Technology is a high-growth sector because new technologies and innovation drive business growth. However, some stocks outside technology delivered strong, fantastic investor returns last year. If you’re looking for the ultimate growth stock, the top pick is in the energy sector.
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CES Energy Solutions (TSX:CEU) ranked 4th in the 2024 TSX30 List, a flagship program for the top-performing Canadian stocks based on dividend-adjusted share price performance over three years. A $500 investment can capture the potential for robust returns in 2025 and beyond.
The mid-cap stock had a banner year last year, rewarding investors with a 192.6%-plus gain. In the last three years, the overall return is 411.5%-plus. At $9.76 per share, CES also pays a modest but safe 1.2% dividend yield (13.9% payout ratio). The quarterly payout is a bonus from this appreciating asset.
Niche player
CES Energy is not an oil and gas producer but a provider of consumable chemical solutions. The players in North America’s oil and gas industry use technically advanced consumable chemical solutions throughout the life cycle of the oilfield. Most of the revenues (90%) come from two core businesses: drilling fluids & production and specialty chemicals.
This $2.2 billion company operates in the major basins of Canada and the United States. It boasts a fully integrated world-class basic chemical manufacturing capability (nine separate lab facilities) and a vertically integrated consumables business model. Among its customer base are 50 large-cap industry operators.
The significant exposure to North American oil and gas and related water production, as well as the ever-increasing demand for consumable fluids and specialty chemicals, sustain FCF generation through the cycles. Net income grew by an average of 77% ($52.4 million) in the last two years.
Record-setting performance
CES is fresh from its record-setting performance in Q3 2024. In the three months ended September 30, 2024, the top line increased 13% year-over-year to a record quarterly revenue of $606.5 million. The quarterly revenues in the U.S. ($402.6 million) and Canadian ($203.9 million) markets were also new records.
Net income rose 31% to $46.6 million from a year ago. After three quarters, the total free cash flow (FCF) reached $152.3 million. According to management, the increasingly complicated drilling programs amid a lower U.S. industry rig count required higher service intensity.
Nonetheless, the $85 million in capital expenditure in 2024 is adequate to support higher activity levels and business development opportunities. Moving forward, the global demand requirements and demand trends of developing countries to support energy transition combined with the depletion of existing resources are positive developments.
These trends would increase service intensity and enhance drilling and production performance in constructive end markets for CES services. Management said energy industry fundamentals will continue to support critical drilling and production activity for oil and natural gas.
Key takeaways
The capex-light, asset-light, consumable chemicals business model and established infrastructure are the competitive advantages of CES Energy Solutions. Besides enabling the generation of significant surplus FCF, it provides financial resiliency and ensures profitability. If the strong financial performance continues, the stock price will soar even higher.
