The August stock market decline has created many new buying opportunities. I strongly recommend that investors take advantage of the current low prices and buy undervalued Canadian stocks. I screened my Benjamin Graham database to find undervalued Canadian companies with rapidly growing earnings and strong balance sheets. I believe the two companies recommended below offer excellent appreciation potential during the next two to three years.
Canadian National Railway (CNI), based in Montreal, operates Canada’s largest railroad system covering Canada from east to west and the central U.S. south to the Gulf of Mexico. Canadian National Railway is the most efficient rail operator in North America with high profits and low costs. The company hauls a wide variety of goods including forest products, intermodal shipping containers, farm products, petroleum and chemicals.
Canadian National’s $1.7 billion capital improvement program to expand port facilities, add track and purchase freight cars and fuel-efficient locomotives will help earnings roll along at a 13% clip during the next four years.
The giant expansion of Canadian National’s port facilities at Prince Rupert, British Columbia, is providing a more efficient rail leg for shipping intermodal containers from Asia to North America’s Midwest. We believe revenues will rise 11% and earnings per share (EPS) will increase 18% during the next 12 months. The persistent housing market slump in the U.S. has slowed forest product shipments, but all other segments of Canadian National’s business are healthy and growing.
CNI currently trades at a reasonable 12.3 times our forward 12-month EPS estimate of 5.60, with a dividend yield of 2.0%. CNI is a solid long-term investment.
Potash Corp. (POT), based in Saskatoon, Saskatchewan, is a leading producer of potash, nitrogen and phosphate fertilizers. Nutrient depleted and neglected soil will require increasing amounts of fertilizer during the next several years. POT suffered from weak demand and low fertilizer prices in 2009. However, critical demand for food in places like China and Africa will require more and more fertilizer to maximize crop production.
Potash is expanding. The company spent $7.5 billion to enlarge its Saskatchewan and New Brunswick facilities, which will boost fertilizer production more than 50% by 2015.
Larger global grain crops are currently boosting demand, as evidenced by Potash’s rapid growth during the past six quarters. Sales increased an impressive 74% and EPS soared 85% during the quarter ended 6/30/11. Higher fertilizer prices and lower costs are creating an ideal business environment for the company. We expect strong sales and EPS growth to continue during the next several years as well.
Potash shares sell at a reasonable 13.7 times forward 12-month EPS. The company pays a small quarterly dividend, which yields 0.5%. Potash is a rapidly growing company with a bargain stock price.
I will continue to follow Canadian National Railway, Potash Corp. and other Canadian companies in my Cabot Benjamin Graham Value Letter. My October issue, coming soon, will include a Special Feature on undervalued Canadian stocks. I hope you won’t miss it!