Portfolio Update

AirBoss of America Corp. (TSX: BOS, OTC: ABSSF) reported disappointing results for the final quarter of 2016. Earnings per share declined 56% year over year, to US$0.07. But the declared quarterly dividend per share was 17% higher, at C$0.07.

The steep earnings drop sparked a selloff, with the share price down as much as 16.1% in the week following the announcement. The stock has since recovered somewhat.

Revenue and profits fell for all three divisions, making it an especially bad quarter for the company. Subdued business conditions and isolated factors, such as the end of a major automotive contract and a reconfiguration of certain defense products, combined to produce these poor results.

Management noted that there are early signs of an improvement in demand from the industrial, mining, and oil and gas sectors, while an expected increase in defense spending could boost demand for boots, gloves, and masks. Consensus forecasts indicate a flat performance for 2017, with a strong recovery in 2018.

On a more positive note, AirBoss managed to increase free cash flow (i.e., operating cash flow minus capital expenditures) by 73% for the full year. Strong cash flow helped further strengthen the balance sheet, which positions the company well for either internal or external growth.

We were also heartened by the dividend increase. This suggests the board is confident about the company’s future and its ability to withstand a temporary slowdown in profits.

AirBoss’s valuation is still below its main peers. The stock yields an attractive 2.5% on a forward basis, and we estimate its fair value at C$16, or US$12, which leaves considerable upside potential as profits recover.

North West Company (TSX: NWC, OTC: NWTUF) announced reasonable results for the final quarter of 2016. Adjusted earnings per share grew 5.3% year over year, to C$0.33, while the quarterly dividend was increased by 3.2%, to C$0.32 per share.

Overall sales rose 1.1%, with the Canadian division faring better than international operations. Same-store sales (excluding the effect of foreign exchange) increased by 1.5%. Costs were well controlled, resulting in an 11% jump in EBITDA (earnings before interest, taxation, depreciation, and amortization).

The international division saw a small decrease in profits despite slightly higher sales. Key reasons were the 50% cut in Alaska’s Permanent Fund Dividend, which lowered sales at AC Value Centers, while the Zika virus had the same effect at the firm’s Cost-U-Less operations in the Caribbean.

The Canadian division grew revenue by 3.2% and gross profits by 5.6%, thanks to strong food sales and successes with the Top Categories and Top Markets initiatives. Economic conditions in Northern Canada are expected to improve this year due to increased government-sponsored childcare benefits and infrastructure spending.

Although debt levels have increased moderately, North West’s balance sheet remains sound, with a debt-to-capital ratio of 35% and healthy operating and free cash flow.

The company is ramping up capital expenditures to accelerate its store-improvement program, and that will put some strain on the balance sheet. However, the dividend is safe, and we expect mid-single-digit growth once the capital program is completed.

North West closed the US$27 million acquisition of Riteway Food Markets in the British Virgin Islands on Feb. 9, 2017. This business is expected to boost overall net profits by 5% to 10% annually.

Management offered a mixed outlook for 2017, with Northern Canada expected to perform relatively well as the country’s new childcare benefits lift consumer spending. However, conditions in Alaska will remain challenging due to low oil prices, while operations in Western Canada face low food inflation and more competition.

North West’s valuation is in line with its Canadian peers, though a premium could be justified given its competitive positioning in niche markets and higher levels of profitability. The stock currently yields 4.1%, and we estimate its fair value at C$31, or US$23.

Earnings Season Checklist

We’re nearing the end of earnings season for the calendar fourth quarter. The table below lists the date for each company’s earnings release, as well as the expected dividend. Rows that have been highlighted green indicate companies that have already reported results.

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