Badger Daylighting will never be the sexiest stock in your portfolio. After all, the company makes millions by sucking dirt out of the ground. But, in this case, drab is working. Badger's share price has surged 64% since last July, yet it still seems to have plenty of growth potential. "This is one of my top picks for the year," says Brian Pow, vice-president of research for Calgary-based investment dealer Acumen Capital Partners.
Badger builds and operates trucks and tools that use vacuum technology to excavate, meaning they can dig around pipelines, cables and other obstacles without damaging them. Yet the company had been on a bumpy ride since oil prices started to slide in 2014. Badger's share price declined by half between April, 2014, and last July. Then, long-time CEO Tor Wilson had to step down for medical reasons.
But before Wilson left, he had already done much of the heavy lifting required for a turnaround: diversifying beyond the oil and gas industry, expanding in Eastern Canada and the United States, and cleaning up Badger's balance sheet. Wilson's successor, Paul Vanderberg, says it should be a smoother road from here. "This is a high-value business with good margins and a good return on capital," he says.
One big boost could come from increased infrastructure spending in Canada and the United States, says Pow, especially President Donald Trump's proposed $1-trillion (U.S.) spree. Currently, about a third of Badger's sales are in the U.S., and the company wants to increase that to at least half over the next five years.
Badger also plans to keep diversifying into sectors such as utilities and home building. When oil prices started sinking in 2014, the company quickly shifted 200 idle trucks out of Alberta. That was a smart move, says Pow, although Badger's earnings per share still plunged by 39% in 2015.
Wil Wutherich, president of Montreal-based investment manager Wutherich & Co., says Badger has other impressive fundamentals. The company has minimal debt, and it provides an in-demand service its competitors have trouble matching. There are other vacuum-excavating companies and Badger's own process isn't patented. But it is complex, and the company keeps it tightly under wraps.
There is just one obvious worry for investors: valuation. Lately, Badger has been trading at a trailing price-to-earnings multiple near 30. That's in the upper range among the stocks Wutherich has in his portfolio. But he thinks investors are willing to accept a high basic multiple for Badger. "It has revalued as people have seen how successful it's been in redeploying its fleet to other sectors," he says. Wutherich has owned the stock for about 16 years, and he doesn't plan to sell, but he's not buying more, either. However, that could change if Badger's growth beats expectations. "I hope they blow completely past them," he says.
By other measures, the company may be more reasonably priced. Pow looks at the ratio of enterprise value to EBITDA, and on that basis Badger is in line with its peers in the environmental and facilities services sector, and cheaper than the S&P/TSX Composite Index. It's trading at 9.2 times its forecast EV/EBITDA ratio, compared with about 13 times for the index. Pow also focuses on Badger's average monthly revenue per truck. That is now about $28,000, and Vanderberg is aiming to hit $30,000.
Pow would like Badger to add more vehicles, but Vanderberg is cautious. "We're a one-truck-at-a-time organic growth model," he says. "It's slow and steady." Nor is Vanderberg inclined to raise Badger's dividend. The current dividend yield is only about 1.1%. But Vanderberg says he prefers to reinvest in the business first.
That discipline should help pave the way for more expansion. Pow thinks Badger can beat growth expectations, which makes it worth the high trailing P/E ratio. His price target is $35, but he believes the stock could hit $40. "This business is lean and mean," he says.
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