Photographer: Simon Dawson/Bloomberg

Badger Daylighting Plummets as Cohodes Pounces on Earnings Miss

  • U.S. expansion is adding expenses for hiring new drivers
  • Sales also trail estimates amid heightened competition

Badger Daylighting Ltd., which helps oil and gas companies safely access buried pipes, fell the most in more than 10 years as the cost of training workers hurt profit and a prominent short-seller criticized the company.

The Canadian service provider is hiring new drivers for its hydrovac trucks as it increases its U.S. presence, and that process typically entails having trainees shadow experienced drivers for a period of time, meaning Badger isn’t getting as much profit out of its labor, said Brian Pow, an analyst at Acumen Capital in Calgary. The company also is shelling out more to hire managers for the new areas it’s entering, he said.

“All their overhead relates to growing out their coverage of the U.S. market,” Pow said.

Profit was 10 Canadian cents a share last quarter, Calgary-based Badger said Friday. Analysts estimated 32 cents, on average. While revenue rose 15 percent to C$101.8 million ($74.2 million), that trailed analysts’ C$112 million projection, held back by heavy competition in markets like eastern Canada.

Adding to the decline were negative comments on Badger from Marc Cohodes, the private investor who has gained prominence for his short bet on Home Capital Group Inc. Cohodes posted pages of a negative presentation on Badger to his Twitter feed Friday, saying that the shares are overvalued and that there are low barriers to entry.

Stock Slump

The shares fell as much as 28 percent to C$22 in Toronto, the biggest intraday decline since November 2006. Badger Daylighting already had slid 4.8 percent this year through Thursday.

Chief Financial Officer Jerry Schiefelbein said Badger is working to train new workers and managers on how to operate more efficiently, which should help reduce costs. He said the company’s first-quarter sales were “pretty good” following a couple of tough years.

As for Cohodes’ criticism about low barriers to entry, Schiefelbein said Badger’s size gives it an advantage over mom-and-pop shops that would seek to compete with the company. Badger can tackle bigger projects for municipalities, has safety systems that larger customers require and it can move assets to markets where there is more demand, he said.

“It’s not just digging holes in the ground,” Schiefelbein said in an interview.

He declined to comment on the company’s valuation, saying he’ll let the market determine that.

Badger uses a technique called hydrovac excavation, in which pressurized water and a powerful vacuum is used to expose buried pipes and cables. While the sector is competitive, a busy industrial season should give Badger a pickup in the second half of the year, and the company will have trucks ready to handle the increased demand, Pow said.

The shares are now trading at an estimated enterprise value of about 7.7 times earnings before interest, taxes, depreciation and amortization, making Friday’s drop a “tremendous buying opportunity,” Pow said.

Badger said in its statement that it was “frustrated” by the higher costs and that it is focused on making its operations efficient and improving margins.

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