That being the case, not every bank is equally risky, and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is likely the safest among the Big Five. We’ll take a closer look below and show why there’s very limited downside at $55 per share.

The right exposures

While the decline in oil prices has been bad for Canada’s economy, the pain has largely been restricted to the oil-producing regions. And TD has less exposure to the Prairie Provinces (which include Alberta and Saskatchewan) than any of the other Big Five. It’s no coincidence that TD also has the lowest exposure among energy companies.

TD’s Canadian business is concentrated in Ontario (as one would expect, given the bank’s name), and this is a region that benefits tremendously from the low Canadian dollar. Better yet, the bank has a large presence on the U.S. East Coast, which is benefiting from low gasoline prices.

On top of all that, TD is mainly a retail bank (a relatively low-risk business) with less than 10% of earnings coming from wholesale. And the bank has placed a heavy emphasis on risk management ever since a disastrous year in 2002, which certainly should pay dividends in this environment.

A cheap-enough price

In its most recent fiscal year, TD generated $4.61 in adjusted earnings per share. What would have happened to that number in worse scenarios?

Well, let’s suppose TD’s loan losses were 50% higher. That would have caused adjusted EPS to fall to $4.24 (assuming a constant tax rate). So with a $55 share price, that still equals just a 13 times multiple–very reasonable for a company of TD’s quality.

Of course, TD would have no trouble paying its dividend in this scenario, since the annual payout still only equals $2.20 per year. That’s a 4% yield with TD at $55 per share.

So, to sum up, if the energy sector slides further into the abyss, or if Canadians find themselves increasingly squeezed, then TD’s loan losses should remain well under control. And even if losses spike by 50%, then the shares are still reasonably priced and the dividend is still affordable. Thus, if you’re looking for safety, you shouldn’t be afraid of this bank stock.

The post Toronto-Dominion Bank Has Minimal Downside at $55 Per Share appeared first on The Motley Fool Canada.

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Oil prices plunged on Friday in the wake of new comments by Saudi Arabia deputy crown prince Mohammed bin Salman. Shares of Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) and Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) both fell by roughly 4% in response, as of this writing.

We’ll take a closer look at bin Salman’s comments and what they mean for the sector.

What he said

In an interview with Bloomberg, bin Salman said that Saudi Arabia will only agree to an oil production freeze if all other major producers–including Iran–do so as well.

“If all countries agree to freeze production, we’re ready,” said bin Salman. “If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.”

What it means for the sector

Iran has already been ramping up oil production as sanctions against the country have been lifted. According to OPEC’s most recent monthly report, the country increased oil production to 3.13 million barrels per day in February, a rise of more than 6%. Iran has also vowed to increase production to four million barrels per day, even while the market remains oversupplied.

And there is zero chance the country will change its mind. Back in February, Iran oil minister Bijan Zangeneh called the idea for a production freeze a “joke,” and said there’s no way the country would join.

Mr. bin Salman’s comments come as OPEC is due to meet this month, and the outcome of that meeting has been thrown into doubt. One energy analyst even told Bloomberg that the meeting is “looking more and more pointless.”

A greater ability to cope

While Saudi Arabia and Iran may disagree on the merits of a production freeze, they do have one very important thing in common: an ability to weather the low oil price environment for an extended period of time.

Saudi Arabia’s resilience is largely due to its vast foreign exchange reserves, which now stand at just under US$600 billion. While this number is down by US$150 billion from its 2014 peak, the country is pursuing reforms to repair holes in its budget. These include spending cuts, subsidy reforms, and revenue-raising initiatives (which includes an IPO of its state-run oil company).

Meanwhile, Iran has grown resilient out of necessity. According to Moody’s (and plenty of other observers), decades of isolation have forced the country to cope with low oil prices more than other oil exporters. This has meant that even with prices depressed, economic growth is projected to come in at 5% in 2016-2017. Iran also benefits from a young, well-educated workforce and a strong industrial base.

North American producers, on the other hand, are feeling the pain. Production in the United States is falling. Canadian producers continue to cut budgets and lay off workers. It’s starting to look like Saudi Arabia’s strategy is working, which makes it more likely the strategy will continue. These are all things you need to consider before investing in Crescent Point or Canadian Natural Resources.

The post Why Canadian Natural Resources Limited and Crescent Point Energy Corp. Sank 4% on Friday appeared first on The Motley Fool Canada.

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According to a recent Globe and Mail article (available to subscribers only), Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) spends $2 billion per year on technology, much of which goes towards competing with new FinTech start-ups. And on Thursday morning, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) CEO Bharat Masrani called for regulation of the FinTech industry.

