Badger Daylighting is a buy for long-term capital gains and modest, growing dividends.
We’ve added Calgary-based engineering and construction stock Badger Daylighting (TSX—BAD) to The Back Page coverage of industrial stocks. Disregard its stock symbol ‘BAD’. The company actually holds attraction.
We rate it a buy for long-term share price gains and modest, growing dividends. But buy only if you can accept a company that we rate ‘Higher Risk’ and that currently trades at a high multiple of this year’s expected earnings.
Badger is the largest in its industry
Badger describes itself as “North America’s largest provider of non-destructive excavating services. Badger traditionally works for contractors and facility owners in a broad range of infrastructure industries.
“The Company’s key technology is the Badger Hydrovac, which is used primarily for safe digging in congested grounds and challenging conditions. The Badger Hydrovac uses a pressurized water stream to liquefy the soil cover, which is then removed with a powerful vacuum system and deposited into a storage tank. Badger manufactures its truck-mounted hydrovac units.”
Earnings and cash flow growing
Badger currently generates more than three-quarters of its revenue and nearly 84 per cent of its pre-tax profits in the US.
Last year, Badger earned a net profit of $67.8 million, or $1.83 a share. This was up by 3.4 per cent from a net profit of $65.9 million, or $1.77 a share, the year before. But the company’s 2018 cash flow jumped by nearly a third, to more than $32.6 million. This suggests that Badger did better than it seems at first glance.
Badger writes: “Continued growth in Badger’s end-use markets and geographic areas has resulted in an increase in revenue and improved fleet utilization as evidenced by improved financial results.” In 2019, Badger’s earnings are expected to grow by 7.1 per cent, to $1.96 a share. Based on this estimate, its P/E (Price-to-Earnings) ratio is an excessive 25.1 times.
But keep in mind that the forward-looking market is already starting to focus on the outlook for stocks in 2020. Next year, Badger’s earnings are expected to leap by 40.4 per cent, to $2.71 a share. Based on this estimate, Badger trades at a more reasonable forward P/E ratio of 17.9 times.
Share buybacks help earnings growth
In addition, Badger’s forward Marpep Growth Index, or MGI, is positive. Divide the earnings per share growth rate by the forward P/E ratio and you get a forward MGI of close to 2.3 (40.4 divided by 17.9). Since this is well above 1.0, it suggests that the shares are undervalued.
Another factor behind Badger’s earnings growth is its share buybacks. In the year to May 14, the company repurchased and cancelled 1,282,068 common shares. Badger can buy back as many as two million shares up to May 20, 2020. As the earnings are spread over fewer shares, the earnings per share rise, of course. This can justify a higher share price.
One year away from becoming dividend aristocrat
Badger also rewards its shareholders with growing dividends. It has raised its dividend in each of the four latest years: To 39.6 cents a share in 2016; 45.6 cents a share in 2017; 54 cents a share in 2018; and now 57 cents a share. If Badger raises its dividend again in 2020, to make it five increases in a row, it will become a ‘dividend aristocrat’.
Badger can afford to buy back its shares. On March 31, its net debt-to-cash-flow ratio stood at only 0.6 times. This is well within our standard comfort zone of two times or less. The company holds cash of $36.8 million.
Buy Badger for long-term share price gains as well as modest, growing dividends. But only if you can accept buying a company that we rate ‘Higher Risk’ and that currently trades at a hefty P/E ratio.
This is an edited version of an article that was originally published for subscribers in the July 5, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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