North American infrastructure is aging. New industries are demanding new infrastructure. And an ever-expanding population is necessitating infrastructure additions. This adds up to an infrastructure boom here in Canada that will be sustained for years to come.
Let’s take a closer look at this bullish secular trend and some of the Canadian stocks set to benefit.
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Aecon’s stock: Undervalued and yielding 4%
The two major trends at play in the infrastructure space have been building for some time now. The first is the fact that it’s aged and needs to be repaired and updated. The second is the move toward sustainability. This has meant strong demand for renewable energy infrastructure, most notably nuclear energy and electrification projects.
Aecon Group (TSX: ARE) is one of Canada’s largest publicly traded construction and infrastructure development companies. In the last five years, Aecon’s business has benefitted from these trends. This is reflected in the company’s financial results. For example, revenue increased 34% to $4.6 billion in this period, and its net income increased 122% to $161.9 million. This Canadian stock has risen accordingly.
But that’s not all. The company’s focus on profitability, growth, and risk management has taken a significant amount of the risk out of its business. Construction companies require a significant amount of debt to fund capital spending. Projects can easily go over budget, and this has always been a big negative for companies like Aecon.
To address these risks, Aecon has changed its way. This has meant that the company now works through a collaborative model in order to bring projects through development. This means that the risks of these big projects are not solely borne by Aecon. The partners share in the risks.
Looking ahead, Aecon is pursuing growth by focusing on energy transition opportunities. This will provide the company with more consistent earnings and cash flows over the long term.
Badger Infrastructure stock: Strong growth expected to continue
Badger Infrastructure Solutions (TSX: BDGI) is a highly profitable company that provides non-destructive excavating services. The company has a strong history of excellence, and its diverse set of clients are from a broad range of industries, such as energy generation, electricity and natural gas transmission networks, telecommunications, and water.
The infrastructure boom will clearly continue to have a positive effect on Badger’s business. In the last five years, the company has seen its revenue grow by 39% to $684 million and its operating cash flow increase by 55% to $132 million.
Valuation
The valuation that investors give to Canadian infrastructure stocks has never been that high. This is understandable given the risks that we discussed, such as high capital intensity and the very risky nature of large infrastructure projects. Also, these companies were typically not fast-growing companies.
Today, these things are changing. The most notable change is the changing demand environment. Driven by new industries (sustainable energy) as well as an aging infrastructure that absolutely must be upgraded, the infrastructure boom is highly supported for the long term. This will mean a strong performance from Canadian infrastructure stocks.
Aecon trades at a mere 13 times this year’s expected earnings, and Badger trades at 20 times. Badger’s business is not as much of a Canadian infrastructure stock, meaning it’s less risky and it’s more profitable, so this makes sense. Yet, Aecon has grown its dividend by a compound annual growth rate of 8% in the last 10 years, and it’s currently yielding 4%. So, its valuation seems low in my view.
