Stifel analyst Ian Gilllies thinks government spending is likely to “remain the gift that keeps on giving” for Canadian engineering and construction firms, predicting organic revenue growth tailwinds are going to continue longer than previously expected.
“In the U.S. and Canada, we continue to expect rising capital investments from the government to support near-shoring and population growth,” he said.
“Our analysis of four key agencies in the United States would indicate that a long-tail of spending will occur as budgeted dollars have been slow to translate into committed dollar.
As this occurs, it should propel government non-resi spending higher. In Canada, government budgets depict spending growth of 12 per cent which should drive higher demand for E&C services.
Changes to UK policy are another positive harbinger for spending. Government spending is the gift that keeps on giving for E&Cs.
“Private sector capex healthy, but there is nuance. We use the S&P 500 as a proxy for private sector capex, and the 2024E-2026E capex CAGR [compound annual growth rate] is 5 per cent, which helps support out view of above-average organic revenue growth for the E&Cs in our coverage.
However, this capex CAGR excluding the Mag 7 is only 3 per cent. As such, it will be important for E&Cs to have exposure to key tech themes such as data center growth, semiconductor plant development; utility work resulting from higher power demand; and power plant work.
To varying degrees, all the companies we cover that are in this report have exposure to this theme which is a net/net positive.”
In a report released Friday, Mr. Gillies said stocks’ valuations are “still reasonable-to-attractive given elevated EPS growth rates and expanding return metrics.”
“The one key change to our thesis is that we believe ‘above trend’ organic growth should be possible past 2026. whereas we had previously anticipated a return to more normalized organic growth in 2026 and beyond,” he explained.
“ARE is our best near-term investment idea to generate alpha, while STN and WSP should continue to be core holdings in portfolios given the compounding nature of each stock.”
Mr. Gillies raised his targets to the five stocks he covers in the sector to highs on the Street. They are:
* Aecon Group Inc. (ARE-T, “buy”) to $31 from $30. The average is $22.09.
Analyst: “Turnaround story that should benefit from MSD to HSD [mid-to-high single digits] organic revenue growth and substantial margin expansion. Utility focused M&A remains a key focus. 2024-2026 estimated EPS to go from -$0.46 to $2.50, while P/E in 2026 is inexpensive at 8.4 times.”