In 2013, the global economy will be faced with a number of strong headwinds: a sluggish U.S. recovery, continued economic turmoil in Europe, and the possibility (albeit small) of a "hard landing" in China. Given these challenges, it is easy to believe that the global economy will continue to grow at a sluggish pace. For the immediate future, slow economic growth is a reality; however, the situation is improving. Overall, global growth in 2012 was 3.3%. In 2013, global growth is forecasted to increase 0.3% to 3.6%. As the global economy continues to improve, SNC-Lavalin Group Inc. (OTCPK:SNCAF) will benefit.
SNC-Lavalin Group Inc. is Canada's largest engineering and construction firm, and one of the largest engineering and construction firms in the world. The company provides such services as feasibility studies, planning, design, and construction management. These services are now employed in over 10,000 projects in multiple regions around the world across multiple industries, such as mining, power, and infrastructure. As demand for the company's services has increased, the company has increased its employee count from 21,300 in 2008 to 23,900 in 2012 and its revenues from 1,780 in the third quarter of 2011 to 1,975 in the third quarter of 2012. SNC is a large-cap company, with a market capitalization of $6.09 billion.
The company's main competitive advantage is its operations across a variety of geographic regions and industries. The company's employees work on projects in about 100 countries at any given time. As a result of this diversity, the company is protected against concentrated economic risk in particular regions or in particular sectors. For example, if economic growth is slow in Canada, the company can look to emerging markets for growth. At the moment, however, infrastructure spending is booming in Canada. The federal government is considering a scheme that would allow provinces and municipalities to replace aging infrastructure. The scheme would set aside $5 billion a year for a period of 10 years. Given that about 50% of SNC's revenues are in Canada, this scheme would likely benefit SNC.
The company is also in a sound financial position. It has over $1 billion in free cash and its Return on Equity is 21.09%, the strongest of its peers. (An ROE around 15% or above is considered good.) In addition, the company has steadily increased its dividend over the past five years, from $0.39 in 2007 to $0.85 in 2011. This gives the stock a 2.18% yield. This yield is lower than its peers, which means there is room for dividend growth. The company is also expected to increase its Earnings Per Share, from $0.50 in the fourth quarter of 2011 to $0.85 in the fourth quarter of 2012.
Finally, SNC has been subject to a great deal of short-term, negative news over the past year that temporarily depressed the stock price. This news, which included reports of unauthorized payments to the regime of the former Libyan dictator and possible misconduct in the awarding of a $1.3-billion contract in Quebec, has led to turmoil in the stock price. As this news blows over, the stock should return to its normal levels.
In conclusion, SNC-Lavalin Group Inc. represents an opportunity to capitalize on global economic growth and investment in infrastructure, while protecting against economic turmoil in particular regions. I recommend SNC-Lavalin as a buy.