The Canadian penny is on its way out, and cash transactions are increasingly rare as well. Although it may not be a household name, this maker of transaction-processing software is aggressively seeking an even greater share of the market in credit card, debit card and smartphone payments.

ACI WORLDWIDE (Nasdaq symbol ACIW; www.tsainc.com) makes software that is used to process transactions involving credit cards, debit cards, automated teller machines, point-of-sale terminals and interbank payments.

In mid-February 2012, ACI completed its purchase of S1 Corp. for $540 million in cash and stock. This acquisition is a good fit: S1 sells transaction software for banks, credit unions, retailers and other payment processors. It has over 3,000 clients worldwide.

In the first quarter of 2012, ACI’s revenue rose 31.6%, to $137.6 million from $104.5 million a year earlier. The gain was largely due to S1’s $22.5-million contribution. Without acquisition-related costs, earnings per share rose sharply, to $0.28 from $0.05.

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Tech stocks: ACI maintains high research spending to offer most advanced transaction software

ACI holds cash of $201.1 million, or $5.05 a share. Its long-term debt of $352.5 million is a low 22.0% of its market cap.

The company spends a high 22% of its revenue on research. That will let it keep offering the most advanced transaction-processing software. This includes switching from cash and cheques to credit and debit cards, as well as mobile payments with smartphones.

The stock trades at a high 31.9 times ACI’s forecast 2012 earnings of $1.26 a share.

In the latest edition of Stock Pickers Digest, we look at ACI’s projected earnings for next year and whether or not it can sustain its strong growth in a highly competitive business. We conclude with our clear buy-hold-sell advice.

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A positive outlook for the Canadian economy will continue to boost stocks across many industries. Some stocks benefit by supplying different industries, like this heavy equipment supplier we have just added it to the list of growth stocks we cover in our newsletter for aggressive investing, Stock Pickers Digest.

WAJAX CORP. (Toronto symbol WJX; www.wajax.ca) sells and services heavy equipment, including cranes and forklifts. It also sells related parts (such as bearings, motors, hoses and fittings) and power systems (including diesel engines and transmissions).

Wajax operates through 117 dealerships across Canada. Its customers are in the natural resource, construction, manufacturing, industrial processing and transportation industries.

In the three months ended December 31, 2011, Wajax’s revenue rose 19.2%, to $377.2 million from $316.4 million a year earlier. Demand remained strong across all of the company’s markets.

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Growth stocks: Wajax sees strong demand in all markets

In the three months ended December 31, 2011, Wajax’s revenue rose 19.2%, to $377.2 million from $316.4 million a year earlier. Demand remained strong across all of the company’s markets.

Earnings rose 4.9%, to $16.6 million, or $1.00 a share, from $15.8 million, or $0.95 a share. Earnings rose at a slower pace than revenue because the company had to start paying income tax in the latest quarter (a total of $5.9 million). It did not pay taxes a year earlier, when it was still an income trust. Cash flow per share jumped 43.3%, to $1.72 from $1.20.

The stock trades at just 11.9 times this year’s forecast earnings of $4.12 a share. The company raised its monthly dividend by 35% with the March 2012 payment, to $0.27 a share from $0.20. The stock now yields a high 6.6%.

In the latest edition of Stock Pickers Digest, we look at the short- and long-term outlook for the Canadian economy and how that is likely to impact Wajax’s ability to keep growing. We conclude with our clear buy-hold-sell advice.

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In the three months ended December 31, 2011, Calian’s revenue rose 6.7%, to $56.8 million from $53.3 million a year earlier. Earnings rose 14.4%, to $3.6 million, or $0.47 a share, from $3.1 million, or $0.41 a share.

Sales rose at the systems engineering division, partly due to an increase in U.S. military orders. The business and technology services division also saw continued strong demand. Calian’s backlog now stands at $665 million, with contracts running to 2018.

The company holds cash of $28.6 million, or $3.71 a share, and has no debt. Calian raised its quarterly dividend by 4.0%, to $0.26 from $0.25, with the December 2011 payment. The shares now yield 5.5%.

Calian Technologies is still a buy.

ALARMFORCE INDUSTRIES $9.59 (Toronto symbol AF; TSINetwork Rating: Speculative) (1-800-267-2001; www.alarmforce.com; Shares outstanding: 12.2 million; Market cap: $117.0 million; No dividends paid) sells two-way voice alarm systems and monitoring services in Canada and the U.S.

AlarmForce’s system differs from others because it lets operators verify an alarm by establishing immediate two-way voice contact with homeowners. It then dispatches security personnel. If intruders are present, the two-way contact can scare them off.

The company has used radio and TV advertising to gain a high profile. It gives its system away to gain new subscribers. Users then sign a three-year contract to pay $25 a month for monitoring service.

In the three months ended October 31, 2011, revenue rose 10.5%, to a record $10.6 million from $9.6 million a year earlier. Earnings fell to $10,851, or nil per share, from $1.2 million, or $0.10 a share.

