The Motley Fool

Aecon is Helping to Build Canada – It Could Also Help Build Your Portfolio

One company that is swimming against today’s negative market action is Aecon (TSX:ARE), the Canadian infrastructure and industrial construction juggernaut.  The stock is up about 5% to the $12 mark after the company issued a strong quarterly release this morning.  Comments by the CEO indicate today’s jump could be just the beginning.

Margin expansion

In the opening of today’s press release, Chairman and CEO John Beck, who has been on Aecon’s board since 1963(!), clearly stated the company’s primary objective is to achieve an EBITDA margin of 9% by 2015.  To put this figure into perspective, the table below outlines Aecon’s EBITDA margin over the past 7 fiscal years.


















Source:  Company reports

Beck’s target appears overly ambitious given the company’s historic results.  If achieved however, the impact on the stock price could be dramatic.

If all other entries (except taxes) on Aecon’s 2012 income statement are held constant and we tweak the EBITDA margin from 5.9% to 9%, Aecon conceivably could have earned $2.07 per diluted share.  This compares quite favourably to Aecon’s reported 2012 diluted EPS of $1.18.

Aecon currently trades at a multiple of 10.2 to this reported EPS figure.  By 2015, if this company is earning $2 per share on the back of stronger margins, even if the multiple holds, which is unlikely, the stock price could be in the $20 range – a capital gain of 67% over a three-year period.  If the company is able to demonstrate improved margins, the multiple is very likely to expand.  This sets $20 as a floor for what this stock could be worth.

Seems like a stretch but…

Stranger things have happened.  Aecon has historically been focused on general contracting type work, a highly competitive space.  Even though it’s one of the bigger players on the block, increasing prices in this type of business and expanding margins is incredibly difficult, as demonstrated by Aecon’s results.

Through the recession however Aecon made several strategic acquisitions that have helped to change its business mix.  The company’s focus is shifting to larger, more complex turnkey projects as well as higher margin mining operations.  If all goes according to plan, this new mix of higher margin work will allow Aecon to achieve its goal.

The Foolish Bottom Line

A dividend hike to $0.32 from $0.28 accompanied this morning’s release.  The stock now yields 2.7% which helps to boost the potential total return.

Given the relatively low multiple at which the stock currently trades, it would appear the market is dubious about the possibility that Aecon will be successful achieving its margin target.  When we consider limited downside and a potential 3 year total return of more than 67% including the dividend, a compelling risk/reward scenario for Aecon’s stock begins to emerge.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.