Earnings season for the calendar first quarter is underway in earnest. By Friday, May 5, which is the cutoff for this issue, nearly half of our holdings had reported their results.

We covered three of them in the most recent edition of Canadian Edge Weekly. In case you missed it, they are reprised below, along with our earnings analyses of seven other portfolio companies. The updates are in alphabetical order.

Suncor’s first-quarter results are covered in this issue’s Spotlight.

Also of note, there is one substantive change this issue: We’ve downgraded WestJet to a Sell. More on that below.

Alright, let’s get into it.

A&W Revenue Royalties Income Fund (TSX: AW-U, OTC: AWRRF) reported disappointing first-quarter results. Royalty income grew just 0.6%, to C$7.4 million, on total sales growth of 0.6%, to C$245.2 million.

Although same-store sales declined 0.3%, royalty income still managed to grow thanks to the addition of 23 restaurants to the royalty pool, which now totals 861 restaurants.

Management primarily attributed the quarter’s performance to poor winter weather in most regions of Canada. But it also noted continuing weakness in the country’s foodservice industry, particularly in Alberta and Saskatchewan, where the local economies are still recovering from the energy crash.

Although the A&W restaurant chain in Canada was originally launched by the well-known American root beer brand, it hasn’t been part of that company since 1972.

In contrast to the sad remnants of the American franchise, the Canadian chain, which is now independently owned and operated, still enjoys considerable respect among fast-food consumers in the Great White North, particularly for its Burger Family and reputation for using better ingredients than competitors. In fact, after McDonald’s, A&W boasts the second-highest market share among the country’s fast-food chains, at around 16% based on total sales.

However, it should be noted that the income fund doesn’t actually own or operate any of the restaurants. Instead, the fund generates income through its ownership of the A&W trademarks, which it licenses to the restaurants and for which it receives a royalty equivalent to 3% of gross sales. Though the restaurant chain chose to monetize its own trademarks with this investment vehicle, it still gets some of that money back through its 21.2% stake in the fund.

While A&W’s monthly distribution remains unchanged, it’s still 6.4% higher than a year ago. The fund has grown its payout by 2.4% annually over the past five years.

Looking ahead, management expects new growth initiatives such as all-day breakfast sandwiches will help boost sales in addition, of course, to opening new locations.

The C$442 million income fund has low debt and covered its monthly payout by 1.24 times for the first quarter.

Since reporting earnings, A&W’s units have sold off and are now down 13.2% from their trailing year high and rapidly approaching the levels at which we added the fund to the portfolio last October. With a yield of 4.5%, A&W remains a buy below C$37, or US$28.

BCE Inc. (TSX: BCE, NYSE: BCE), one of the core holdings in our portfolio, grew first-quarter adjusted earnings per share by 2.4%, to C$0.87, on a 2.1% rise in sales, to C$5.4 billion.

This steady performance beat analyst profit estimates by 4.4%, for the fifth earnings beat in the past eight quarters. BCE also managed to eke out its third consecutive quarterly upside surprise, with sales exceeding forecasts by 0.3%.

The telecom giant’s wireless division continues to drive overall growth, with operating income from the business up 7.5% year over year, to C$818 million, accounting for nearly 37% of the company’s total operating profit.

To offset cutthroat pricing competition on smartphones, the wireless segment focused on growing its customer base—postpaid net additions jumped 38.7%, to nearly 36,000 subscribers—while maintaining pricing discipline on services, which boosted average revenue per user by 4.2%, to C$65.66. These results also got a partial lift from the closing of the C$4.2 billion Manitoba Telecom acquisition on March 21.

Although BCE’s wireless division generally sees somewhat higher customer churn than its two main rivals, postpaid churn was just 1.17% during the quarter, up 2 basis points from the prior year, but toward the low end of recent annual churn rates.

Meanwhile, BCE’s wireline and media segments more or less continue to tread water, though there are still profits to be wrung from each business.

Even in the wireless era, the wireline segment still accounts for more than 57% of operating income. The business managed to grow adjusted EBITDA (earnings before interest, taxation, depreciation, and amortization) by 0.4%, for the 11^th consecutive quarter of growth.

