The North American construction sector has been a top performer in recent months. It’s caught many by surprise, so I thought it would be useful to shed some light on what’s going on.
Two major forces are at play in propping up North American construction companies. The first is the aging infrastructure. With much of North America’s infrastructure having been built in the mid 1900s, it has become too old, too outdated, and ready for a face lift at a minimum. The second is the move toward sustainability. This is increasing demand for many new renewable energy projects, as well as non-energy projects in the fight against climate change.
Of course, these projects need infrastructure. And construction companies like Aecon Group Inc. (TSX:ARE) are seeing increased demand because of it. In fact, 60% of Aecon’s 2022 revenue is tied to sustainability projects.
But this is just the beginning, as Aecon and other North American construction companies continue to see strong demand in areas such as nuclear energy and electrification projects.
Aecon: The construction business is booming
Construction companies have not typically been considered growth companies. In contrast, they’re typically considered to be companies with high risk, high capital requirements, and sluggish growth rates. Today, things are different.
Aecon is one of Canada’s largest publicly traded construction and infrastructure development companies. The simple fact is that the two forces that I discussed at the beginning of this article are powering huge demand. In 2022, Aecon reported revenue of $4.7 billion, 18% higher than last year. Additionally, backlog increased to $6.3 billion from $6.2 billion last year and new orders are coming in fast. In fact, new contracts awards were $4.8 billion in 2022, almost 30% higher than the same period last year.
As for Aecon stock, it’s finally getting the recognition is deserves. This comes after big challenges such as rampant inflation and rising interest rates. These issues clearly have big impacts on construction projects. They brought the stock so low that it was yielding as high as 7% at one time last year. However, these issues are stabilizing. Furthermore, Aecon has made efforts to de-risk its business recently and we’re now seeing the benefits of it.
In fact, Aecon has a diverse business model that’s driving strong revenue growth and a strong outlook. Over the next two years, revenue growth will be fuelled by the continued playing out of its strategy and focus on sustainability projects and upgrades. Beyond this, projects such as Ontario’s $10 billion GO expansion will fuel backlog and revenue growth. Aecon stock has soared 39% so far in 2023 and is currently yielding 5.65%.
Badger Infrastructure Solutions
Badger Infrastructure Solutions (TSX:BDGI) is another North American construction stock that’s up big recently. In fact, it has rallied 26% from its December 2022 lows.
Badger is a highly profitable company that provides non-destructive excavating services. The company has a strong history of excellence. It also has a diverse set of clients from a broad range of industries, including energy generation, electricity and natural gas transmission networks, telecommunications, and water.
Badger will be reporting its Q4 earnings on March 24, but if we look at its latest results, we can see that the business is booming. In fact, revenue in the third quarter increased 20%, EBITDA 24%, and the EBITDA margin to 21.6%.
The outlook for Badger looks bright, and with the recent margin and efficiency improvements, I think that the outlook for Badger stock also looks bright.
In closing, the North American construction group is benefitting from a secular trend. This means that business will probably be booming for some time. It also means that the performance of stocks within this group, like Aecon stock, will also probably continue to be strong.