In a report previewing earnings season for Canadian industrials titled Some near-term pain, but long-term gain, Stifel analyst Ian Gillies warned “the next few months are going to be spooky for the short-cycle names.” “We expect the focus for 3Q24 to be on whether there are initial positive demand signals emerging from recent interest rate cuts in Canada and the U.S,” he said. “Many investors are already looking past what is likely to be tepid 3Q24 and 4Q24 results, into a recovery for volumes and pricing in 2025.
“If this messaging does not materialize, we could be looking at a step back in the near-term for short-cycle stocks (ex-Stelco) given that those stocks in our coverage are up 7.0 per cent in the last 3 months (driven by multiple expansion) compared to SPX at 3.3 per cent. Our best idea for the remainder of 24 and into 25 remains Aecon, given the combination of earnings recovery, backlog growth, inexpensive valuation and index inclusion. We continue to favour the long-cycle infrastructure-focused names such as WSP, STN, and BDT as outlined in our 2026 estimate rollout.”
Mr. Gillies predicted long-cycle stocks should “continue to articulate a robust growth outlook.”
“We anticipate WSP, Stantec, Bird and Aecon to all post strong backlogs, and continue to suggest margin expansion is likely,” he said. “With that said, catalysts are likely to be limited given that Bird just hosted an investor day, WSP will release its updated business plan in February 2025, and Stantec’s updated business plan was released in December 2023. Of this group of companies, Aecon remains our best idea into year-end.
“2Q24 going to be a mixed bag for short-cycle stocks: We have revised 2024E EBITDA lower for 3 of 8 short-cycle stocks in our coverage, while only raised one. The reductions are primarily due to lower-than-anticipated demand in 3Q24. We also anticipate 4Q24 will be a weaker-than-expected quarter. As such, it will be important for the short-cycle stocks that we cover to demonstrate a compelling case that 2025 should see demand improvements.”
Mr. Gillies made four target changes ahead of earnings season:
- Adentra Inc. ( “buy”) to $50 from $53. The average is $54.43.
- Doman Building Materials Group Ltd. ( “buy”) to $10 from $9.25. Average: $10.29.
- Mattr Corp. ( “buy”) to $18 from $20. Average: $19.81.
- Neo Performance Materials Inc. ( “buy”) to $15 from $14.50. Average: $12.76.
For top pick Aecon Group Inc. , he kept a “buy” rating and Street-high $31 target. The average is $22.81.
“We believe the level of uncertainty has reduced significantly following the resolution of CGL and the company quantifying an impact of $125-million for the remaining three legacy projects. In our view, Aecon can deliver revenue growth of MSD to HSD [mid to high single digits] given spending trends put forth by governments out to 2026-2027, on a normalized basis. Moreover, we believe the company can deliver adj. EBITDA of at least $433-million (accounting EBITDA: $356-million) on a normalized basis. As a result, the significantly de-risked earnings profile leads to our BUY rating.”