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North American Construction Gains 90% YTD: More Room to Run?

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Riding on higher construction activity, North American Construction Group Ltd. or NACG (NOA - Free Report) has emerged as an attractive investment option of late. So far this year, the stock has surged 90.9% while the industry has declined 15.3%.

Notably, earnings estimates for this premier provider of heavy construction and mining services in Canada have moved north, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s 2018 earnings has moved up 84% over the past 60 days. Estimates for 2019 have climbed 14% over the same time frame. This signifies that analysts are optimistic about the company’s future earnings growth.

Let us delve deeper into other factors that make this Zacks Rank #1 (Strong Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank stocks here.


 

Higher Construction Activity to Drive Revenues

Increase in mine support services revenues along with overburden removal on earthworks activity at each of the Mildred Lake and Millennium mines have been driving the top line for the company. Notably, the company’s revenues grew 67% in the second quarter of 2018 backed by the above-mentioned factors. Meanwhile, higher levels of heavy civil construction activity at the Kearl mine has contributed to the growth.

NACG continues to generate civil construction revenues from its three-year mine support contract at the Highland Valley Copper mine in British Columbia, which began in the third quarter of 2017. Revenues also come in from mine support services, realized from the Dene North Site Services partnership and multiple oil sands operations.

Solid Organic Growth Plan

The company is progressing well with its three-year organic growth plan that targets a minimum 15% compound growth in revenues and EBITDA over that period. In fact, the second quarter of 2018 marks the second year of this growth plan.

The plan requires NACG to build production-related recurring service volumes in the company’s core oil sands market together with the addition of value-creating services. The company also intends to expand its market coverage to include other resource mines (e.g. coal, copper, gold, diamonds, etc.) and infrastructure-related projects that involve major earthwork.

Following the 37% and 24% growth in revenues and EBITDA respectively in 2017, NACG is on track to exceed its growth targets for 2018. EBITDA growth is expected to be at least 30% for 2018.

NACG has solid growth prospects, as is evident from the Zacks Consensus Estimate for its current-year earnings of 46 cents per share, reflecting 228.6% growth year over year (higher than the industry average of 38.2%). Meanwhile, the company’s revenues are expected to increase a decent 22.1% in 2018 (versus 2.4% of the industry). Also, the stock is a great pick in terms of growth investment, supported by a Growth Score of A.

Acquisition of Nuna Logistics

On Sep 20, NACG agreed to acquire minority stake in Nuna Logistics, a civil construction and contract mining company, from a group of private selling stakeholders. The $42.5-million deal will give NACG a 49% interest in the civil construction and contract mining company active across Nunavut and Northwest Territories.

Nuna Logistics generates sales from non-oil-sands operations, offering NACG an opportunity to execute its customer and revenue diversification strategy, with approximately 20% incremental and diversified revenues expected from the deal in 2019.

This addition is in line with NACG’s growth plan, as Nuna expands end user coverage into other commodity areas (e.g. base metals, precious metals, and diamonds) and infrastructure-related projects that involve major earthwork.

Other Stocks to Consider

Other top-ranked stocks in the Construction sector include Primoris Services Corp. (PRIM - Free Report) , KBR, Inc. (KBR - Free Report) and Jacobs Engineering Group Inc. (JEC - Free Report) . While Primoris Services and KBR sport a Zacks Rank #1, Jacobs carries a Zacks Rank #2 (Buy).

Primoris Services’ earnings are expected to increase 34.8% in 2018.

KBR surpassed earnings estimates in three of the trailing four quarters, resulting in an average positive surprise of 12.3%.

Jacobs’ 2018 earnings are expected to increase 35.2%.

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