January 15, 2003

ARC Energy Trust (AET.UN on TSX) Calgary, AB, tel: (403) 292-0680. Price: Jan 14/03: $12.19, 52-week range: $13.44-11.04. First mention of the trust unit in this newsletter was at $9 on Feb 4/00. This major oil & gas royalty trust announced one acquisition in late December that will provide production averaging 2,000 boe/d.  The cost of $71 million is no bargain but the reserves acquired 8 million boe appear to be good quality with a reserve life index of 11 years.  Estimated production for 2003 of 42,150 boe/d will not differ much from that of 2002 but higher commodity prices will most likely enhance cash flow and disbursements, in spite of hedging programs.  In fact, monthly distributions have just been hiked to 15 cents/unit from 12 cents.  It appears that 64% of oil production for Q1 2003 has been hedged, 30% at $26.20, 17% at $25 and another 17% at $31.21.  24% of natural gas production appears to be hedged in this quarter, most of which at $6.06/mcf.  The indicated payout of $1.80/unit provides a yield of 14.8%, but the hedging somewhat caps the trading price of the units at its current level.

Advantage Energy Income Fund  (AVN.UN on TSX), Calgary, AB, tel: (403) 261-8810. Price:  Jan 14/03: $13.58, 52-week range equivalent: $13.75-7.91.  Last mention of the income fund was at $12.79 on Oct.9/02 and first mentioned at $10.40 on April 3/01.  Production has increased 26% over that of Q3 and is now averaging 13,500 boe/d consisting of 77% natural gas and 23% light oil and gas liquids.  The increased cash flow has paved the way for increased disbursements to the rate of monthly payouts of 18 cents/unit, up from 13 cents.  Nevertheless, this represents 70% to 75% of cash flow, the remainder held in reserve or for capital expenditures.  The initial plan for 2003 is calling for capital development of $35 million to $40 million, consisting of approximately 100 shallow wells.  82% of the activity will be directed to natural gas production, the balance to light oil.  Advantage has entered into a $150 million syndicated credit agreement, an increase of $40 million over the previous facility.  Some of this is earmarked for acquisitions.  The trust does use hedging operations and expects to layer in additional fixed prices for both natural gas and oil this summer.  In the meantime 67% of anticipated natural gas production in Q1 2003 is hedged at $4.95/mcf.  The units are currently trading at a yield of 15.9%

Associated Brands Income Fund (ABF.UN on TSX), Toronto, ON, tel: (416) 503-7000, Price: Jan 14/03: $11.00, 52-week range: $11.00-10.11.  This is the first mention of the fund in this newsletter.  Associated Brands is a leading North American manufacturer of private-label dry blend food and household products.  Since beginning operations in 1985, the company has become one of the three largest such companies.  It currently produces 10 million cases of food and household products annually, selling to 43 of the 50 largest North American food retailers.  Annual sales revenue is approximately $155 million and EBITDA about $20 million.  Its 5 largest customers account for 40% of sales, the 10 largest 57%, with no one customer accounting for more than 19%.  Among these customers are A&P, Kroger, Loblaw, Safeway, Sobey’s, Topco and Wal-Mart.  The company produces over 1,500 separate food product items and 125 household products.  A recent IPO raised $117.6 million through the sale of 11,762,800 units at $10/unit.  The funds raised were used to acquire the business of Associated Brands and certain of its indebtedness.  The fund is currently capitalized with $108 million representing 11,762,800 trust units along with 31.1 million of acquired debt.  The trust will be making distribution payments on a monthly basis and it is expected that this will initially amount to $14 million, or $1.075/unit in the first year.  This would come to about 9 cents a month, although the first payment of 13.44 cents/unit paid on Jan 15 represented the period of Nov 15/02 to Dec 31/02.  There could be some growth potential to these income fund units, but in the meantime they appear to offer a stable income yield of 9.77% on the current trading price.

