Four stocks that may benefit from a falling loonie

One way investors can play this currency weakness to their advantage is to buy into stocks of companies that fall on the right side of the dollar divide. Select high-quality Canadian companies, with strong balance sheets, healthy growth prospects, and considerable revenue and share-price exposure to the U.S. dollar could prove to be strategic investment picks when the loonie falls, according to Morningstar equity research.

Canada's number two integrated energy company,  Imperial Oil (IMO) explores for, produces and sells crude oil and natural gas. The company, which operates three refineries in Canada and manufactures chemicals and markets petroleum products, is nearly 70% owned by U.S. oil giant  Exxon Mobil (XOM). Any weakness in the Canadian dollar fattens its earnings numbers as the company's revenues are reported in U.S. dollars while operating costs are incurred in Canadian dollars.

"Imperial's diversified operations partially offset the impact of oil price volatility, and coupled with reduced capital spending, provide ample cash flow to maintain the company's financial position and explore growth opportunities, luxuries that pure-play peers do not have," says a Morningstar report.

The Calgary-based company reported a strong first-quarter net income of $251.6 million, after reporting a loss in the same period a year earlier. The company generated a staggering $354 million in cash flow in the first quarter, up from $49 million in the corresponding period the year before, and has raised dividends for 10 consecutive years. "Imperial's integrated operations provide stable operating cash flow, supporting its dedication to dividend growth," says Morningstar equity analyst Joe Gemino.

"Imperial management has maintained a strong balance sheet with reasonable financial leverage, and the recent steps to cut capital spending provide Imperial with ample capital resources to manage the low oil price environment," says Gemino, who puts the stock's fair value at $41. When the oil prices improve, he adds, the company's future oil sands projects could drive significant growth.

The largest agricultural retailer in the United States, Canada-based  Agrium (AGU) sells fertilizers, crop chemicals and seeds directly to farm customers. Its wholesale operation produces and markets crop nutrients such as nitrogen, potash and phosphate, with natural resources located in both the U.S. and Canada. A lower Canadian dollar provides additional revenue boost as a sizeable portion of Agrium's sales is generated in the U.S., while the majority of its production costs are in Canadian dollars.

Morningstar forecasts the fertilizer giant to continue its aggressive acquisition of American retailers, a strategy that has proved very successful in a highly fragmented industry. Agrium's growing footprint helps strengthen its bargaining power with suppliers and creates steady cash flows, says Morningstar equity analyst Seth Goldstein.

Agrium recently reported a 6% jump in first-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) for its retail segment from a year earlier, reaching US$50 million on the back of profitability that grew across all product and service categories. "While the first quarter typically sees the lowest sales volume of the year for Agrium's retail business, we were pleased to see an increase in both proprietary seed sales and services, as these areas of the retail business will grow faster than the other categories and drive gross margin expansion over the long term," says Goldstein, who recently raised the stock's fair value from $148 to $156 "due to a weaker Canadian dollar."

Agrium is also the third-largest potash producer in North America, and while Goldstein cautions that North American nitrogen fertilizer profitability reached a cyclical peak in the last couple of years, he adds, on a more positive note, that "increasing demand for meat in China, India and other emerging markets should support grain prices, motivating farmers to increase yields through greater fertilizer and chemical use."

Canada-based independent IT services provider  CGI Group (GIB.A) generates more than $10 billion in annual revenue, operating in 40 countries. The firm's services include consulting, systems integration, application maintenance and business process outsourcing, which are offered in North America and Europe, its primary markets. Government contracts account for nearly a third of its revenue.

"With more than $20 billion in backlog, an average contract duration of six to seven years, and some of those contracts attached to clients that have been with the firm longer than 25 years, CGI has a solid operational foundation," says a Morningstar equity report.

Morningstar equity analyst Andrew Lange attributes CGI's growing prominence to its aggressive mergers and acquisitions strategy. The company has so far made 70 acquisitions, including such headline-making deals as American Management Systems, Stanley and Logica.

"We expect the company to continue to focus on the U.S. commercial sector, given the size of the market and the growth opportunity it sees in the region," says Lange, who appraises the stock's value to be $59, adding that investors may want to seek a wider margin of safety given the stock's currently trading at a premium to its fair value.

Lange forecasts the firm, which gets almost one-third of its sales in the U.S., to continue to focus on the U.S. commercial sector, based on the size of the market and the growth opportunity the region represents.

"We assume a mix of organic and inorganic growth to drive a 5.6% revenue compound annual growth rate over the next five years given CGI's build-and-buy growth strategy," says Lange, noting that the company's deep IT knowledge and entrenched position in North America and Europe make it "an attractive partner for clients mired in IT complexity."

Canadian auto parts supplier  Magna International (MG) manufactures a wide range of products including exteriors, interiors, seating, body and chassis, and vision and electronic systems. The company counts  General Motors (GM), Volkswagen, BMW and  Ford (F) among its customers, and also assembles vehicles under contract.

The Aurora, Ontario-based company recently received the Most Innovative Automotive Supplier award, its second time in three years. Magna is one of the largest, most diversified auto-parts suppliers in the world, says a Morningstar report. "The company generates innovations, benefits from high customer switching costs, possesses long-term, highly integrated customer relationships, and has wide product breadth," the report notes.

The company's healthy liquidity and balance sheet are able to support operations through severe industry downturns. "Incremental revenue from contracted new business provides revenue growth above global industry production volume and should bolster operating leverage in the near term," says Morningstar equity analyst Richard Hilgert.

He recently raised the stock's fair value estimate from $58 to $75, prompted by factors including currency translation, higher forecast revenue, slightly better forecast profitability, lower effective tax-rate assumptions and an adjustment to the average cost of capital.

The stock is currently trading at an attractive discount to its fair value, because "investors have not fully recognized incremental revenue and cash flow accruing to Magna over the next three years from contracted vehicle assembly, the [German transmissions maker] Getrag acquisition, U.S. tax reform, and advanced driver-assist systems, or ADAS," says Hilgert.

Magna recently entered China, the world's largest automobile market, by tying up with Chinese seating supplier Hubei Aviation Precision Machinery, with a view to further expansion to other Asian countries.