Daily Gains Letter

Look to Infrastructure for Portfolio Protection

By for Daily Gains Letter | Feb 27, 2013

















270213_DL_whitefootWith the global economy in disarray, it probably doesn’t sound like the best time to add an infrastructure company to your investment portfolio. But it is.

In spite of a weak U.S economy, record debt, the eurozone slipping back into recession, and a weak outlook, pressure continues to mount for countries around the world to build and upgrade their infrastructure (i.e., hospitals, toll roads, airports and ports; utilities and communications infrastructure) in an effort to help stimulate the economy.

And the timing couldn’t be better. In spite of the dramatically changing environment, the global infrastructure has not kept pace. In fact, the world faces an infrastructure deficit estimated at $20.0 trillion over the next two decades, with Brazil, China, India, and the U.S. leading the way. The U.S. infrastructure deficit totals $40.0 billion a year in the roads sector alone. (Source: Thompson, C., et al., “The problem is more than money: Global Infrastructure Crisis,” Deloitte web site, last accessed February 26, 2013.)

Ultimately, the development of a strong infrastructure is essential to manage growth and drive productivity. To achieve this, cash-strapped governments around the world have turned to the private sector for help.

Aecon Group Inc. (TSX/ARE) provides international construction and infrastructure services to customers in the private and public sectors worldwide. The company operates in three of the most lucrative sectors: transportation, energy, and natural resources. The company’s infrastructure branch constructs public and private infrastructure, including roads and highways, hydroelectric power projects, office buildings, airports, marine facilities, and transit systems. The company’s industrial segment engages in the construction of alternative and fossil fuel power plants; in-plant construction at nuclear power plants; and mechanical and electrical installations in hospitals, schools, and institutional buildings.

Aecon has a market cap of $654 million, a forward price-to-earnings (P/E) ratio of 10.5, $87.0 million in cash, and provides an annual dividend of 1.85%, or $0.28 per share.

In November, the company announced that third-quarter revenues were in line with the same prior-year period at $834 million. Net income for the third quarter slipped 13% to $35.9 million, or $0.50 per diluted share. Year-to-date revenues were in line with the first nine months of fiscal 2011 at just under $2.0 billion; as was net income at $21.6 million, or $0.38 per share. (Source: “Aecon reports third quarter 2012 results and record backlog,” Aecon Group Inc. web site, November 5, 2012, last accessed February 26, 2013.)

Aecon’s backlog for the nine months of 2012 rose to a record $2.8 billion, compared to $2.2 billion in the same nine-month period in 2011—an increase of 25%. The record backlog was driven by $938 million in new contract awards in the third quarter of 2012, as compared to $869 million in 2011.

John M. Beck, Chairman and CEO of Aecon, noted, “We are very pleased to announce a record backlog of $2.8 billion—a solid demonstration of the significant demand for our services despite the economic climate.” (Source: Ibid.)

Subsequent to the end of the third quarter, Aecon announced it was awarded a $100-million joint venture pipeline project in Alberta, Canada. The project is expected to be completed in 2014.

The company also announced the commencement of commercial flight operations at the state-of-the-art New Quito International Airport in Ecuador. Aecon is a partner of both the construction joint venture and the concessionaire, and it holds a 42.3% economic stake in the venture. (Source: “Canadian-led partnership celebrates flawless commencement of commercial flight operations at New Quito International Airport,” Aecon Group Inc. web site, February 20, 2013.)

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Chart courtesy of www.StockCharts.com

Despite posting solid third-quarter results and announcing a record backlog, Aecon’s share price continued to slide downward in November 2012—eventually rebounding off a support level near $10.00. Since March 2012, Aecon’s share price has been testing a downward-trending resistance level. At the same time, its support level has been trending higher, forming an ascending triangle on the stock chart.

Over the short term, investors should look for Aecon to retrace again, finding support on the trendline. Longer term, until Aecon’s share price crosses above resistance, it cannot be said that the stock has broken out—it’s still forming an ascending triangle.

Currently trading above its 50-day moving average (MA), Aecon continues to be bullish. Since the beginning of 2013, the company’s share price has climbed 15%.

Overall, however, 2011 was a difficult year for global construction, climbing just 0.5% to $4.6 trillion. While the numbers are not yet in for 2012, global construction is not expected to experience sustained growth until 2015. (Source: “World Construction 2012,” Davis Langdon web site, last accessed February 26, 2013.)

That said, Aecon has been bucking the trend and, in spite of the weak global climate, it has said its backlog for the nine months ended September 30, 2012 increased 27% year-over-year to a record $2.8 billion.

In 2013, Aecon should benefit from ongoing demand in the transportation sector and industrial segment. In particular, the company’s utilities and mining businesses have continued to grow. As such, Aecon continues to be an excellent stock with great long-term growth potential.

Going forward, infrastructure stocks could provide solid returns on the heels of falling bond yields and a bull run that is getting long in the horns.

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