Canada’s trade surplus has reached its highest level since just prior to the onset of the Global Financial Crisis. This is the strongest evidence yet that the economy’s transition from its reliance on debt-burdened consumers could finally be underway.

Exports account for about one-third of Canada’s economy, with the US absorbing roughly three-quarters of the country’s shipments.

International merchandise trade blew past expectations in July, with a surge in exports pushing Canada’s trade surplus to CAD2.6 billion. Economists had actually expected the surplus to shrink to CAD1.2 billion from June’s revised number of CAD1.83 billion.

To put these numbers in context, over the trailing five-year period, Canada has averaged a trade deficit of CAD425 million per month. And over the trailing year, the country has averaged a trade surplus of CAD300 million.

The trend toward rising trade surpluses had seemed to be gathering momentum in February and March. But Canada’s trade balance fell back into deficit in April due to a sudden drop in energy exports that resulted in part because a number of key refineries had been idled for routine maintenance that month.

But the past three months have shown a strong resurgence in export activity along with a decline in imports, causing the trade balance to shift in a positive direction by an average of CAD1 billion per month. During this period, the biggest change in terms of dollar amount actually occurred in June as the surplus jumped to CAD1.83 billion from CAD449 million in the prior month.

According to Statistics Canada (StatCan), exports rose to CAD45.5 billion in July, with motor vehicles and parts the single largest contributor to this performance.

Exports of motor vehicles and parts, which is Canada’s second-largest export category after energy products, climbed 9.7 percent month over month in July, to CAD6.9 billion, for the fifth increase in seven months, thanks to record auto sales in the US. On a year-over-year basis, exports in this category have grown by 18.2 percent.

At a sub-category level, exports of passenger cars and light trucks jumped 10.2 percent, while exports of motor vehicle engines and motor vehicle parts were up 8.9 percent.

Aircraft and other transportation equipment delivered the strongest performance on a year-over-year basis, with export growth of 30.4 percent over that period, but activity in July was muted. And this category is one of the smaller ones in terms of dollar-value contribution to total exports.

Overall exports to the US increased by 1.9 percent, to CAD34.4 billion, while imports from the US rose 1.2 percent, to CAD29.2 billion. As a result, Canada’s trade surplus with the US widened to CAD5.1 billion in July from CAD4.9 billion in the prior month.

In addition to keeping tabs on exports, we’ve also been closely monitoring imports of industrial machinery, equipment and parts to get a sense of whether Canadian businesses are investing for future growth.

Imports in this category grew 1.4 percent month over month, to CAD4.1 billion. Growth in this area has been jagged since February, but the category is still up 11.0 percent year over year, which seems promising.

StatCan released these results a day after the Bank of Canada (BoC) announced that it would maintain its benchmark overnight rate at 1 percent. In the statement accompanying its decision, the central bank observed, “Canadian exports surged in the second quarter after a weak winter, supported notably by stronger US investment spending and the past depreciation of the Canadian dollar.”

“While an increasing number of export sectors appear to be turning the corner toward recovery,” the BoC continued, “this pickup will need to be sustained before it will translate into higher business investment and hiring.”

Hopefully, July’s result will help such cautious optimism evolve into wholehearted optimism. But we’ll likely need at least a couple more months of robust export activity to persuade the practitioners of the so-called dismal science accordingly.

Portfolio Update

Conservative Portfolio Holding EnerCare Inc (TSX: ECI, OTC: CSUWF) reported that second-quarter revenue increased 3.4 percent year over year, to CAD74.05 million, while net income declined by 0.4 percent, to CAD7.46 million.

But it should be noted that EnerCare reported “other income” of CAD1.7 million for the second quarter of 2013, as a result of a settlement with Direct Energy for billing and collection matters pertaining to water heater buyouts. This more than accounts for the difference in net income between the two reporting periods.

Beyond that, EBITDA (earnings before interest, taxation, depreciation and amortization) rose 10 percent, to a record CAD40.74 million. And profit for the six-month period ended June 30 came in at CAD14.4 million versus a loss of CAD2.9 million in the comparable year-ago period.

The CAD807 million water heater rental and sub-metering services company generated CAD49.2 million in revenue from rentals, up 4.1 percent from a year ago, while its sub-metering business delivered CAD24.7 million in revenue, an increase of nearly 2 percent year over year.

The faster-growing sub-metering unit was outpaced during the quarter by rentals largely due to a rate increase implemented in January. Over the six-month period that ended June 30, by contrast, sub-metering revenue jumped 13.8 percent, to CAD58.3 million, while rentals revenue climbed 3.7 percent, to CAD97.9 million.

On Bay Street, the company’s second-quarter performance beat analyst expectations by 52.4 percent on earnings per share, the fourth consecutive quarter in which the company delivered a sizable upside surprise. But revenue fell short of estimates by nearly 7 percent, the first time EnerCare’s top line fell short of the consensus in six quarters.

Analyst sentiment remains largely bullish with a neutral tilt, at four “buys” and three “holds.” The consensus 12-month target price is CAD14.73, which suggests potential appreciation of 6.7 percent above the current share price.

Over the trailing 12-month period, shares of EnerCare have risen 47.4 percent on a price basis in local currency terms and 57.4 percent on a dividend-reinvested basis. By comparison, the S&P/TSX Composite Index gained 22.1 percent during that same period, with a total return of 25.7 percent when reinvesting dividends.

Since initial recommendation on Nov. 5, 2010, EnerCare’s stock has risen 132.6 percent on a price basis and 211.4 percent on a dividend-reinvested basis. That’s a significant testimonial to the power of reinvesting dividends for those investors who are able to do so.

After quarter-end, EnerCare announced that it had signed an agreement to acquire Direct Energy’s Ontario home and small commercial services (OHCS) business for CAD550 million.

Management characterized the deal as transformative since it will provide EnerCare with direct access to its customers, control over all aspects of its operations, and greater financial scale.

In fact, the two businesses were previously part of the same company, before the assets that comprise the entity now known as EnerCare were spun off in 2002 as The Consumers’ Waterheater Income Fund. According to the company, OHCS services approximately 98 percent of its rental water heater and HVAC portfolio.

Additionally, the acquisition is expected to generate accretion in excess of 25 percent to pro forma distributable cash flow per share by 2015. The deal is slated to close in the fourth quarter.

Analysts forecast adjusted earnings per share of CAD0.44 for full-year 2014, an increase of just 3 percent year over year. However, earnings growth is projected to jump 38 percent in 2015, to CAD0.61 per share, while revenue is expected to surge 52 percent, to CAD541.8 million.

The company pays a monthly dividend of CAD0.0604, or CAD0.725 annualized, for a current yield of 5.2 percent.

EnerCare is a buy below USD10.