Enough About Keystone, Here’s More About Keystone

By Ari Charney • June 25, 2013 • Canadian Edge Weekly

The odds for the eventual approval of TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL Pipeline may have suddenly fallen. But that all seems to depend on who’s parsing President Barack Obama’s discussion of the pipeline from earlier today.

In an effort to shift the narrative from numerous scandals that have rocked his administration in recent months, the president announced a raft of initiatives with the intent of dampening man’s effect on the environment by cutting carbon emissions, while also discussing the minimum environmental standard the pipeline would have to meet in order to garner his approval.

The president said he would only approve the pipeline if it could be determined that its construction “does not significantly exacerbate the problem of carbon pollution.” Of course, the State Department is still in the midst of conducting an environmental review of the massive 1200-mile pipeline that would help move land-locked crude from Canada’s oil sands to key refineries along the US Gulf Coast. If built, the pipeline is projected to have a capacity of up to 510,000 barrels per day.

The Obama administration has repeatedly deferred approval on Keystone XL since late 2011, when the Environmental Protection Agency (EPA) issued its ruling that the controversial pipeline would pose “no significant impacts” to most resources along its path, provided TransCanada adhered to certain environmental protection measures.

Those closely monitoring the president’s speech noted his use of the phrase “tar sands,” which is favored by environmentalists over the more neutral “oil sands.” But others noted the wiggle room afforded by his use of the wording “significantly exacerbate.”

While the president’s plan, which includes directing the EPA to establish carbon pollution standards for new and existing power plants, could have a far more observable impact on the average US citizen, his comments on the pipeline have attracted most of the media’s attention thus far.

This move could bolster the president’s standing among environmentalists, shoring up a key part of his political base that had, until recently, been reportedly growing disenchanted with his leadership. While politicians are naturally inclined to appease their most supportive constituencies, they often defer such actions until they’re truly necessary. As such, Obama’s latest move is straight out of the playbook for embattled second-term presidents, regardless of political party.

From a certain perspective, it’s difficult to imagine how the president’s comments don’t signal a foregone conclusion, even though nothing’s official yet. After all, facilitating the shipment of hundreds of thousands of barrels of crude oil per day to end markets means those energy commodities will presumably be put to use, and therefore increase carbon emissions. And the heavy oil extracted from Canada’s oil sands tends to produce greater emissions than conventional crude.

But since these resources would be exploited anyway, Obama has narrowed his focus to determining which means of transportation will have the least impact on emissions. As I’ve written previously, Canadian energy producers and shippers have already resorted to moving their products to market via truck and rail, both of which aren’t exactly carbon neutral. And the latter point likely also holds true for crude tankers steaming their way to Asia.

That’s consistent with what a draft of the State Department’s environmental impact study reported in March: Energy commodities will find their way to market one way or another, and the Keystone XL Pipeline will therefore only have a small impact on emissions.

Since the average person’s brain shuts down as soon as topics such as relations between utilities and regulators are broached, perhaps Obama used his discussion of the Keystone XL Pipeline as a way of easily crystallizing what might otherwise be fairly abstract policymaking.

In a sense, Obama’s remarks about Keystone may have been intended as chum to distract critics on both the left and the right. Opponents of the pipeline are concerned that the president’s discussion of it in this context was meant to temporarily pacify them, while his actual intent is to proceed with approving the pipeline later this year. And pundits and politicians on the right could fixate on the pipeline, instead of on the implications of these latest initiatives to cut emissions.

If indeed this turns out to have been a form of political jujitsu, then that means the Keystone XL pipeline could still be built. Though by then, we’ll all be thoroughly exhausted from analyzing its prospects.

The Roundup

Last month, financial technology firm Davis + Henderson Corp (TSX: DH, OTC: DHIFF) reported first-quarter sales that beat analyst estimates by 0.8 percent, but missed estimates for earnings per share by 7.8 percent. As far as analyst expectations go, this performance was largely consistent with the prior quarter.

In response to its earnings release, the company’s shares had a modest retreat before ascending to a new 52-week high in late May. Since then, the shares have fallen in sympathy with the broad market and currently trade about 4.5 percent below the earlier high.

