We recently compiled a list of the 10 Best Canadian Stocks To Buy According to Wall Street Analysts. In this article, we are going to take a look at where North American Construction Group Ltd. (NYSE:NOA) stands against the other Canadian stocks.
In the ever-evolving landscape of investment opportunities, keeping an eye on the broader economic environment can be as crucial as analyzing individual stocks. As we delve into the best Canadian stocks to buy, it’s important to consider the country’s current economic outlook. Canada’s economic environment reveals a complex mix of challenges and potential opportunities. The global economy is still reeling from historically high inflation, which has triggered the most aggressive monetary tightening in decades. While the U.S. economy has demonstrated an unexpected resilience, balancing robust growth with moderating inflation, Canada’s situation requires closer scrutiny. The Canadian economy, though strong in many respects, is particularly sensitive to interest rates. High levels of household debt and relatively short mortgage terms amplify the effects of rising interest rates, making Canadian consumers and businesses more vulnerable compared to their U.S. counterparts. Nevertheless, the latter part of 2023 showed unexpected economic strength, buoyed by record immigration and positive spillover from a resilient U.S. economy, leading to a significant easing of recession fears in Canada.
Yet, the Canadian economy is not entirely out of the woods. Growth is anticipated to remain below trend in 2024, with the Bank of Canada forecasting a modest GDP increase of 1.25% to 1.5%. This slowdown is partially attributed to Canada’s distinct economic vulnerabilities. For instance, productivity growth has been alarmingly weak, with Canada’s senior deputy governor labeling it as an “emergency”. This decline is largely due to insufficient business investment in key areas such as equipment and intellectual property, compounded by limited competition in essential sectors like telecommunications and banking. On a positive note, this slower growth is expected to ease inflationary pressures. Headline inflation has been gradually decreasing, and core inflation, which excludes volatile food and energy prices, is moving closer to the Bank of Canada’s target range. This scenario provides the Bank with some flexibility, with expectations for a 50-75 basis point reduction in interest rates later this year.
Despite strong job creation, particularly a notable surge in April 2024, employment growth of 2.0% over the past year has not kept pace with the 3.4% rise in population. This disparity has pushed the unemployment rate up by nearly a full percentage point to 6.2%, and it is projected to remain high through the rest of this year before beginning to decline in 2025. Wage growth, which averaged 5.3% in 2023, has decelerated to 3.9% (annualized) in the first quarter of 2024. With inflation pressures easing, this slower wage growth is expected to continue through 2024 and into the following year. Although the Bank of Canada’s decision to cut its policy rate is a step in the right direction, Canadian households remain the most indebted in the G7. The interest rate hikes since 2022 have strained household finances, resulting in a decline in real consumer spending per capita over five of the last seven quarters as more income is diverted towards servicing mortgage and loan interest payments.
The housing market has felt these effects more acutely. Real residential investment per capita dropped by 22.8% in the first quarter of 2024 compared to two years earlier. Looking forward, consumer spending and residential investment are expected to recover as lower interest rates stimulate demand. However, with low consumer confidence, hesitation to make significant purchases, ongoing housing affordability issues, and elevated savings rates, the pace of recovery in the latter half of 2024 is likely to be slow. Deloitte forecasts that more substantial improvements in consumption and residential investment will occur next year as confidence improves. Overall, Canada’s economy performed better in the first half of 2024 than expected, but this strength is projected to be counterbalanced by slower real GDP growth in the latter part of the year due to reduced household spending. The updated forecast anticipates real GDP growth of 1.2% for 2024, accelerating to 2.6% in 2025. On a per-capita basis, real GDP is expected to decline by 1.6% this year before rebounding to 1.1% growth in 2025.
For investors looking to capitalize on these evolving conditions, understanding the underlying economic indicators and trends is essential. With this context, we now turn to a detailed examination of the best Canadian stocks to buy according to Wall Street analysts.
Our Methodology
For this article we first used a stock screener to identify Canadian stocks that analysts see material upside to, as of September 9. From this list we chose 10 stocks that have the highest upside potential from their current price based on average analyst price targets.
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: 54%
Average Analyst Share Price Target: $27.96
North American Construction Group Ltd. (NYSE:NOA) is a leading provider of mining and heavy construction services, particularly focused on surface mines in Canada’s oil sands region. It presents an upside potential of 54%, with analysts setting an average share price target of $27.96.
The company’s Q2 2024 performance demonstrated resilience despite challenges, particularly in its Canadian operations, which faced weather-related disruptions. However, the company maintained an impressive 26% EBITDA margin, highlighting its strong operational efficiency. Its Australian division continued to perform exceptionally well, with MacKellar posting its best results in company history, contributing significantly to overall growth. A key strength for North American Construction Group Ltd. (NYSE:NOA) is its focus on safety and operational consistency. The company has won several safety awards, underscoring its commitment to its workforce. This focus has allowed it to expand its workforce significantly since 2016, with hours worked up 340%. Furthermore, the company’s ability to manage its fleet efficiently is also notable, with 50 underutilized trucks either being reallocated to more productive markets or sold at favorable terms.
Financially, North American Construction Group Ltd. (NYSE:NOA) acquisition of MacKellar in Australia continues to pay dividends, as it contributed to a third consecutive quarter of solid performance. Gross profit margins remained strong, especially in the Australian division, which achieved over 20% in Q2. Moreover, North American Construction Group Ltd. (NYSE:NOA) strong cash flow generation and reasonable debt levels give it flexibility to fund future growth and integrate new assets. The company’s future looks promising, with a robust backlog of CAD 2.8 billion and growing opportunities in both the Canadian oil sands and Australian resource sectors. North American Construction Group Ltd. (NYSE:NOA) ability to win contracts outside its traditional markets, combined with operational efficiencies, makes it well-positioned for sustained growth and profitability in 2024 and beyond.
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 8th on our list of the best Canadian stocks to buy according to Wall Street Analysts. While we acknowledge the potential of NOA to grow, 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.
