The Bank of Canada (BoC) may have finally gotten the news it’s been patiently awaiting. The central bank is focused on resuscitating the country’s ailing manufacturing sector. Its hope is that Canada’s economy will once again be driven by export-oriented manufacturers, relieving the country of its dependence on debt-burdened consumers.

Based on the latest data from Statistics Canada (StatCan), this transition could already be underway. According to StatCan, Canada’s February manufacturing sales increased 1.4 percent month over month, to CAD51.2 billion.

This performance not only beat the consensus forecast by four-tenths of a percentage point, it was the strongest growth in sales in more than a year. Perhaps even more important, the overall dollar amount was the highest level since July 2008, when the sector’s sales hit an all-time high of CAD53.3 billion just prior to the Global Financial Crisis. Sales have now risen 33.5 percent from their bottom in May 2009 amid the Great Recession.

According to economists with National Bank Financial, the depreciation of the Canadian dollar against the US dollar was a key factor in this performance, since the country’s manufacturers export about 40 percent of their products, with most destined for the US.

The Canadian dollar currently trades near USD0.91, down about 14.2 percent from this cycle’s high of USD1.06 back in mid-2011. However, the loonie is up about 2.3 percent from the four-year low it hit back in late March.

While sales rose in 15 of 21 industries, half of February’s gain was driven by sales of transportation equipment, while sales of petroleum and coal products also made a sizable contribution. Transportation equipment sales rose 4.3 percent, to CAD8.9 billion, with particular strength from sales of motor vehicle parts, which were up by 6.4 percent. The motor vehicle assembly and other transportation equipment industries also posted gains in February.

Sales in the petroleum and coal product industry increased 2.9 percent, to CAD7.5 billion, their highest level since March 2012. However, most of the gain was due to a 2.5 percent rise in prices for the industry, rather than higher volumes.

Meanwhile, these gains were offset by broad declines in the food (down 0.6 percent), computer and electronic product (down 3.8 percent), and wood product (down 1.5 percent) industries.

Also of note, unfilled orders, or backlog, jumped 16.5 percent, to CAD91.6 billion, the largest monthly increase since StatCan first began collecting data in this area back in 1992. Most of this backlog was attributable to orders received by transportation equipment manufacturers.

Unfilled orders for the manufacturing sector have risen even more sharply than overall sales. The latest number is 79.6 percent higher than the post-recession low of CAD51 billion posted in November 2009.

In the transportation equipment industry, unfilled orders were up 23.4 percent, to CAD66.6 billion, the highest level on record. Orders received in the other transportation equipment sub-industry as well as the aerospace product and parts sub-industry drove this result. However, economists note that these industries tend to have long production cycles, so it’s unclear how soon the rise in backlog will flow through to the economy.

Still, there is evidence that this momentum was sustained at least through last month, as the Royal Bank of Canada’s monthly Manufacturing Purchasing Managers’ Index hit a three-month high in March, with a reading of 53.3. A reading above 50 indicates expansion in the sector, and the index has been above that threshold now for 12 consecutive months.

Equally important, new export orders increased at the second-fastest pace since last October. At the same time, the survey showed there were widespread supply disruptions that led to longer delivery times for raw materials and a corresponding increase in unfinished work.

And while a lower exchange rate helps spur export volumes, it also leads to cost inflation, with manufacturers reporting the steepest rise in input costs since May 2011.

Finally, as we reported last week, the BoC’s quarterly Business Outlook Survey showed that manufacturing was one of the few sectors where companies are planning to make growth-oriented investments in machinery and equipment (M&E). The survey was based on interviews with the senior management teams of about 100 firms that are considered most representative of the composition of Canada’s gross domestic product (GDP). The spring 2014 survey was conducted from Feb. 18 to March 13.

According to the central bank, a number of manufacturers indicated that they are planning to increase spending on M&E in an effort to improve competitiveness or to create opportunities for growth. Investment intentions in this area are somewhat more prominent among small and medium-sized firms and among export-oriented firms.

