Viterra's a laggard, but it's not cheap

The Globe and Mail

In this August 30, 2007 file photo, a Viterra grain elevator is shown near Regina, Sask. Grain handler Viterra Inc. is cheering the end of the Canadian Wheat Board's monopoly.The company, with corporate offices in Calgary and Regina, says it can start taking bids right away to market wheat, durum and barley on behalf of Canadian growers for delivery August 1, 2012. THE CANADIAN PRESS/Troy Fleece (TROY FLEECE/THE CANADIAN PRESS)

Viterra Inc.’s stock may be a weak performer over the past year, but that doesn’t mean the company’s cheap.

Viterra shares surged Friday on the Toronto Stock Exchange on bets that the company will be taken over after it said it had interest from third parties.

Any bidder is going to have to pay up. Even before the gain on takeover talk, Viterra was trading at about 16 times trailing earnings, and almost 15.5 times forward earnings, according to Bloomberg News. That’s hardly cheap by any measure. The forward earnings multiple isn’t far off historical averages for the past few years. The trailing multiple was about in line with the p/e ratio of the Standard & Poor’s TSX Composite Index.

Story continues below ad

After Friday’s move in the stock, the trailing price-earnings ratio is now 20 times. That’s steep, a level Viterra hasn’t seen with any consistency since 2007.

Any buyer is going to have to believe that there’s big earnings growth that the market isn’t seeing, or a lot of synergies.

On the synergy side, it’s hard to find much. It would be hard for a local competitor to buy Viterra, given competition concerns and Viterra’s size, so that means a foreign buyer is more likely. Synergies would be limited.

So that leaves an earnings lift that the market is underestimating. Viterra has been vocal that there’s a significant increase in profit in store as the Canadian Wheat Board’s dominance of Canadian wheat export sales wanes.

The company maintains that there’s as much as $50-million more in earnings before interest, taxes, depreciation and amortization in the pipeline because of the changes to the Wheat Board. That would be a 7 per cent increase, based on last year’s EBITDA.

But analysts at National Bank Financial recently pointed out that it’s unlikely that the end of its stranglehold on the market will mean the Canadian Wheat Board will completely disappear. It may remain a strong competitor.

“Should the CWB retain a significant portion of the former Board grain market, and perhaps even grab share of the former non-Board grain handle, market share and margin gains by Viterra are apt to be challenged.”

Their target price on the stock was $9.25.

At the other end of the spectrum, Canaccord Genuity analyst Keith Carpenter has a $14 target on Viterra, and considers it an acquisition target.

“Of the three major grain handlers, Viterra is the largest and the only one that is publicly traded. Using Australia as the most recent example of a country that has become fully deregulated, and the M&A activity that followed, we would expect a bid for Viterra.”