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Canada's Top Companies 2008 :: FP Business Magazine / FP 500


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LIST :: http://www.financialpost.com/magazine/fp500/list.html

 

The beat goes on

The right numbers are up. But momentum? That’s another thing

 

Cooper Langford, Financial Post Business Published: Tuesday, June 03, 2008

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Good stories start in the middle of the action, so let's do that - specifically at the No. 162 spot on the 2008 edition of the Financial Post 500, our annual ranking of Canada's largest companies by revenue. In that position: Martinrea International Inc., a Vaughan, Ont.-based auto-parts maker that's put the pedal to the metal in pursuit of growth. In a year when the loonie hit par with the U.S. buck and belt-tightening at Detroit's Big Three throttled the auto sector, Martinrea did a surprising thing: It more than doubled its revenue to $2 billion. In the process, it also jumped 168 places, making it one of the highest-climbing firms on our list.

 

That an upstart underdog in a declining sector can deliver such a positive outcome says a lot about the stories, themes and companies that define this year's FP500. Some firms have had great years, but for many others it was just the opposite. And in a lot of cases, one company's good fortune comes at the expense of others. Martinrea, for example, made its big leap because it was able to acquire a major rival at depressed market prices. Likewise, factors such as the price of oil - which rose to within a hair's breadth of US$100 per barrel in 2007 - boosted most oil producers while hammering other companies that were directly or indirectly hurt by the high cost of fuel. Martinrea's success is revealing in one other way as well. With total revenue of all the FP500 companies increasing by just $44 billion in 2007 - to $1.583 trillion from $1.539 trillion - the little parts maker's $1.1-billion revenue gain represents fully 2.5% of the entire increase. When you're counting on a company that represents a meagre 0.1% of the total FP500 revenue to do that much heavy lifting, you have to wonder about the strength of the underlying economy and the prospects for the year ahead.

 

Meanwhile, the theme of surprise extended to some of the largest companies on the FP500, too. Start with Royal Bank of Canada, which returns as No. 1 overall. No one doubted that it would retain its crown as Canada's largest corporation, but how many thought it would also lead our list of top revenue gainers? After all, the financial sector was hammered last year by fallout from the subprime mortgage crisis and the choked credit markets that followed. Yet RBC - thanks to its well-diversified base of revenue streams - shone through with a year-over-year increase of more than $5 billion. And then there's EnCana Corp. (No. 13), Canada's largest energy company and one of its most profitable firms. Many people will no doubt be surprised to find that it tops our list of biggest profit decliners. Granted, it still earned $4.3 billion, but that's off $2.1 billion from 2006, despite a 24% increase in revenue to $23 billion. Blame a steep mid-year dip in the price of natural gas, the erosion of margins due to the rising dollar and ever-escalating costs that resulted from shortages of materials and skilled labour. (A complete series of "Top 5" breakout lists and profiles accompanies this story.)

 

ANYONE LOOKING for more predict-able outcomes can still hang their hat on the global commodity boom. While price increases didn't match those of 2006, there was still enough steam in the market for it to have a major impact on the list - powering up some of 2007's largest percentage revenue gains. Yamana Gold Inc. (No. 340), for example, leapt onto the FP500 with a 318% increase, to $800 million, following its $3.5-billion acquisition in September of Meridian Gold Inc.

 

Soaring oil prices continued to stoke more than a few bottom lines across the energy sector - average revenue growth there came in at 18.8%. Leading the way was Calgary-based Harvest Energy Trust (No. 94) with a revenue increase of 193.2%, to $4 billion. This gain was due, in part, to its mid-2006 acquisition of North Atlantic Refining Ltd. in Come By Chance, N.L., a groundbreaking $1.6-billion deal that turned Harvest into Canada's first vertically integrated oil and gas royalty trust.

 

At the same time, however, energy costs - coupled with the strong dollar - weighed heavily on central Canada. They wreaked havoc particularly on forestry companies already reeling from the collapse of the U.S. housing market. Indeed, of the 19 forestry firms on our ranking, only four avoided outright revenue declines. Nine of the remaining firms saw a double-digit fall in their income. Weyerhaeuser Canada Ltd. turned in the worst performance, stumbling to the No. 384 position from No. 231 as its revenue fell to $648 million - a 50% decrease, which earned it the dubious distinction of this year's "Worst Fall." The picture looks only a little brighter in the beleaguered manufacturing sector, where half of the 28 ranked firms posted revenue declines.

