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North American Construction Hits 52-Week High: Room to Run?


North American Construction Group Ltd. or NACG NOA crafts a new 52-week high of $12.48 on Oct 8. The stock pulled back to end the trading session at $12.44, gaining 6.4%. That said, we have noticed that NACG has outperformed the industry in each of 4-week, 12-week and 52-week time frames, validating its Momentum Score of A.

In fact, NACG has gained 151.4% year to date against the Zacks Construction sector’s decline of 15.6% and the Zacks Heavy Construction Industry’s fall of 17.8%. Higher construction activity as well as solid execution of its organic and inorganic growth plan should drive the stock’s performance in the upcoming quarters as well.

Also, over the past 30 days, earnings estimates for 2018 have increased 2.2%, while remaining steady for 2019, with expected year-over-year growth rate of 235.7% and 21.3%, respectively. This Zacks Rank #1 (Strong Buy) company has an impressive Growth Score of A.

Importantly, the industry ranks in the top 24% (62 out of 256) of the Zacks classified industries. In fact, the industry has been gaining from a buoyant U.S. economy and robust construction market fundamentals.

What's Driving the Outperformance?

Increase in mine support services revenues, along with overburden removal on earthworks activity at each of the Mildred Lake and Millennium mines have been driving the top line of the company. NACG continues to generate civil construction revenues from its three-year mine support contract at the Highland Valley Copper mine in British Columbia, which began in the third quarter of 2017. Revenues also come in from mine support services, realized from the Dene North Site Services partnership and multiple oil sands operations.

Meanwhile, the company is progressing well with its three-year organic growth plan that targets a minimum 15% compound growth in revenues and EBITDA over the said period. In fact, the second quarter of 2018 marks the second year of this growth plan. Following 37% and 24% growth in revenues and EBITDA, respectively, in 2017, NACG is on track to exceed its growth targets for 2018. EBITDA growth is expected to be at least 30% for 2018.

The plan requires NACG to generate production-related recurring service volumes in the company’s core oil sands market, together with the addition of value-creating services.

Additionally, the company follows a systematic inorganic strategy in order to diversify its offerings into other commodity areas (e.g. base metals, precious metals, and diamonds) and infrastructure-related projects that involve major earthwork. The latest agreement to acquire Nuna Logistics is a classic example of the same. On Sep 20, NACG agreed to acquire minority stake in Nuna Logistics, a civil construction and contract mining company, from a group of private selling stakeholders. The $42.5-million deal will give NACG a 49% interest in the civil construction and contract mining company, which is active across Nunavut and Northwest Territories.

Nuna Logistics generates sales from non-oil-sands operations, offering NACG an opportunity to execute its customer and revenue diversification strategy, with approximately 20% incremental and diversified revenues expected from the deal in 2019.

NACG will play an active role in the leadership of Nuna and hence anticipates the synergies to be fully realized within two years from the closing of the transaction, which is likely to occur early in the fourth quarter.

Moreover, on Oct 3, NACG has signed a definitive purchase and sale agreement to acquire the heavy construction equipment fleet and related assets of Aecon Group Inc. for $199.1 million in cash. This addition is likely to provide NACG with more than $220 million of additional annual revenue capability. Importantly, NACG anticipates 2019 basic earnings per share to exceed $1.60, subject to closing of the transaction by the end of 2018.

Other Stocks to Consider

Other top-ranked stocks in the Construction sector include Fluor Corporation FLR, AECOM ACM and KBR, Inc. KBR. While Fluor sports a Zacks Rank #1, AECOM and KBR both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fluor’s 2018 earnings are expected to increase 39.3%.

AECOM surpassed earnings estimates in all the trailing four quarters, resulting in an average positive surprise of 3.15%.

KBR surpassed earnings estimates in three of the trailing four quarters, delivering an average positive surprise of 12.3%.

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