5 engineering stocks to buy; 3 downgraded to hold

‘The Back Page’ is a weekly feature of The Investment Reporter that examines the market outlook with a focus on a particular industry. Here are 5 engineering stocks to buy for capital gains potential over the next few years and 3 engineering stocks we’ve downgraded to ‘hold’.

Engineering_StocksSince we published our May 5 issue, the 10 engineering stocks we cover regularly are down by an average of 1.5 per cent compared to the S&P/TSX Composite Index’s drop of four per cent over the same period.

Key stocks SNC-Lavalin Group (TSX—SNC) and Stantec (TSX—STN) remain buys for share price gains and decent growing dividends.

Magellan Aerospace (TSX—MAL), Russel Metals (TSX—RUS) and WSP Global (TSX—WSP) remain buys for share price gains and dividends.

Russel Metals in particular and WSP Global pay attractive dividends.

3 engineering stocks downgraded

This time we’ve downgraded ADF Group (TSX—DRX), Aecon Group (TSX—ARE) and Stuart Olson Inc. (TSX—SOX) to holds. The latter’s dividend is at risk: it yields an excessive 9.3 per cent and its earnings this year and next fall short of the dividend of 48 cents a share.

ADF Group designs and engineers connections and fabricates and installs complex steel structures. Since we published our May 5 issue, its shares have inched up by 0.8 per cent. In the year to January 31, 2018, we expect the company to earn about seven cents a share, up from a nickel a share, the year before. Based on this estimate, it trades at an excessive price-to-earnings ratio of 37.1 times.

ADF’s dividend of two cents a share works out to a small yield of less than 0.8 per cent. On the positive side, the shares trade 21 per cent below their book value of $3.20 a share. On balance, we’ve now downgraded ADF to a hold. But only if you can accept holding a stock that we rate ‘Higher Risk’.

Aecon Group is for sale—hold: Since we published our May 5 issue, the shares of this construction and infrastructure-development company have risen by 6.8 per cent. That’s the most of the 10 stocks. This largely reflects its willingness to sell out.

On August 25 Aecon wrote that: “it has engaged BMO Capital Markets and TD Securities to explore a potential sale of the Company. Any transaction would be intended to create shareholder value.” Given growing investment in, and renewal of, infrastructure, we would expect Aecon’s competitors to make takeover bids. The rise in Aecon’s price, however, means that this is already priced into the shares. If no attractive takeover bid is made, the shares would likely decline. Hold.

This is an edited version of an article that was originally published for subscribers in the September 22, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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