Beazer Homes USA, Inc. (BZH on NYSE), Atlanta, GA. Tel: (404) 250-3420. Price: Jan 14/03: $61.25, 52-week range: $95.05-51.40.  Last mention of the company in this newsletter was at $78.22 on May 31/02 and first mention was at $59.90 on Nov 23/01.  The company continues to be taking advantage of a strong housing market and does not appear to be encountering any real pause.  Q4 earnings for the period ended Sept 30/02 were up 18% to $3.03/sh and for the year earnings were $10.74/sh, up 31%.  The company will be reporting Q4 and year 2002 results on Jan 24/03.  However, for the quarter new orders amounted to 3,141, a 25% increase over the 2,510 units a year ago.  The strong backlog at Sept 30/02 year-end has provided management with a forecast of earnings of $12.25 for 2003.  Even a modest 7 multiple to this cyclical estimate provides an $86 share price.

Charter One Financial, Inc. (CF on NYSE), Cleveland, OH, tel: (216) 566-5300.  Price: Jan 14/03: $30.39, 52-week range: $34.77-23.89.  Last and first mention of the bank in this newsletter was at $32.84 on May 31/02, adjusted for stock dividend.  Charter One, the 25th largest bank in the US, has $40 billion in assets.  The bank has been expanding through small acquisitions as well as organically.  An example of the latter is the agreement with Tops Friendly Markets to open 34 new grocery store branches in northern Ohio and western New York.  This will bring the in-store network to 84.  Charter One paid out a 5% stock dividend on Sept 30/02 and subsequently retained the 22 cents/sh quarterly dividend.  Effectively, Charter One has increased the cash dividend 26 times since going public in 1988.  The holding company will be announcing Q4 and year 2002 results on January 17/03.  It is expected that earnings will be 63 cents a share for the quarter and $2.45/sh for the year.  This would compare favourably with the 2.10/sh earned in 2001.  Consensus opinion for 2003 earnings appears to be $2.70.  A 14 multiple to this implies a share price of $38.

Educational Development Corporation (EDUC on NASDAQ), Tulsa, Okla., tel: (918) 622-4522, Price: Jan 14/03: $8.70, 52-week range: $8.95-4.77.  This is the first mention of the company in this newsletter.  In business since 1965, the company is the sole U.S. distributor of a line of children’s books produced in the UK by Usborne Publishing.  It offers over 1,100 different titles for children of all ages. It operates two divisions: Home Business and Publishing.  The Home Business division distributes books through independent consultants who hold book showings in individual homes and through book fairs and direct sales, as well as to school and public libraries.  The Publishing division markets books to bookstores, toy stores, specialty stores and other retail outlets, as well as over the Internet.  For the Q3 ended Nov 30/02, sales increased 30% to $7.8 million and net income 58% to $764,900, or 19 cents/sh from 12 cents/sh.  For the nine months, sales increased 23% to $19.6 million and earnings 38% to $1.8 million, or 43 cents/sh from 32 cents/sh.  There are only 4.1 million shares outstanding and the company has no debt.  Because of its healthy cash position, EDUC proposes to pay out 20% of earnings in cash dividends.  Management expects earnings for fiscal year ending Feb 28/03 to be 53 cents/sh to 55 cents/sh, compared with 40 cents/sh last year.  Assigning a 20 multiple to the earnings of this growth company implies a share price of $11 over the next several months.

Fording Inc. (FDG on TSX), Calgary, AB, tel: (403) 260-9800, Price: Jan 14/03: $33.60, 52-week range: $34.10- 21.59.  Last mention of the company was at $20.80 on Sept 28/01 and first mention was at $24.60 on Aug 31/01.  The company has been the subject of a takeover bid by two opposing partners who have now joined forces to create a substantial income trust dealing on metallurgical coal.  It will end up accounting for about 20% of global metallurgical coal exports, second only to Australia’s BHP Billiton which commands about 30% of the market.  Fording shareholders will be offered the choice of $35/sh in cash up to a maximum of $1.05 billion of the $1.82 billion purchase price, or one unit of the Fording Trust for each FDG share, or a combination of both which if the maximum amount of cash is requested would end up being a combination of $21.75 cash/sh and 0.379 of a trust unit per share.  Unit holders will also receive a total disbursement of $1.48/unit in addition to the regular distribution payouts of the trust units.  There should be approximately 47 million units outstanding when completed.  Fording is the second of the four companies spun off by Canadian Pacific (see DDIN Aug 31/01, Sept 28/01 in Past Picks) to be taken over or merged.  Which will be the next?  CP Ships, or Fairmont Hotels?

