Electrification And Nuclear Projects Will Transform US And Canadian Infrastructure

Key Takeaways

• Strategic focus on energy transition infrastructure, collaborative contracts, and recurring revenue streams is strengthening margin stability and reducing earnings volatility.
  
• Enhanced balance sheet and market positioning support sustained growth, expanded project opportunities, and optionality for margin and earnings expansion.
  
• Margin pressure, reliance on government projects, labour shortages, acquisition risk, and contract structures collectively limit Aecon's long-term earnings growth and profit expansion potential.

Catalysts

Aecon Group Inc., together with its subsidiaries, provide construction and infrastructure development services to private and public sector clients in Canada, the United States, and internationally.

• Accelerating investment in energy transition and decarbonization infrastructure (such as grid-scale energy storage, nuclear refurbishment, and electrification projects) is driving robust demand for Aecon's core capabilities, supported by record backlog and multi-year project pipelines-positively impacting revenue growth and order book visibility.
  
• Increased public spending on infrastructure-driven by urbanization, population growth, and the need to upgrade aging assets in Canada and the U.S.-is expanding Aecon's addressable markets, supporting sustained growth in top-line revenue and reducing reliance on one-off projects.
  
• Aecon's strategic pivot toward a higher mix of collaborative, non-fixed price contracts (now 76% of backlog) and recurring revenue segments like utilities and concessions is improving earnings quality and margin stability, likely supporting better net margins and mitigating volatility from legacy fixed-price projects.
  
• Significant progress in deleveraging, balance sheet strengthening, and disciplined capital allocation-including successful integration of targeted acquisitions-has created financial headroom for larger project bids and further M&A, providing optionality for earnings and margin expansion.
  
• Aecon's growing expertise and market position in nuclear and power transmission, alongside successful project delivery and potential for additional wins in both the Canadian and U.S. markets, positions the company to capture outsized share of secular industry growth, boosting long-term revenue and profitability.

Aecon Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aecon Group's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 3.2% in 3 years time.
• Analysts expect earnings to reach CA$184.9 million (and earnings per share of CA$1.6) by about September 2028, up from CA$24.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, down from 52.0x today. This future PE is lower than the current PE for the CA Construction industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Aecon Group Future Earnings Per Share Growth

Risks

• Aecon's declining construction EBITDA margin (from 8% last year to 6.8% this year, and just 6.2% in the most recent quarter) indicates that margin compression remains an ongoing risk despite topline growth, with management noting lower gross profit in some segments and explicitly trading margin for risk reduction, potentially impacting long-term earnings and net margins.
  
• High reliance on public sector, utilities, and power infrastructure projects exposes Aecon to potential shifts in government policy, fiscal austerity, and regulatory delays-particularly in the US given recent political uncertainty and in Canada if fiscal priorities change-which could constrain future backlog conversion into revenues.
  
• Ongoing skilled labour shortages and competition for talent in construction remain acute, with Aecon acknowledging the need for careful workforce management as project demand accelerates; persistent labour constraints could drive up costs and delay project execution, negatively affecting margins and realized earnings.
  
• Aecon's recent and anticipated growth relies significantly on large acquisitions (e.g., Xtreme, United, Ainsworth) and expanding US operations, but integration risks and cyclicality in private industrial contracting (e.g., project delays from clients like Dow Chemical) add volatility to revenue consistency and risk underperformance in sectors outside the core Canadian market.
  
• While the substantial shift toward collaborative, non-fixed price contracts has improved backlog quality and reduced risk of major write-downs, management conceded that these contracts offer less room for upside margin, potentially capping profit growth during periods of industry outperformance and limiting long-term upside in net margin expansion.

Valuation

• The analysts have a consensus price target of CA$23.273 for Aecon Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$28.0, and the most bearish reporting a price target of just CA$19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$5.8 billion, earnings will come to CA$184.9 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of CA$20.4, the analyst price target of CA$23.27 is 12.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.