Inside the Canadian Infrastructure Play

 |  Includes: AMFW, FLR, STN, TTEK
by: Market Blog

By David Berman

Benoit Caron, an analyst at National Bank Financial, has an interesting note on Stantec Inc. (NYSE:SXC) that also manages to say a few things about the infrastructure play in general.

Stantec, a Canadian engineering firm, reported what he felt were disappointing fourth quarter results on Thursday, leaving Mr. Caron to conclude that the relative weakness during the quarter was not just a hiccup. As a result, he lowered his 12-month price target to $28 from $30 previously (although he maintained a “sector perform” recommendation on the stock).

Management is hopeful that growth will resume in the second half of 2010, but we do not share their optimism,” he said in a note, arguing that private investments in commercial construction will continue to slide sharply in 2010. Stantec generates nearly half of its revenues in the United States.

But, you might well ask, what about infrastructure spending – the sort of big projects (along with tax breaks and other items) outlined in President Barack Obama’s $787 billion (U.S.) stimulus plan? Mr. Caron believes that stimulus spending is not having a meaningful impact.

“According to management, public spending on infrastructure in the U.S has remained fairly stable over the last few quarters and has not provided many new opportunities in general,” he said. “We believe part of the reason lies in massive State and municipal budget deficits that require officials to cut non-essential spending, thus offsetting Federal spending. In Canada, sound public finances are allowing for a more rapid disbursement of stimulus funds across the country, but not nearly enough to make up for the overall decrease in private spending.”

Meanwhile, the analyst noted that a number of other engineering and construction stocks have missed expectations recently. Fluor Corp. (NYSE:FLR) reported earnings of 82 cents a shares, versus expectations of 88 cents. Foster Wheeler Corp. (FWLT) said in its quarterly report that weak market conditions are affecting the company. And in late January, Tetra Tech Inc. (NASDAQ:TTEK) lowered its guidance for 2010 earnings to $1.08 a share from $1.18 previously.

“We are forecasting that the remainder of fiscal 2010 will remain strong for our front-end consulting and engineering services,” said Dan Batrack, Tetra’s chief executive, in a statement. “However, we now believe that back-end construction management services will weaken in the second quarter and remain soft for the remainder of the fiscal year, driven primarily by the commercial market downturn and the continued slow pace of stimulus spending.”