Pat McKeough responds to many requests from members of his Inner Circle for specific advice and stock tips as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week an Inner Circle member asked about a company whose trucks have become a frequent sight on Canadian roads. Aecon Group develops infrastructure through three different groups, Energy, Infrastructure and Mining. Pat examines the company’s businesses and assesses the risk of its international ventures. He also analyzes Aecon’s financial situation and assesses its ability to keep winning long-term contracts.
Q: Hi Pat: Could I have your advice on Aecon Group? Thanks.
A: Aecon Group Inc. (symbol ARE on Toronto; www.aecon.com), is one of Canada’s largest infrastructure developers. Aecon and its predecessors built Canadian landmarks like the CN Tower, the St. Lawrence Seaway, the Calgary Olympic Oval and the Halifax Shipyards.
Aecon has three divisions:
The Energy Group, which accounts for 43% of Aecon’s revenue, builds plants and facilities and assembles related components for clients in the power industry, including nuclear reactors.
The Infrastructure Group (32% of revenue) builds roads, bridges, tunnels and public transit projects. It also sells asphalt and aggregates (crushed stone and gravel), key ingredients for making concrete.
The Mining Group (25% of revenue) develops, builds and maintains mines and oil and gas properties. It also builds related infrastructure, like roads and waste management systems, and helps its clients restore their sites and plant new trees.
In addition, the company develops, finances and operates public infrastructure projects. It currently holds a 45.5% interest in a 35-year concession on Ecuador’s Quito International Airport. (Concessions are rights that governments grant to run public facilities.) Holdings like this can be highly attractive. For example, SNC Lavalin has had great returns from its interest in Ontario’s 407 Toll Highway (we wrote about SNC Lavalin earlier this week; see the article here). However, current political events and trends in Ecuador and nearby suggest this particular asset faces political risk.
Pipeline contracts boost Aecon revenue in latest quarter
In the three months ended September 30, 2013, Aecon’s revenue rose 9.4%, to $897.3 million from $820.5 million a year earlier, mainly due to new contracts related to Western Canadian pipelines and Ontario utilities.
Earnings rose 5.2%, to $36.4 million from $34.6 million. Due to fewer shares outstanding, earnings per share rose 6.0%, to $0.53 from $0.50. Aecon’s $0.32 annual dividend yields 2.1%.
New bookings fell 17.7%, to $772 million from $938 million a year earlier. On September 30, 2013, Aecon’s order backlog was $2.09 billion, down 24.7% from a year ago. The company expects to complete 62% of its backlog within the next 12 months.
Aecon recently won a contract with Metrolinx, the Ontario government’s public transit agency. Metrolinx selected a 50/50 joint venture between Aecon and ACS Dragados Canada to build two tunnels for Toronto’s Eglinton Crosstown Light Rail Transit project. Aecon’s share of the $177-million deal is $88.5 million. The partners expect to complete the work in mid-2016.
In the Inner Circle Q&A, Pat assesses Aecon’s reputation and its ability to keep winning new contracts. He also looks at the company’s balance-sheet strength and its earnings forecast. He concludes with his clear buy-hold-sell advice on this stock.
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