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(B)(N) SNC SNC-Lavalin Group Incorporated

March 9, 2013

Drama. A “consensus earnings” forecast has trampled the stock price of the SNC-Lavalin Group (at least for a day) and one has to wonder whether this is a “buying opportunity” or something that we should prudently shrug off as just another day of market excess and wait for more information such as another “earnings forecast” (Reuters, March 8, 2013, SNC Lavalin shares down as results, outlook fall short and CNW, March 8, 2013, IIROC Trading Halt – SNC). Over 2 million shares changed hands on Friday in contrast to a typical day of 500,000 shares and the stock price dropped from $46 on Thursday (and $49 last week) to $43 today. The 102-year old Canadian company is one of the largest engineering companies in the world and has a market capitalization of about $7 billion (in contrast to, for example, Siemens AG at $90 billion) and the current dividend is $0.23 per quarter or $139 million per year for a current yield of 2.1%.

Readers of these Posts already know what we’re going to say (please see Exhibit 1 below) but we are astounded (and would like to share that “wonder”) by the rootlessness and fecklessness of legions of  “investors” – our cohorts and competition – who appear to shoot first and aim later, time and time again. The investment paradigm in question is the “Risk/Reward Equation” and the notion that in order to make money in the stock market, we need to “buy low” and “sell high” – which is the right idea, but everybody is trying to do it and not many succeed (please see our Post, The Investor Product, February 2013, or The Active Investor (DOA), November 2012).

In this example, the Price-to-Earnings Ratio (P/E) is expected to be 21.4 (PE) on an annual basis and the last quarterly earnings were expected to be $0.50 per share (EPS) but came in at an actual $0.16 and a reduced outlook for 2013 (according to “analysts’ expectations”) from expected earnings of $2.83 to $2.73 or less (we guess). Our pencils aren’t that sharp, but the implication appears to be that an expected (future) stock price of $60 = PE × EPS = 21.4×$2.83 has dropped to $58 per share, neither of which is even close to current, and unexpected (we guess) stock prices of between $35 and $50 in the past year.

We also note that the implied stock price “Fair Price” is a risk-adjusted price of Sharpe-Markowitz type (please see our Post, The Price of Risk, August 2012, and Volatility for the Delta Challenged, June 2012) under the rubric:

[Fair Price] = [P/E] × EPS

where [P/E] is a consensus (or average) estimate of the expected price-to-earnings multiple for the firm or its industry, and EPS (earnings per share) is a measure of “investor risk tolerance”. Of course, no one has ever been able to prove that [Fair Price] has anything to do with the successful management of stock portfolios. Likely, because it isn’t true. As risk averse investors, we want to keep our money – 100% Capital Safety – and obtain a hopeful but not necessarily guaranteed return above the rate of inflation, and we don’t bet on the future of anything.

We have included SNC-Lavalin in the Perpetual Bond™ at various times, most notably with commitment between $30 and $52 in 2009 and early 2010 (Red Line Stock Price (SP) above the Black Line Risk Price (SF)) and again in late 2010 through 2011 when we were sold out on a call at $58 (July 2011). We could buy it now but note that the demonstrated downside due to volatility is minus ($4) suggesting a $Stop/Loss at $39 and the current Risk Price (SF) is $42. If we buy it now, then we would also “collar” the price. The June put at $42 is available today for $1.95 per share and an offsetting June call at $46 can be sold or shorted for $1.00 per share so that for a net cost of $0.95 per share ($1.95 less $1.00) we can guarantee our price at between $42 and $46 for the next three months while we collect our dividends, manage our options on the long position, and await further real outcomes in the stock price, regardless of what the company might be doing.

Exhibit 1: (B)(N) SNC SNC-Lavalin Group Incorporated – Risk Price Chart

(B)(N) SNC SNC-Lavalin Group Incorporated

SNC-Lavalin Group Incorporated provides engineering and construction, and operations and maintenance services worldwide.

(Please Click on the Chart to make it larger if required.)

From the company: The company undertakes infrastructure projects, such as airports, buildings, health and care, educational and recreational facilities, seaports, marine and ferry terminals, flood control and urban transit systems, railways, roads and bridges, and water and wastewater treatment, and distribution facilities; and environmental projects, such as social and environmental site assessments and studies, community engagement, remediation and reclamation, ecological and human health risk assessments, marine and coastal management, geoenvironmental services, climate change, air quality and acoustics, geographic information systems, and agriculture and rural development. It also undertakes chemicals and petroleum projects in bitumen and oil production, onshore and offshore oil and gas, upgrading and refining, biofuels and green chemicals, gas processing, liquefied natural gas plants and re-gasification terminals, coal gasification, carbon capture, transportation and storage, pipelines, terminals, and pump stations. In addition, the company’s activities consist of mineral and metal recovery processes, such as mine infrastructure development, mineral processing, smelting, refining, mine closure and reclamation, mine and tailings management, and fertilizers; and power projects comprise hydro, nuclear, and thermal power generation, as well as energy from waste, green energy solutions, and power transmission and distribution. Further, it offers logistics solutions for buildings, power plants, water supply and treatment systems, desalination plants, postal services, broadcasting facilities, light rail transit systems, ships, and camps; invests in infrastructure concessions; and undertakes various projects in agrifood, pharmaceuticals, biotechnology, and sulphuric acid industries. SNC-Lavalin Group Inc. was founded in 1911 and is headquartered in Montreal, Canada


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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