3 fast-growing value stocks from Canada

These companies show rapidly growing earnings and strong balance sheets.

By TheStockAdvisors Apr 25, 2012 9:00AM

By J. Royden Ward, Cabot Benjamin Graham Value Letter

I believe there are many outstanding buying opportunities among undervalued Canada-based stocks. As such, I screened my Benjamin Graham Database to find Canadian companies with rapidly growing earnings and strong balance sheets.

Here are three that offer excellent appreciation potential during the next six to 12 months as well as low risk: Goldcorp (GG), Suncor (SU) and Thomson Reuters (TRI).

Based in Vancouver, Goldcorp is one of the largest gold producers in North and South America with mines in Canada, the U.S., Mexico, Guatemala and Argentina. In addition to gold, the company also mines silver, copper, lead and zinc.

Goldcorp does not hedge future production, so its earnings tend to rise and fall in step with the rise and fall of gold and silver prices.

Goldcorp's gold production increased significantly during the first nine months of 2011 as a result of increased activity at existing mines and the start-up of a large gold mine in Mexico.

Output in 2012 will get a boost from a new mine in Guatemala, again in 2013 from a large mine in the Dominican Republic, and then in 2014 from three more mines in Central America. Goldcorp's future growth prospects are far better than those of its competitors.

Revenues increased 41% and earnings per share jumped 39% during the past 12 months. Gold production was flat in the fourth quarter, but gold prices were considerably higher.

My forecast for the next 12 months includes rapid sales and earnings growth of 18%. The current dip in gold and silver prices should give way to increasing prices during the remainder of 2012. Also, prices for copper, lead and zinc fell 20% in 2011, but should rise 20% in 2012.

Gold is usually a good hedge against political and financial turmoil, which we have seen plenty of in Europe, the Middle East and Africa during the past year.

We don't know what additional problems will pop up during 2012, but I advise buying GG to counteract possible stock market declines caused by further turmoil.

At 15.2 times my forward earnings per share estimate of 2.71, GG is selling at a big discount to paid monthly, provides a yield of 1.3%.

Based in Calgary, Alberta, Suncor is an integrated oil and gas producer and one of the largest energy companies in Canada. The company is focused on Alberta's vast Athabasca oil sands, with complementary operations in refining and marketing.

Suncor is spending heavily to ramp up its lucrative oil sands production in Canada. Proceeds from seven sales of various assets are being used to expand production and to pay down debt incurred in the company's 2010 purchase of Petro-Canada.

In addition to oil sands development, Suncor's diversification includes drilling operations in the North Sea, Libya and Syria; refineries in Canada and the U.S.; facilities in Ontario, which produce ethanol from corn; and 1,500 gas stations throughout Canada under the Petro-Canada and Sunoco brand names.

Revenues increased 19% and earnings per share soared 35% during the past 12 months as a result of high oil prices, elevated production and a boost from the purchase of Petro-Canada.

My forecast for the next 12 months includes sales expansion of 6% and earnings per share growth of 19%. At just 9.0 times my forward earnings per share estimate of 3.33, SU shares are clearly undervalued. The current dividend yield of 1.5% is respectable.

Domiciled in Toronto, Thomson Reuters is a leading provider of information and technology to professionals and users in the fields of financial services (58% of revenues), law (27% of revenues), higher education, healthcare and reference information, and scientific research.

Approximately 90% of 2011 revenues were derived from electronically delivered products over the Internet.

Three recent acquisitions have bolstered Thomson Reuters' offerings in the rapidly growing governance, risk and compliance fields. In addition, purchases in Latin America and elsewhere will lead to more profitable
revenues.

Management's restructuring plan is going well. Better operations efficiency, cost cuts and new accounting software will bring about accelerating earnings during the next couple of years.

Turmoil in the U.S. banking sector and problems in Europe will hamper sales and earnings to a small extent in 2012, but my forecast includes 7% revenue growth coupled with 22% earnings per share growth during the next 12 months.

At 10.9 times my forward 12-month earnings per share estimate of 2.60, Thomson Reuters shares are clearly undervalued. The recently raised dividend now yields a handsome 4.5%.

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