Raymond James analyst Frederic Bastien and Bryan Fast think it’s now appropriate to “temper” their optimism toward Infrastructure and Construction (I&C) stocks.
In a report released Tuesday, they cut their expectations for most companies in their coverage universe, citing “extreme market volatility resulting from supply chain disruptions, runaway inflation and the Ukraine war.”
“The 19 companies included in today’s report underwhelmed in 1H22, with only five stocks faring better than the broader TSX Index over the period as inflation fears gripped the market,” they said. “Last year’s runner-up (IBG), asset-heavy names (BIP, BEP) and large machinery stocks (RBA, TIH) accomplished the feat, while many labour intensive businesses (FSV, DXT) suffered steep declines. Our other professional services firms and engineering consultancies (CIGI, STN, WSP) gave up some of their exceptionally strong 2021 gains early in the year, but have recently firmed up on the premise they should have a hand in helping governments implement their green recovery plans and organizations transition to a net zero future.”
The analysts do see I&C stocks “entering a possible economic recession in much better shape than they were at the onset of the Global Financial Crisis.”
“They have diversified their revenue streams by discipline, end-market and geography, and many can count on stronger balance sheets to see them through tougher times,” they said. “Moreover, weaker links are no longer part of the equation due to takeovers, bankruptcies or research coverage realignment, which partly justifies the positive bias behind our stock recommendations. The risk, of course, is that while many management teams we discussed with in the past week are innately optimistic, demand conditions are on the cusp of deteriorating as the world rapidly adjusts to the dramatic events that have unfolded in the financial markets.”
The analyst also made these target adjustments (I only included the stocks I own):
- Bird Construction Inc. (“outperform”) to $12 from $13.50. Average: $12.39.
- Colliers International Group Inc. ( “strong buy”) to US$170 from US$180. Average: US$159.86.
- Finning International Inc. (“outperform”) to $39 from $46. Average: $44.67.
- North American Construction Group Ltd. ( “outperform”) to $24 from $27.50. Average: $27.30.