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Putnam Recovery Seen Making Great-West a Bargain

Paul Desmarais Jr.
Paul Desmarais Jr., Power Corp. Chairman and co-CEO. Photographer: David Vilder/Bloomberg

Great-West Lifeco Inc.’s money-losing U.S. wealth unit is dragging down the stock. That makes it a bargain, according to a Bloomberg News valuation analysis.

The insurer, majority-owned by Power Corp. of Canada, the holding company run by the billionaire Desmarais family, is the cheapest Canadian stock on a list of the world’s 500 largest companies, according to data compiled by Bloomberg. The ranking crunches price-to-earnings and price-to-book ratios, among other measures, to find companies that offer the best value.

Investors are discounting the company’s share price as Putnam Investments LLC, its Boston-based asset management unit, has operated at a loss almost every quarter since being acquired in 2007, analysts such as Peter Routledge at National Bank Financial, said.

“They’ve built this big battleship and it’s yet to hit cruising speed,” Routledge said by phone from Toronto last week. “At some point they’ll figure out Putnam and then you’ll have a huge boost in valuation. That’s what you’re waiting for as an investor.”

Great-West, Canada’s second-largest life insurer, gives investors more return for the stock price than New York-based American International Group Inc. and Warren Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc., Bloomberg data show.

There are 18 Canadian stocks in the ranking, including Manulife Financial Corp., the country’s largest life insurer, and Royal Bank of Canada, its biggest lender.

Retirement Plans

“We are experiencing strong sales momentum at Putnam Investments,” Great-West Chief Executive Officer Paul Mahon said in an e-mail statement yesterday. “We are excited about what we will be able to provide to clients in the U.S. group retirement market by combining the best from the respective offerings of Great-West Financial, J.P. Morgan and Putnam.”

The company announced in April it would acquire the large-market retirement services unit from JPMorgan Chase & Co., the largest U.S. lender, making Great-West the second-largest record-keeper of U.S. 401(k)-type retirement plans by participants, serving 6.8 million workers with a combined $387 billion in assets.

Shares of Great-West, based in Winnipeg, Manitoba, declined 9.7 percent this year through yesterday, the worst performer on the six-company Standard & Poor’s/TSX Composite Life and Health Insurance Index, which had a 2.8 percent drop. The stock fell 0.7 percent to C$29.37 at 9:35 a.m. in Toronto.

Valuation Metrics

Great-West acquired Putnam Investments from Marsh & McLennan Cos. in August 2007 for $3.9 billion and spent C$184 million ($169 million) restructuring the operations. In June that year, Power Corp. Chairman and co-CEO Paul Desmarais Jr. said that Putnam’s profitability would be restored by about 2011. By the first quarter of 2010, the investment manager broke even on a pre-tax basis following six straight quarters of losses.

Putnam, which currently manages $153 billion, has had only two quarters of profit since then. The loss at Putnam widened to C$53 million in the latest quarter from C$14 million in the year-ago period.

Great-West’s price-to-earnings ratio of 13.4 is below the 14.5 average of its Canadian peers on the list as is its price-to-book ratio, which stands at 1.8 compared with the 2.1 average, the data show. Its price-to-free cash flow, which compares market price to the capital it generates for expansion, dividends and other uses, is less than half the average. Canadian National Railway Co. and Canadian Pacific Railway Ltd. are the most expensive Canadian companies in the ranking.

‘Prove It’

“There’s a divergence between the memory of Great-West being good value managers and Putnam losing money for six years,” Routledge at National Bank said. “The market is in ’prove it’ mode. Until Great-West can show profitability at Putnam, the discount’s likely to stay.” That’s unlikely to happen until 2017, Routledge said.

Power Corp., the Montreal-based holding company run by brothers Paul and Andre Desmarais, owns a 67 percent stake in Great-West. The family’s patriarch, Paul Desmarais Sr., who died last year, started investing at the age of 24 in a small bus company and eventually built an empire that included media, insurance, and investment management companies that propelled him to billionaire status.

“Sometimes stocks are cheap for a reason -- in this case they’re not showing that they’re going to be able to turn Putnam around,” said David Atkins, vice president of investments at Cardinal Capital Management LLC in Manitoba who oversees C$1.9 billion, including Great-West shares. “There’s a little bit of frustration.” Atkins has held the stock for at least a decade and said he’s keeping the shares.

Fund Sales

Thanks to the market discount on Great-West, the stock is a great investment, according to John Aiken, an analyst at Barclays Plc in Toronto who rates the stock a buy.

“You’re not paying anything for Putnam and there is a possibility for upside,” Aiken said by phone last week. “As a value investor, you’re looking for something that is not being recognized by the marketplace. With a little bit of optimism you can see upside for Putnam. If and when that turns, you should see a sizable increase in value.”

The turn may be starting. Putnam’s revenue rose 23 percent to $9.1 billion in the latest quarter, driven by the highest level of mutual fund sales since 2003.

Patience Required

Outside of Putnam, Great-West’s geared for increased profit from its European unit after acquiring Irish Life Group Ltd. last year, according to Michael Smedley, chief investment officer who manages about C$1.2 billion at Morgan Meighen & Associates in Toronto. The C$1.75 billion deal marked the company’s latest push abroad as its peers increase their presence in Asia.

“We like the Irish acquisition -- that’s what caught our attention and they’ll likely grow that unit,” Smedley said by phone last week. “Over the longer term, they’ll get improved returns from Europe.”

Great-West recorded profit rose 14 percent to C$587 million in the first quarter from a year ago as sales jumped 43 percent to C$19.9 billion over the same period.

“It’s still a good long-term investment if you’re looking out five, ten years from now,” Atkins at Cardinal said. “Investors will need to be patient with Great-West. I don’t think they’re going to get hurt by being patient.”

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