With the secular attrition of legacy phone service, the segment’s main drivers are broadband Internet and pay-TV. Customer additions in both areas were markedly lower than a year ago, but BCE continues to grind out gains through hard-nosed cost-cutting, which pushed margins to an industry-leading 42.3%.

The wireline segment is investing aggressively in the buildout of broadband fiber infrastructure and expects to rollout fiber connections to 1.1 million Montreal homes and businesses by the end of the year. That will bring the company’s total fiber connections to 3.6 million across seven provinces.

Bell Media continues to adapt to the rapidly changing media landscape, with higher sales from video on demand and streaming services helping segment operating income climb 1.3%, to C$751 million.

Overall, BCE’s total customer connections across all services grew 5.3%, to 22.1 million.

Looking ahead, management forecasts sales and adjusted EBITDA growth of 5% this year, based on the midpoint of its guidance ranges. These latest projections are a significant improvement from the prior quarter and reflect the inclusion of Manitoba Telecom.

At the same time, the company lowered its guidance range for adjusted earnings per share by 3.5%, to $3.30 to $3.40 from an earlier forecast of $3.42 to $3.52, due to expenses relating to the transaction. If BCE manages to hit the midpoint of the new range, this would mean full-year 2017 adjusted EPS would decline by 3.5%. Thereafter, analysts forecast earnings growth of around 6% annually through 2020.

BCE increased its dividend by 5.1% during the first quarter, to C$0.7175 per share, or C$2.87 annualized. Though leverage metrics continue to rise, the telecom still enjoys stable investment-grade credit ratings from the major agencies. Meanwhile, the company is still covering its dividend, though its payout ratio remains elevated, at 84.1%.

With a yield of 4.7%, BCE remains a buy below C$72, or US$53.

Brookfield Infrastructure Partners LP (TSX: BIP-U, NYSE: BIP) grew first-quarter funds from operations (FFO) per unit by 4.4% year over year, to US$0.71, on a 44.5% jump in revenue, to US$656 million.

Brookfield Infrastructure is one of the publicly traded portfolios of Canadian alternative asset giant Brookfield Asset Management (TSX: BAM/A, NYSE: BAM). The investment vehicle affords Brookfield an opportunity to monetize a portion of its extensive holdings, while still getting a taste of the cash flows that they generate. And it gives income investors exposure to assets that produce stable cash flows underpinned by long-term contracts.

The asset manager is an incredibly shrewd investor that is well known for scooping up top assets on the cheap during sector downturns.

In the first quarter, the partnership’s transportation and energy divisions generated strong FFO growth of 30.9% and 55.0%, respectively.

Management attributed the transportation segment’s performance to higher tariffs and volumes, as well as contributions from recently acquired toll-road and port assets. Among the division’s holdings are rail operations in Australia and South America, toll roads in India and South America, and port terminals situated across the developed world.

The energy division got a boost from transporting higher volumes through its pipelines, as well as from newly secured contracts at its North American gas transmission business. Among the segment’s holdings are 15,000 kilometers of pipelines and 600 billion cubic feet of natural gas storage in the U.S. and Canada.

Meanwhile, FFO growth at Brookfield’s utilities and communications infrastructure segments was flat compared to a year ago.

The utilities division’s cash-flow growth was restrained by lower rates at its Australian coal-export terminal and the sale of the Ontario electric transmission business. And higher interest expense from a new capital structure kept a lid on FFO at the communications segment.

Shortly after the end of the first quarter, Brookfield announced that it and its deal partners had completed the US$5.2 billion acquisition of a 90% stake in a gas transmission system from the Brazilian energy giant Petrobras. As part of a consortium, Brookfield agreed to deploy US$1.3 billion, giving it a 25% interest in the business.

Although Brookfield carries significant leverage, debt is typically held at the operating-company level, and the vast majority of borrowings are non-recourse. Additionally, Brookfield has the backing of its deep-pocketed parent.

Brookfield is targeting long-term distribution growth of 5% to 9% annually, based on an average FFO payout ratio range of 60% to 70%.

With a forward yield of 4.4%, Brookfield Infrastructure Partners is a buy below C$54, or US$40.

Cineplex Inc. (TSX: CGX, OTC: CPXGF) reported first-quarter adjusted earnings per share grew 2.9% year over year, to C$0.35, on a 4.0% rise in sales, to C$394.2 million.