Gateway Casinos Income Fund (CGI.UN) on TSX), Burnaby, BC, tel: (604) 412-0166, Price: Jan 14/03: $10.37, 52-week range: $10.48-9.50.  This is the first mention of the income fund in this newsletter.  This income fund was formed to receive and distribute funds flowing through a trust holding security in the partnership that operates 6 casinos in western Canada.  These are the 28,000 sq.ft Burnaby casino located adjacent to a large hotel in suburban Vancouver, 4 smaller casinos in the central British Columbia communities of Kamloops, Kelowna, Penticton and Vernon and one 36,000 sq.ft casino located in the West Edmonton Mall in Alberta.  All 6 casinos are owned and regulated by the two respective provincial governments.  The partnership’s profitability is based on a percentage of the “win” take and is dependent on the number of customer visits and on cost management.  The partnership casinos employ 1200 employees, while the partnership itself employs 28 salaried staff.  A recent IPO raised $106 million through the sale of 10.6 million income fund units at $10/unit.  There are now 26.4 million units outstanding, of which 60% are owned by management and original shareholders.  On a pro-forma basis, revenues for the 12 months ended July 31, 2002 were $76 million, EBITDA $33 million and distributable cash $32 million, indicating an annual payout of $1.20/unit.  Revenues and EBITDA have been trending up, appearing to be $20 million and $10 million in Q4 2002.  This may explain why the initial payout on Jan 31, 2003 relating to operations for the month of December will be 11 cents/unit.  If this payout is maintained, the income units are currently trading to yield 12.7%.  Management believes there are opportunities for growth, both internally and through acquisitions.

Gildan Activewear Inc. (GIL.A on TSX, GIL on NYSE) St.Laurent, QC tel: (514) 735-2023. Price: Jan 14/03: $C38.49, 52-week range: C$40.25-22.50.  Last mentioned in this newsletter at $35 on Sept 6/02 and first mentioned in this newsletter at $14.12 on Dec 26/99, adjusted for 2 for 1 split.  The company reported a stellar performance for the fourth quarter and fiscal year ended Sept 29/02.  Sales for the quarter increased 39% to $160 million and net income was $19.6 million, or 66 cents/sh compared with $6.7 million, or 23 cents/sh.  For the year, sales increased 19% to $601 million and net 32% to $66.5 million, or $2.26/sh up from  $1.71/sh.  In spite of the absence of overall industry growth, unit sales for Gildan were up due to continuing market share penetration in all product categories.  In T-shirts, Gildan increased market share to 28$ from 26%, golf shirts to 15% from 9% and in fleece to 12% from 10%.  Furthermore, the company is achieving strong share penetration in the European market with sales in Q4 77% higher than a year ago.  Gross margins in the most recent quarter improved to 28% from 24% as a result of lower material costs combined with manufacturing efficiencies, increased vertical integration in yarn spinning and higher valued product mix.  Management is calling for earnings per diluted share in 2003 to attain $2.60-$2.70 and expects long-term growth of 15% to 20%.  That being the case, a 20 multiple to earnings implies a possible share price of $52 over the next year.  There are 30.3 million shares on a fully diluted basis.

Harris Steel Group Inc. (HSG.A on TSX) Toronto, ON, tel: (416) 590-9549. Price: Jan 14/03: $21.50, 52-week range: $33-20.  This is the first mention of the company in this newsletter.  The company deals on reinforced steel and is coming off a series of large contracts over the last three years.  Management is advising shareholders that earnings in Q4 will be substantially lower.  Sales for the nine-months ended Sept 30/02 were $401 million compared with $417 million last year.  Net income was $20.2 million, or $3.00/sh compared with $18.3 million, or $2.71/sh last year.  There are only 6.7 million shares outstanding.  Earnings could be $1.00/sh for the final quarter of 2002, down from last year’s $1.72.  That would make net for the year at $4.00/sh.  Net working capital at Sept 30/02 was $156 million, or over $23/sh.  Shareholder’s equity at year-end, December 31/02 may be reported at $206 million, or close to $31 a share.  The stock currently trading at a substantial discount to book value and at 5.4 times earnings appears to be greatly undervalued.  The thinly traded shares could very well find a level closer to $30 over the next few months.

