Blacktop politics are as old as the roads that led to Rome, but the time lag between a politician promising to improve public infrastructure and cutting the ribbon has grown longer—to years, and sometimes as much as a decade. Projects must be identified, cost-sharing with local governments negotiated, engineering studies conducted, budgets set and land acquired before a shovel ever strikes the dirt. That’s assuming there are no protests or legal challenges.
The federal Liberals came to power a year ago in large part on their promise to invest $120 billion in infrastructure over the next decade, essentially doubling Ottawa’s spending from the previous 10 years. So far, not much has been spent. About $1.8 billion had made its way into the economy as of June 1. A lot of Canadian businesses are eagerly awaiting this economic stimulus amid an otherwise sluggish environment. But it is infrastructure companies that are first in line to get their hands on the cash.
Investors in those companies will need to be patient, cautions Mona Nazir, a research analyst Laurentian Bank Securities, but the money will come—and so, too, will higher earnings and equity prices. Many of these companies already enjoyed a bump in share prices when the Liberals won the election, and again after the budget announcement, but Nazir thinks the real gains will come once the extra cash starts showing up on balance sheets. “As the money flows through, organic growth should be higher,” she says.
The bigger, more expensive projects, such as roads, bridges and water pipe upgrades, will likely start getting funded in 2018, says Nazir. However, Maxim Sytchev, an analyst with National Bank Financial, thinks money will start moving as early as 2017. Once that happens, Sytchev says, “the tide will lift every boat.” Architects, contractors, engineers and equipment sellers should all see some uplift, as should makers of infrastructure inputs such as concrete, formed steel and utility poles.
Of course, some companies will benefit more than others. The government has said that transportation, waste water and First Nations infrastructure upgrades are all a priority and could receive the first phase of funds. Design and engineering firms will also be the ones that touch that cash before anyone else, says Nazir, since they’re first in the infrastructure food chain. Construction firms come into the picture near the end.
Another factor in stock selection is the level of exposure to the domestic market you want. The companies that will see the biggest boost are those that derive the greatest share of their revenue from Canada; bigger firms, such as WSP Global or Stantec, may not benefit as much. The former, for instance, makes just 18% of its sales in Canada. Conversely, you may prefer the stability of more geographically diversified players. The downturn in the energy sector, which hit Canada’s construction companies hard, illustrated the vulnerability of domestic firms.
There are other ways to play the infrastructure spend, too. Vishal Patel, a portfolio manager with Dynamic Funds, doesn’t see as much additional upside in the infrastructure sector as some do. Retailers, which should benefit as the infrastructure money makes its way into the overall GDP, represent a better buy right now, he argues. The government stimulus, once it starts flowing, he says, will be “good for the Canadian consumer and the banks, too.”
In fact, just upping your Canadian assets could be a boon for your portfolio, says Patel. But if you’re seeking a pure play, the coming years look to be good ones for the builders of civil infrastructure. “It’s hard to find an industry where there is an upward spending pattern,” says Sytchev. “It’s nice in terms of absolute return, but from a relative basis, it looks even more attractive.”
Five Canadian infrastructure stocks to watch
Bird Construction Inc. (TSX: BDT)
Once heavily weighted to commodities, this Mississauga, Ont., construction company now derives 60% of its top line from infrastructure. It’s one of the more undervalued operators, says Maxim Sytchev of National Bank.
Stantec Inc. (TSX: STN)
This Edmonton-based engineering consultancy has taken a hit from its oil and gas exposure. It’s undervalued, says Sytchev, trading at 14.6 times 2017 earnings.
IBI Group Inc. (TSX: IBG)
This Toronto architecture and engineering firm generates 55% of its revenues in Canada, mostly from the building and infrastructure verticals. It’s a good organic grower, expanding 8% this year.
WSP Global Inc. (TSX: WSP)
Montreal-based WSP provides a global hedge for those who don’t want to be too exposed to Canada—WSP generates 18% of its revenues here.
Pure Technologies Ltd. (TSX: PUR)
Calgary’s Pure Technologies monitors water pipelines. It has devised a swimming ball that can detect leaks—a cost-saving solution, says Laurentian Bank’s Mona Nazir.
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