Stock Smarts: Digging for Dollars
A company that does nothing more than dig holes increased revenue by 29 per cent
The other night at a dinner party, a guest who knows a lot about the markets mentioned that a group of his friends had decided to have a contest. Each would pick a stock and the others would treat the one whose choice did best over the next 12 months to dinner.
Intrigued, I asked which stock our guest had selected. Badger Daylighting, he replied. I’d heard of the company but I had never done any research on it. To be honest, I didn’t even know what it did and the name isn’t very helpful. I don’t normally pay much attention to stocks I hear discussed at dinner parties but this one interested me so I decided to look a little deeper.
Well, it turns out that Badger does what badgers do: it digs holes. Big holes, little holes, deep holes, shallow holes, and everything in between. It digs holes for oil companies, construction firms, public utilities, and industrial plants. And, hard as it may be to believe, it does so very profitably.
The company describes itself as “North America’s leading provider of non-destructive hydrovac excavation services”.
If you’re wondering what the heck that means, you’re not alone. It sounded like gobbledygook to me too. It turns out that it’s a proprietary method for excavating using pressurized water to liquefy soil, which is then removed with a vacuum system and deposited into a storage tank housed on specialized trucks. This method is especially useful in areas where there are extensive underground pipes and cables since it eliminates the danger of severing vital lines. If you’ve ever had your phone, water, electricity, cable, or gas cut off by a misdirected mechanical digger, you’ll immediately appreciate the value of the hydrovac system.
Badger, which is based in Calgary, has been designing and manufacturing its system for more than 20 years. It now operates across North America with 957 trucks working out of over 100 local offices.
In case you don’t think there’s a lot of money in digging holes, take a look at the company’s third-quarter financial results, which were released on Nov. 14. Year-over-year revenue increased by 29% to $113.1 million, thanks mainly to a 34% increase in Canadian revenue (U.S. revenue was up 24%). The big jump in Canada was due in part to last year’s acquisition of Fieldtek Holdings Ltd. but even without that revenues would be up 17%.
Funds from operations (FFO) increased by 58% period over period to almost $31 million from $19.6 million in the comparable quarter of 2013. Net profit was $16 million ($0.43 per share) compared to $11.8 million ($0.32 per share) in the same period of 2013.
For the first nine months of the 2014 fiscal year, Badger reported a profit of $36.1 million ($0.97 per share) compared to $29.1 million ($0.79 per share) a year ago.
Investors did not pay much attention to Badger until the spring of 2013. Then the shares began a steady upward climb, culminating in an all-time high of $43.63 on April 1. They then began a retreat that was exacerbated by a relatively weak first-quarter report. That continued until mid-October when the stock traded as low as $23.75. It has since rallied but at $32.77 it is still trading well below its April high and its 200-day moving average.
At the current level the shares are not cheap. The trailing 12 months p/e ratio is 25.8, based on earnings of $1.27 per share over that period. However, the company appears to have good upside potential, particularly with the U.S. economy on the rebound.
The shares also offer modest cash flow with a monthly dividend of $0.03 per share ($0.36 a year), to yield 1.1% at the current price.
What could go wrong?
A downturn in oil drilling and/or the construction industry would certainly have an impact on Badger’s business. But with so much North American infrastructure needing to be replaced or upgraded, there should be plenty of business for hole diggers in the coming years.
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