Nevertheless, this performance fell slightly short of analyst estimates on both the top and bottom lines—the fourth consecutive miss for sales and the fifth consecutive miss for earnings.

One of the main reasons that analysts have such difficulty forecasting the company’s earnings is that as a movie-theater owner its short-term performance depends in large part on how many Hollywood films turn out to be blockbusters.

That means Cineplex potentially faces a feast or famine on a quarterly basis. And even when the company has a solid quarter with record revenue, such as the first quarter, that performance doesn’t stand out as much when the prior-year period set similar records.

In this case, while the first quarter benefited from strong box-office sales thanks to “Beauty and the Beast,” the comparable year-ago period included the tail end of the “Star Wars: The Force Awakens” run and the release of “Deadpool,” which had the all-time highest-grossing February opening weekend. That made for a very tough comparable.

But the company’s shrew management has found ways to wring more money from patrons even when fewer of them bother to go to the movies. During the first quarter, for instance, total attendance declined by 4.8%, to 19.6 million, while box office revenue per patron climbed 3.3%, to C$9.97, while concession revenue per patron rose 5.0%, to C$5.71.

Management attributed this performance to higher-margin fare, such as showing 3D versions of more of the latest hit movies, while enticing patrons to order more food and beverages with expanded menus at key locations.

Meanwhile, Cineplex is pushing into an area that may provide steadier earnings growth to help offset the variability of the movie business. In recent years, the company has leveraged its experience from offering video games at its theaters to expand into operating its own standalone arcades, as well as supplying games and equipment to others. Amusement revenue jumped nearly 60% year over year, to C$41.4 million, and now accounts for 10.5% of total revenue.

In early April, Cineplex closed the acquisition of Dandy Amusements International, a leading amusement game machines operator in the U.S. The deal extends Cineplex’s gaming footprint in the U.S., giving it coast-to-coast coverage.

With retailers struggling in the age of e-commerce, Cineplex’s experiential approach to entertainment could be in high demand as mall operators search for new ways to adapt to the retail revolution and get consumers off the couch.

At the same time, the company will have to continue giving consumers something they can’t already enjoy at home, since most families, at this point, have what amounts to a theater-like experience and a personal arcade (or two … or three) in their living rooms—with access to similar media on their phones and tablets.

One way Cineplex is equalizing the cinematic experience with that of the home theater is by offering luxury recliners at select locations—and also charging accordingly.

I recently paid a premium for such an experience at a non-Cineplex theater, and though I initially balked at the ticket price, once I realized that I could lounge while watching a movie I spent more money on concessions that I would have otherwise.

Although this initiative is still in its early stages, Cineplex’s own experience from a business standpoint has been positive enough to increase its rollout of luxury recliners to 15 theaters by the year’s end.

Beyond these tactical and strategic moves, Cineplex’s absolutely commanding 78.7% share of the Canadian movie-theater market should give it unparalleled insights into how customers’ tastes are evolving, so that the business can continue evolving along with them.

Cineplex’s dominating position and its decision to share the wealth with investors—the company announced that it’s boosting its monthly dividend by 3.7%, to C$1.68 per share annualized, effective with the June payout—have translated into a super-premium valuation.

Even with adjusted earnings per share forecast to jump 48% year over year in 2017, to C$1.83, the stock still trades at a forward price-to-earnings ratio (P/E) of 29.2. Although that’s down from a P/E ratio of 42.9 over the trailing year, it’s still a significant premium to the broad market, as well as its North American peers.

While there’s a lot to like about Cineplex, it’s effectively a “Hold” at current levels. With a yield of 3.0%, Cineplex is a buy below C$51, or US$38.

Canadian utility giant Fortis Inc. (TSX: FTS, NYSE: FTS) grew first-quarter adjusted earnings per share by 3.0%, to C$0.69, on a 29% rise in sales, to C$2.3 billion.

Nevertheless, this performance fell short of analyst expectations on both the top and bottom lines. Analysts likely had difficulty in forecasting how the U.S.-based transmission company ITC, which Fortis acquired last October, would affect earnings during its first full quarter of contributing toward consolidated results.

