Monday, April 10, 2017

Canam Group

Canam Group (CAM) is a previous holding of mine that has gotten very cheap again. I have written extensively about this stock in the past here.

Once again, its shares have fallen to low levels, at just 0.5x book value. This is because they have had a tough year, with a couple of large projects having unexpected costs. This will happen in this industry, as complex jobs like bridges and stadium construction can be difficult to deliver on-time and on budget.

However, for the most part, the company manages just fine. Book value per share has grown steadily for many years, and so bad years like this are opportunities to get a good price for a company in an industry with barriers to entry: few companies are in a position to provide steel structures for large buildings/bridges because of previous consolidation and the know-how (built over decades) required, which to me means this company will be around for a long time.

Management owns more than 10% of the company, so they tend to do shareholder friendly things like buy back shares and focus on profitability.

There are some debt payments coming up, but I expect the company's focus on profits to allow it to pay it off or refinance with future debt.

Backlog is very strong right now, at over $1 billion. For the above reasons, I think Canam is an asymmetric bet. In my opinion, the odds are that they recover their profitability, whereas the high discount to book protects the downside should conditions turn south for a while.

Disclosure: Author is long shares of CAM.TO

H/T @jmaron9


Anonymous said...

How do you get comfortable with

- the industry profitability is poor
- the company does not have a great track record of generating shareholder value (organic growth is 0 over a business cycle, buybacks seem good but the share count has not dropped over the long term)
- this is a cyclical company at a cyclical high

The company certainly seems cheap on a p/b, but I would not want to be the owner of the entire business.

Adib said...

the first time you bought it, it had a good balance sheet with very little debt. The debt is much higher now. Is interest well covered?

Anonymous said...

What is the difference between Cam.TO & CNMGF?

Saj Karsan said...

Hi Anon,

I'm always more interested in the company than the industry's profitability. Tangible book value has increased some 50% over the last 10 years, which isn't amazing but probably not deserving of a 40% discount either. As for timing cycles, I can't speak to that. But the way I view it is they are going through a temporary rough patch thanks to some recent mistakes, so I expect them to fix those and enjoy some profitability soon.

Hi Adib,

You are right; the debt is a potential risk. No, interest is not well-covered because earnings are negative. This has to change.

Hi Anon2,

Not sure. Looking at their history though, looks like the same thing apart from currency

Anonymous said...

Great call!