Wednesday, September 29, 2010

Consumers' Waterheater Inc Fund 2

I do not own this stock (TSX-CWI.UN). I started to follow it a few years ago because income trusts were are hot investment idea. In the end, I decided that I rather stick with dividend paying stock. However, I did buy a few income trust, the main one being Pembina Pipelines (TSX-PIF.UN). As are most income trust, Consumers will be converting to a corporation by 2011. They have already cut their dividend payouts in half in anticipation of this.

There is an interesting report on this stock from Contra the Heard. See money show. Contra the Heard tend to be aggressive and rather short term in their investments. I am not saying you should not take their advice seriously, because you should. They are serious investors. They just have a very different style than I have. Another blogger, called Dividend Girl has bought this stock and is pleased with it.

The first thing I like to look when evaluating a stock is Insider Trading. For this company there is a bit more insider selling than insider buying, but both are for very small amounts. We therefore learn nothing here.

For this stock, it is hard to gauge if the current stock price is a good one or not. First, I will talk about the P/E ratio. Since this company’s estimated earnings are expected to be way below what they have been in the past, the current P/E is at 100.8. But this is meaningless if the earnings for 2010 are abnormally low, and earnings will recover. Many analysts feel that earnings will recover.

However, what we can do is look at the trailing P/E Ratio. The trailing P/E ratio uses last year’s earnings. The trailing P/E ratio is 11.5 and this is not a bad ratio. The other thing is to use is the last 12 months earnings in the P/E ratio, which are earnings from Q3 and Q4 of 2009 and Q1 and Q2 of 2010. This gives us earnings of $0.25 and a P/E of 20. A P/E of 20 is high, but not excessive.

With the Graham Price, I get one of $2.00 mainly because earnings for 2010 are expected to be so low. However, the Graham Price has no been below $5.00 before and the one for 2011, because of better earnings is expected to be $4.00. The current yield is very good at 12.9% even after the recent cut in dividends. However, if you read about value investing, you are always warned to not chase dividends. Yields are often very high for good reasons, and usually it is because a company is in financial difficulties. An interesting point on this yield is that the current yield is still higher than the 5 year average for this stock, which is 10.9%.

Surprisingly, the Price/Book Value ratio is not a bad indicator on this stock. The stock is trading at only 1.42 times book value. At a P/B ratio of 1.42, this company is trading at a ratio that is only some 60% of the 7 year average of 2.02. The one good thing under this stock is that for the first time ever, the Book Value increased about 6.5% from the end of 2009 to Q2 2010.

Another thing you might want to check is the Beta number for this stock. This number tells you how well a stock will do comparable to the market. The market has a Beta of 1.00 and if a stock will do better than the market the Beta number will be higher than 1.00. If the stock will do worse than the market, then the Beta number is less than 1.00. The Globe and Mail gives this stock a Beta number of 0.26. See Globe and Mail. For an explanation of Beta, you can look at Investopedia.

The negative thing that analysts say about this stock is that they have had a hard time retaining customers. A few remark that this company, like a lot of income trusts, had an unsustainable payout ratio and that the current payout in dividends is now sustainable. Of the analysts giving recommendations on this stock, I find a couple of Hold and 1 Sell recommendation. The consensus recommendation would be a Hold. (See my site for information on analyst ratings.)

Currently, I plan to continue to track this stock. I find it interesting to see how some of the income trusts will do as corporations.

Consumers' Waterheater Income Fund owns a portfolio of waterheaters and other portfolio assets, which they rent to primarily residential customers. They rent out waterheaters in the GTA and southern Ontario and it is considered a Business Trust. Its web site is here Consumers. See my spreadsheet at cwi.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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