Badger Daylighting (TSX:BAD) is in the business of excavation, or digging — more specifically, it does non-destructive excavation with its own Badger Hydrovac, which “uses high-pressure water and vacuum systems mounted on a truck chassis to expose buried infrastructure or prepare an area for future work.”
The stock has had a volatile few years, with short sellers going after it and a multiple that went from frothy and rich to current levels that are bordering on dirt cheap.
To add a little more colour, we can see that in recent history, when the energy sector crashed and burned, Badger Daylighting stock was negatively affected by its exposure to the oil and gas sector, which represented 50% of its total revenues.
So, now that WTI oil has surpassed $75, why is Badger stock still trading 25% below its highs of April 2014?
It doesn’t add up to me, and it seems like we have a case of mispricing that will soon be corrected when investors see more proof of Badger’s strong business fundamentals and results.
We have already seen strong results, with strong cash flows, and solid strength in the company’s balance sheet. These are some of the many reasons why I believe the stock that investors love to hate is a strong contrarian buy.
Let’s dig deeper.
Badger has diversified its revenue base over the years, increasing its U.S. revenue as a percentage of total revenue to well over 50%, as U.S. revenue is still increasing at an annual 23% growth rate.
Revenue from industries other than the energy industry, such as municipalities and utilities, have been increasing as well — hence, a more diverse revenue profile, which reduces the risk inherent in owning the stock.
Strong macro case
The market for non-destructive excavation is healthy, as clients are choosing the digging solution that doesn’t disturb the infrastructure, such as pipes, as this is clearly more desirable.
Also, the macro-economic environment in Canada and the U.S. is highly supportive of ongoing construction projects.
In the energy sector, oil prices keep rising, and recent news that Canada’s $40 billion LNG project got the go-ahead is just the latest that shows a strengthening spending environment for Badger. Strong economic growth will continue to boost spending on municipal projects, utilities projects, and energy projects.
As for Badger, strong business fundamentals remain and continue to get stronger against this macro backdrop.
In the first six months of 2018, revenue increased more than 20%, adjusted EBITDA increased 21%, and cash flow from operations increased by a similar amount. The company’s balance sheet remains strong with a debt-to-capitalization ratio of 22%.
Trading at approximately 18 times this year’s expected earnings, this stock has never been cheaper.