 

In broad terms, though, the economy absorbed the worst of these impacts. Much like corporate revenue and profit (which climbed 4.4% for the FP500 as a whole, compared to a 34% rise in 2006), GDP growth held steady, clocking in at 2.7%, the same as 2006, but down from 2.9% in 2005. Unemployment, meanwhile, fell to 6%, its lowest level in 33 years. These kinds of numbers, it seems, were good enough to keep consumers in stores with their wallets open, as a look at some of the newcomers to the FP500 suggests. For evidence, look no further than the No. 288 position, occupied this year by consumer electronics manufacturer LG Electronics Canada, with revenue of $1 billion. A few ranks further down, at No. 311, you'll find Kia Canada Inc., a subsidiary of Korean auto maker Kia Motors, with revenue of almost $900 million. Equally intriguing - given fears for the future of the music and video retail business - is the arrival on the FP500 of HMV Canada Inc. at No. 500, with revenue of $407 million. Granted, HMV's revenue is actually down 0.6%, yet it still made the jump from No. 510 last year on the Next 300 list.

 

DEALING WITH volatility and a rapidly changing economic landscape may have been the biggest theme in corporate Canada during 2007, but it wasn't the only one: Foreign takeovers also swept the market. The headlines were bigger in 2006, when iconic Canadian firms such as Hudson's Bay Co., Inco Ltd. and Dofasco fell into foreign hands. But it wasn't until last year that the number and value of takeover deals hit truly astonishing levels.

 

In the first six months of 2007, the value of foreign M&A activity in Canada soared to $153 billion, according to investment banking firm Crosbie & Co. Inc., eclipsing the total of $102 billion for all of 2006. By the end of the year, the value of deals reached a record-setting $186.8 billion, with international miner Rio Tinto plc's $44.9-billion acquisition of Alcan Inc. (No. 7) leading the way. Other deals included Houston-based Marathon Oil Corp.'s $7.1-billion bid for Western Oil Sands Inc. (No. 296), Abu Dhabi National Energy Co.'s $5-billion takeout of PrimeWest Energy Trust (No. 398) and IBM Corp.'s $4.4-billion acquisition of software maker Cognos Inc. (No. 261).

 

With those kinds of names and numbers in the air, it's no surprise that the flurry of activity reignited the age-old debate about the "hollowing" of corporate Canada. Dominic D'Alessandro, who recently announced he'll retire next year as CEO of Manulife Financial Corp. (No. 2), weighed in during his annual address to shareholders in May 2007, saying: "I sometimes worry that we may all wake up and find that, as a nation, we have lost control of our affairs." Others wondered what all the fuss was about. In a March 2007 report, the Institute for Competitiveness & Prosperity argued that Canada's ability to produce companies that are global leaders far outweighs the losses it has witnessed due to foreign takeovers. Among the examples it used to make its case were Research in Motion Ltd. (No. 65), North American convenience-store giant Alimentation Couche-Tard Inc. (No. 24) and ATS Automation Tooling Systems Inc. (No. 367), a manufacturing-solutions firm active in the international health-care, electronics and automotive sectors.

 

We'll keep our opinions to ourselves, but here's one notable fact: According to Crosbie & Co., Canadian firms made twice as many acquisitions abroad as foreign firms did here. At $93 billion, however, the total value of those deals was only half the value of foreign takeovers in Canada.

 

GIVEN ALL that acquisition activity in 2007, it's almost inevitable that some companies now on our list will have disappeared when it comes time to compile the FP500 for 2008. Others may fall off because their revenue stumbles to levels where they no longer make the cut-off. But the FP500 is a renewable resource; for every firm that leaves, there's another that takes its place. A scan of the Next 300, which follows our main ranking, offers hints. Companies that stand out include The Data Group Income Fund, which rose more than 100 positions to No. 507 and was just $10 million shy of making the big chart, as well as rising food manufacturer Lassonde Industries Inc. at No. 505, up from No. 545 in 2006.

 

The biggest wild card for next year's ranking, however - one that affects nearly every company on both the FP500 and the Next 300 - has to do with where the economy will take them. The FP500 as a whole hasn't had a year of revenue decline since 2004 (and the drop was a miniscule $2 billion), but it looks like a distinct possibility if current GDP forecasts prove accurate. In late April, the Bank of Canada called for GDP growth of just 1.4% in 2008, with most private-sector forecasts in the same ballpark. While Canada's domestic markets should do okay, a weak U.S. economy will drag us down. Results like that, at least a full percentage point lower than 2007's 2.7%, would make it hard for FP500 revenue totals to stay out of the red. If so, spunky companies like Martinrea may be fewer and farther between when we do this again next year.

 

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