Their balance sheets appear bullet-proof

By Sean Silcoff
Globe Investor Magazine Online, Nov. 18, 2008

They are the envy of the corporate world: public companies that entered the credit crisis with near-bulletproof balance sheets.

"Quality stocks with strong balance sheets, good and sustainable dividends and good long-term growth prospects will be the first to recover," Nick Majendie, chief portfolio manager of Canaccord Capital's independence accounts, wrote recently.

Here are some candidates worth researching that may fit the bill. Rogers Communications Inc. After several near-bankruptcies over the years, Rogers headed into the mother of all credit crises in its strongest financial position yet. Why? One word: Wireless. Founder Ted Rogers invested in wireless on his own in the 1980s after the Rogers board, including wife, Loretta, voted against him.

"Had I not been stubborn enough [to invest in wireless] Rogers Communications would not be the company it is today," Mr. Rogers says in his recent autobiography, Relentless. (The public company later bought him out.) Rogers' $3.4-billion outlay in 2004 to buy Microcell Telecommunications and take out minority partner AT&T Wireless looks even smarter today.

Wireless accounted for 56 per cent of revenue and 70 per cent of operating profit in the first nine months of this year (cable and media account for the rest); it's the driver behind Rogers' estimated 2008 $4-billion-plus in earnings before interest, taxes, depreciation and amortization (EBITDA) and $1.7-billion in cash flow. Rogers has shrunk its ratio of net debt-to-EBITDA from five-times in 2004 to a conservative two-times, and picked up an investment grade credit rating.

"You can consider Rogers a blue-chip company, which I don't think you could have said five or 10 years ago." says Richard Talbot, co-head of global research for RBC Capital Markets. "It has an ability to become debt-free within a foreseeable time frame."

Rogers is prepared for a prolonged credit crisis: It recently sold $1.4-billion (U.S.) worth of long-term bonds, has $1.8-billion of borrowing room on a credit line (due July, 2013), and no major debt maturities until May, 2011. 5N Plus Inc.

Small-cap companies in growth industries can get whacked when markets turn south. This Montreal firm, which purifies metals used in solar panels, is no exception. In the three years through May 31, 5N's revenue and profit grew on average by 44.4 per cent and 105.4 per cent, respectively, to $31-million (Canadian) and $7.8-million. A former division of Noranda Inc., 5N earned a further $4.3-million on sales of $14-million in the first quarter and has a $53.6-million backlog. But after rising from its $3 initial public offering price last December to $13 in June, the stock has crashed to under $6.

So why is this small-cap on the bullet-proof list? 5N has long-term supply agreements with major customers that guarantee revenue of $20-million a year. The little firm also has a big war chest: $50-million in cash from two stock offerings and just $6-million debt, plus an unused $3.5-million credit facility. Meanwhile, its main customer, fast-growing U.S. solar module manufacturer First Solar Inc. is a financial Hercules: it earned $99.3-million (U.S.) on $349-million in revenue in its most recent quarter and has $715.2-million in cash and marketable securities against $140.8-million in debt. And that growth is expected to continue: The U.S. Congress recently extended tax credits to the solar industry and Americans elected Barack Obama - a clean energy proponent - as president. Telus Corp.

Big, incumbent telecom companies used to be the steadiest of credits. Then BCE Inc. agreed to a leveraged buyout. When the deal closes next month it will leave Telus Corp. as the one large Canadian telco with a bullet-proof balance sheet. Chief financial officer Bob McFarlane also wins high marks for seizing financing opportunities when capital markets were favourable. "He's very proactive in that regard and always has been that way," says Chris Diceman, senior vice-president with credit rating agency DBRS. Case in point: Telus last March prematurely extended its $1.7-billion (Canadian) credit line that was to come due next spring all the way to March 2013, locking in a more favourable rate than would be available today.

Remember it wasn't long ago that analysts advised Telus to lever up and increase the dividend. "The fact we resisted those who said we should just borrow up and stuck with our policies has proven to be the correct strategy," says Mr. McFarlane. Telus heads into the credit crisis with an investment-grade credit rating, a conservative net debt-to-EBITDA ratio of 1.8-times and no major debt maturities until 2011, with enough surplus cash to buy back shares. "If we were into a real crisis we'd redirect those funds and we'd have no problem," Mr. McFarlane says. Gildan Activewear Inc.

The low-cost T-shirt maker has invited skepticism from short-sellers who were convinced its high growth and high stock valuation in a commodity business couldn't last. But there is no disputing Gildan's rock-solid financial situation. The company had a miserly $91-million (U.S.) in long-term debt net of cash at the end of its third quarter on July 6, compared with total capitalization of $1.1-billion. It has plans to spend $160-million in its 2009 fiscal year to increase capacity, without requiring outside help.

Gildan's debt as a percentage of total capital has dropped by three-quarters in the past seven years as it used its rich cash flows - $92.2-million in the first three-quarters of this year - to bring down leverage. "I've spent enough nights in different companies worrying about liquidity to never want to go there again," chief financial officer Laurence Sellyn says.

Gildan is on track to earn more than $250-million in operating profit this year and has significant unused capacity on its credit facility. Talk about an enviable position: Gildan has enough cash and bank financing to pursue both its internal expansion and acquisitions. "We feel very happy that we took a conservative stance toward our capital structure, because there's no liquidity in the markets," Mr. Sellyn says. "Companies that require financing in the next two to three years are getting absolutely killed."

Special to The Globe and Mail