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The stock price of Stuart Olson Inc. (SOX-TSX) took a hit this month after the construction and engineering enterprise halved the quarterly dividend from 12 cents to 6 cents after 31 straight quarters at a dozen pennies. Unfortunately, we were caught in the downdraft. After years of kicking the stock’s tires and being wary that the dividend was too high, Benj bought shares, believing the probability was reasonable that the builder would find a way not to reduce the payment – a key priority of management. Typically, when a dividend is decreased, the stock price tumbles. Alas, this one followed the pattern perfectly. The only good thing we can say is that our subscribers were warned that this could happen when the stock was purchased in December at $4.66.

There were a number of reasons that the payout was slashed, which will save the Calgary-based corporation about $1.7-million a quarter. Revenues fell in the fourth quarter ended Dec. 31 to $228-million from $283-million a year ago. That was a primary cause of a loss of $1.3-million compared with the profit of $5.7-million. Accompanying this, cash flow also turned mildly negative while the backlog dipped from $1.7-billion to $1.6-billion. Plus, as president and chief executive David LeMay stated, there is a strategic shift occurring where the company aims to “include larger design-build projects and projects with increasing scope and scale." Accomplishing that will require more cash than the enterprise is used to throwing at a development. A lower dividend also helps to facilitate the payment of the convertible debentures of almost $85-million, which are due toward the end of this year.

There are still more negatives associated with this enterprise. A key one is that management has indicated that first-quarter revenues will be “meaningfully lower” than last year. Though not all investors think this way, many have difficulty looking beyond short-term numbers, so they chose to dump the stock and look elsewhere for better returns. When the results are reported, some current shareholders could also throw in the towel, offering a purchasing opportunity for buyers, although at the current price of about $4.20, it seems like significant upside exists. A decade ago, the share price was north of $20, while in 2014 it was above $11. The top brass has suggested that full-year results should be better than in 2018, which implies quite a rebound in the last half of the year.

As we opined last year, a recession is likely in the not-too-distant future. That might motivate the federal government to implement additional infrastructure plans even with its huge debt and deficit. This would likely prove a beneficial result for SOX and would help to offset some of the weakness the company is currently dealing with in the oil patch.

There is a major wild card in the mix that could positively affect the stock price. Activist investors Crescendo Partners and Jamarant Capital have advised Stuart Olson’s board that they want to see the organization examine strategic alternatives. They estimate the company could receive up to $9.70 a share in a sale. Crescendo was involved in two other companies in which Contra owned a position that were taken over at significant premiums, ComDev and Spar Aerospace. A trifecta would be lovely. Stuart Olson remains on our buy list.


Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter

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