D. R. Horton, Inc. (DHI on NYSE), Arlington, TX, tel: (817) 856-8200, Price: Jan 14/02: $19.17, 52-week range: $29.17-16.03.  Last mention of the company in this newsletter was at $21.08 on July 26/02 and first mention at $22.31 on January 23/02, adjusted for a 3 for 2 split.  The company continues to pile up growth.  The company will be reporting results for Q1 2003 on Jan 16/03.  It expects to report earnings of 64 cents/sh-66 cents/sh based on 159 million fully diluted shares. Meanwhile, it did announce record sales for the quarter of $1.7 billion (7,252 homes) compared with $1.0 billion (5,144 homes) in the corresponding quarter a year ago, a 66% increase.  For the fiscal year ended September 30, revenues increased 51% to $6.7 billion, net income 57% to $405 million and earnings per share 29% to $2.87/sh based on 142 million f.d.shs compared with $2.23/sh based on 115 f.d. shs.  These results consisted of closing sales on 29,761 homes compared with 21,371 homes in fiscal 2001.  The company’s backlog at September 30 was $2.8 billion (12,697 homes) compared with $1.9 billion (9,263 homes) a year ago.  Management is expecting another record year for 2003, projecting revenues of $8.0 billion, closing sales on about 35,000 homes and for earnings per share to increase 18% to 20% to $3.40 to $3.45, based on 160 million fully diluted shares to be outstanding.  An 8 times multiple to this indicates a share price of $27, a 9 times multiple, $31.  The modest dividend, 6 cents/sh each quarter, provides a 1.25% yield.

MAAX Inc. (MXA on TSX), Ste-Marie-de-Beauce, QC, tel: (418) 387-3641, Price: Jan 14/03: $17.05, 52-week range: $21.75-12.80.  Last mention of the company in this newsletter was at $20.46 on July 4/02 and the first mention was on Dec 25/99 at $12.25.  So far in fiscal 2003, this manufacturer of bathroom fixtures has been producing good financial results, but this is in comparison to a lacklustre year, fiscal 2002, when MAAX suffered from the downturn in the economy.  Now, with strong house construction and renovations, the company is doing well and should announce a strong Q3 due to be released over the next few days.  Sales for the first half ended August 31/02 grew 15% to $309 million and net income 40% to $21 million, or 87 cents/sh.  Results for the Q3 ended Nov 30 will contain the operations of Indiana-based Aker Plastics acquired for $122 million, effective Sept 1/02.  These results are expected on January 16 and could be 30 cents/sh up from last year’s 23 cents. The Aker acquisition will add US$75 million ($115 million Canadian) to annual sales and will position the company strongly in the Northeast and Midwest US markets.  Sales are projected to reach $615 million this fiscal year 2003 compared with that reported of $518 million in 2002, net income of $35 million, or $1.40/sh, compared with $22 million, or $1.02/sh last year.  Management’s goal is to grow revenues and profits15% a year subsequently.  Consequently, a 15 multiple to this year’s earnings points to a possible share price of $21.

Pier 1 Imports, Inc (PIR on NYSE) Fort Worth, TX Tel: (817) 252-8000 Price: Jan 14/03: $18.75, 52-week range: $24.35-14.35. Last mention of the company in this newsletter was at $18.50 on Jan 23/02 and first mention was at $6.12 on Dec 26/99.  Sales foQ3 ended Nov 30/02 increased 13% to $438 million.  Comparative store sales increased 4.6%.  Net income increased 24% to $31 million, or 33 cents/sh compared with 26 cents a year ago.  Nine months sales increased 15% to $1.23 billion, while net income increased 47% to $75 million, or 74 cents/sh, up from 53 cents a year ago.  Comparative store sales during this period increased 6.4%.  Management indicates that Q4 earnings could attain 56 cents/sh bringing the total to $1.34/sh for fiscal 2003 ending Feb 28, a significant increase over the $1.04/sh last year.  Early indications are bearing this out since December sales rose 10.7% to $287 million and comp store sales were up3.8% in a challenging retail environment.  The company is on track to open a net 90 stores this year bringing the total to 1000 stores.  The company has been buying back shares, 2 million in the last year, and under its plan could purchase an additional 5 million shares.  Currently there are 94.8 million shs out on a fully diluted basis.  Consensus earning estimates appear to call for  earnings of $1.55/sh for next year and with a 15% growth rate, PIR stock could trade at a 15 multiple to these earnings, implying a share price of $23.

