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Don’t Wait for the Bottom

Jan 1, 2009

Builder stocks are cheap and poised to benefit from an infrastructure stimulus

by Fabrice Taylor

In case you haven’t noticed yet, we are going through the worst financial crisis in decades. Or is it millennia? Whatever. It’s bad, and by the time you finish reading this we will likely be in a recession, if we’re not in one already.

Sounds like an inopportune time to put money to work in the markets, doesn’t it? But it’s not, because there are always opportunities to earn a return, even if it’s tough to do right now. Here’s one idea: when a country goes into an economic downturn, what do governments typically do? They spend money, of course. On what? Usually on infrastructure. You know, roads, bridges, hospitals, airports.

As of this writing, a number of countries, including the United States, are planning or have started big fiscal stimulus plans that involve spending lots of money to build things. The idea is that it creates jobs at the same time as it improves productivity. The Harper government is holding out, arguing that tax cuts are enough, but adding that it will follow suit if things get worse. We’ll see, probably later this month, when the federal budget is expected to be unveiled, about a month earlier than usual. At any rate, Canadian governments have already allocated billions to infrastructure, and spending plans are being accelerated.

North American governments actually have two good reasons to spend on infrastructure. Besides reviving their economies, they’re tackling the so-called “infrastructure deficit” that in Canada’s case was run up in the 1990s as senior governments’ fiscal deficits were being eliminated. According to the “Civil Infrastructure Systems Technology Road Map” (authored by, among others, the Canadian Society for Civil Engineering and the National Research Council), Canada has used up almost 80% of the life expectancy of its existing infrastructure. Ontario is spending $30 billion over five years on hospitals, schools and transportation projects. Alberta has a $13.3-billion capital plan. Other governments, including the feds, are also loosening the purse strings. They’re relying more on the private sector for help as well, especially through public-private partnerships.

So who benefits from all this money? Construction and engineering firms. Let’s look at a few of them. The Churchill Corporation (CUQ: TSX), based in Edmonton, is a powerhouse in construction through its Stuart Olson building contracting unit. Stuart Olson specializes in light industrial, commercial and institutional buildings. It does brisk business with government and other public authorities building hospitals and whatnot and contributing more than two-thirds of Churchill’s revenues.

Churchill’s stock has been crushed in this correction, falling from almost $25 to under $5 at the low point. There are some good reasons for that drop in price: general economic ones plus the fact that Churchill gets a lot of work from oilsands developers up north, where they are cancelling or delaying projects as fast as they announced them two years ago. But the sell-off might be overdone if the drop in oil is short-lived and if a few more public dollars come the company’s way. The shares are quoted at four times earnings, which means they are either really cheap or profits are going to drop. But they’d have to drop an awful lot to move the stock much lower.

Another possibility is Aecon Group Inc. (ARE: TSX), which is based in Ontario but is very active in Alberta. Like Churchill, Aecon shares have been crushed, and for the same reasons. Yet they might similarly come back. Aecon has been around for about 100 years and helped build some of the great landmarks in Canada, including the St. Lawrence Seaway and the CN Tower. The company also owns concessions on the Quito airport in Ecuador and the cross-Israel highway, which could be monetized at some point. (There is some worry about Ecuador’s political stability though.)

Then there’s Lockerbie & Hole Inc. (LH:TSX), crosstown rival to Churchill. Lockerbie has also been hurt and last time I looked was quoted at a little more than a third of its 52-week high. Lockerbie, which was founded in 1898, was punished recently when the Fort Hills oilsands project was delayed, tearing $130 million from the company’s order backlog until the project is renewed. That, according to National Bank Financial, cost the company more than 10% of its earnings per share next year and a full quarter of profits the following year. Still, the shares can be had for about $5, less than 10 times earnings, and the company, which just went public in 2007, evidently thinks its own shares are attractive, since it’s buying them back for about the current price.

Finally, look at Stantec Inc. (STN: TSX, NYSE), an engineering and architectural consulting firm with a well-diversified stream of revenues, which are also growing quickly. Its stock has done relatively well, having only been cut in half from its high. Stantec is well managed and grows in part by acquiring smaller, private companies in its field, so as long as the acquisitions are made wisely, it doesn’t need a booming economy to earn more money.

Don’t expect any of these companies to soar back to their highs. There are very good reasons to expect private-sector construction activity to slow down, maybe even drastically so. But if investors have been too pessimistic in beating up these highly economically sensitive stocks, they should perk up nicely once the smoke clears. As always, do your own homework.

Fabrice Taylor is the Prairie Trader. He is an award-winning journalist and equity analyst.

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One Response to Don’t Wait for the Bottom

  1. Dear Fabrice: Your comment “There is some worry about Ecuador‚Äôs political stability though” is incorrect. The reason why aecon Quito airport project will fail is because FAA and ICAO (international aeronautical authorities) do not want to license the project. Canadians are building that without the proper studies and breaking international aeronautical convention laws, and local laws. Please do not blame this on the Ecuadorians…..canadians may sound like bells and angels to you….but they are shitting on Ecuador and other places in South America.
    No I am not a leftist, and no I am not a third worlder complaining against the crown. I am a red blooded american citizen who has alll the documents pertaining to that investigation. Call me at some point if the Aecon shares plummette