March 2nd, 2010 by Potato

I sold all my Consumers’ Waterheater (CWI.UN) this morning. Their results came out yesterday, and they did not look very good: attrition rate was higher than I had hoped/forecast, along with some other disappointments in the restart of their submetering business. But there were two big things that made me lose confidence in the stock.

The first was pure numbers: their payout ratio for the last quarter was 86%. They had cut the distribution in half a few months ago, and that was supposed to bring the payout ratio down to <70% (i.e.: a level that would be sustainable after the 2011 Harper/Flaherty tax came into effect). Yet despite the vastly reduced payout in effect for the whole quarter, their payout was still so high as to suggest another potential cut in the future if things didn’t start improving.

The second was the conference call. Right at the end they talk about how their competitors (who were already playing dirty with tactics to skirt rules that are supposed to allow consumers to back out of agreements from door-to-door salespeople) were stripping the CWI tanks of valuable components during the switchovers, and CWI hadn’t done anything about it yet. They had the wording in the contract to charge the customers for the damage, but haven’t been.

On the one hand, I can understand that: I’d probably fight a charge for damage to a tank, and it is a little scummy to try to grab some cash from a customer on their way out the door. On the other hand, these are customers that they’ve lost anyway, and their tanks are damaged beyond reasonable wear and tear. Something should have been done — if it is indeed their competitors stripping components as they allege, then there should be a lawsuit in the works. Why is management dragging their feet on this?

My dad put it well: the management at CWI aren’t operations types. They’ve handed off the day-to-day stuff to Direct Energy, and have been caught flat-footed in the face of an extremely aggressive set of competitors.

So for now, I’m out.

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