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Tepid economic growth has been a challenge for cyclical stocks, with many trading at a deep discounts to their historical averages. One such stock, Canam Group Inc., is trading below its historical averages and is profiled below.

The company

Saint-Georges, Que.-based Canam Group has exposure to the non-residential construction industry as the largest North American manufacturer of steel components. Canam services three key construction markets: buildings, structural steel and bridges. On average, management estimates that it is involved in the construction of 10,000 projects each year.

Here are some key factors for investors to consider:

  • Growth potential with its strong backlog. The backlog of orders was $1.2-billion at the end of 2015, up from $1-billion last year, with 67 per cent of its backlog focused on U.S. projects. A high backlog is indicative of strong future revenue and earnings growth for the company.
  • Strengthening financials. The company reported better-than-expected fourth-quarter financial results. Looking at the full year, revenue rose 30 per cent to $1.6-billion in 2015. Earnings before interest, taxes, depreciation and amortization (EBITDA) improved to 7 per cent from 6.4 per cent in 2014. Earnings per share jumped 54 per cent to $1.08 in 2015, up from 70 cents in the previous year.
  • Potential profitability improvement. On the fourth-quarter conference call, Marc Dutil, Canam Group’s chief executive officer, stated that he believes “the bridge division can have the most significant impact on our bottom line in 2016.”
  • The company has made management changes to this division aimed at improving its profitability. As well, this division should see benefits from Montreal’s new Champlain Bridge since production began in January.
  • Strong balance sheet. The company’s net debt-to-EBITDA was 1.8 times, providing the company with the financial flexibility to grow organically and through acquisitions.
  • U.S. non-residential construction market. According to the American Institute of Architects’ (AIA) semi-annual Consensus Construction Forecast, non-residential construction spending is anticipated to grow 8.3 per cent in 2016, and 6.7 per cent in 2017. Kermit Baker, AIA’s chief economist, noted that after many years of “challenging” economic times, “the institutional project sector is finally on very solid footing.”

Dividend policy

Canam pays shareholders a quarterly dividend of 4 cents a share, or 16 cents a year, equating to an annualized dividend yield of approximately 1 per cent.

The company suspended its dividend in 2011. Management reinstated its 4-cent dividend paid to shareholders in January, 2014, and has maintained it at this level since then.

Valuation

The stock is trading at a compelling valuation, with the stock trading below historical levels. According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of six times the consensus 2016 estimate, below its historical three-year average EV/EBITDA multiple of eight times.

Analysts' recommendations

According to Bloomberg, there are four recent buy recommendations.

Three analysts have $19 price targets, and one analyst has a $17 target.

The average one-year target is $18.50, implying the shares could appreciate over 40 per cent in the next year.

The consensus EBITDA forecast is $134-million in 2016, up from $112.5-million in 2015, and is anticipated to rise 7 per cent to $143.5-million in 2017. The Street's earnings-per-share forecast is $1.33 in 2016, up from $1.08 this year, and is expected to climb more than 10 per cent to $1.47 in 2017.

Chart watch

The stock experienced a parabolic move, rising from the low $4 range at the start of 2012 to the mid-$13 range by the end of 2013.

Since then, the stock has been trading sideways largely between $12 and $15, with a short period when the share price dipped into the $10 to $12 range.

There is technical resistance at $13, right where the stock's 50-day moving average lies, and then around $14, close to its 200-day moving average ($13.78), and large overhead resistance between $15.50 and $16, a level that the stock has retested several times and has failed to break above.

There is downside support at $12, and large support around $10.

The bottom line

On a risk-reward basis, Canam's upside potential appears to outweigh its downside risk.

I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.

The author does not personally own shares in the security mentioned in this story.