EnerCare Inc (ECI.TO) Buy, Sell or Hold

EnerCare Inc (ECI.TO)

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Water heater rental business is very regional. 17% distribution. Recently cut distributions. Have some big debt coming due early 2010. Getting more competition but with new housing development in Ontario they have more chance of growth.

SELL

Risk/reward not looking particularly good right now. Cut distribution in half earlier this year, which brought payout ratio down to under 100% but doesn't feel the present 5.4% is safe. Has been a marked deterioration in the business outlook. Competition has increased significantly.

TOP PICK

6.75% bond maturing April 30/14. Yielding about 6%. Cash flow is based upon rental of water heaters, so a fairly safe utility type play. (Single A rated.) Had some balance sheet concerns recently, which is why it was downgraded. Still a solid investment grade.

COMMENT

Doesn't like business trusts as he sees a potential problem between now and January 2011.

BUY

(Market Call Minute.) Has been hit very hard but does earn its cost of capital. Longer term it will do better.

BUY

Facing pressure from a new competitor that is getting into the water heater business. Getting to a level where he is getting interested. Market is pricing in a 20%-25% distribution cut.

DON'T BUY

Sold her holdings over the last year. Prices dropped because the market is factoring in a distribution cut. Payout ratio of about 100%. Will definitely have to cut the distribution in 2011. Competitive landscape has become quite a bit more aggressive.

COMMENT

Price has come down as investors risk appetite has dropped. Net attrition rates have been picking up as housing starts in Ontario have trailed off so new water heaters and rentals are down. However, new home starts are starting to look more positive. 21.7% yield.

DON'T BUY

Rents water heaters, etc. and recently diversified into smart meters. The issue with them is the recent refinancing of their debt at slightly higher rates. Always found debt levels too high and with the slowdown in housing it has been an issue of attrition.

COMMENT

When they convert to a corporation, the distribution will be a lot less than the current 10.75%. Payout ratio is very high.

HOLD

Has looked at this recently because of their 20% distributions. However, the balance sheet didn't attract him enough for him to go beyond a cursory look. A lot of companies as they convert to corporations are finding a perfect opportunity to cut distributions.

DON'T BUY

Has good visibility in a more defensive environment. Payout ratio has crept up over 100% because of refinancing of debt. She doesn't generally like this. Competitive intensity has increased over the last little while. Cautious on this in the near term. If things become more optimistic, she will probably cycle out of this name. 10.75% distribution could be at risk.

BUY

Safety of distribution depends on how people buy new water heaters vs. renting. Reliance Energy just did a bond issue. So credit markets are staring to loosen up here.

COMMENT

Has recently taken quite a hit because of increasing competition. Outlook is relatively stable but with a slight downward trend. 100% payout ratio is higher than what she would like. Acquired a smart-metering business that was to provide some upside but government ruling will not allow it into apartment buildings yet. Expecting a cut in distributions.

BUY

Extremely boring company of most listeners are probably paying every month for their water heater and every year the company increases the price by 1%-2% and no one knows it. Cash flow is almost guaranteed. Recession resistant. 10.75% distribution is very safe.

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EnerCare Inc (ECI.TO)