The company’s earnings fell because it spent more on advertising as it expanded into Florida. It also invested more in its VideoRelay system, which it launched in October 2011. VideoRelay lets subscribers watch their homes through their computers and smartphones.

AlarmForce now has 124,100 subscribers in Canada, up 9.3% from 113,500 a year earlier. In the U.S., its customer base jumped 22.8%, to 22,100 from 18,000.

AlarmForce’s expansion into the U.S.—a market with huge potential—has shown results, but it does add risk. To mitigate that risk, the company aims to take a steady, disciplined approach.

Demand for security systems is growing steadily. As well, VideoRelay could further add to AlarmForce’s growth prospects.

AlarmForce is still a hold.

Fortress is buying the plant for a nominal amount of $1, but it will commit to spending $222 million on the conversion, which should be finished in mid-2013. The Quebec government will grant the company a 10-year, $132.4-million loan to help finance the plant.

Fortress’s outlook is positive, and the new dissolving pulp plant should make a big contribution to its earnings.

Fortress Paper is still a buy.

Demand for the company’s flights remains high, and it has entered into new partnerships with other airlines; these were the main reasons for the higher revenue.

Earnings fell 4.3%, to $35.6 million from $37.2 million. Higher fuel prices were the main reason for the decline. However, earnings per share were unchanged at $0.26, due to fewer shares outstanding. The company has also raised its quarterly dividend by 20%, to $0.06 from $0.05. The shares now yield 1.7%.

WestJet has now decided to go ahead with its plan to launch a new short-haul Canadian regional airline. That would let it feed more customers into its international routes and better serve its frequent-flying business clients. The company aims to start up the new airline by the end of 2013.

WestJet is still a buy.

SYMANTEC CORP. $17.94 (Nasdaq symbol SYMC; TSINetwork Rating: Average) (1-408-517-8000; www.symantec.com; Shares outstanding: 737.2 million; Market cap: $13.2 billion; No dividends paid) reports that its earnings per share gained 20.0% in the three months ended December 30, 2011, to $0.42 from $0.35. Sales rose 6.9%, to $1.72 billion from $1.6 billion.

Demand for security software will likely remain steady due to rising concerns about identity theft and online intruders. However, a shortage of hard drives due to flooding in Thailand is dampening computer sales. That would hurt Symantec, because the company gets 85% of its sales to consumers from software that is preinstalled on new computers. Consumers account for about 30% of Symantec’s overall sales.

As well, economic uncertainty will probably weigh on sales in Europe, which supplies around 25% of Symantec’s overall sales.

Symantec is now a hold.

NEW GOLD $11.17 (Toronto symbol NGD; TSINetwork Rating: Speculative) (888-315-9715; www.newgold.com; Shares outstanding: 461.4 million; Market cap: $5.2 billion; No dividends paid) produced a record 387,155 ounces of gold in 2011, up 1.1% from 369,077 ounces in 2010.

The company’s production could rise as high as 445,000 ounces in 2012. That growth will come mostly from its New Afton mine, which should start up in the middle of this year.

Even if the New Gold doesn’t expand its mines or make acquisitions, its production could top one million ounces within six years. Most of that rise will come from the successful development of the Blackwater project, which could hold up to 6.8 million ounces of gold.

New Gold is still a buy.

Gennum went through a sharp setback in the recession, as TV broadcasters had less to spend on the company’s equipment, which lets them store, edit and transfer video signals.

That’s why the stock fell from $14.50 in January 2007 to just $3.50 in December 2008. It rebounded to $8.35 in February 2011, but moved down to $5.75 in December 2011.

As part of a major restructuring plan that it instituted in response to the slowing sales, Gennum sold its slow-growing hearing aid and headset businesses. It used the cash to buy firms that specialize in the fast-growing area of chips that speed up the flow of data in computer networks.

Throughout the recession, Gennum continued to spend a high 30% or more of its revenue on research. It also maintained ample cash reserves and had little long-term debt.

Gennum investors should tender their shares to Semtech to receive the full $13.55 a share without paying brokerage fees.

The company often uses acquisitions to fuel its growth. It cuts the risk of this strategy by focusing on smaller companies that enhance its products or expand its geographic reach.

Big purchase starting to pay off

CGI’s most important purchase in the past few years was its $932.2-million acquisition of Stanley Inc. in September 2010. Stanley provides computer outsourcing services to military and civilian agencies of the U.S. government. These clients could face budget cuts in the coming years. But even if they do, Stanley should keep winning contracts, because its services help these agencies cut costs.

CGI’s revenue rose 3.1%, from $3.7 billion in 2007 to $3.8 billion in 2009 (the company’s fiscal years end September 30). Unfavourable currency rates cut revenue by 2.4%, to $3.7 billion, in 2010. Thanks to the Stanley acquisition, revenue rebounded to $4.3 billion in 2011.

Earnings rose at a much faster pace: up 84.7%, from $235.6 million in 2007 to $435.1 million in 2011. CGI prefers to use its excess cash to buy back shares instead of paying a dividend. Because of fewer shares outstanding, earnings per share rose 125.7%, from $0.70 in 2007 to $1.58 in 2011.

