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To buy or not to buy BCE -- and other stock questions for investors

Why is BCE’s share price so far below its sale price? Should you buy it? These and other stock inquiries answered by a Canadian advisory.

Will it or won’t it? And at what price? Once again, it’s hard to get a straight answer from the phone company. The biggest deal in Canadian history has become one of the biggest question marks on the markets.

The deal was done ages ago. Ontario Teachers’ Pension Plan and its various partners agreed to buy BCE Inc. (TSX-BCE) way back in the summer. They agreed to pay $42.75. They agreed to close the deal in the first quarter of 2008.

So why is the share price some $7 less than the closing price? Why has the deal been pushed back to the second quarter of the year? Is anything every straightforward with this company?

For some pertinent answers we turn to a leading Canadian market letter, The Investment Reporter. Unlike some observers, this advisory believes the deal is going through — and that aggressive investors may still realize a tidy profit from it.

The advisory also has several other stocks to recommend in these up and down markets. First, let’s see what’s fact and what’s fiction in the long-running serial that is the BCE deal.

What the stock market thinks

The stock market isn’t acting as though it believes the deal is going through. Otherwise the share price of BCE would be considerably higher than the $34.69 it closed at yesterday.

If you’re already a BCE shareholder, that doesn’t matter to you. You are going to collect one more dividend and sell into the market for $42.75.

Or, does the current bargain price mean the market simply doesn’t think the deal is going through at the announced price? Will a lower price have to be agreed upon? That would certainly be unwelcome news to current shareholders.

And yet Ontario Teachers’ Pension Plan CEO Jim Leech stated just two weeks ago that the deal was going through as planned, The Investment Reporter reminds us. “If the plan falls through, Mr. Leech will lose credibility.”

Best and worst case scenarios

If the deal does go through, says the advisory, it could mean significant gains for investors who jump in now. Provided the takeover succeeds, those investors would ring up a capital gain of 22 per cent by the time the deal closes in the second quarter.

“Keep in mind that even if the takeover price is reduced somewhat, investors who buy BCE at today’s price still stand to make a big profit.”

What if the deal doesn’t happen at all?

“In a worst-case scenario, where the transaction fails, you earn a high dividend yield of 4.2 per cent. Also, you avoid capital gains taxes and need not find a new home for your money.”

This gambit may not be for every investor, but the advisory concludes: “Buy if you can accept some risk.”

What the bond market thinks

If the stock market is feeling a bit skeptical about the BCE deal, the bond market isn’t. More specifically, the credit-default swaps (CDS) market is acting as though the BCE deal will be completed.

And this market, says the advisory’s editor, “is a much more efficient predictor of events than the stock market.” Perhaps the ticker tape never lies, as the brokers contend, but like Mark Twain, it may stretch the truth a little.

On the CDS market, premiums for insurance on BCE bonds are very high. Those premiums would not be paid unless BCE was expected to go heavily into debt, which is exactly what it will do if the deal goes through.

An article in the Globe & Mail’s Report on Business this week indicated that the very institutions who signed up for loans on the BCE deal, Toronto-Dominion Bank and Citigroup, are purchasing insurance, which means they must be planning to go through with the loans.

Trust the CDS market, was the word of one expert quoted in the article. It reflects what is truly happening behind the scenes.

It’s always risky to make a move whose success depends on a lot of behind-closed-doors machinations you’ll never be invited to, but the rewards would be considerable if the deal goes through as advertised.

The world needs more fertilizer

By the time you read this, the shares of Potash Corp. of Saskatchewan (TSX-POT) may have gone too high for anyone to afford. Just kidding, but the fact is that Potash shares keep going up, splitting, and then going up again until it seems like they must surely run out of gas.

It was trading at $140.22 when this advisory reported on the company late last week. It was trading as high as $147.85 yesterday before slipping back down below $142 in a generally bad day of trading on the markets.

Any way you look at it, that’s expensive. On the other hand, Potash expects its profits to double. It just keeps on selling more fertilizer at higher prices.

“Potash has a lot going for it,” says the advisory. “The world needs more crops. The consumption of grain has exceeded its production in seven of the past eight years and inventories are very low.” That obviously calls for more fertilizer.

And it’s likely that crop production will not only have to be maintained, but increased substantially. The world’s population is growing steadily, and so is a more affluent middle class in many parts of the world. They’re developing an appetite for a protein-rich diet. More fertilizer.

There’s more. The U.S. is pushing its corn growers to produce larger crops to supply ethanol for fuel. More fertilizer.

Not enough fertilizer

After all that, it turns out there’s not enough fertilizer to go around. “Usually producers build their supplies in the fourth quarter — before the planning season,” reports the advisory. But last year, tight inventories got even tighter. That means higher prices, and more profits for Potash.

Potash is also set up to expand its output much quicker than its competitors. It plans to raise its shipments by seven per cent this year and increase production by 25 per cent next year. It also owns stakes in producers in South America, the Middle East and Asia, which allows it to get to market quicker than most producers.

Not least, the company produces all three fertilizers: potash, nitrogen and phosphate. There don’t appear to many advantages that this company doesn’t enjoy. Except that the darn stock price is so high.

But we think the point has been amply made that the demand for fertilizer is pretty high as well. And the company’s dividends keep going up, too. So if you’re not concerned about getting in at a steep price, buy, says this advisory.

A growing cheese empire

We conclude with one more stock that isn’t in the throes of a tortuous deal and isn’t all that expensive. But it looks like a relatively safe and profitable place to park some money in a market that is prone to trouble.

Saputo Inc. (TSX-SAP) is in the dairy business, which means it’s one of those consumer stocks that are regularly advertised as safe buys in a slow economy. “People always have to eat,” is the usual phrase. Of course, they have to eat when the economy is good, too, but you get the point.

The company recently added to its growing cheese empire by agreeing to buy the Alto Dairy Cooperative in Wisconsin. This firm generates US$378 million a year in business from its two plants.

Saputo knows cheese, says the advisory, and this acquisition churns out a host of Italian and American cheeses that are sold entirely in the U.S. This will strengthen the Canadian firm’s growing presence in the American market.

The deal closes in March, near Saputo’s fiscal year end, which means Alto will not add to this year’s earnings. But next year it should make a considerable contribution.
Last year, Saputo bought Land O’ Lakes west coast industrial operations, a feat which almost doubled its share price. Yet that price is scarcely in Potash territory.

The shares closed yesterday at $27.11. They have climbed more or less steadily over the past six months. Saputo also raises its dividends pretty steadily. On both counts, The Investment Reporter makes it a solid buy.

So there are three degrees of risk — betting on a deal that may or may not go through as planned, an expensive stock that may get even richer, and a stock with steady growth that seems relatively safe in a dangerous market.

Even in the most tormented markets, you’re not buying the whole market. You’re buying one stock at a time, and every one has a different story. No matter what the markets do, many of those stories are bound to have happy endings.