Progress Energy Ltd. (PGX on CDNX), Calgary, AB, Tel: (403) 216-2510, Price: Jan 14/03: $7.95, 52-week range: $8.50-4.65.  Last mention of the company in this newsletter was at $5.45 on Oct 9/02 and first mention was at $3.55 on November 23/01.  The company has recently reported on the progress being made on its two main core areas: Fort St. John, BC and west-central Alberta.  The company expects to exit 2002 with a production averaging 7,000 boe/d and is forecasting to average production at a rate of 8,000 boe/d in 2003 and to exit that year at a rate of 9,000.  Cash flow is forecast to attain $43 million for 2003, a sizable increase from the $22 million to $25 million in 2002.  Capital expenditures of $50 million are being programmed for 2003, including the drilling of 50 wells.  Net debt, consequently, is expected to increase by about $7 million to $53 million at 2003 year-end.  Assigning a 6.5 multiple to cash flow of $1.25/sh, based on 34.2 million shs outstanding on a fully diluted basis indicates a share price of $8.125, close to its current trading level.

Rambus Inc. (RMBS on NASDAQ), Palo Alta, CA, tel: (650) 947-5050, Price: Jan 14/03: $8.52, 52-week range: $9.75-3.08.  This is the first mention of the company in this newsletter.  Rambus is a leading developer and marketer of chip-to-chip interface technology, products and solutions to the electronic industry.  The company licences its technology in the form of ASIC cells that are incorporated into high-performance memory and logic chips by 25 of the world’s top semiconductor makers.  In a difficult environment, the company has just completed its 26th consecutive quarter of profitability.  Revenues have been averaging about $25 million a quarter over the last year during which time net income has varied between $5.5 million and $6 million, the equivalent of 6 cents a share based on 100 million shares outstanding on a fully dilutes basis.  Research and development expenditures have also fluctuated between $5.5 million and $6 million during this period.  The company maintains a strong balance sheet with $64 million in cash or equivalent at December 31/02 and no debt.  The company recently announced new agreements with Sony Corporation, Sony Computer Entertainment Inc. and Toshiba Corporation for the license and utilization of two new high-speed interfaces.  This will be felt as early as in the current Q2 in additional revenues.  However, there will be additional initial start-up costs and continued high litigation costs so that Q2 results may be unchanged or possibly lower.  Rambus is still a young company, 6 rears old, and is considered a long-term growth company.  The current stock price is a shadow of its high of over $100 in June 2000.

Repadre Capital Corporation (RPD on TSX), Toronto, ON, tel: (416) 365-8090, Price: Jan 13/03: $12.45, 52-week range: $12.85-4.22.  Last mention of the company in this newsletter was at $10.80 on Dec 14/02 and first mention was at $8.39 on May 31/02.  The merger with IAMGOLD Corp. was completed on January 8/03 and the shares of Repadre were delisted from the TSX on January 13.  On the basis of 1.6 shares of IMG for each share of RPD, the closing price of IAMGOLD shares on Jan 14 at $7.58 is equivalent to $12.13 per old Repadre share.  One positive outcome of the merger is that Joseph Conway, ex-CEO of Repadre becomes president and chief executive of IAMGOLD, replacing Todd Bruce who has resigned.  Under the new direction, the company could increase gold production from 400,000 ounces/year to 500,000 ounces by concentrating on Ghana and forgetting about grassroots exploration in South America.

Research in Motion Limited (RIMM on NASDAQ, RIM on TSX), Waterloo, ON, tel: (519) 888-7465, Price: Jan 14/03: $15.42, 52-week range: $29.55-8.35.  This is the first mention of the company in this newsletter.  The company is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market.  It is best known for its BlackBerry wireless platform and the RIM Wireless Handheld product line.  The company reported revenues of $74 million inQ3 ended Nov 30/02 and a loss of 19 cents/sh before one-time charges.  This was a bit better than anticipated.  Management has now lowered its guidance for Q4 ending Feb 28/03 to $80 to $85 million and has provided guidance for Q1 of $85 million to $90 million.  This implies revenues for fiscal 2003 of between $300 million and $305 million.  Indications now are that revenues for fiscal 2004 will be $400 million and that break-even operations will occur only in the 2nd half of fiscal 2004 or toward the end of calendar year 2003.  Cash burn of $18 million inQ3 reduced the company’s cash position to $531 million, or $6.60/sh.  Cash burns over the next two quarters are expected to be $20 million and $15 million.  RIM had 430,000 BlackBerry users at Nov 30/02.  In November, the company announced a deal with Nokia that will see the BlackBerry software incorporated on Nokia handheld devices.  Management is optimistic that will add significant revenue beginning in 2003.  It is difficult to evaluate fair value to RIM stock, of which there are 78 million shares outstanding, but employing a combination of earnings expectations two years down the road to current cash value and to the incremental growth of subscribers, a share price of $17 could be realistic over the near term.  This would still be a far cry from the $100 to $150 trading prices of 2000.