Clearly, the Canadian banks are worried about these FinTech start-ups. And they have good reason to be. FinTechs have a much lower cost structure, allowing them to pass on savings to consumers through better rates and lower fees. Meanwhile, the big banks can have a bureaucratic culture, one that makes technological innovation slow and difficult.

But the FinTech are facing obstacles too, and investors must consider these factors before selling all their bank shares. On that note, below are three big advantages the banks have over FinTechs.

1. The power of relationships

One of the biggest FinTech threats to Canadian banks are so-called robo-advisors, such as WealthSimple, which automatically steer investors into ETF solutions for a very low fee. What make robo-advisors particularly threatening is the high cost of Canadian mutual funds.

But many Canadians would have to give up a long-standing relationship with their financial advisors if they want to switch to a robo-advisor, and this is nothing to sneeze at. Not only would it involve a painful conversation, but it would also mean giving up personalized advice–something that many financially unaware Canadians count on.

This is especially the case with the older generation, and these are the people who have the most money. Eventually, this will change as the younger generation ages, but this shift will take decades.

2. Limited desire to switch

Over the past five years, the percentage of Canadians looking to dump their bank has gone from the mid-teens to the single digits. The banks deserve some credit for this, especially TD, which has placed a heavy emphasis on customer service.

But technology plays another big factor. New features such as automatic bill payments make switching bank accounts a much bigger hassle, especially with such limited benefits. Again the FinTechs will whittle away at the banks’ lead, but high switching costs will make this a very slow process, especially among the most valuable customers.

3. Limited competition

Another big threat, especially in the United States, has been the introduction of new payment options like Apple Pay. When Apple Inc. launched this product in the U.S., it was able to play the banks off each other. Put another way, most banks were afraid of being left out, which allowed Apple to dictate the terms.

Canada has been a different story. Because there are only six large banks, they were able to form a consortium to negotiate with Apple Pay. And what was the result? Apply Pay is available for AMEX cardholders only.

Over time, other services like Apple Pay will look to “partner” with large banks, and they will inevitably have more success in the United States. Investors in the Canadian banks will have far less reason to worry.

The post 3 Reasons Why the Big Banks Will Win vs. the FinTechs appeared first on The Motley Fool Canada.

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BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) reported results for the fourth quarter of FY 2016, and the numbers were very mixed. We’ll take a look at the good news and the bad news.

The good news

Since becoming BlackBerry’s CEO, John Chen has placed a strong emphasis on cost cutting, and these efforts were once again reflected in BlackBerry’s results. Despite missing revenue estimates (more on that later), BlackBerry posted an adjusted loss of just US$0.03 per share, beating analyst expectations by US$0.07.

Due to these cost-cutting efforts, BlackBerry was once again able to lower its hardware breakeven threshold for device sales. Only a couple of years ago, Mr. Chen said the company needed to sell 10 million devices to break even on hardware. Now that number stands at three million.

The other good piece of news is that software more than doubled year over year, allowing BlackBerry to meet its $500 million goal for annual software revenue. This was largely done through some big acquisitions, such as the $425 million acquisition of Good Technology in November. Yet BlackBerry still deserves a lot of credit for reaching this goal, one that few people thought was achievable.

On a related note, shareholders should be happy about the changing revenue mix. In the most recent quarter, software and services accounted for 28% of revenue. At this time last year, that number was just 11%.

The bad news

Once again, BlackBerry’s top line was very disappointing with revenue totaling just $464 million. That’s a decline of nearly 30% year over year and 18% short of analyst estimates.

Anemic hardware sales were the main cause. BlackBerry recognized revenue on just 600,000 devices in the quarter, a decline from 700,000 in Q3. What makes this especially disappointing is that Q4 included the Christmas season and was also the first quarter that fully included Priv sales.

BlackBerry didn’t disclose how many Priv units were shipped, and this is a sign the phones simply haven’t caught on. Mr. Chen also admitted that a high price point may have inhibited sales, calling the high-end Android market “saturated.”

And even though BlackBerry is shifting its focus to software, falling hardware sales are not inconsequential. The company still derives close to 40% of its revenue from hardware, which is actually an increase relative to last year thanks to plunging service-access-fees revenue. Falling hardware sales are also bad for the brand, which ultimately affects the software business as well.

Is BlackBerry worth buying?

After deducting net cash, BlackBerry is valued at about $2.6 billion, which is equivalent to roughly 1.8 times revenue. For a company in which revenue is declining and profits are hard to come by, this is a steep multiple. This is also a very uncertain industry, one in which BlackBerry is competing directly with better-funded competitors.

