David Olive: Trans Mountain’s false hopes, bettering Buffett and SNC-Lavalin’s ‘special’ stock

David Olive: Trans Mountain’s false hopes, bettering Buffett and SNC-Lavalin’s ‘special’ stock

Off the record, federal officials have said it’s more likely than not that the cabinet of Prime Minister Justin Trudeau will decide June 18 to go ahead with the $ 13.5-billion federally funded megaproject to almost triple the capacity of the Trans Mountain pipeline.

An expanded Trans Mountain would enable Alberta finally to sell its landlocked Athabasca heavy oil in markets other than the U.S., which currently takes almost all of Alberta’s oil production.

It would be unwise, though, to bet on that outcome – for instance, by investing in oilpatch stocks that would likely see a bounce on news of a green light from Ottawa for this controversial project.

On balance, the federal Liberals have more to lose than to gain politically from a go-ahead decision.

Alberta, the ingrate province, will not reward the Liberals with even one Commons seat in the October federal election. And the Liberals might lose seats in their B.C. stronghold, where an expanded Trans Mountain is regarded as a threat to the B.C. coastline.

Recent polling shows Liberal support bleeding away to the Green Party, not only in the Greens’ B.C. redoubt but in Quebec and Ontario.

All to say that a pro-pipeline, pro-oil posture is not ideal for the Liberals heading into the October campaign.

Conversely, withholding cabinet approval for Trans Mountain gives Ottawa some leverage with the new Alberta government of Premier Jason Kenney, who in defiance of Ottawa has scrapped Alberta’s participation in a pan-Canadian carbon-pricing program, a key initiative of the Trudeau government.

Kenney, who regards an expanded Trans Mountain as Alberta’s birthright, needs reminding that there is a price to be paid by being a skunk in the federation.

Warren Buffett, we hardly knew ye

Don’t be quick to invest alongside Warren Buffett.

As revealed last week, Buffett got suckered into investing in a California outfit, a now-bankrupt DC Solar, that court documents describe as a “Ponzi-type investment fraud scheme.”

Buffett’s Berkshire Hathaway Inc. was taken for $ 377 million (U.S.) in write-offs on its stake in the firm. U.S. banking giant Wells Fargo & Co., a much bigger Berkshire investment, has admitted to ripping off millions of its customers; is under regulatory investigation; and is such an accounting mess that its outside auditor refuses to sign off on its financial statements.

Also this year, it became apparent that the 2015 mega-merger of Kraft Foods and Heinz Co. is a bust. The merger was engineered by Buffett and the Brazilian private-equity firm 3G Capital, which also owns Tim Hortons.

In March, Kraft Heinz Co., whose stock has lost more than a third of its value this year, took a $ 15.4-billion writeoff on its flagship, slow-selling Kraft and Oscar Mayer brands. “We overpaid” [for Kraft], says Buffett, who made his reputation by underpaying for assets.

Because of Berkshire’s status as a proxy for the U.S. economy, BRK.A stock is up an impressive 48 per cent over the past three years.

But it’s getting easier to do better than that, investing in focused companies whose stock-market performance outshines the world’s biggest conglomerate. A partial list of such firms includes McDonald’s Corp. (up 61 per cent in three years), Canadian Pacific Railway Ltd. (up 76 per cent), JPMorgan Chase & Co. (up 77 per cent), Caterpillar Inc. (up 93 per cent), Fiat Chrysler Automobiles N.V. (up 114 per cent), Microsoft Corp. (up 145 per cent) and Air Canada (up 279 per cent).

SNC-Lavalin: A ‘special situations’ stock

The beaten-down stock price of SNC-Lavalin Group Inc. finds the company’s assets deeply undervalued.

At the current SNC stock price of about $ 27, the market is placing a value of zero on SNC’s core engineering and construction business. The market also assigns no value to SNC’s WS Atkins unit, which SNC management believes is worth more than the $ 3.6 billion that SNC paid to acquire the major British engineering firm in 2017.

With a current total shareholder value of about $ 4.8 billion, SNC in its entirety is valued at less than its 16.8 per cent stake in Highway 407, a lucrative toll road in Ontario.

SNC has another 14 so-called infrastructure concession investments, including the Okanagan Lake floating bridge, that the market also places no value on.

SNC might seem a prime candidate to be acquired on the cheap, broken up and sold in pieces for a very handsome profit.

Trouble is, Quebec City has vowed that it will buy any major Quebec-based company threatened with foreign takeover, and it cited only SNC in unveiling that policy.

SNC is additionally takeover-proof given the more than 20 per cent stake in SNC held by the Caisse de dépôt et placement du Québec, the state pension-fund manager.

Then again, Quebec City might be agreeable to the spin-off of selected assets, such as WS Atkins and those infrastructure properties not located in Quebec. Such sales would strengthen SNC’s debt-laden balance sheet, boosting the stock price.

Stocks like SNC, whose valuations are determined not by economic and business fundamentals but by unquantifiable factors like politics, are called “special situations.”

On North American stock markets, SNC might be the biggest pure play in politics.

David Olive is a business columnist based in Toronto. Follow him on Twitter: @TheGrtRecession

TORONTO STAR

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