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Small cap builds on recovering U.S. construction market

Shares in Canam, the steel fabrication company that helped build the BC Place roof in Vancouver, are trading near seven-year highs.

DARRYL DYCK/The Globe and Mail

The U.S. economy is back in building mode and that's generating a much-needed boost for investors in steel fabrication company Canam Group Inc.

Shares in Saint-Georges, Que.-based company, which designs and manufactures steel components for bridges and building structures such as the retractable roof at BC Place Stadium in Vancouver, are up more than 65 per cent over the past year.

The stock is also trading near seven-year highs, which analysts say shouldn't be a deterrent for new investors – or a signal for existing ones to sell – given Canam's huge order backlog, mostly in the steadily recovering U.S. industrial and commercial construction market.

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"A lot of people look at this name from the perspective of – 'It has done really well over the past 12 months, has it reached the end?' I don't think so," said National Bank financial analyst Leon Aghazarian.

He points to the company's record backlog valued at about $800-million, which includes about $220-million in new contracts since the start of the year. Some of those include steel for the structure of Rogers Place arena, the new home of the Edmonton Oilers that is slated to open in the fall of 2016, and a retractable roof for the Arthur Ashe Stadium tennis venue in New York.

Analysts say that more than 70 per cent of the company's backlog is in the United States, which is where analysts expect Canam to see the bulk of its near-term growth.

"We believe we are still in the early stages of recovery in the non-residential construction cycle and expect to see more contract announcements in the coming quarters," GMP Securities analyst Justin Wu said in a recent note.

All five analysts that cover the stock have a "buy" or equivalent recommendation on it, according to S&P Capital IQ. The analyst consensus price target for Canam over the next year is $17.55.

That's well above its current price of around $14 on the Toronto Stock Exchange.

Canam shares hit a 52-week high of $15.48 last month, days after the company reported annual revenue of more than $1-billion in 2013 and unveiled its updated order list. It was the highest level for the stock since just before the 2008-09 recession, when a slowdown in commercial and industrial construction took a bite out of the company's earnings. Canam stock fell below $3 briefly in late 2011 after the company cut its dividend to cope with the effects of the recession.

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Business has been steadily picking up since, due in part to a number of acquisitions the company has made to help increase sales. Canam recently bought the steel joist fabrication assets of Quincy Joist Co. in the U.S. as well as a 67-per-cent stake in Massif Technologies, an engineering company that designs lumber framing. It has also sold assets in recent years to focus on its three segments: buildings, structural steel and bridges. Today, Canam says it has 21 plants across North America, Romania, India and China.

Canam shares have jumped about 33 per cent since it announced in October that it would reinstate its dividend thanks to improved profit margins.

Analysts also say its valuation is inexpensive when considering its enterprise value – the market value of all its shares plus the company's net debt – in comparison to its earnings before interest, taxes, depreciation and amortization (EBITDA).

It has an EV/EBITDA ratio of about 7.5, according to S&P Capital IQ, which analysts say is below its three-year average.

Canam and other companies in the construction industry have recently been hit by slowdown in activity, due to bad winter weather in parts of North America. That led Raymond James analyst Frederic Bastien to temper his first-quarter EBITDA expectations for Canam. He maintains a "strong buy" rating on the company. (EBITDA represents earnings before interest, taxes, depreciation and amortization.) He lowered his EBITDA forecast for the quarter to $12-million from $16-million, but kept his estimate for the full year intact at $111-million. The company is expected to report first-quarter earnings on Friday.

"We believe Canam is doing all the right things to maintain its leading position in the steel fabrication industry," he said in a recent note.

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