Skip to main content
reader's choice

Equity markets appear fragile due to global growth concerns. As well, stock valuations are questionable given many companies' lack of growth or decelerating growth. Amid the declines in Tuesday's 288-point sell-off in the S&P/TSX composite index, which stocks managed to retain their value? A screen, for TSX-listed stocks with a market capitalization greater than $200-million that have positive year-to-date returns and delivered at least a 1-per-cent gain on Tuesday, resulted in a list of 22 stocks (see table below).

One such company that held its ground is profiled below. It is also a stock a reader requested an analysis on.

The company

Calgary-based DIRTT Environmental Solutions (the acronym stands for Doing It Right This Time) designs, manufactures and installs customized interiors serving industries such as health care, education and energy. The company's services provide consumers with customized construction at a reasonable cost and in a quick time frame. Most projects, approximately 80 per cent, are renovations, not new builds. Sales are generated through distribution partners. As of last month, DIRTT had 98 distribution partners in 180 locations whom, with a vested interest in the company, are motivated to generate revenues. Management is focused on growth, expanding in existing markets and plans to enter new markets and new geographies. As such, the company currently does not pay a dividend.

Client base

The company has a diversified customer base ranging from small businesses to large multinational firms.

For the first half of the year, 81 per cent of revenues stemmed from the United States, 16 per cent from Canada and international projects represented 3 per cent of revenues. The strengthening U.S. dollar is positive for the company. At the start of 2015, approximately 20 per cent of clients were in the energy related segments, oil and gas and pipelines. In the second quarter, revenues from Canada declined 38 per cent year-over-year.

Financial results

In addition to its energy exposure, DIRTT reported weaker-than-expected second-quarter results, sending the stock price down 6 per cent. The company reported revenue of $52.9-million, below the consensus estimate of $54.6-million. Adjusted gross profit margins at 42 per cent were also shy of expectations, and down from 43.2 per cent reported last quarter. Furthermore, management announced the revenue contribution from an existing large contract would be deferred to the fourth quarter, with the majority of the balance of remaining revenues not realized until 2016.

Revenues can vary from quarter-to-quarter or be "lumpy" depending on the number of projects and sizes. For instance, the average project size was $76,000 in the second quarter, down from $89,000 in the first quarter.

Balance sheet

In June, DIRTT raised approximately $40.6-million, net, through a bought deal financing, issuing shares at $8.35. The cash position at the end of the second quarter was $92.7-million, or more than $1 a share.


The stock is trading at an 2016 enterprise value to earnings before interest, taxes, depreciation and amortization multiple of 9.5 times the consensus estimate, above its one-year historical average of nine times.

On a price-to-earnings basis, the stock trades at 20.8 times the consensus 2016 earnings estimate, above the one-year historical average multiple of 17.8 times.

Chart watch

The stock has a limited trading history since it was just listed in November, 2013. Year-to-date, the stock price has advanced 73 per cent. However, the positive price momentum hit a speed bump and the stock has declined 30 per cent since its peak in May. There is technical support around $6, failing that around $5.50 and then $5. There is upside resistance around $6.50, then at $7. The stock has a relative strength index reading of 57, a neutral level.

Analysts' recommendations

There are eight analysts who cover this small cap stock, all have buy recommendations. One-year price targets range from $8 to $10, the average one-year price target is $8.82, implying a potential price return of more than 40 per cent.

Analysts are forecasting strong revenue and earnings growth for the company. The consensus revenue estimate is $233-million in 2015, expanding to $278-million in 2016. The consensus earnings per share estimate is 17 cents a share in 2015, growing to 30 cents in 2016.

The bottom line

I prefer recommending stocks that deliver, or are expected to deliver, positive earnings surprises and have positive earnings revisions by analysts. This stock doesn't have these qualities. As well, the company's energy exposure is a concern. That being said, much of these negatives have now been priced into the stock. Furthermore, the company has a strong, proven management team and a solid balance sheet. In the near-term, given the market volatility, if the stock price falls below $6, that is where I would be recommending the stock.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to

CompanyTicker$ Price (Sep. 24)
Acadian TimberADN-T20.63
Advantage Oil & GasAAV-T7.21
Aecon GroupARE-T12.97
Atrium Mortgage InvestmentAI-T11.57
Boyd Group Income FundBYD.UN-T60.42
CanWel Building MaterialsCWX-T5.74
Chorus AviationCHR.B-T5.60
Clairvest GroupCVG-T29.85
Colliers InternationalCIG-T58.04
DIRTT Environmental SolutionsDRT-T6.24
Guardian Capital GroupGCG.A-T17.50
Horizon North LogisticsHNL-T2.65
K-Bro LinenKBL-T46.93
Kinaxis Inc.KXS-T40.99
Newfoundland CapitalNCC.A-T11.10
North West CompanyNWC-T28.27
Pure Industrial REITAAR.UN-T4.49
Sienna Senior LivingSIA-T16.98
Total Energy ServicesTOT-T14.67
Winpak Ltd.WPK-T40.45