As for the numbers themselves, D+H reported CAD171.7 million in revenue from continuing operations for the first quarter, up 3.8 percent compared to the same period last year. Although profits fell 61.6 percent to CAD5.7 million, the difference between comparable periods was entirely due to a loss of $10.7 million from discontinued operations, which pertains to a divestiture detailed below.

Top-line growth was largely driven by D+H’s US segment, where revenue jumped 66.3 percent year over year, to CAD19.3 million. By contrast, revenue from the firm’s Canadian segment fell 0.9 percent, to CAD152.4 million. EBITDA (earnings before interest, taxation, depreciation and amortization) margins for the US segment also compared favorably to Canadian operations at 41.5 percent and 23 percent, respectively.

The results for the US division were largely driven by recent acquisitions, including the first-quarter deal to acquire Compushare, which is detailed below, as well as the May 2012 purchase of loan origination system vendor Avista Solutions, and the April 2011 purchase of mortgage processing system vendor Mortgagebot.

Among D+H’s three business divisions, banking technology solutions led the way, with revenue up 25.7 percent year over year, to CAD32.9 million. While revenue from the Canadian side of this division fell 6.7 percent, to CAD13.6 million, due to a weakening housing market there, the US division’s contribution skyrocketed 66 percent, to CAD19.3 million. As noted previously, much of this growth was spurred by recent acquisitions, with all of the revenue derived from cloud-based systems.

However, this division is still dwarfed by both the payment solutions and lending processing solutions divisions, which accounted for 42.9 percent and 37.9 percent of overall revenue, respectively. Sales for payment solutions fell 1.5 percent, to CAD73.7 million, while sales for lending processing solutions were up 1.1 percent, to CAD65.1 million.

D+H undertook two significant corporate actions during the first quarter. On Jan. 30, it completed its acquisition of the US-based financial technology firm Compushare. D+H had first established a minority stake in Compushare in April 2012. The terms of the deal were not disclosed, though management expects it to be accretive to shareholders.

Compushare principally serves community banks and credit unions with its technology management and cloud computing solutions. The deal adds 385 customers to D+H’s US customer base, for a new total of more than 1,700 customers in the US, giving the firm a market share there of around 28 percent.

Then on March 7, D+H announced its plans to divest its non-core business processing division to the Gores Group, a private-equity firm. These lower-margin businesses encompass areas such as credit card services, coupon and rebate services, and benefits and administration, among others, all of which fall outside of D+H’s core focus on banks and credit unions. Once again, the financial terms of the deal were not disclosed. These businesses collectively generated about CAD60 million in annual revenue, which represented about 7.9 percent of total revenue in 2012. The deal closed on May 10.

Management hopes to continue expanding its US market share and increase subscription revenues from its cloud-based systems to offset the aforementioned challenges from the Canadian housing market, as well as lower check usage. Given the positive effect acquisitions have had on revenue and margins, management plans to continue looking for bolt-on acquisitions to supplement its existing platforms.

On Bay Street, analyst sentiment shifted slightly following D+H’s earnings release: Industrial Alliance Securities downgraded the shares to “buy” from a “strong buy,” due to recent share price appreciation, though it maintained its 12-month price target of CAD25.00. The overall ratings mix currently stands at three “buys,” five “holds,” and no “sells.” The consensus 12-month price target among the seven analysts for which we have such data is CAD24.07, which is 3.4 percent above where shares trade presently.

Analysts forecast full-year sales and earnings per share to decline by 5.5 percent and 9 percent, respectively. Next year, however, revenue is expected to climb 3.7 percent, while earnings per share are projected to rise 7.7 percent.

With a forward yield of 5.5 percent, Davis + Henderson remains a buy below 21 in the Conservative Holdings Portfolio.

Here’s where to find our analyses for Portfolio Holdings that have reported earnings for the first quarter of 2013:

Conservative Holdings

Aggressive Holdings

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Philip Mcnamee

Philip Mcnamee

Thank you for making the links work for all your portfolios. I’ve been frustrated because until the revamping of your reports recently the links did not work.
Good job!

Investing Daily Service

Investing Daily Service

Mr. McNamee:

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