Infrastructure spending in Canada has been in a 10-year bull cycle, as annual investments in government sector non-residential building, and engineering and construction have doubled since 2006. That compares to a 20 per cent increase in the U.S.
But it remains difficult to find a perfect and reasonably priced play on the limited opportunities related to government-funded construction in Canada, according to Raymond James analyst Frederic Bastien, who noted that the government’s recent commitments to sustain funding isn’t a game-changer.
“…Being bullish on infrastructure spending is not the same as being bullish on infrastructure stocks,” Bastien told clients. “Valuations matter a great deal, which is one of our sector concerns at present.”
The analyst noted that since the infrastructure story gained traction in the fall, multiples have expanded to a point that suggests further spending increases may already be priced into stocks.
He also pointed out that it’s hard to find a construction company that is completely dependent on government projects. Instead, private spending and resource-related activity tends to be the primary driver of these stocks.
For example, engineering firms like Stantec Inc. and IBI Group Inc. depend on school and hospital construction just as much as they do residential and commercial building. Similarly, large equipment dealers like Finning International Inc. and contractors like Aecon Group Inc. rely on road building, but also mining activity, oil drilling and forestry.
Bastien also said its important to acknowledge the risk of ‘crowding out’ investments with increasing amounts of government debt, the politics and delays associated with government-funded projects, the backend-loaded nature of much of the spending, and the broader scope of what now defines infrastructure.
“Accordingly, we advise investors to be very mindful of who exactly benefits from this type of specialized construction,” the analyst said.