shop quickly and efficiently,” sparking the opening of a prototype store with a self-serve model in Boston.

The company’s third quarter analysis states plans to grow sales numbers by adding new stores and achieving more sales on the DAVIDsTEA website.

The company has plans to construct, lease and open 25 new stores in Canada and 15 new stores in the U.S. as well as renovate several stores. Additionally, management hopes more sales will come from places such as hotels, restaurants, and offices and workplace locations.



The problem is that in order to achieve these higher sales numbers, the company has to spend more, according to Lackey.

“They have not been able to turn a profit which is why you can buy the stock now for about a quarter of what it was when they first went public,” said Lackey.

As of the end of October, DAVIDsTea opened 42 new stores in the span of one year. The company’s reported net loss in its third quarter increased to $4.96 million from $871,000 in 2015.

AN UNKNOWN FUTURE

The recent resignation of DAVIDsTEA’s CEO Sylvain Toutant also puts the company in unsteady waters as it enters a new fiscal year, according to Lackey. David Segal—the company’s co-founder, former CEO, namesake and brand ambassador—resigned in 2016 as well.

An interim CEO, Christine Bullen, has taken charge as Toutant departed on January 28. When asked about where the company might be headed, a spokesperson replied through e-mail stating that it is in a “quiet period” until fourth quarter results are released and therefore cannot comment or answer any questions.

Lackey believes Bullen is an “unknown quantity” who could take the company in either direction. He said that the company’s handling has been quite amateurish up until now but if Bullen knows what she’s doing, she may be able to turn things around.

If you’re willing to take a risk, however, it may be a good time to invest.

“There’s maximum pessimism and no hope right now,” said Lackey. “It’s high risk and high reward.”

Back in the spring, the company was turning profit and stocks were up. If the company manages to get back to those numbers, it could be rewarding, according to Lackey.

DAVIDsTea might be able to turn things around just yet.


David’s Tea Stock Prices by shalumehta on TradingView.com

Postmedia reports operating loss: company not viable, experts say

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Postmedia Network Canada posted a loss in operating income in its most recent financial report, prompting multiple experts to question the future of the company.

The company suffered an operating loss of $46.3 million in the first quarter of this fiscal year. That amounts to a 338 per cent decrease when compared to the $19.4 million gain that the company posted in the same quarter last year.

Operating Loss (p. 10)
An operating loss of over 338 per cent was caused by a variety of factors, including corporate restructuring and and a general decrease in income.
View entire document on DocumentCloud

Business strategy professor Ian Lee of Carleton University said that Postmedia has simply “run out of options” in managing its losses.

“Postmedia is dying before our eyes,” Lee said. “It’s the beginning of the end.”

Associate Professor Michael McIntyre – Photo courtesy of Sprott School of Business, Carleton University

The loss of income continues Postmedia’s recent trend as the company continues  to lose money. Struggles to offset its steadily lowering print ad revenue in the digital world have seen total revenue drop by over $36 million, or 14.4 per cent, since this period last year.

Michael McIntyre, a professor and financial expert at Carleton University, criticized Postmedia’s lack of a winning corporate strategy as a reason for its lower income. He blamed the company’s inability to beat their digital competitors, adding that there was “potential” for the company to fold if they cannot find a solution to their income loss.

Postmedia Stock by MatthewOlson on TradingView.com

President and CEO Paul Godfrey has remained optimistic for Postmedia’s future. In the news release for its most recent financial reports, Godfrey said that the company was making progress in its restructuring plans through “significant cost reduction initiatives,” and had “increases in digital revenues this quarter.”

But for Postmedia, the recent numbers and news from the company tell a less positive story.

Part of the company’s response to its loss of income has been to cut back on its workforce.  Postmedia announced last October its goal to trim salaries in the company by 20 per cent through voluntary buyouts to reduce expenses. Postmedia also said they would lay off employees if its target was not met. Those layoffs began in January, with 90 jobs cut across the country. Postmedia did not respond to an inquiry about the status of their workforce.

Associate Professor Ian Lee – Photo courtesy of Sprott School of Business, Carleton University

Lee was adamant that the company’s business model is no longer viable.

“There’s nothing left to do but just lay off people,” Lee said. “You can only restructure so many times and then there’s literally nothing left to restructure.”

Restructuring and layoffs have not prevented Godfrey and the rest of the company’s top executives from receiving significant bonuses. The company will pay out a total of $2.275 million in retention bonuses to Godfrey and four other executives in three parts, with the final instalment  due to be paid out in July of 2017.

