Talk about a value stock pick! Aecon Group (TSX:ARE) stock fell about 60% from the peak of 2021 to the trough in December 2022. In a few months, the stock has rallied about 60%. However, it still has 50% gains to go before it revisits its 2021 peak of over $20 per share.
Any investor would love to enjoy 50-60% gains in such a short time. However, the stock comes with high risk as well. What’s most notable is the volatility of the stock. In large part, this volatility has to do with its unpredictably cyclical earnings.
For example, just after the financial crisis recession, in 2009 and 2010, the Canadian construction and infrastructure development company witnessed adjusted earnings-per-share (EPS) declines of 33% and 39%, respectively. However, in the following two years — in 2011 and 2012 — it experienced double-digit rate adjusted EPS growth. By 2012, its adjusted EPS almost recovered to pre-recession levels.
Similarly, in 2013 and 2014, the company experienced double-digit earnings declines. A turnaround led to earnings almost doubling from 2014 to 2016. As a result, you can see the industrial stock going up and down in response to the expected changes in earnings.
Investors who were able to capture shares at lows and had the confidence and patience to wait until a subsequent recovery could have booked highly lucrative profits. For example, from the 2008 low to the 2009 high, the cyclical stock returned about 148%! From the 2011 low to a 2012 high, the stock returned 84%. From a 2015 low to a 2016 high, the stock returned 76%.
Of course, it’s impossible to guess the bottom and high. They’re only clear in hindsight. However, these returns demonstrate the possibility of high returns in the stock.
Another opportunity in sight
The value stock has just experienced two consecutive years of double-digit earnings declines. Specifically, for both 2021 and 2022, Aecon experienced adjusted EPS drops of 40%!
As the stock still trades at approximately 40% below its 2021 high, buyers of the value stock today could experience some awesome gains over the next three to five years on a turnaround.
The company lost earnings in 2022 primarily due to fixed price contracts which made up about 50% of Aecon’s revenues last year. The costs of projects have gone up — no thanks to high inflation. However, it’s unable to reflect the higher costs in these contracts.
Now that management is aware of this problem, it may be able to massage the terms in its future contracts to be more resilient against inflation. If not, it’d still be able to benefit from increased infrastructure spending during the phase of an economic expansion. Of course, it could take some time before we would revisit this phase, as we’re likely rolling into a contraction phase.
So far, Aecon has been able to maintain its dividend despite a large drop in its earnings. At writing, it yields 5.7%. This is a dividend that it has kept the same or raised higher every year since 2007. If the stock even maintains its dividend and an economic expansion plays out some time over the next three to five years — an investment today could double your money!
Interested investors may be able to pick up the stock on weakness, as Aecon is about to report its first-quarter results in late April.