Construction is a weak bet as economy struggles

Sun Sep 25, 2011 10:33am EDT
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By Nicole Mordant

VANCOUVER (Reuters) - Canadian construction and engineering stocks have lost about a quarter of their value this year, yet one sector is considered in buying territory while the other is seen at risk of further losses.

After a promising start to the year, investors have soured on both industries as government stimulus funds have dried up, private-sector recovery has lagged and competition has squeezed operating margins. Fears of another global recession only add to the gloom.

But analysts and industry figures note companies providing engineering services tend to work on far more projects at any one time than construction companies do, spreading their risk.

They also tend to get higher-margin work and generally pay richer dividends than the construction companies that actually do the bricks and mortar work.

"Construction stocks are stuck in a no-man's land. The environment is slow and it's going to take a while for the construction side to improve," said Maxim Sytchev, a managing director at investment bank AltaCorp Capital Inc.

"A lot of the work they were bidding on, we only now know what margins they were bidding on. People were essentially just bidding to bid," Sytchev said, referring to the period after the 2008-09 recession.

Before stepping in to buy at reduced prices, investors need to see signs that the likes of Aecon Group Inc (ARE.TO: Quote), Canada's biggest publicly traded construction company, and rivals Churchill Corp CUQ.TO and Bird Construction Inc BDT.TO are in the running for some large contracts at fatter margins than in the past year.

Analysts are more optimistic about engineering, an industry that includes global player SNC Lavalin Group Inc (SNC.TO: Quote), acquisitive engineering services group Stantec Inc (STN.TO: Quote) and small engineering consulting firm Genivar GNV.TO.   Continued...