Sobeys Inc (SBY on TSX), Stellarton, NS, tel: (902) 752-8371, Price: Jan 14/03: $39.86, 52-week range: $45.75-31.30.  Last and first mention of the company in this newsletter was at $42.45 on Jul4/02.  Sobeys earnings rose 17% in Q2 ended Nov 2/02 to $46.6 million, or 71 cents/sh from an adjusted 60 cents/sh a year ago.  Sales at $2.61 billion were up 7.7% and same store sales 2.4%.  Net profit margin of 1.78% compares with last year’s 1.45%.  The company’s financial position improved as well, debt at Nov 2 being 27% of total capital compared with42% a year ago.  Management feels the company is on track to grow sales 6% to 8% during this fiscal year 2003 and operating earnings per share between 12% and 16% and realize a return on shareholders equity of 13%.  If successful, earnings per share could attain $2.85/sh, based on 60 million shares outstanding.  A 15 multiple to match the growth in earnings implies a stock-trading price of  $43.

Tusk Energy Inc. (TKE on TSE), Calgary, AB, Tel: (403) 264-8875.  Price: Sept 14/03: $2.70, 52-week range: $2.78-0.84. Last mention of the company in this newsletter was at $2.55 on Dec 14/02 and first mention was at $1.42 on Feb 14/97.  Drilling activity in the fourth quarter has added more that 1200 net boe/d of productive capacity expected to flow in Q1 2003.  The acquisition of Del Roca Energy Ltd. Is expected to add 600 boe/d.  This means that target production in q1 2003 could be 4,000 boe/d.  This compares with average production on 2,360 boe/d in December 2002, and 1,440 in December 2001.  If the maximum number of shares (2.8 million) is requested in the takeover of Del Roca, there will then be 20.4 million shares outstanding.  Tusk is of a size small enough that continued growth could have a significant effect.

Ultima Energy Trust  (UET.UN on TSE), Calgary, AB, tel: (403) 264-5709. Price: Jan 14/03: $5.29, 52-week range: $6.06-4.12.  Last mention of the trust in this newsletter was at $5.65 on Oct 9/02 and first mention was at $5.40 on May 31/02.  The trust has converted its interest in the Weyburn Limited Partnership into a direct11.7136% participation in the Weyburn unit net royalty interest and the Plato light oil producing property by contributing a $66.9 million cash repayment of a note due EnCana Resources, the operator of the project.  This means that Ultima will be able to add 2,400 boe/d of net production and 100 boe/d from Plato bringing production for the trust now to 6,800 boe/d, 87% oil.  The Weyburn unit is a premier oil producing property located in southeastern Saskatchewan currently producing in excess of 20,000 boe/d.  Production is expected to increase by 30% over the next few years with continuing carbon dioxide miscible flooding.  This would bring Ultima’s share to 3,000 boe/d.  The reserves have an established reserve life of 20 years, thus increasing the trusts reserve life index by 35% to 13 years.  In order to par for this, the trust floated an issue of 10 million units for $49 million along with drawing down $20.35 million from an existing credit facility.  Ultima seeks to hedge up to 60% of its production.  Currently it has hedges in place on 2,875 bo/d for 2003.  The number of units to be outstanding will be 33,857,000 and there will be $56 million of long-term debt.  The 8 cents monthly payout now appears to be more secure making the 18% yield on the units that much more appealing.

