However, this big difference in valuations from a PE standpoint is related to a one-time gain associated with the acquisition of Compton Petroleum. On September 12, 2012, MFC closed on the acquisition of Compton Petroleum for $33 million. Compton primarily operates in the Western Canadian Sedimentary Basin. Usually when a firm acquires a company, it has to account for the difference in price paid and book value by marking that down as goodwill. In this case however, Compton Petroleum’s book value significantly exceeded market value and MIL recorded that as negative goodwill. In 3Q12, MFC recognized $230 million on their income statement as a result of the negative goodwill, a one-time event. GAAP earnings were $4.14 per share in 3Q12, but after adjusting for the goodwill benefit, EPS was $0.46 per share.
The acquisition is still an interesting one beyond the accounting. It’s expanding MFC’s commodities business to include energy. Compton’s land is under developed, the debt structure is less than optimal, production volumes can increase, and there is room to reduce costs. On a first look, Compton appears to have suffered from a lack of development, attention and properly deployed capital.
MFC Industrial also acquired 60% of the shares of Possehl Mexico SA de C.V and 70% of ACC Resources both fully integrated commodity supply chain firms. MFC is consolidating the industry and rolling up smaller players onto their platform to create value for shareholders.
MFC Industrial is an interesting stock and similar to an investment in a private equity or hedge fund. The bulls believe in management’s expertise, that it can continue to extract value from acquisitions, successful engage in commodities contracts and trades for their own account. The track record over the years of a 10 year average annual return of 20% to shareholders supports management’s case to own the shares.
The article Why Does This Stock Have a Low PE? originally appeared on Fool.com and is written by Mike Thiessen.
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