Upgrading To Outperformer As New Strategy Takes Hold
Our Conclusion
Effective May 2, we are upgrading Badger from Neutral to Outperformer on
the strength we are seeing in its U.S. division, which we believe is a direct
result of the company’s sales strategy, and valuation. We view Badger’s Q1
results as a solid start to the year despite some headwinds in Canada. When
looking at Badger’s U.S. business, the company posted stronger-than-
anticipated margins, and with the U.S. accounting for ~80% of Badger’s
business, we are putting a heavier emphasis on that division. We have
raised our price target from C$52.00 to C$54.00.
Key Points
Strategy Taking Hold In The U.S.: While Q1 is Badger’s seasonally slowest
quarter, we believe that the solid performance in the U.S. is demonstrative of
the positive impacts Badger’s sales strategy is having on its results. Revenue
in the U.S. posted a Y/Y improvement of 19%, and Badger’s U.S. EBITDA
margin came in at 19.7%, up 330 bps Y/Y. U.S. RPT also improved on a Y/Y
basis to $39,855, up 2.7% Y/Y. While we believe we are already starting to
see the positive impact of Badger’s data-driven sales approach, we also
believe there is continued room for growth with some initiatives either not yet
rolled out or in the very early stages.
Expect Weakness In Canada To Last A While Longer: While Badger
posted solid results for Q1 with its EBITDA margin coming in at 18.1%
versus our expectations at 17.8%, it was notably impacted by weakness in
Canada. Revenue in Canada declined 18% Y/Y, while EBITDA margins
north of the border contracted from 18.4% the year prior to 5.6%. RPT in
Canada declined 24% to C$27,832. Badger noted that it had a number of
large projects end in Q4/23, and while it had lined up several other large
projects in Q1 for those trucks, a number of them have been delayed. We
have often noted that a benefit to Badger’s assets being on wheels is that the
company can reallocate its trucks quickly. While this is true, the company
has said it is much harder and more costly to do so cross-border. Badger
added that what it is currently seeing in the market is the normal course day-
to-day business in Canada remains steady; however, at this time it is missing
the contribution from larger projects. The company expects there to be
sequential growth Q/Q in Canada, but for it to remain weak this year on a
Y/Y basis.
Valuation Is Compelling: Over the past month, Badger’s shares have
declined 13% and the company is now trading at 6.0x 2025 consensus
EBITDA. We are applying a 7.0x multiple to our 2025E EBITDA to derive our
C$54.00 price target, which reflects a ~22% return to target. The 7.0x
multiple is roughly one turn below its historical average, reflecting some of
the uncertainty in the Canadian market.