Upton Resources Inc. (URC on TSE), Calgary AB, tel: (403) 263-7373, Price: Jan 14/03: $3.90, 52-week range: $4.60-2.57.  Last mention of the company in this newsletter was at $3.55 on July 26/02 and first mention was at $2.85 on Sept 28/01.  The company’s acquisition of Empire Energy in April added 1500 boe/d to production so that production in the third quarter ended Sept 30/02 averaged 6, 100 boe/d compared with 4,677 boe/d a year ago.  Production in Q4 is expected to have averaged 6,400 boe/d, over 90% of this being oil.  The company has its North Dakota oil operations up for sale in order to concentrate on southeast Saskatchewan and natural gas-prone properties in northwest Alberta.  Q3 operations produced $11.3 million in cash flow, equivalent to 51 cents/sh based on 22.3 million fully diluted shares to be outstanding.  For the year, normally reported in early March, cash flow could approach $40 million, or close to $1.80/sh.  As at September 30, 1500 bo/d were hedged, representing a little over 25% of production.  With prevailing higher prices, 2003 should see higher cash flow.  Some of this will disappear and have to be replaced once the US operations are disposed.  Upton has had one recent setback as a result of the deep probe at Strachan encountering water. With enough variables, it is difficult to project share value, although it seems that the stock does appear to be undervalued trading at less than 2 times possible cash flow of $2/sh in 2003.

Western Digital Corp. (WDC on NYSE), Lake Forest, CA, tel: (949) 672-7000 Price: Jan 14/03: $7.70, 52-week range: $8.96-2.98.  This is the first mention of the company in this newsletter.  Founded in 1970, the company produces hard disc drives, mainly for desktop computers and its storage products are sold to systems manufacturers and resellers under the Western Digital brand name.  Annual sales are about $2.2 billion.  In Q1 ended Sept 30/02, revenues grew 32% to $583 million over that of a year ago on shipments of 8.6 million units compared with 5.4 million in last year’s first quarter.  Net income for the latest period was $22 million, or 11 cents/sh on the 197 million shares outstanding, compared with a loss of $557,000 a year ago.  Cash flow in the most recent period was $45 million.  In December, its WD Caviar Special Edition hard drive was chosen as the best desktop performer by Maximum PC magazine.  WDC has a cash and cash equivalent position of $244 million.  This along with the strong cash flow generated should handily meet the $73 million of convertible debentures that could be put to the company in February of 2003. The company will report Q2 earnings on January 23.  These are expected to be similar to Q1, 11 cents/sh, and annual forecasts are for 44 cents/sh.  Under these circumstances, the shares could very well find a trading level of $9, still quite a distance from its previous high of $50 in 1997 or even $20 in 1999.

WestJet Airlines Ltd. (WJA on TSX), Calgary, AB, Tel: 1-877-493-7853.  Price: Jan 14/03: $16.01, 52-week range: $21.95-14.88.  Last and first mention of the company in this newsletter was at $16.48 on Sept 6/02.  For the month of December, revenue passenger miles (RPMs) rose 51% to 339 million from December last year.  Full year RPMs increased 52% to 3.4 billion.  Available seat miles grew 57% to 470 million in December from that of last December and for the whole year increased 55% to 4.6 billion from 3 billion in 2001.  Because of the added capacity, WestJet’s load factor for December was 72% compared with 75% a year ago and for the year 2002 it was 73% compared with 75% in 2001.  The company announced on Jan 10 that it was adding a fuel surcharge of $5 on flights of less than 300 miles, $7 on flights between 300 and 1000 miles and $10 on trips over 1000 miles.  For Q3 ended Sept 30/02, the company reported a 76% increase in earnings to $23 million, or 30 cents/sh, fully diluted.  Nine months earnings increased 55% to $42.5 million, or 57 cents/sh.  The company believes it has suffered, along with other airlines, by the federal government security surcharge on airline tickets, $12 one way, $24 return, particularly on short haul flights.  Fortunately, WestJet continues to cut costs and this has enabled the company to add capacity.  Nevertheless, management warned that earnings for Q4 would be significantly less than what analysts were expecting.  The guidance implied that earnings for the year might be in the vicinity of 66 cents/sh.  This would compare with 53 cents a year ago.  According to expansion plans, earnings for 2003 could attain 85 cents/sh and $1.20/sh for 2004.  With this type of growth, shares could trade at 20 times next year’s earnings, implying a stock price of $24.

Back to main page