Investors in industrial machinery company Wajax Corp. have seen a pickup in their shares in the past week after the company showed more results from its cost-cutting efforts, but the stock is still being weighed down by a sluggish commodities sector that shows no sign of near-term improvement.
Shares of Mississauga, Ont.-based Wajax are up about 10 per cent since it showed on Aug. 7 how it was saving millions by reducing spending and debt amid falling revenue.
Wajax has 123 locations across Canada that sell and service equipment to the resources, construction and transportation sectors. Its revenue has been hit by the slump in the mining and energy sectors, which represents about a third of its business, as well as a weaker Canadian economy overall.
Analysts say Wajax is doing what it can in a tough market, but investors haven't been thrilled with all of its recent moves.
Wajax recently closed a $74.8-million bought deal financing to help strengthen its balance sheet and set it up for potential acquisitions. The issue was announced in late May when the stock price was down 50 per cent from its high of just above $50 in May, 2012, and at its lowest point since the 2008-09 global financial crisis.
"Investors were not happy that [the financing] was so dilutive," said Raymond James analyst Ben Cherniavsky, who has a "market perform" rating, which is similar to a "hold," and $24 price target on the stock.
Wajax isn't the only parts-and-service business suffering from the weaker mining and energy markets, but "from an investor perspective, it's difficult to get really excited at this point," Mr. Cherniavsky said. "The valuation is attractive – I just don't know when we're going to get out of this cycle and how low it's going to go."
Among six analysts who cover the stock, four have a "hold" or equivalent rating, while two say "buy," according to S&P Capital IQ. The analyst consensus price target over the next year is $25.67.
The stock is down 40 per cent over the past year, compared to a 32-per-cent drop for Finning International Inc., which is in similar businesses but with a broader global reach, and a 35-per-cent decline for Rocky Mountain Dealerships Inc., which caters to the construction and agriculture sectors across the Prairies.
About half of Wajax's revenue comes from its equipment division; 28 per cent from industrial components such as safety and mill supplies; and the other 22 per cent from power systems, including engines and transmissions. Revenue in the second-quarter fell across all divisions by a total of 9 per cent to $340.7-million compared to a year earlier, while net earnings decreased 27 per cent to $9-million, or 52 cents a share.
Desjardins Securities analyst Benoit Poirier recently upgraded Wajax to "buy" from "hold" and hiked his target to $29 from $25, citing the positive impact on margins from the company's restructuring efforts. Wajax said it reduced its debt by $84.7-million quarter-over-quarter to $167.3-million as of June 30 (a large chunk of it due to the recent financing), and is on track to save $7.4-million annually by cutting costs and jobs.
Mr. Poirier believes the dividend, now yielding about 4.5 per cent, is sustainable after it was cut by 58 per cent to $1 a share on an annual basis earlier this year, and as a result of the recent equity financing.
"In the longer term, we expect the company to benefit from its new strategic plan, which could include accretive acquisitions," Mr. Poirier said in a note.
BMO Capital Markets analyst Bert Powell lowered his target price to $24 from $25 and maintained his "market perform" rating, which is similar to a "hold."
"The issue for investors is that there is probably limited upside until 2017, or longer," Mr. Powell said in a note. He believes next year will remain challenging and that it's too soon to see benefits from its growth strategy, which includes both organic and acquisition growth.
John Stephenson, chief executive at Stephenson & Co., doesn't own Wajax and has no plans to buy the stock, even though it's considered cheap right now.
"It's not so much the company, but the macro environment," Mr. Stephenson said.
Investors could hold the stock and may do well on it later, if they're patient. "You are getting a cheap stock with a stable dividend. That's good for some investors," he said.