So at this point, BlackBerry remains a speculative investment at best. There are better options for your portfolio.

The post BlackBerry Ltd.: The Good News and the Bad News From Q4 appeared first on The Motley Fool Canada.

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Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) shares plunged by 7% on Monday after a Senate committee subpoenaed outgoing CEO Michael Pearson.

So what exactly is in store for Mr. Pearson, and why did investors react so negatively?

What Mr. Pearson can expect

Valeant is fighting a multifront battle nowadays. The company is facing questions regarding its financial health, its business model, Philidor, investigations from regulators, corporate governance, and its financial reporting. But Congress only cares about one thing: Valeant’s history of steep drug-price increases.

In a sense, this is good news for Mr. Pearson. He won’t have to answer any questions that he is not ready to answer. But here’s the bad news: politicians are furious with Valeant’s drug-pricing practices, especially regarding Isuprel and Nitropress, two heart medications the company acquired in 2015. Valeant raised these drugs’ prices by 525% and 212%, respectively.

And the politicians aren’t alone. Polls have shown the American public is fed up with the rising cost of drugs. Republican voters want action on this issue just as much as they want Obamacare repealed. Even PhRMA, the chief pharmaceutical lobby, isn’t standing by Valeant; instead, it’s comparing the company to the much-maligned Turing Pharmaceuticals.

So Mr. Pearson can expect some harsh treatment at the hearing, which takes place on April 27.

Why the shares reacted negatively

We all know how Washington works. Politicians love to grandstand in front of TV cameras, but when it comes to passing meaningful policies, they are much more hesitant. So there’s reason to believe Mr. Pearson’s testimony won’t be meaningful in the long run.

But there are legitimate reasons to be worried. First of all, Mr. Pearson is not known to be a strong public speaker.

Secondly, research has shown that when drug prices are under public scrutiny, drug-price increases tend to slow dramatically. So the longer that Valeant is made out to be the villain, the more impact it will have on its business model.

And to top it all off, Valeant’s financial condition is so poor that short-term factors matter that much more. Put another way, by the time the dust settles on this issue, Valeant could even be bankrupt. This is something you need to think about before buying the stock.

The post Valeant Pharmaceuticals Intl Inc.: What Michael Pearson’s Testimony Means for the Company appeared first on The Motley Fool Canada.

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Back in January, no one wanted a piece of Kinross Gold Corporation (TSX:K)(NYSE:KGC), and it’s easy to see why. The company’s 2011 acquisition of Red Back Mining has turned into a disaster and has only been made worse by falling gold prices. To top it all off, there have been worries about Kinross’s exposure to Russia. To put this in perspective, the U.S.-listed shares had fallen by more than 90% over the previous five years.

But a lot has changed since then. Gold prices have firmed up. Kinross has put up some decent numbers. And most recently, the company has decided to proceed with a phased expansion of its Tasiast mine, which was originally acquired in the Red Back deal. When putting this all together, the company’s shares have increased by more than 150% in just two-and-a-half months.

So just how strong have Kinross’s results been? And what does the Tasiast expansion mean for the company’s future?

Strong results

Seemingly without anyone noticing, Kinross has actually delivered strong results during each of the past four years. In 2015 production came in at 2.6 million ounces, which was at the top end of guidance, while costs and capital expenditures were lower than forecast.

There have been a couple of nice tailwinds helping Kinross along the way. First of all, the decline in oil prices has helped the company reduce costs. Secondly, the fall in the Russian rouble and Brazilian real has dramatically reduced costs at the company’s mines in those countries.

The Tasiast expansion

The original plan to expand Tasiast would have cost US$1.6 billion and would not have been well received in a falling gold-price environment. But the current plan offers a number of advantages.

First of all, the expansion takes a phased approach, which dramatically reduces risk. Phase one would run until Q1 2018, cost roughly $300 million, and increase production to over 400,000 ounces per year (an increase of nearly 100%). Better yet, phase one would reduce all-in sustaining costs at the mine to $760 per ounce and yield an internal rate of return of 20%.

Second, Kinross’s new approach is much less costly, even if the company goes ahead with phase two. Altogether, the two phases would cost less than $1 billion and come with an IRR of 17%.

Of course, these numbers assume that all plans go smoothly, which is usually a generous assumption in this sector. But these numbers still hold a lot of promise and demonstrate the lower-risk approach that Kinross is taking. The numbers assume a gold price of just US$1,200 per ounce, which is below today’s spot prices.

All in all, it looks like Kinross is finally turning a corner. It’s not surprising at all that the company’s stock price is up so much.

