The Churchill Corporation: Building up Canada
Note: Unless expressly noted, all figures are presented in Canadian Dollars ($CAD).
With Canadian municipalities issuing between $6 billion and $7 billion worth of building permits each month, the construction spending boom in Canada is on. Being driven by new construction projects as well as improvements to existing infrastructure, this trend continues to gain steam. Building in areas of Western Canada such as Alberta and British Columbia has been especially strong. This movement has played directly into the hands of The Churchill Corporation (TSE: CUQ.TO).
Based in Edmonton with a market cap of a little more than $300 million, the company operates as a diversified construction company. Through its four operating segments Churchill provides general contracting, electrical, insulation and industrial contracting services to clients in both the public and private sectors.
The company was incorporated in 1981 and derives the majority of its revenue from its Stuart Olson subsidiary, which has a history dating back to 1939. The Stuart Olson division of Churchill has emerged as a prominent player in construction management and general contracting services in Western Canada. It has recently landed contracts with the University of Calgary, Red Deer College and Discovery Parks.
Laird Electrical is the company’s second largest source of revenue and was acquired by Churchill in 2003. It specializes in industrial electrical construction and maintenance services. Churchill also has two smaller subsidiaries that handle its insulation and industrial contracting projects. Included in the insulation segment’s portfolio are prestigious clients such as Agrium Inc. (NYSE: AGU), Imperial Oil Ltd. (AMEX: IMO) and Suncor Energy Inc. (NYSE: SU).
The uptick in construction in Western Canada has had a stirring impact on Churchill’s bottom line as well as its stock price. Common shares of Churchill have surged more than 170% over the course of the past 52 weeks. The company’s third-quarter results which were reported in November were extremely impressive. For the quarter ended Sept. 30, management reported net income of $5.6 million, or $0.31 per share, on $203.8 million in contract revenue.
These numbers handily topped analysts’ estimates from Paradigm Capital and Blackmont Capital, which had projected earnings of $0.26 per share and $0.24 per share, respectively. They also marked a 40.1% rise in year-over-year contract revenue and allowed the company to shore up its balance sheet by erasing some of its debt. During the third-quarter, Churchill completely paid off its operating line of credit via $15.5 million in repayments.
Stuart Olson and Laird Electrical led the charge during the third-quarter in combining for 87.8% of the company’s revenue. Strong commercial construction activity in Alberta led Stuart Olson’s revenue 97.9% higher than its prior year third-quarter, while Laird reported revenues 25.9% below that of the year-ago quarter. Management attributes the most recent quarter’s percentage decline in revenues to delays in engineering and awards during the first half of 2006, which led to an inflated revenue level in the second half of 2006.
Analysts covering Churchill are projecting earnings for the company’s full fiscal year to be in the range of $1.04 per share to $1.07 per share. In 2006, Churchill reported diluted EPS of $0.45.
Going into 2008, the outlook continues to look favorable for Churchill. Analysts are projecting EPS growth in the range of 17% to 60%.
One of the primary reasons that analysts have been able to project a path of such strong growth for Churchill’s future is the company’s ability to win new work that has added to a rapidly growing backlog. Among its recent wins is a $523 million government contract in which Churchill was selected as the construction manager to build a new jail facility in Edmonton. At the end of its third-quarter, the company’s backlog sat at $734.5 million. This figure has climbed a staggering 56.4% from the year-ago quarter. Doug Cooper, an analyst for Paradigm Capital, wrote in a research note, “We believe that the backlog gives excellent visibility on future revenue.”
Cooper also believes that the company’s strategic location is advantageous given Western Canada’s population growth and the development of Alberta’s oil sands. In a research note he wrote, “Located in the heart of the activity in Edmonton, we believe that Churchill is well positioned to benefit from the growth in construction projects.”
Cooper has raised his 12-month target price on shares of Churchill to $30, up from a previous target of $25. On Wednesday, shares of Churchill closed at $16.90.
An investment in Churchill does not come without risk. In a December research report, Frederic Bastien, an analyst for Raymond James, noted, “The recently announced hike in royalty rates imposed on Alberta’s energy sector also has the potential to threaten some of the more marginal industrial projects planned in the oil sands.”
Although the risk of a major slowdown in capital expenditures by Churchill’s clients is unlikely, it should be kept in the back of one’s mind. With the present landscape, additions and upgrades to the aging infrastructure in Western Canada in the years ahead are sure to be costly. They should also allow Churchill (CUQ) shareholders to build some nice gains into their portfolios.