For its part, Fortis’ management noted that quarterly results were “heavily influenced” by the inclusion of ITC, which is already accretive to earnings. Although first-quarter results missed analyst estimates, Fortis says the integration of its newly acquired business is “going well,” with the final piece of financing undertaken during the quarter—a private placement of C$500 million worth of equity.

Beyond the ongoing integration of ITC, management noted a positive earnings impact from higher electric retail rates following the outcome of a rate case filed by Arizona-based utility subsidiary UNS.

Fortis is in the midst of a five-year C$13 billion plan to upgrade and expand its infrastructure. Regulated electric and gas operations in the U.S. and Canada will get the bulk of this investment, while part of this budget also includes C$3.5 billion to expand ITC’s transmission infrastructure.

These investments are expected to drive earnings growth of 5.5% annually through 2021, which will help the company achieved targeted dividend growth of 6% annually over the same period.

Although Fortis issued significant equity to finance its acquisition of ITC, the holding company is still heavily levered overall, in part because ITC already carried a substantial debt burden. Even so, Fortis still enjoys stable, investment-grade credit ratings from the major agencies.

However, there’s a pretty big divergence between the company’s “A-” rating from Standard & Poor’s and its Baa3 rating from Moody’s. Management says the company deserves a rating that’s at least one notch higher from Moody’s and is clearly interested in achieving an even higher rating over time.

We’re willing to grant Fortis time to absorb ITC, which should help credit metrics improve as the year progresses. But we’re less impressed with management’s willingness to use persuasion on the one hand, and equity issued via its dividend reinvestment program on the other, to improve its standing with Moody’s, especially with an ambitious capital-spending program underway.

Even by the inflated standards of its U.S. peers, Fortis’ balance sheet is fairly bloated. Management needs to get more serious about proactively reducing leverage over time.

The good news is that with largely regulated operations, Fortis has a low-risk business profile, which translates into significant indulgences from the credit raters. We’re patient too, but our patience is not infinite. With a yield of 3.7%, Fortis remains a buy below C$45, or US$34.

Inter Pipeline Ltd. (TSX: IPL, OTC: IPPLF) reported first-quarter funds from operations (FFO) per share grew 21.8% year over year, to C$0.67, on a 39.0% jump in sales, to C$578.7 million.

Management primarily attributed this performance to the company’s natural gas liquids (NGL) processing business, which includes the Canadian operations acquired from Williams for C$1.35 billion back in September.

The acquisition helped make Inter Pipeline’s NGLs business its second-largest division, with FFO up 247%, to C$81.9 million. Of course, the rebound in commodities prices and a resurgent North American petrochemicals industry were also helpful, with the frac spread for propane nearly doubling from a year ago.

Meanwhile, the firm’s oil sands transportation business, which is by far its largest division, grew FFO by 6% year over year, to C$148.2 million, thanks to record throughput volumes of 1.3 million barrels per day. The segment’s operations consist of three pipeline systems under long-term contracts with up to 2.3 million barrels per day of capacity.

The conventional oil pipelines division also generated record FFO, up 7%, to C$53.4 million, due to strong midstream marketing activities. The segment’s operations include 3,900 kilometers of pipelines that serve more than 100 producers.

Like some of its peers in the North American midstream space, Inter Pipeline sees a potential growth opportunity from pushing further into petrochemicals. To this end, the firm is pursuing the development of a C$3.1 billion petrochemicals complex.

Although this strategic shift would further diversify Inter Pipeline’s business, these operations tend to have much lower margins than pipelines and greater exposure to commodity risk.

But that’s a longer-term concern. At this point in the commodities cycle, it could be a shrewd move.

Inter Pipeline carries lower leverage than its larger Canadian midstream peers, while its stock offers a higher yield.

At the same time, dividend growth is expected to average around 4% annually through 2019, which is a markedly slower trajectory than its peers. For those who invest at current prices, however, Inter Pipeline’s stock will still yield more than those of its peers three years hence, even when accounting for their superior dividend growth.

With a yield of 5.9%, Inter Pipeline is a buy below C$31, or US$23.

Manulife Financial Corp. (TSX: MFC, NYSE: MFC) grew first-quarter core earnings per share 20.5% year over year, to C$0.51, and generated a core return on equity of 10.8%.