That number does not include the $925,000 in bonuses paid out to Godfrey and five other top executives in 2015 for their work in acquiring Sun Media’s English-language holdings. That deal cost $316 million and significantly boosted Postmedia’s revenues. But it also raised the company’s operating costs, which it has so far been unable to balance.

Corporate Bonuses (p. 26)
An outline of the most recent bonuses given to top executives with Postmedia. Two of the executives given retention bonuses, Jeffrey Haar and Doug Lamb, have since left the company. Haar stepped away in November and Lamb will be done at the end of February.
View entire document on DocumentCloud

Postmedia’s troubles have not gone unnoticed. The Public Policy Forum, headed by former news editor and journalist Edward Greenspon, recently released a report entitled “The Shattered Mirror” which discusses the current state of the news media in Canada. The report offers possible solutions to save news outlets like Postmedia from their increasing deficits, including government bailouts and funding.

But Lee said the government won’t bail out Postmedia because it already has a preferred option for news.

“It’s called the CBC,” Lee said. “And it’s doing very well.”

Nevsun Resouces Ltd. abandons production of copper concentrate

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In the second quarter of 2016 (Q2) Canadian mining company, Nevsun Resources Ltd (Nevsun), abandoned the production of copper concentrate. This created Q3 copper production numbers that were lower than its projected quarterly goal.

Nevsun is engaged in mining mineral resources. Its main asset is Bisha Mine, located in Eritrea. The North-East African country borders the Red Sea which makes it a strategic location in that region for the flow of exports to markets in Asia and Europe. Bisha Mine specializes in mining gold, copper and zinc resources. The mine began commercial production of gold in 2011.

Red Sea Exports

As planned, Nevsun moved from its gold production phase to copper production phase in 2013. However, the third quarter Management Discussion and Analysis shows the company transitioned from the commercial production of copper to zinc earlier than expected. Transitioning generally occurs when the extracted mineral resource no longer produces a commercially saleable concentrate. In this case, commercial copper production ceased once saleable copper concentrates depleted.

Nevsun’s 2016 objective was to produce 40 to 60 million pounds of copper from primary ore. However, the company’s Progress Update declared it would be unable to meet copper production goals for the second half of the year. In Q3 the company faced a 33 per cent decline in revenue compared to its nine month ended September 2015 numbers and a 67 per cent decline in revenue compared to its three month ended September 2015 numbers. This can be traced back to the depreciation and depletion numbers which increased by 93 per cent as compared to three months ended in September 2015 and 34 per cent as compared to nine months ended in September 2015.



So, how did Nevsun miss its copper target? Working with mineral resources is a calculated risk. In the mining industry, there is a distinction between “mineral reserves” and “mineral resources.” While a mineral reserve illustrates known amounts of concentrated minerals ready for extraction, the term “mineral resources” merely suggests there’s a strong potential for the extraction of mineral concentrates. Though mineral resources offer a strong incentive to extract concentrates, there’s an implication that it may not be possible. Therefore, the challenges faced by Nevsun’s commercial copper production were part of a known risk factored into the mineral resource trade.

Since this challenge is an anticipated risk of the mineral resource industry, Nevsun was able to adapt to its circumstance. In lieu of the ability to export a commercially saleable copper concentrates in Q2 the company found itself speeding up the process to access zinc concentrates. Despite the challenges, the company saw a 33 per cent increase in total assets. This is due to its acquisition of a new mining project in Serbia.

Nevsun also boasts an operating income of $17.5 million in Q3 2016, a 207% increase from operating income of $5.7 million generated in Q3 2015. The Company recorded operating expenses of $2.4 million in Q3 2016 compared $50.1 million to during the same quarter last year. A 54 per cent decrease in described by Nevsun as it being related to the more expensive “pre-commercial production” phase of the mining process took place in the previous quarters.



While operational expenses went down, administrative expenses went way up. Administrative expenses rose by 304 per cent compared to the same time last year. The company explained that this is due to an increase in valuation of the company’s shares. Administrative expenses were made up of increases to employee salaries, benefits and long-term incentive compensation.

Nevsun may have faced challenges in its production of copper concentrates but the company’s expansion into mines in Serbia shows signs of continuing to do business by sticking to the minerals it knows best.

Nevsun Resources Ltd. Stock Prices by rtecle on TradingView.com