Falling debt, rising order backlog

CGI had to borrow some of the cash it needed to buy Stanley. That raised its long-term debt to $1 billion on September 30, 2010, from just $265.4 million a year earlier. However, CGI had cut its debt to $917.8 million by December 31, 2011. That’s just 18% of its market cap.

The company is also in a strong position to profit from growing demand for cloud computing. (That’s where data is kept on centralized servers that users connect to over the Internet.) For example, CGI recently won a $20.8 U.S.-million, five-year contract to modernize and manage several U.S. government websites, including www.USA.gov.

In all, CGI booked $1.4 billion of new contracts during the quarter ended December 31, 2011. New clients accounted for 52% of this total; the remaining 48% came from extensions and renewals. Its order backlog was $13.6 billion at the end of the quarter, up from $13.0 billion a year earlier. That’s equal to 3.2 times its annual revenue.

Low p/e adds extra appeal

The company will probably earn $1.75 a share in fiscal 2012. The shares trade at 11.4 times that estimate. That’s a low p/e ratio in light of CGI’s strong earnings growth and recurring revenue from long-term contracts.

CGI Group is a buy.

NVIDIA CORP. $15 (www.nvidia.com) has agreed to supply its new Tegra 3 video chips to German carmaker Audi, which will use them to power in-car information and entertainment systems. Deals like this make Nvidia less reliant on selling chips to makers of computers and video-game consoles. Buy.

LIMITED BRANDS INC. $42 (www.limitedbrands.com) reported that its same-store sales rose 7% in December 2011 compared with December 2010. Same-store sales rose 11% at Victoria’s Secret (lingerie) and 4% at Bath & Body Works (personal-care products). Same-store sales at the La Senza lingerie chain were flat. Buy.

WestJet’s revenue rose 3.3% in the three months ended September 30, 2011, to $775.3 million from $684.1 million a year earlier. Demand for the company’s flights remained strong.

However, earnings per share fell 6.7%, to $0.28 from $0.30, mainly because WestJet’s fuel costs rose 27% from a year earlier, to an average of $0.89 a litre.

WestJet has a modern, fuel-efficient fleet and a low cost structure. To keep growing, it is selectively adding to the 71 cities it currently serves. The company is focusing on sunshine destinations, where it can add to its earnings by selling customized vacation packages that include flights.

In addition, WestJet is considering launching a new short-haul Canadian regional airline. That would let it feed more customers into its international routes and better serve its frequent-flying business clients.

WestJet is still a buy.

The chain consists of 366 Reitmans, 158 Penningtons, 158 Smart Set, 123 Addition Elle, 77 Thyme Maternity, 68 RW & Co. and 25 Cassis stores. Reitmans is in the process of closing the Cassis stores and converting them to its other chains.

In the three months ended October 29, 2011, Reitmans’ earnings fell 49.0%, to $10.6 million, or $0.16 a share, from $20.7 million, or $0.31 a share, a year earlier. The company’s sales were down 3.2%, to $254.1 million from $262.5 million. Same-store sales declined 5.8%.

Fewer shoppers visited Reitmans’ stores in the quarter, due to weaker consumer confidence. As well, the company spent more on promotions to fend off rising competition.

However, Reitmans’ strong brands should help its earnings rebound as consumer spending continues to recover. Moreover, strong Canadian dollar helps the company, because it pays its Chinese suppliers in U.S. dollars.

The retailer’s balance sheet remains strong: it holds cash of $229.1 million, or $3.44 a share, and just $9.0 million of long-term debt. Its shares yield a high 5.6%.

Reitmans is still a buy.

FIRSTSERVICE CORP. $28.40 (Toronto symbol FSV; TSINetwork Rating: Extra Risk) (416-960-9500; www.firstservice.com; Shares outstanding: 30.5 million; Market cap: $866.2 million; No dividends paid) serves the following areas of the real estate market: commercial real estate, residential property management, and property improvement. FirstService has more than 20,000 employees worldwide.

FirstService’s revenue rose 10.4% in the three months ended September 30, 2011, to $585.4 million from $530.5 million a year earlier (all figures except share price in U.S. dollars). Excluding one-time items, earnings per share were unchanged at $0.61. Cash flow rose 22.6%, to $1.03 a share from $0.84.

Revenue increased at two of FirstService’s three divisions: commercial real estate (up 14%) and residential property management (up 15%).

Property services revenue fell 2%. That’s because increased U.S. government regulations continue to slow the rate at which banks and other mortgage providers can foreclose on homeowners who are behind on their payments. As a result, there were fewer newly foreclosed properties for the property services division to manage in the latest quarter.

The company’s total debt of $388.2 million is a manageable 44.8% of its $866.2-million market cap.
FirstService needs a sustained recovery in global real estate markets for its shares to move higher. Meanwhile, the stock trades at a low 12.6 times this year’s forecast earnings of $2.25 a share.

FirstService is a hold.