2. North American Construction Group Ltd. (NYSE:NOA)
Forward P/E Ratio as of April 21: 5.85
Number of Hedge Fund Holders: 11
Average Upside Potential as of April 21: 69.72%
North American Construction Group Ltd. (NYSE:NOA) provides mining and heavy civil construction services to customers in the resource development and industrial construction sectors. It offers mine management services for a thermal coal mine, and construction & operations support services in the Canadian oil sands region.
In Q4 2024, the company’s Australian Operations segment, which includes the contributions from the MacKellar Group and DGI, experienced sequential growth and increased by $31 million. Notably, MacKellar achieved its highest revenue quarter ever in Q4, and the Australian equipment fleet maintained a strong average utilization rate of 82%, which consistently exceeded 80% every month of the quarter.
The acquisition of MacKellar in October 2023 has proven to be a key catalyst for North American Construction’s diversification strategy. In its first year under North American Construction’s ownership, the Australian business exceeded expectations in several areas. The Australian Operations are projected to generate 60% of the company’s earnings before interest and tax (EBIT) in 2025.
Bonhoeffer Capital Management highlighted the company as a compelling investment due to its growth strategy and stated the following regarding North American Construction Group Ltd. (NYSE:NOA) in its Q3 2024 investor letter:
“Our broadcast TV franchises, leasing, building products distributors and dealerships and service outsourcing, fall into this category. One trend we find particularly compelling in these firms is growth creation through acquisitions, which provides synergies and operational leverage associated with vertical and horizontal consolidation. The increased cash flow from acquisitions and subsequent synergies are used to repay the debt and repurchase stock, and the process is repeated. This strategy’s effectiveness is dependent upon a spread between borrowing, interest rates and the cash returns from the core business and acquisitions. Over the past few months, long-term interest rates have been declining and short-term rates are expected to follow so a large and growing spread is available to firms, like North American Construction Group Ltd. (NYSE:NOA) who have a high return on capital. One way to measure future expected returns are post-synergy cash flow ratios paid for acquisitions. Another way to measure future growth in expected returns is through incremental return on incremental invested capital (RoIIC).
Many of our holdings used the acquisition/buyback model described above. Some of these firms have also used modest leverage to magnify the returns of equity to 20% and above, over the past five to ten years from the acquisition/buyback model. These firms include: Terravest, Asbury Automobile, Ashtead, Autohellas, Builders First Source and NOA. In addition, many of these firms are buying back stock and the modest current valuations make these buybacks accretive…” (Click here to read the full text)