So while these results have a number of nuances, the broad takeaway is that Canada’s manufacturing sector is starting to show real signs of life. Though it has yet to make a positive contribution to the economy, momentum is gathering toward that end.

Portfolio Update

For its fiscal second quarter (ended Feb. 28), Shaw Communications Inc (TSX: SJR/B, NYSE: SJR) reported that revenue rose 2 percent, to CAD1.27 billion, versus the year-ago period, while net income jumped 22 percent, to CAD222 million. The company generated free cash flow of CAD158 million, down slightly from CAD161 million a year ago.

Shaw is a diversified
communications and media company, providing
consumers with broadband cable television,
high-speed Internet, home phone, telecommunications
services (through Shaw Business), satellite
direct-to-home services (through Shaw Direct), and
engaging programming content (through Shaw Media).



The company’s extensive fiber network serves 3.3 million customers. Shaw Media’s Global Television is one of the largest conventional television networks in Canada, and the company also operates 18 specialty networks, including HGTV Canada, Food Network Canada, History, and Showcase.

Revenue in the Cable division improved by 3 percent for the quarter, to CAD839 million, while the segment’s operating income before amortization increased by 1 percent, to CAD398 million. Revenue growth was primarily driven by pricing adjustments and lower promotional activity, but partially reduced by various expense increases, including employee-related amounts and programming.

Satellite revenue climbed 5.3 percent, to CAD 220 million, while the division’s operating income before amortization declined by 6.4 percent, to CAD69 million. Revenue grew due to pricing adjustments, but was more than offset by higher expenses, including operating costs related to the new Anik G1 satellite and programming expenses.

The Media division posted revenue for the quarter of CAD239 million, down 4 percent from a year ago. Operating income before amortization fell 15.3 percent, to CAD61 million. The segment’s numbers were lower due to reduced advertising revenues resulting from the Sochi Winter Olympics, but partially offset by increased subscriber revenues.

Across the company as a whole, total operating income before amortization declined by 2 percent, to CAD528 million. However, the comparable year-ago quarter benefitted from a one-time adjustment related to certain broadcast license fees, which totaled approximately CAD14 million. Excluding this adjustment, consolidated operating income before amortization improved by 1 percent for the quarter.

Shaw’s fiscal second-quarter results fell short of analyst expectations by 8.6 percent on earnings per share (EPS) and 0.1 percent on sales. That’s the fourth consecutive quarter in which the company has disappointed on EPS, though last quarter’s miss was by a narrow 0.2 percent.

In response, Euro Pacific Canada Inc downgraded the stock to “sell” from “hold,” though it maintained its 12-month target price at CAD25.00.

The mix of analyst sentiment is now largely neutral with a slightly bearish tilt, at three “buys,” 11 “holds,” and five “sells.” The consensus 12-month target price is CAD26.17, which is 0.7 percent below the current share price.

Shaw’s stock currently trades just 1.3 percent below its all-time high of CAD26.70, which was hit on April 10, the day of the company’s earnings release. The shares have climbed 17.1 percent from their trailing-year low back in mid-June.

The stock’s recent ascent has been fueled in part by investors betting on a possible takeover by Rogers Communications (TSX: RCI/B, NYSE: RCI). As The Globe and Mail notes, such speculation about the fate of Shaw often makes the rounds because it is the last big-name Canadian communications and media company whose operations would mesh well with an industry leader like Rogers.

However, analysts believe such an action is unlikely because the current generation of the Rogers family has taken a more conservative approach to strategy and deal-making than patriarch Ted Rogers, who died in 2008. 

For fiscal-year 2014 (ending Aug. 31), analysts forecast adjusted EPS of CAD1.75, up 9 percent year over year. Sales are projected to rise by 2 percent, to CAD5.26 billion, while net-income adjusted for one-time items is expected to increase by 8 percent, to CAD798 million.

Over the past five years, Shaw’s payout has grown 5.8 percent annually, with the latest boost to the dividend, of around 8 percent, effective with the March payout. The current monthly dividend is now CAD0.091667, or CAD1.10 annualized.

With a forward yield of 4.2 percent, Shaw is a buy below USD24 in the Conservative Portfolio.