Fabrice Taylor is a chartered financial analyst.
As far as headlines go, Cash Rich And Vastly Undervalued will catch the eye of even the most jaded second-millennium investor.
That's National Bank Financial's description of Seacliff Construction Corp. and Churchill Corp., both of which toil in the building industry.
Both are pound-the-table buys, according to the firm. The arguments are interesting. A summary: Both companies earned solid profits in the latest quarter. Churchill beat the Street's estimates by 10 per cent, while Seacliff blew them out of the water. Both firms have solid backlogs and are benefiting from something of a resurgence in their home markets in Western Canada.
Neither company's profitability is expected to shoot out the lights over the next couple of years, although earnings are expected to rise in both 2010 and 2011.
More important to the valuation are free cash flow and the cash balances both companies carry.
Seacliff is forecast to crank out between $20-million and $25-million in excess cash a year over the next three to four years as it works off its backlog. A sign of management confidence is that the board recently instituted a dividend. Churchill's free cash flow will be even greater.
As things stand, Churchill has $130-million in cash and a market value of $215-million. Seacliff's cash represents almost two-thirds of its market capitalization. Neither company needs that much money, so they can either give some back to shareholders through buybacks or dividends (Seacliff yields about 2.5 per cent while Churchill doesn't pay a dividend) or they can grow by acquisition. The construction market is still pretty fragmented, and both firms are western centric.
Both companies also have specific selling features. Churchill recently hired a new chief executive officer and a new head of its Stuart Olson construction division. Both of its new leaders have, according to National Bank, a focus on creating shareholder value, and since the Stuart Olson division is the big earnings engine at Churchill, that bodes well. Stuart Olson's profitability is rapidly on the rise, and has been for several years. Churchill also got rid of a money-losing division this year. The consolidated backlog, meanwhile, is surprisingly strong at $1.3-billion and growing.
Seacliff went public about a year ago, so it has little history as a public company. But it does have a very defensive backlog, with 75 per cent of it being institutional, which isn't as prone to be cancelled because of economic factors.
Despite a cooling construction market, Seacliff is performing well, meaning it could be gaining market share.
Of greater interest, though, is what it will do with all that cash if its stock stays in the doldrums. A huge dividend is possible; a big acquisition (or some small ones) is also possible. A going-private transaction might be an option, too, or a hostile bid. After all, you could finance the purchase of this company largely with its own cash.
Seacliff trades for nine times forward earnings, while Churchill changes hands at about eight times. Accounting for excess cash, these companies both trade for next to nothing. Low multiples aren't uncommon in this industry, where bad news can materialize very quickly. But these ones seem too low, which is probably why both stocks are doing well.
If you're like me, you might find the idea of buying stocks somewhat paralyzing as we head into the frightening fall season, especially when it feels like - at least - a pullback is warranted. If so, though, keep your eyes on these names. They'll likely sell off sharply - and bounce back as vigorously.
*****
Construction firms with promise
SEACLIFF CONSTRUCTION / ( SDC/ TSX)
Yesterday's close $9, up 15 ¢
CHURCHILL CORPORATION / ( CUQ/ TSX)
Yesterday's close $13, up 70 ¢
THE GLOBE AND MAIL 66 SOURCE: THOMSON DATASTREAM A
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