Here are two Canadian construction industry stocks to buy for long-term capital gains.
SNC Lavalin Group Inc. (TSX—SNC)
It looks like SNC is on the mend. It’s a “fully-integrated professional services and project management company with offices around the world”. We’ve upgraded SNC to a buy for long-term share price gains.
One positive development was that the World Bank removed SNC and about 100 of its affiliates from its anti-corruption ban two years ahead of schedule.
A second positive development is that the company is focusing on profitable businesses.
SNC has sold its oil & gas business. It’s focusing on design and engineering, consulting and advisory services, intelligent network and cybersecurity, procurement, project and capital, construction and management, operations and management, decommissioning and sustaining capital.
SNC is also limiting its risk in certain projects. President and chief executive officer Ian Edwards said: “The recent award of a major infrastructure project in the UK (United Kingdom), which will be delivered through a risk-capped alliance agreement, underscores the global potential of an infrastructure services offering and demonstrates the opportunity to apply our major project expertise through new and beneficial contracting. We expect more demand to build and upgrade infrastructure in North America too.”
In 2021, SNC is expected to earn $1.75 a share. That’s a turnaround from last year’s loss of $1.07 a share. Based on this year’s estimate, the stock trades at a reasonable P/E (price-to-earnings) ratio of 15.7 times. Next year, SNC’s earnings are expected to grow by 15.4 per cent, to $2.02 a share. Based on this estimate, the shares trade at a better forward P/E ratio of only 13.6 times. SNC had negative cash flow of nearly $108 million last year. That was because of last year’s loss.
With the company expected to earn a substantial profit this year, it will have a positive net debt-to-cash-flow ratio again. SNC’s net debt-to-equity ratio was a reasonable 0.64 to one on New Year’s Eve.
On New Year’s Eve, SNC held cash of about $933 million. This fell short of total debt. Then again, the company had the ability to borrow up to $2.0 billion from its revolving credit facility.
As SNC’s earnings grow, its shares should eventually rise. So, we’ve upgraded SNC to a buy for long-term share price gains. The company pays annualized dividends of eight cents a share. But this yields only a small 0.29 per cent. If you need investment income to sustain your lifestyle, then buy higher-yielding shares.
Stantec Inc. (TSX—STN; NYSE—STN)
Stantec’s shares have leaped by 47.2 per cent since December. This gives Stantec upwards share price momentum, so the shares could go up further. Then again, the run-up in the share price makes Stantec costlier.
Stantec is a global engineering and design firm. Over the years it has expanded into new practices worldwide. This diversification by practice and geographical region cuts its risk and reduces its exposure to any one customer.
Stantec continues to expand. On April 8, for instance, it agreed to acquire Engenium Chemicals. It’s a project-delivery consultancy specializing in the delivery of mining, resources and industrial infrastructure projects. This expands Stantec’s product offering. Stantec also recently acquired Australia-based transportation and engineering firm GTA Consultants, expanding the company’s footprint in Australia.
In 2021, Stantec’s earnings per share are expected to grow by 4.5 per cent, to $2.32 a share. Based on this estimate, the stock trades at a high P/E (price-to-earnings) ratio of nearly 25.1 times.
In 2022, Stantec’s earnings growth is expected to accelerate by more than 12.9 per cent, to $2.62 a share. Based on this estimate, the stock trades at a better, but still hefty P/E ratio of nearly 22.2 times. Faster earnings per share growth, however, can help justify a higher share price.
We expect Stantec’s earnings growth to continue. For one thing, it has managed to grow quickly over many years. More important, there’s a need to build new—and upgrade—existing infrastructure.
US President Joe Biden has pointed out that China is building much more infrastructure than the US. He wants to close that gap. Better infrastructure can also make it easier for North American multi-national corporations to penetrate and supply new markets worldwide. In addition, new and better infrastructure can prevent disasters such as the collapse of bridges and highway overpasses. Stantec owns lots of American subsidiaries.
Stantec is what’s known as a ‘dividend aristocrat’. In Canada, that refers to companies that have raised their dividends for at least five years in a row. While Stantec’s dividends have gone up, the shares have risen even more. The yearly 66 cents that Stantec now pays yields only a small 1.14 per cent.
Stantec also has a clean balance sheet. On New Year’s Day, it held cash of nearly $290 million and prepaid expenses of $39.4 million. Subtract total debt of $1.315 billion and the company’s net debt was $986 million. This was 1.6 times the cash flow of $603 million that the company generated last year. That’s within our standard comfort zone of two times or less. This gives Stantec considerable financial flexibility.
Stantec is a very conservative blue chip stock that remains a buy for long-term share price gains.
This is an edited version of an article that was originally published for subscribers in the May 2021, Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
The MoneyLetter, MPL Communications Inc.
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