Tree Island Steel Ltd. shares have been hammered following a recent earnings miss, but analysts say the sell-off is overdone and creates a buying opportunity for investors.
Shares of the Richmond, B.C.-based manufacturer and supplier of steel products such as nails and wire mesh, are up more than 30 per cent over the past year, but are also down about 25 per cent since Nov. 2, the day before the company reported third-quarter earnings that were below analysts' expectations.
Revenues fell 6 per cent year-over-year to $57.7-million in the quarter ended Sept. 30. EBITDA (earnings before interest, taxes, depreciation and amortization) fell to $5.4-million compared to $6.2-million a year earlier, and below expectations of about $7-million.
Tree Island chief executive officer Dale MacLean blamed lower selling prices and "moderating customer sentiment" for the drop in results. He also pointed to a "temporary pause-type effect in the U.S. economy" – the company's largest market – and a "more cautious tone in the short-term," which included the months leading up to the U.S. presidential election.
Analysts also view the pullback in the stock as temporary and cite the company's diversified product mix and an anticipated boost in infrastructure spending across North America as reasons to own its shares.
The stock is also cheap right now, after the recent sell-off.
"I would argue the valuation is quite attractive," said Raymond James analyst David Quezada. "The fundamentals of the business haven't changed much … I think right now is a good opportunity."
Mr. Quezada has a "buy" rating on the stock and $5.75 price target. Among four analysts who cover Tree Island, three have a "buy" rating and one a "hold." The analyst consensus price target over the next year is $5.69, which is nearly a 26-per-cent increase from where it's currently trading around $4.50.
Canaccord Genuity analyst Roman Trusz recently initiated coverage of the stock with a "buy" rating and $6.00 target price, saying Tree Island is "nailing it."
"With [approximately] 43 per cent of sales coming from the construction sector, the thriving U.S. housing market, and significant non-residential spending on tap across North America [those factors] provide a long, stable runway of growth," Mr. Trusz said in a note.
He forecasts "modest" EBITDA growth driven by "a better product mix, production efficiencies related to the recent consolidation of residential production, and overall operating leverage from higher volumes."
In an interview, Mr. MacLean said his goal since joining the company in mid-2011 has been to help "bring stability back to the business," which was hit hard by the U.S. housing crisis a decade ago and the subsequent global recession.
"Our focus now is clearly on growth. We've cleaned up the balance sheet. We've defined what we feel is the critical path for Tree Island," Mr. MacLean said.
That allowed the company to buy Irving Wire Products Corp. of Calgary in November, 2015, and continue to be on the hunt other acquisitions.
Mr. MacLean said Tree Island also has a lot of capacity to expand its existing business in the U.S and Canada.
Risks for the company include a downturn in the economy, in particular in the U.S. where it generates about two-thirds of its sales, as well as competition.
Ryan Modesto, managing partner at independent research company 5i Research, credits Tree Island for improving its balance sheet in recent years. The company's dividend, which currently yields about 1.8 per cent, also appears stable, he said.
"At the lower valuation, it is looking interesting right now," Mr. Modesto said of the stock.
Still, he cautions investors about getting in.
"There are things that could work for it, but it is a higher-risk name," Mr. Modesto said, recommending investors who may be interested buy some shares now and then again later if the company shows more growth.