One of the insurance giant’s key growth drivers continues to be its Asia division, which accounted for 39.4% of sales and nearly quintupled net income from a year ago, to C$587 million. Credit for this performance was partly attributed to a 31% jump in annualized premium equivalent sales at the segment’s insurance business, while stronger equity-market returns boosted the division’s assets under management by 29%, to US$47.7 billion.

The U.S. division (35.7% of sales) also delivered a record performance, with wealth and asset management gross flows up 13% year over year and assets under management and administration reaching US$268 billion by the quarter’s end.

Together, these performances helped lift Manulife’s overall assets under management and administration above the C$1 trillion threshold for the first time in company history.

During the quarter, Manulife became the first financial institution to be granted an investment company wholly foreign-owned enterprise license by the Chinese government, a crucial designation that will allow the Canadian firm to expand its market share in the Middle Kingdom to a much broader investor base, particularly small and midsize domestic insurers looking to access the global markets.

Looking ahead, analysts forecast adjusted earnings per share will climb 12% this year, to C$2.19, on sales growth of 8%, to C$56.2 billion.

Manulife boosted its first-quarter payout by 10.8%, to C$0.205 per share, or C$0.82 annualized. Analysts forecast further dividend growth of 9.1% annually through 2019.

With a forward yield of 3.3%, Manulife is a buy below C$25, or US$19.

Thomson Reuters Corp.’s (TSX: TRI, NYSE: TRI) strategic shift toward higher-margin businesses finally bore fruit during the first quarter, with adjusted earnings per share surging 37.0% year over year, to C$0.63 (EPS is reported in C$, while the other financials are in US$), despite the fact that sales only grew 1%, to US$2.8 billion.

Adjusted EBITDA (earnings before interest, taxation, depreciation, and amortization) margin expanded by a substantial 4.3 percentage points, to 31.1%.

This marked the US$32 billion company’s eighth consecutive quarterly earnings beat, and it was the first upside surprise for sales in nine quarters.

Thomson’s tax-and-accounting division was the quarter’s star performer, with sales growth of 6%, to US$417 million, driving a 24% jump in adjusted EBITDA, to US$141 million.

The company’s other two segments delivered more modest growth. The financial-and-risk segment, Thomson’s biggest division, grew sales 1%, to US$1.5 billion, while adjusted EBITDA climbed 6%, to US$463 million.

Legal, the second-largest division, grew sales 1%, to US$824 million, while adjusted EBITDA rose 3%, to US$307 million.

Despite the solid operational performance, Thomson’s free cash flow was deeply in the red for the quarter, at negative US$581 million.

The main reason for the steep drop was a US$500 million pension fund contribution. The cash infusion lifted the funding status of the company’s pension plans to more than 90%. As such, management does not expect to make any further material contributions in the near term.

Additionally, the company’s US$3.6 billion divestiture of its intellectual property and science division last October also reduced the quarter’s cash flows by about US$152 million, and Thomson also made severance payments of US$86 million during the quarter.

With pension and severance expenses now out of the way, management anticipates a return to stronger free-cash-flow generation, with a forecasted range of US$900 million to US$1.2 billion for full-year 2017.

Thomson not only has a more streamlined business that’s leveraged to growth from its most profitable products, the vast majority of its revenue is now recurring—around 90%. That not only provides business stability, it also gives investors a fair amount of earnings visibility.

While top-line growth is expected to remain in the low-single digits, analysts forecast adjusted earnings per share will grow 9.4% annually through 2019. That, in turn, could help drive somewhat stronger dividend growth, which has averaged just 1.5% annually over the past three years.

Recent gains have pushed shares to an all-time high, and the stock now trades moderately above fair value. As such, it may be worth taking partial profits, or at least rebalancing your position to an equal weighting.

With a yield of 3.1%, Thomson Reuters is a buy below C$56, or US$42.

TransCanada Corp. (TSX: TRP, NYSE: TRP) reported first-quarter adjusted earnings per share rose 15.7%, to C$0.81, on revenue growth of 32.9%, to C$3.4 billion.

The biggest driver of this performance was TransCanada’s US$12 billion acquisition of Columbia Pipeline Group last July and the subsequent roll-up of Columbia’s master limited partnership (MLP) subsidiary during the first quarter. As a result, the firm saw segment earnings from its U.S. natural gas pipelines division more than double, to C$561 million, making it the firm’s single-biggest segment in terms of operating profits.