The post Kinross Gold Corporation Is on the Move appeared first on The Motley Fool Canada.

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Back in December, Bombardier, Inc. (TSX:BBD.B) requested US$1 billion in financial assistance from the federal government, setting off a fierce national debate. But according to recent comments from a senior executive, Bombardier may not even need the money at all.

Speaking in Switzerland, Bombardier vice president Rob Dewar (who’s in charge of the CSeries program) said, “We don’t need a backup plan because what’s secured already is actually more than we require.”

So what exactly is going on here? Does Bombardier really need the money? And if not, then why has the company made such a request?

The numbers

Bombardier exited 2015 with just over US$4.0 billion in liquidity, which includes US$2.7 billion in cash and US$1.3 billion in unused credit lines. In addition, the company is due to receive $1 billion from the government of Quebec, and another $1.5 billion from the province’s largest pension fund. That brings the total liquidity figure to $6.5 billion, giving Bombardier lots of cushion in the near term.

And according to past statements, this should be enough money. For example, at Bombardier’s Investor Day in late November, CEO Alain Bellemare said, “We will have the right level of liquidity to execute our plan.” CFO John Di Bert made similar comments at the event: “My expectation here is that we have the liquidity necessary to get through the investment programs to sustain and to fund the operational transformations we need to undertake.”

To be more specific, Bombardier expects to start generating positive free cash flow in the back half of 2018. And $6.5 billion should be enough to sustain the company until then. So why exactly is the company looking for federal help?

It’s all about confidence

Buying an airplane isn’t like buying a toothbrush. When an airline purchases an airplane, it wants to be sure the manufacturer remains committed to the program. Likewise, the airline also wants assurances the manufacturer is on solid financial footing. Otherwise the airline could end up with what’s known as an “orphan plane.”

And it’s very disadvantageous to own an orphan plane. One problem is that pilots require extra training to fly the plane. Another problem is that the planes have poor resale value, which can put a dent in fleet plans.

Of course, Bombardier is not very secure financially, and this is having an impact on sales. The company hasn’t even secured a firm CSeries order since September 2014. So in an ideal scenario, a government injection will bring about more confidence in the company, which will lead to more CSeries sales, feeding a virtuous cycle. Other than a takeover, it’s the best outcome shareholders can hope for.

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During a conference call on Wednesday, Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) CEO Don Lindsay said that the company’s dual-class share structure makes it easier to take a long-term view, which is critical in today’s low commodity price environment. He also said there have been no discussions about collapsing the structure.

Under the structure, Teck’s Class A shares have 100 times the voting power of Class B shares, which gives Chairman Norman Keevil and his family nearly 30% of the total votes, despite holding a far lower economic interest.

So has the structure actually been good for shareholders? And what does it mean for Teck going forward?

The case for dual-class share structures

At most publicly traded companies, there is tremendous pressure to achieve short-term results, and this can certainly impact long-term performance. According to a recent survey, 55% of public company executives would not initiate a beneficial project if it meant a decrease in the next quarter’s earnings.

If a company fails to meet its short-term expectations, then it can lead to a whole host of problems. Activist hedge funds (many of which are renowned for being too short-term focused) could step in. Pressure could mount for management to be fired. Perhaps a hostile takeover could come at an inopportune time. All of these events would look great for shareholders in the short term, but destroy value in the long term.

Do these principles apply to Teck?

To answer this question, one must take a look at Mr. Lindsay’s track record as CEO of Teck.

Mr. Lindsay’s tenure stretches back to 2005, but his biggest impact on Teck came in 2008 when the company paid US$14.1 billion to buy out Fording Canadian Coal Trust. This transaction had the worst-possible timing, since it occurred right before the financial crisis. As a result, Teck nearly went bankrupt.

To Mr. Lindsay’s credit, he managed to save the company from oblivion, and Teck came roaring back. But there was another problem with the deal: he severely overpaid for the asset.

Mr. Lindsay’s tenure as CEO has also been marked by the acquisition of a 20% interest in the Fort Hills Oil Sands project. But there was never any need for a mining company like Teck to do this and, given the state of the oil sector, it is clear once again that Mr. Lindsay got a bad deal.

What has been the effect of all of this? Well, Teck’s share price has declined by more than half during Mr. Lindsay’s tenure. Meanwhile, mining giants like BHP and Rio Tinto have seen their shares slightly increase. Clearly, Teck’s investors would have been better off if the company were bought out.

What does this mean going forward?

There is some good news and some bad news here. The good news is that Teck isn’t in a position to make any more major acquisitions. And in this type of scenario, Mr. Lindsay has actually proven himself to be an effective CEO.

