Wednesday, September 03, 2008

Kicking the tires -- Sherritt International (S:TSX)

What with the cash piling up in my savings account, it's about time for me to make another RRSP contribution, so I've been doing some digging, looking for a suitable stock to buy into. I'm liking what I see about resource company Sherritt International, (ticker symbol S on the TSX). I see a lot to like about the company, and some things that raise my eyebrows a little, so I thought I'd post a few thoughts here for my clever readership to see and try and get some feedback on my thought process. My apologies if you're numbers-averse.


  • It's a resource story. Sherritt's business basically divides into four units, listed here in order of size, in terms of percentage of sales -- Metals, Oil/Gas, Electricity, and Coal. Outside of a few token trusts and dividend-paying energy companies buried in my dividend ETF (CDZ on the TSX) I don't really have much of a resource presence in my portfolio -- rare for a Canadian investor. I've been underweight for a while, looking for an entry point into the space in general. I know it's impossible to time the market, but what with oil having retreated significantly from its July high of $147, I figure now' s as good a chance as any to jump in. Most commodities have seen a similar decline in value over the last several months, and nickel (66% of which goes into the production of stainless steel) is a major part of Sherritt's business. In the spirit of buying high and selling low, I figure my odds are pretty good at the moment. Whether it's the right firm inside the sector remains to be seen.
  • It's international, and diversified across several industries. With a number of operations across the country, the Toronto-based company obviously has a strong Canadian presence. But things like power plants in Cuba, offshore oil patches in Spain, gas operations in Pakistan and nickel mines in Madagascar give me a little more international exposure as Canada's economy shows signs of slipping into recession.
  • A whole bunch of the company's fundamentals look really, really good right now. Consider a few of them. Over the past five years, Sherritt has boosted its profit by an average of 36% per year. Consensus estimates expect further earnings growth in the next two fiscal years. In June, Sherritt was the only company in Canada to earn an A grade both as a value stock and a growth stock by MoneySense magazine. The company pays a dividend (albeit a small one) and it's growing. The company's book value (basically, the floor price that the company would be worth if they sold off all their assets individually) is somewhere between $12-$13, analysts say (sorry I can't link to the reports). Considering Sherritt currently trades at under $9 a share, a price/book value of about 0.75 makes me positively giddy. Of the seven analysts who cover the stock, all rate it a "buy" with target prices ranging from $15.50 to $21 -- not that I put too much faith in analysts who basically get paid to convince clients to buy stocks.
  • The Cuba 'thing'. Sherritt does more business in Cuba than many firms, and I can't decide if that's a good thing or a bad thing. I like that they have the courage to go against the flow, but I have to question the wisdom of a company that basically flips the bird at the U.S., the world's largest economy, and does business in Cuba. Sherritt's had a huge presence on the island for years, and it shows no sign of pulling out any time soon. I suspect Washington's trade embargo can't go on forever, and god knows what will happen when Raul Castro dies and/or steps down. Sherritt could be better-positioned than anyone to hit the ground running on the influx of money that would result. Or not, and maybe Washington will carry a grudge. Even before Cuba opens up, who's to say they wouldn't go back to their more totalitarian tendencies and start seizing assets, Chavez-style. I have no idea, and uncertainty like that is not generally something I like in the companies I own
  • The stock has been a ski-hill downward for the last month. Normally, I don't care about things like that unless it's a stock I want to sell, but the scope is quite drastic. Since reporting a 39% dip in profit (largely due to tanking nickel prices) at the end of July, Sherritt stock has gone on to lose more than 50% of its value. A collapse like that hardly seems appropriate just because of a profit blip. What am I missing? I like buying things cheap, but am I trying to catch a falling knife?
  • Insider trading, going in the wrong direction. This one leaves a real bad taste in my mouth. According to filings, independent company director Daniel Owen owned more than 2,000,000 Sherritt shares in March, worth some $18-million. But Owen dumped more than half of his stake throughout August. And that was after the bad earnings release. Does he know something I don't? Probably...
Anyway, that's the basic picture as I see it today. Nothing imminent, but it's certainly a stock I can't seem to get out of my head. Ironically, I'd be more sold on buying the stock if Mr. Market hadn't just given it a 50% haircut. It's often hard to go against the herd.


Anonymous said...

Well sir, they might be concerned about being able to finance the construction of the Ambytovy Mine in Madagascar. Tightening credit and falling commodity prices make it really hard to pay for a mine that is equal in value to your current market capitalization. Or maybe its just me.

Jarred White said...

Ambatovy is a world-class, large tonnage nickel project that is positioned to be among the world's biggest lateritic nickel mines. Sherritt, the project operator, has a 40% ownership position, Sumitomo and Korea Resources each have a 27.5% stake, and the project's engineering contractor, SNC-Lavalin, has a 5% interest.

Jarred White said...

The mine's value has collapsed along with Sherritt's stock price.

Sherritt is a $40% owner, and has respected partners.

I consider this a strong long-term buy.

Anonymous said...

all crap when you own it, now that I bought it at 8 bucks now worth 2.50 and still going down

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