We recently compiled a list of the 7 Most Undervalued Canadian Stocks To Buy According To Analysts. In this article, we are going to take a look at where North American Construction Group Ltd. (NYSE:NOA) stands against the other undervalued Canadian stocks.
The Canadian stock market experienced a notable rebound in the third quarter of 2024, following a sluggish performance earlier in the year. This resurgence was primarily fueled by a series of interest rate cuts by the Bank of Canada, which helped cool inflation and support broader economic recovery. The central bank’s actions, which included rate reductions totaling 75 basis points so far, have rejuvenated the real estate market and provided a significant lift to financial services stocks. According to a report by Reuters, the Toronto market gained 9.7% in Q3 2024, making it the strongest quarterly performance since 2019. The impact of these measures has created an optimistic outlook for the market, potentially setting the stage for continued growth in the coming months.
The third quarter proved to be the strongest for Canada’s main stock market, thanks to a combination of domestic rate cuts and rebounding global markets. Economies around the world showed signs of recovery, improving investor sentiment and benefiting Canadian equities. Financial and technology stocks were among the biggest contributors to the market’s positive performance, with financial stocks gaining 10% and tech stocks up by 12% during the quarter, according to data from Reuters.
This strong performance was driven by key players in the industry, highlighting the potential of Canadian financial and tech stocks. The financial sector also saw significant gains, supported by the large weight of financials in the Canadian index, which amplified the impact of rate relief on credit performance. The recovery was further bolstered by strong earnings reports and a pivot towards rate cuts by the U.S. Federal Reserve, which lent additional support to the Canadian market.
The impressive performance of Canadian stocks can be attributed to a combination of domestic and global factors. Analysts noted that the Bank of Canada’s rate cuts had a revitalizing effect on the real estate market, which in turn bolstered financial services stocks. Jimmy Jean, a prominent economist, pointed out that the expectation of additional rate cuts created a favorable environment for the real estate sector, allowing it to lead the market recovery.
Furthermore, the Canadian stock market benefited from a broader global recovery, as investor sentiment improved in tandem with solid earnings reports from international markets. In this context, Canada emerged as one of the best-performing markets worldwide in the third quarter, following a period of underperformance in the second quarter.
As the outlook for the remainder of the year unfolds, analysts anticipate that if the Bank of Canada continues its rate-cutting strategy, the positive momentum could persist. Lower mortgage rates are expected to alleviate borrowing costs for households, stimulating demand for housing and further strengthening the real estate and financial sectors. However, challenges remain, particularly in light of geopolitical tensions that could impact oil prices and the energy sector. Despite these concerns, the overall sentiment surrounding Canadian equities remains cautiously optimistic, with a focus on identifying undervalued stocks poised for growth in this evolving market landscape.
With these factors in mind, this article delves into the seven most undervalued Canadian stocks that analysts recommend for investors seeking opportunities in this recovering market.
Our Methodology
For this article, we used the Finviz stock screener to identify all the companies operating out of Canada with a forward Price-to-Earnings (P/E) ratio of less than 15 as of October 7, 2024. We then reviewed the price targets set by analysts for each stock and compared them to their respective closing prices on October 7 to evaluate the upside potential. Additionally, we analyzed data from approximately 912 elite hedge funds tracked by Insider Monkey during the second quarter of 2024 to assess hedge fund ownership of each company. The stocks are ranked in ascending order based on their upside potential.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A specialized team conducting site dewatering operations in a vast open pit mine.
North American Construction Group Ltd. (NYSE:NOA)
Upside Potential: 50%
Forward Price to Earnings (P/E) Ratio: 6.07
Number of Hedge Fund Holders: 11
North American Construction Group Ltd. (NYSE:NOA) is a prominent mining and heavy civil construction services provider, operating across Canada, the United States, and Australia. Its diversified operations encompass mine management, heavy equipment rentals, and full-service mine support, making it a valuable inclusion in any list of Canadian stocks. The company’s resilience and operational efficiency along with a forward P/E ratio of 6.07 as of October 8 position it as an undervalued stock with high potential for growth.