The bad news is that Teck is unlikely to get bought out. This is a shame because the mining sector is badly in need of consolidation, and a takeout would probably mean a fat premium for Teck’s shareholders.

So, to get back to Mr. Lindsay’s comments, they certainly were inappropriate given Teck’s history. They also do not reflect the company’s future. And this is something investors must keep in mind before investing in Teck.

The post Teck Resources Ltd.: Is the Dual-Class Structure a Blessing or a Curse? appeared first on The Motley Fool Canada.

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Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) issued a press release on Wednesday that confirmed it is seeking to extend the deadline for filing its audited financial statements. But there was something else in the press release, something not emphasized by the press.

The interest-coverage ratio

Valeant is also asking its lenders to “amend, among other things, the interest-coverage maintenance covenant.” For those of you who are unfamiliar with this metric, the interest-coverage ratio divides a company’s pre-tax profits by its interest expense. In essence, it measures how many times a company can make its interest payments in a given time period. It’s a widely used measure that helps evaluate how big a company’s debt burden is.

One of the covenants on Valeant’s debt states that this ratio must exceed 2.25 times through March 2016, at which point the minimum increases to three times. During the company’s last conference call, Valeant said this ratio was approximately 3.3 times at the end of 2015 (according to unaudited figures). The company also claimed it expects “to be in compliance with credit agreement financial maintenance covenants for full-year 2015 and throughout 2016 based on guidance.”

But now the story is very different. Valeant is looking for “additional cushion in its financial covenants.” Unfortunately, such an amendment will not come for free. Creditors reportedly will ask for some major concessions, which could easily include greater interest payments in exchange for relaxing covenants.

What exactly is going on here?

If we are to believe Valeant, then the company is simply dealing with a small accounting issue related to the now-defunct Philidor and just needs some extra time. Meanwhile, the company is just looking for some extra wiggle room in its financial covenants. But this is starting to look very fishy.

There are plenty of other things that could be going on. Perhaps there are other accounting issues. Or maybe Valeant is already in breach of a financial covenant. At this point, all we can really do is speculate, but as long as the company hasn’t filed audited statements, anything is possible.

The post Valeant Pharmaceuticals Intl Inc.: What Exactly Is Going On Here? appeared first on The Motley Fool Canada.

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On Monday, the U.S. Justice Department announced it had unlocked the San Bernardino shooter’s iPhone without the help of Apple Inc. (NASDAQ:AAPL), ending a legal dispute between the company and the U.S. government.

Interestingly, this whole saga could present an interesting opportunity for BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY).

The dispute between Apple and the FBI

On December 2, Syed Rizwan Farook and Tashfeen Malik, a married couple, murdered 14 people and injured 22 others in San Bernardino, California. The attack, which consisted of a mass shooting and an attempted bombing, was later called a terrorist attack by President Barack Obama. Both perpetrators were killed that day in a shootout with police.

The FBI confiscated Mr. Farook’s work iPhone, but the phone was locked. So authorities demanded that Apple provide a method to break in. Specifically, they were looking for a way to override the function whereby an iPhone erases all data after 10 wrong passcodes are entered. But Apple CEO Tim Cook refused, resulting in a legal battle.

Now that the phone has been hacked into, this specific dispute has drawn to a close. But the issue is far from dead.

The opportunity for BlackBerry

Both sides of the dispute had legitimate cases to make. On the one hand, President Obama warned against taking an “absolutist” view to privacy rights, arguing that at a certain point, it makes the country more dangerous. On the other hand, Apple warned that if it were forced to provide a so-called back door to the iPhone, then secure phones could simply be made in other countries.

This is where BlackBerry comes in. The company is known as a mobile security specialist, and, of course, its phones are designed in Canada and assembled in East Asia.

Don’t get your hopes too high

There are a couple of reasons not to get overly optimistic.

First of all, BlackBerry may not even be making phones for much longer. And if it does release new models, they will almost certainly use the Android operating system, which is not as secure as BlackBerry’s proprietary OS.

Secondly, let’s not forget that the U.S. government is also BlackBerry’s largest client. So if the company were to thumb its nose at the U.S., it might very well be bad for business.

That being the case, let’s recognize the story for what it is: another sign that Apple hasn’t quite figured out how to secure its devices. And that reinforces BlackBerry’s competitive advantage, which shareholders will be counting on to drive long-term returns.

The post BlackBerry Ltd.: The Significance of the Apple Inc. Legal Dispute appeared first on The Motley Fool Canada.

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