The Columbia deal gave TransCanada control of an unparalleled gas transmission network across one of America’s most prolific shale formations along with a crucial long-haul connection to the country’s petrochemicals complex in Louisiana.

The firm’s two other major divisions, Canadian natural gas pipelines and liquids pipelines, grew segment earnings by 3.7% and 7.1%, respectively.

The C$55.4 billion pipeline giant is in the midst of executing a massive C$22.5 billion capital plan, with about a third of this amount already invested in projects thus far.

That CapEx figure doesn’t include the potential revival of the US$8.0 billion Keystone XL pipeline, which finally received a U.S. presidential permit, but still needs to secure state-level approval, as well as prove its economic viability.

Management says these near-term projects support dividend growth toward the upper end of its target range of 8% to 10% annually through 2020.

Naturally, you might be wondering how TransCanada intends to pay for all of that. Management notes that they have a number of funding sources, including internally generated cash flows, the monetization of assets through strategic divestitures and dropdowns to its MLP subsidiary, and a robust dividend-reinvestment program, among others.

And, of course, there are the ever-accommodative capital markets. That brings us to one area of potential worry: TransCanada’s stretched leverage metrics.

Nevertheless, the firm enjoys high investment-grade credit ratings from the three main agencies. While Moody’s Investors Service notes that leverage is a concern, it also cites a number of credit-positive factors, such as TransCanada’s predictable and growing cash flows, its large and diversified project portfolio, and its strategic shift away from higher-risk merchant power generation.

As cash flows from new projects ramp up, credit raters expect leverage metrics to improve to a more reasonable level over the next two to three years. Faster, please.

TransCanada boosted its first-quarter dividend by 10.6% year over year, to C$0.625 per share, or C$2.50 annualized. 

With a forward yield of 3.9%, TransCanada is a buy below C$63, or US$47.

WestJet Airlines Ltd. (TSX: WJA, OTC: WJAFF) reported first-quarter earnings per share dropped 42.3%, to C$0.41, despite sales growth of 8.0%, to C$1.1 billion.

Although management noted that these results included a non-cash adjustment of C$18.5 million and irregular operations-related costs of C$7.0 million, even when accounting for these one-time items earnings would have still posted a decline.

While management noted that the first quarter included growth in revenue per seat mile (up 2.3%) for the first time in eight quarters, investors cannot dine out on such statistics. Indeed, the stock declined 3.4% following the company’s earnings release, though the share price has since partly recovered.

WestJet’s 48 consecutive quarters of profitability are well worth celebrating given that it operates in such a cutthroat industry. But the competitive environment isn’t about to get any easier, with incursions from low-cost rivals stealing market share.

Consequently, WestJet is embarking upon a strategic shift on two fronts.

In a partial return to its roots as a discount carrier, the airline is planning to launch an ultra low-cost carrier, with the first flights to occur later this year or in early 2018.

At the other end of the spectrum, WestJet announced that it’s ordered 20 new Boeing 787 Dreamliners, which will allow the airline to offer business-class service to Europe, Asia, and South America.

The total order is valued at C$5.4 billion, not including potential discounts, and management says it plans to fund the purchase with operating cash flow, instead of debt. WestJet notes that it cancelled another order for 15 planes, which will allow as much as C$1.7 billion to be reallocated toward the new purchase agreement. The first deliveries are expected to occur between 2019 and 2021.

Though such business diversification offers potential growth opportunities, it also entails significant execution risk, not to mention substantial capital expenditures.

Additionally, such spending could weigh on future dividend growth. WestJet hasn’t boosted its payout in more than two years, and analysts don’t foresee another dividend increase until 2019, at the earliest.

With considerable operating risk, rising capital spending, no dividend growth, and a yield of only 2.5%, we don’t see all that much for risk-averse income investors to get excited about here.

Beyond that, earnings per share are projected to drop 19% for the full year, which would make 2017 the trough for this cycle.

Even if WestJet’s latest initiatives ultimately prove successful, investors could experience a lot of heartache between now and then. If WestJet’s stock had a more attractive yield, with the promise of strong future dividend growth, then we might have a reason to stick around. But in the absence of that, it’s time to move along. WestJet is now a Sell.