Aecon group (TSX:ARE) is one of Canada’s largest publicly traded construction and infrastructure development companies. The company generated $4.2 billion in revenue by 2024 and its current backlog is at a record $10.7 billion.
Let’s take a look at why I think this Canadian stock is the best one to buy due to its exposure to higher government spending.
Spending on infrastructure is increasing explosively
Before I go into the details of Aecon, I would like to review the government spending plans.
The Parliamentary Budget Office (PBO) estimates that the Canadian government will spend $159 billion on infrastructure over the next five years. The areas of focus are the same as before, but they are worth repeating. This includes investments in public transport, renewable energy, communities and housing, trade and transport, and rural and northern communities.
This boom in spending is a large part of the driving force behind Aecon’s growth and with investments still underway, it will continue to drive growth in the future. Aecon’s share price already reflects this positive environment for infrastructure spending. As you can see in the chart below, the stock is up 74% over the past five years.
Aecon’s results are also booming
In Aecon’s last quarter, the impact of all these expenses was clearly visible. Adjusted revenues amounted to $1.3 billion, 31% higher than the same period last year. This was driven by the strength of nuclear spending in Ontario and the US, but also by the strength of civilian spending, including spending on road construction and public transportation. Finally, the increase was driven by spending on utilities and gas distribution infrastructure.
While Aecon’s results weren’t exactly impressive, with earnings per share of $0.09, there is light at the end of the tunnel for the company’s profitability. Management’s focus remains on improving profitability.
Over the past five years, Aecon’s activities have benefited from all these positive trends. And this is reflected in the company’s financial results. For example, during this period, revenue rose 16.4% to $4.2 billion and net income rose 122% to $161.9 million. Moreover, Aecon’s backlog is at a record level.
Focus on risk and profitability
Before I close, I’d like to look at Aecon’s bottom line: a net loss. Cost overruns and challenges in pandemic-era projects are to blame. This will no longer be an issue as these projects reach full completion. Aecon’s new way of working is about minimizing risks and maximizing profitability. For example, the company has a strong recurring revenue base and has removed a lot of risk from its projects by entering into partnerships to limit its debt burden.
The bottom line
Aecon is the Canadian stock we need to own today to benefit from the infrastructure spending boom. This boom reflects the significant amount of infrastructure investment underway in North America. The current infrastructure is simply old and in need of replacement and/or renewal. Furthermore, the transition to a net-zero economy will require significant investments to build out the infrastructure to support this transition.
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