Canadian Companies Affected by Recession

Some of Canada’s oldest and largest companies appear to be in big financial trouble. One of the ways that is used to see if a company is likely to fall into bankruptcy is the “Z” score which weighs 5 ratios-equity to debt, return on total assets and sales, working capital and retained earnings to total assets, any score below 1.8 is not good news for employees, investors and other stake holders.

There are 5 that have been analyzed that fit that bill but, where there are losers there are inevitably winners and there are seven that came out on top.

The top 7 are:

Goldcorp (Mining)
Gold topped $1000US in February. Even though it didn’t remain there long it shows that, even during a global economic slowdown, gold’s role as a safe haven is still intact and Canada is home to some of the world’s largest gold companies such as Barrick and Kinross. All of these are expected to do well in 2009.

SNC-Lavalin (Infrastructure)
Canada’s largest and highest profile engineering and design firm is in a good spot with governments around the world pumping money into infrastructure to help boost economies. This company has been around for 100 years so it has lots of experience, as well as money, to take on projects all over the world.

EnCana (Oil and Gas)
Although energy prices may be dropping there is still a lot of growth potential in this sector. This company is a leader in the natural gas field in terms of technology, operational effectiveness and strategy and has almost $400 Million in cash and a lower debt to capital ratio than other senior energy and petroleum producers in Canada.

Royal Bank of Canada (financial services)
When looking for a Saskatoon mortgage broker I have a great guy at Royal Bank in Saskatoon and I am pleased to see RBC on the top 7 list of companies poised to do well. Canada was the envy to US banks by avoiding the same pitfalls and mistakes and risks the US banks made. RBC is poised to gain market share while some of their competitors struggle. They are also in a position to build global capital market franchise with the failure of many global competitors such as CitiGroup, Lehman Bros, Merrill Lynch, etc.

Agrium (Agriculture)
Even when there is a recession people still need to eat so the fertilizer company is virtually recession proof. This is good news for Alberta but also Saskatchewan’s Potash Corp. The edge goes to Alberta’s Agrium because of its acquisition strategy and they are currently in the process of a hostile takeover of CF Industries which would increase its market position in nitrogen to #2 (currently it is #3) and in phosphate to #3 (currently #5)

Canadian National Railway (Transportation)
CN is one of the most efficient railway companies in North America as its operating costs as a percentage of revenue are the lowest among its peers. CN is not immune to the slowing economy but they are in a better position then their competitors once business does recover. CN also has an edge due to the ability to soon bypass Chicago which was a huge bottleneck for transport during a quick economy, they acquired tracks just outside of Chicago in January.

Onex (Private Equity)
Onex specializes in acquisitions that require less than $1 Billion in debt financing and has more than $500 million in cash and no debt and $3.6 Million US to spend in its private equity fund. With a few more smart purchases, such as the purchase of Cineplex from Chapter 11 earlier this decade, Onex could come up big as the economy recovers.

Canadian Real Estate Investment Trust (Real Estate)
Despite the whole scare of plummeting real estate prices this sector has differentiated itself by boasting the most conservative accounting policies and lowest payout ratios in the industry. CREIT has high quality assets, diverse income stream, solid distribution and  a conservative payout history.

Research in Motion (Technology)
The Crackberry is on of Waterloo’s best/worst kept secrets and has about 21 million subscribers which is tiny compared to the 4.7 billion mobile devices that will be in use this year.

Shoppers Drug Mart (Retail)
Besides just needing meds, Shoppers Drug Mart has a growing cosmetics business that helps customers beautify without breaking the bank. Shoppers had a 3.6% increase in the 4th quarter which included one of the worst month-to-month Canadian retail sales declines in 15 years.

Now Time for the Bad

Air Canada (Air line)
Eroding market, rocky relationships with employees, up to their windows in debt, and perilously close to violating debt covenants and not enough cash…this could spell disaster. But, if they had a dime everytime someone complained about their services they would be rolling in it!

This company isn’t expected to run away and die as the government will likely bail them out, even after they didn’t get smart after the first time this happened.

Can West Global Communications (International media company)
They bit off more than they could chew with acquiring the National Post but neglecting to pay off the debt and instead went on an international expansion tour. Although they gained some valuable assets they didn’t manage their debt very well and, as I read my online paper, I can understand how the National Post barely turns a profit which doesn’t help the debt issue.

Nortel Networks (Telecommunications equipment manufacturer)
Overspending on bad acquisition, seismic accounting scandals, overpaid CEO’s ($20M US for the current one!) and poor and outdated technologies all contributed to this one being in the ‘bad’ category.

General Motors (Automobile Manufacturer)
Subsidiary of America’s largest auto manufacturer. Enough said. In December it already secured $3 billion in bailout loans from the federal and Ontario governments, funds it later declined to draw on, to now negotiate a larger sum. Lenders are not giving out car loans to anyone with a pulse now after the economic melt down so this translates to less new cars needed which left all manufacturers scrambling to cut production.

Kari Calder
Saskatoon Real Estate Agent
Century 21 Conexus Realty Ltd.

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