Badger Daylighting; Good? Bad? I’m not Pulling the Trigger

The Company in a Nutshell

• BAD counts on a network of over 100 locations operating over 1,000 hydrovac units.
• As it invests continuously in its technology, BAD enjoys a first mover advantage.
• The company is under lots of pressure by short seller Marc Cohodes.

It is not always easy to make the difference between a good and a bad company. This is exactly what is happening for the past couple of years with Badger Daylighting (BAD.TO). While the company says it’s growing and will be growing at a very fast pace, a famous short seller, Marc Cohodes (who shorted Home Capital Group (HCG.TO), is on a crusade against Badger. Is it THAT BAD? Let’s take a look.

Business Model

Founded in1992, Badger Daylighting Ltd is a provider of non-destructive hydrovac excavation services through two methods: Badger Corporate locations and Operating Partners. The company’s technology, Badger Hydrovac System, is a truck-mounted hydrovac excavation unit. The company is part of the industrial sector, but doesn’t make our top industrial dividend stocks list.

BAD provides services to a diverse customer base including oil and gas, energy, industrial, construction, transportation and other markets, as well as numerous government agencies within Canada and the United States.

Growth Vectors

Source: Badger’s investor presentation

Badger has invested massively to develop its non-destructive excavation technology. It enjoys a massive fleet of 1,000 hydrovac units displayed across a network of over 100 locations. The company intends to use its first mover advantage to expand in U.S. territories. This strategy has worked well in the past few years as you can see in the image above.

Source: Ycharts

BAD also counts on the growing energy market. In fact, one of the reasons why BAD revenue grew that fast was mostly linked to excavation needs in the oil & gas business. Depending on where you stand, this sector could be a growing or volatile business.

Potential Risks

For one, Badger shows a cyclical business affected by seasonality. You clearly see the variation from one quarter to another. This makes it harder for BAD to manage its cash flow during the weaker quarter and always put additional hope that the “good quarters” must remain strong. The company is also over exposed to the oil & gas industry.

Unfortunately, the company is also under strong pressure by famous short seller Marc Cohodes (see affidavit). In his report, Marc highlights the absence of an explanation for lower earnings while revenue keeps growing. Management refused to explain margins contraction based on “sensible competitive information”. Most of the management team left between 2014 and 2016. Mark also questions BAD’s accounting methodologies, real number of trucks in operations and competitions coming from US companies. In other words; this doesn’t smell good.

Dividend Growth Perspective

BAD increased its dividend significantly since 2015, but keep in mind the company had to cut its payment after the 2008 financial crisis (dividend cut occurred in 2011). Are recent dividend increases been made to attract or distract investors?

While the payout ratio is very high, the company’s cash payout ratio is well in control.

Source: Ycharts

If BAD doesn’t show any accounting methodology issues and Cohodes’ concerns are not founded, we expect Badger to keep increasing its dividend going forward. Yet, this is a tricky investment for any dividend growth investors.

BAD.TO doesn’t meet our  7 dividend growth investing principles.

Valuation

Using the past 10 years PE history to have an idea of how BAD should be valued today tells us one thing: this stock is highly volatile.

Source: Ycharts

As you can see, it’s very hard to find an intrinsic value using the price-earnings standard. We also did a dividend discount model (DDM) calculations to find BAD’s value as a dividend growth stocks. Unfortunately, we came out empty-handed once again:

Input Descriptions for 15-Cell Matrix				INPUTS
Enter Recent Annual Dividend Payment:				$0.54
Enter Expected Dividend Growth Rate Years 1-10:				8.00%
Enter Expected Terminal Dividend Growth Rate:				5.00%
Enter Discount Rate:				10.00%
	Discount Rate (Horizontal)
Margin of Safety	9.00%	10.00%	11.00%
20% Premium	$21.67	$17.19	$14.21
10% Premium	$19.87	$15.76	$13.03
Intrinsic Value	$18.06	$14.33	$11.84
10% Discount	$16.26	$12.89	$10.66
20% Discount	$14.45	$11.46	$9.48

Please read the Dividend Discount Model limitations to fully understand my calculations.

At this point, Badger Daylighting doesn’t qualify as “Dividend Stocks Rock” material.

Final Thoughts

Badger has developed “exaction trucks” that are efficient and flexible. It enables to excavate in extreme winter condition. Since BAD manufactures its own hydrovac units, this gives the company a competitive edge against other competitors. However, BAD is still linked to the oil & gas industry is suffered greatly from over capacity between 2014 and 2016. Competition is heavy in the U.S. and it will put additional pressure on BAD’s margins. Finally, the fact the company is being pursued by a short seller increases BAD’s volatility on the market and raises additional questions. Would you invest in a company where you are not 100% sure management is completely honest? We keep a rating of 3 for both our PRO Rating and Dividend Safety score for those reasons.

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Disclaimer: We do not hold XYZ in our Dividend Stocks Rock portfolios.