Bedrock value, that's what we want, especially after a day like Tuesday. It's hard to find, even these days, but it's out there. I submit that shares in Atco Ltd. look like hard value.
Atco is a holding company whose principal investment is a majority stake in Canadian Utilities Ltd. and an even bigger stake in Atco Structures and Logistics.
CU operates power plants, pipelines, power and gas retailing, transmission and a variety of other concerns.
It's a good business. It grows at a steady pace. Revenue and profit go up steadily over time, as do dividends. The same holds true for Atco, inevitably.
But here's what makes the latter more interesting: first, it owns three-quarters of Structures, which, among other things, makes trailers used in remote camps. Up in the oil sands there are fields full of these things with their signature yellow stripe. They're used to house workers and offices. The remaining quarter of this business is owned by CU.
Atco also owns just over half of CU, whose market capitalization is $5.7-billion. Applying Atco's ownership interest to that fulsome number yields about $3-billion. Atco should be worth more than that because in addition to CU it also owns that 75 per cent of Structures.
But Atco's market cap is actually slightly less than that.
In essence, assuming the stock market is valuing CU with something approaching reasonable accuracy, you get something for free when you buy Atco stock.
What do you get? It's a somewhat seasonal business to be sure but it has grown nicely over time. Although dwarfed by utilities and energy in terms of size, Structures still produced $640-million of revenue in 2009, earning $62-million.
That's almost a quarter of Atco's earnings.
And the unit's profitability has improved too. Margins were 7 per cent in 2007 and almost 10 last year when Atco and CU reorganized it. In other words it's worth more today. And it should be more nimble.
The subsidiary's market and services are also growing. It's not just a renter of trailers any more (Atco stands for Alberta Trailer Company, which was founded in 1947). There's lots of work for this unit around the world.
There's more to the story than bedrock value though. Atco's total return, assuming reinvested dividends, is in the neighbourhood of 13 per cent per year over the past two decades.
The dividend has been hiked every year for the past five at least, and is growing at a compound rate of 7 per cent annually. Earnings per share rose more than twice that fast.
Discounts, of course don't exist in a vacuum. There's always a reason for them. In this case it's probably twofold: one is the old holding company markdown. The other is likely because this is a dual share structure deal. The founding Southern family controls the company with relatively little equity.
But Atco is very well run. The business philosophy is similar to a good investment philosophy: Avoiding bad decisions takes precedence over trying to make good ones.
It's highly unlikely that this persistent discount will close any time soon but at least you know you're on terra firm when you invest.