First quarter results that came in below my expectations have me rethinking my position in this company.
A Bird In The Hand
Those first quarter results were a bit of a disappointment. At least to me. For the most part, the market just shrugged, and the stock price didn’t really react much to the news. Evidently, I was holding this company to a higher standard than most.
I bought into Bird Construction last summer after a string of several bad years and a particularly tough first quarter that saw them lose money on the back of a poorly executed project.
This company had ridden the resource boom in Canada for many years to great effect but had been struggling ever since the Canadian oil and mining industries went bust. In the face of this unpleasantness, I saw the potential for better times ahead. The company was making headway in diversifying their operations away from resource work and into more public and private commercial work. They had scored a couple of big contracts outside the resource sector and outside their home base in western Canada: one to help build out Ottawa’s light rail transit system and the other to build a number of new detachments for the Ontario Provincial Police. On top of this, they had their foot in the door at the new LNG terminal being built in Kitimat, a mega project that held the promise of more lucrative contracts to come. The company was predicting a return to profitability and targeting a return to normalized earnings of 59 cents a share by year’s end. Based on the positive developments and their past history of profitability, this target seemed well within reach.
I took a risk and bought in to the promise of better times ahead before any positive results had actually materialised. At first, it looked like this was going to work out beautifully. Earnings came in strong in both Q3 and Q4 of last year, averaging around 16 to 17 cents in each quarter. Annualising that would give you an annual EPS figure of 60 ¢ or more, right on target.
Going into Q1 of this year, I was expecting more of the same. The problematic contract that brought down their first quarter results last year was behind them, they had a strong backlog of business and they had their LNG work out in Kitimat. According to the company, the coronavirus did not significantly affect their business in Q1 so this wouldn’t have been a factor yet, either.
Which is precisely why I found those first quarter results disappointing. I was expecting one more quarter at least of 15 cents or more in EPS. All I got was 2 or 3 cents. What’s more, the company said the results in the first quarter were boosted by the high margin work they were doing in Kitimat. Without this, results would have been even worse.
This has me re-evaluating my expectations for Bird. I’ve brought them down a peg or two. What’s more, the world has taken a 90 degree turn in the past few months. I was hoping that the company would be able to continue to make strides in broadening its base of commercial and institutional contracts while at the same time milking the LNG terminal for all it was worth and perhaps scoring more oil and mining industry contracts as these sectors slowly recovered. All of this is now in question. Cash strapped companies are unlikely going to be rushing to build new stores, warehouses or factories. Cash strapped governments may decide there are more pressing things they need to do with their limited resources than fund big infrastructure projects. And as for a continued recovery in the oil sector? Scratch that.
Of course, I could be wrong about all that. You could make an effective counter argument to each of those points. But I think there could be more effective ways to play a recovery than with Bird. At the current share price over $5 and given the weakened economic environment and my lowered expectations, I see more potential upside in many of my other holdings than I do with this company.
I’ve sold off my stake in Bird Construction and will be looking for a replacement. Q1 earnings season is underway and I’ll be combing through company results over the next few weeks. I hope to find something exciting to take Bird’s place.
Full disclosure: I do not own shares in Bird Construction.