Today, Pat McKeough responds to a Member of his Inner Circle as he looks at a fast-growing Canadian financial company that is expanding within its niche market. Element Financial is an equipment-finance company that operates through four segments. The company is growing rapidly by acquisition, including deals with major U.S. firms. Just last month, Element closed its biggest deal yet, paying GE Capital $8.6 billion for fleet operations that will become part of its Aviation Finance segment. Element Financial’s shares have risen almost 250% since it went public in 2011, and Pat considers the risk of growing very quickly by acquisition`.
Q: Pat: What do you think of Element Financial?
A: Element Financial Corp. (symbol EFN on Toronto; www.elementfinancial.ca) is a leading independent North American equipment-finance company.
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Element operates across the continent through four segments: Commercial and Vendor Finance, Aviation Finance, Fleet Management and Rail Finance.
Commercial and Vendor Finance focuses on equipment for markets ranging from transportation and construction to industrial, health care, golf and office products.
Aviation Finance provides loans for helicopters, simulators, business aircraft and related gear. Fleet Management mainly leases vehicles, and Rail Finance provides railcar leasing.
The company has grown rapidly. In June 2013, it paid $570 million for GE Fleet Canada, which it has combined with its Fleet Management segment. In December 2013, Element bought $348 million U.S. worth of helicopter and railcar leases from GE Capital and Trinity Industries (symbol TRN on New York).
Also in December 2013, it entered into an alliance with Trinity to finance leases for up to $2 billion worth of railcars over two years. So far under this deal, Element has acquired $1.55 billion of railcar leases from Trinity.
In July 2014, the company paid $1.4 billion in cash for PHH Corp.’s North American auto-fleet leasing business, called PHH Arval, to expand in the U.S.
Element’s new businesses boosted its revenue by 167.3% in the three months ended June 30, 2015, to $211.0 million from $78.9 million a year earlier. Earnings jumped 126.1%, to $25.2 million from $11.1 million. The company sold shares to help pay for its acquisitions, so earnings per share rose at a slower rate of 75.0%, to $0.07 from $0.04, on more shares outstanding.
Excluding unusual items, such as costs to integrate its recent purchases, earnings per share rose 109.1%, to $0.23 from $0.11.
Growth stocks: Company expects deal with GE Capital to generate savings of $90 to $95 million
In September 2015, Element completed its biggest acquisition to date: $8.6 billion for GE Capital’s remaining fleet operations in the U.S. and Mexico, along with GE’s fleet-management business in Australia and New Zealand.
The company expects to save $90 million to $95 million U.S. a year by combining these businesses with its existing operations. That will help boost its annual earnings per share by a forecast 20%.
Element’s shares have jumped 275% since it became a publicly traded company in December 2011. They now trade at 18.4 times the $1.01 a share the firm will likely earn in 2015. Its 2016 profits could jump to $1.62 a share, and the stock trades at just 11.5 times that forecast.
However, Element’s growth-by-acquisition strategy adds substantial risk. The stock’s momentum could also slow, as the company will probably focus on absorbing its recent purchases instead of pursuing more.
Element Financial is okay to hold, but only for aggressive investors.
Inner Circle recommendation: HOLD for aggressive investors.
For a growth stock that has made acquisition leading to enormous gains for us, read Smart acquisitions make Alimentation Couche-Tard one of the best investments in Canada.
Have you had any luck buying relatively new Canadian stocks that are having a big growth spurt?