During its Q2 2024 earnings call, North American Construction Group Ltd. (NYSE:NOA) showcased strong financial and operational performance despite challenges such as weather disruptions and fleet mobilization in Canada. The company’s adjusted earnings per share (EPS) stood at CAD 0.78, identical to the previous quarter but significantly higher than the same period last year. This consistent growth highlights the company’s ability to navigate industry headwinds while delivering robust profitability. North American Construction Group Ltd. achieved a record EBITDA of CAD 87 million, reflecting a 26% EBITDA margin driven by strong results from its Australian operations. The recent MacKellar acquisition significantly contributed to this performance, as MacKellar posted an impressive 82% equipment utilization in the quarter.
The company’s Canadian operations experienced temporary setbacks due to wildfires and abnormal rainfall, impacting fleet utilization. However, management has taken proactive steps to mitigate these issues by reallocating idle equipment to high-demand regions in Australia. With utilization targets in Canada expected to recover by early 2025, the company is well-positioned for long-term profitability. Furthermore, the company’s Fargo-Moorhead flood diversion project achieved key milestones and remains on track, adding stability to its revenue streams.
From a balance sheet perspective, North American Construction Group Ltd. (NYSE:NOA) ended Q2 with net debt levels of CAD 833 million, resulting in a manageable leverage ratio of 2.2x. The company’s free cash flow generation is expected to improve in the second half of 2024, driven by better utilization rates and strategic debt management. The company’s focus on reducing debt and improving cash flows aligns with its strategy to enhance shareholder value.
Given its operational excellence, strategic growth initiatives, and strong financial metrics, North American Construction Group Ltd. (NYSE:NOA) is a compelling addition to the list of most undervalued Canadian stocks. Its well-managed operations and expanding presence in the Australian market make it a stock with significant upside potential.
In its Q3 2023 investor letter, Bonhoeffer Capital Management stated the following regarding North American Construction Group Ltd. (NYSE:NOA):
“North American Construction Group Ltd. (NYSE:NOA) is a construction services firm that provides heavy civil and bulk earthmoving and project and mine site operations services in supply-constrained markets. NAC is typically the first contractor in and the last contractor out of project and mine sites. NAC has over 3,500 employees and over 900 pieces of equipment in its fleet operating at 30 sites. The fleet has a replacement value of over $2 billion.
NAC was founded in 1953 as a civil construction firm. NAC has provided earthmoving services in Canada since the 1950s, in the oil sands since the 1970s, and for resources firms since the 1980s. NAC was sold to a private equity firm in 2003 and went public in Canada in 2006. A new CEO, Martin Ferron, was appointed in 2012. His goal was to increase geographic and service offering diversification and to increase return on invested capital (RoIC). In 2012, NAC sold its lower-returning and more cyclical divisions providing pipeline construction and piling-related construction, while retaining its oil sands earthworks business. Later in the 2010s, via acquisitions and partnerships with First Nations and other aboriginal groups, NAC expanded its service offerings and its geographic footprint to other geographies such as the US and Australia. Most of NAC’s invested capital is in large dump trucks and other earthmoving equipment. If NAC could maximize fixed asset utilization, then ROIC would increase. An economies of scale in purchasing and maintenance moat was created by having a highly utilized large fixed asset fleet in remote geographic locations with harsh conditions. Since 2015, equipment utilization has increased from an average of 40%, to 61% in 2023. NAC has a target goal of 75% to 85% by 2024. Since 2012, NAC’s RoIC has increased from -12% to 12%, with a current goal of 15%; and its return on equity has increased from -10% to 22%…” (Click here to read the full text)
Overall NOA ranks 4th on our list of the most undervalued Canadian stocks to buy according to analysts. While we acknowledge the potential of NOA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NOA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.